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Monthly Market Review “High Risk, Low Reward, And 2012 Investment Ideas That Fit The Times” January 19, 2012. Kevin M. Wilson, ChFC , PhD President/CEO/CIO. Dheenu Sivalingam, MBA AVP/CCO/Senior Analyst. Ted A. Pavlovich, WMS VP Wealth Management. Office: 218-464-4399

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Monthly Market Review

  • “High Risk, Low Reward, And 2012 Investment Ideas

  • That Fit The Times”

    January 19, 2012

Kevin M. Wilson, ChFC, PhD


Dheenu Sivalingam, MBA

AVP/CCO/Senior Analyst

Ted A. Pavlovich, WMS

VP Wealth Management

Office: 218-464-4399

Toll Free: 877-327-5062

Fax: 218-464-4397

Email: [email protected]

1314 E. Superior Street

Suite 2

Duluth, MN 55805


IntroductionTed a. pavlovich


What we learned in 2011kevin m. wilson


Structural Debt Problems In

Europe Have Not Been Resolved

The EU Nations Will Also Raise Taxes,

Privatize Assets, Cut Spending, and/or

Devalue The Currency


Loose Money Hasn’t Fixed Economy,

But Has Helped Banks Recover; Only

De-leveraging Will Work

Markets Are Macro-Driven Over Intermediate Term

Technical Analysis Helps With Surviving Volatility,

But Must Be Used On A Large Scale

Twelve predictions for 2012kevin m. wilson


President Obama Will Lose

Based On Current Data, Given

Historical Tendencies

Current NFP vs. Trend

Current GDP Forecast

Current DPI vs. Trend

Euro-zone Debt Crisis Is Hurting The Global Economy


EU Crisis Will Peak…

…And A Big

Bank Will Fail…

…But Then ECB

Will Print Money

The Federal Reserve Will Initiate “QE3”

Recession or Not, The Economy Will Be Sluggish For Years


Deflation Will Continue…

…Because De-Leveraging

Will Take Many Years

Profit Margins Will Mean-Revert…

…Helping Bear Market

To Continue Downward

Flash crash of 05/2010 Demonstrated ETF Trading Risk; This Risk Continues


After Market Correction, Supply & Demand

Problems for Oil Will Continue in 2012

32 BBO/Yr.

13 BBO/Yr.


China and India Will Again Put a Strain on

Global Food Supplies Later in 2012


Macro-economic constraints on the risk/reward matrix in 1h/2012Kevin M. Wilson



Poor Choices on Risk/Reward

Analyses Have Consequences


Graphing The Risk/Reward Matrix

Chinese Assets

German Assets

Italian Assets

Greek Assets

Macro: Real DPI (blue) Falling Rapidly,

Raising Risk to Economy & Markets,

As Real Final Sales (red) Will Follow

Macro: Trend Is Improving, But Level Of

Retail Sales Is Still Very Low

Macro: PCI Index Flat-to-Down, Level Is Low

Macro: Consumer Confidence Improving, But Level Very Low

Macro: Divergence Between S & P 500 & Treasuries Indicates Pivot Point

Macro: Italian M3 Money Supply Looks Very Dangerous,

And Perhaps Is Partly Off-Set By Black Market Activity;

However, Similar Examples Include Russia, Greece

Allocation Levels Informed By Macro Constraints

On The Risk/Reward Matrix (Currently Favors Bonds)

Long Bear Market Episodes (Bond Rallies)

Are Followed By Huge Stock Rallies


Individual Stocks: Risk/Reward Diagram Useful

Kodak Stock

Some winning ideas from 2011 that Should work again in 2012



Buy Dividend Payers?!

Buy Zeros?!

Buy US $?!

Composition of DXY



Secular Themes: Long Term Consumption Trends


Changes In Protein Consumption Will Continue

As incomes rise above subsistence levels, high-value food products become more prevalent in diets. Such products include meat and processed foods like fats, oils, and confectionery products. As shown in the above graph for China, India, and Brazil, protein consumption has the largest projected growth potential.


Water Purification Will Be A Big Problem,

Due To Demand For Oil, Gas, and Food





EUR Weakness is Good for European Companies

  • European equity outperforms 88% of the time when Euro weakens.

  • Organization for Economic Co-operation and Development estimates that, for every 20% drop in the Euro, the Eurozone will enjoy a 1.6% boost to real economic growth. And corporate earnings will rise 22%.

  • If these benefits outweigh proposed austerity measures to cut spending and raise taxes, we could see quick European equity outperformance; most likely it will be good for some countries and not so good for others.


  • European equities that generate more than half of their revenue from outside Europe will benefit the most.


Being a Contrarian

  • The road ahead won't be easy. Investors must focus on the Eurozone countries that stand to benefit the most from the Euro's slide.

  • Like any contrarian countertrend idea, calling the exact bottom of this downturn is impossible. Moreover, it's likely that a few years down the road, the PIIGS will end up restructuring their debt anyway, much like Dubai recently did.

  • Europe is headed for change, in that either it will emerge from the crisis with greater fiscal unity, or with a different membership. Either way, the Eurozone will be different to the one that exists today, something investors need to understand.





Investing in Flat Market

  • Be good stock pickers rather than closet index trackers.


  • Look for companies with low expectations. Investors can sometimes become overly pessimistic about the prospects for a company for many reasons. But a strong business that has maybe just hit a temporary snag can generate extraordinary returns, if it is able to right the ship.

  • Look for companies who have a strong innovating culture, There have been many technological advances since 1998, but not all of them have led to profitable growth for firms. The companies that have succeeded at innovating are the ones that have banked real profits and produced positive cash flow for their owners.

  • Look for companies who are in a favorable industry trends. A rising tide lifts all boats. In other words, some companies have seen strong gains simply because of the industries they operate in. These companies have the wind at their backs and don't have to fight tooth-and-nail to steal market share in order to grow. The pie simply grows larger and everyone wins.


  • Look for companies who have a strong dividend and dividend growth. Although dividends have historically accounted for close to 40% of the total return of the stock market, they were not very fashionable in the late 1990's. But in this era of super low interest rates and choppy stock markets, the dividend stock seems to be making a bit of a comeback. Not only can you get a higher yield right now on many blue chip stocks than you could on a 10-year Treasury note, many of these companies consistently raise their dividends each year. There are strong tax advantages as well, assuming tax laws don’t change.

  • Look for companies who have attractive valuations. Fortunately for long-term investors, valuations on the S&P 500 are much more attractive than they were in 1998. But that doesn't guarantee strong returns for the stock market over the next decade.

  • Be disciplined. Don't buy it unless the price is at the level you believe is at or below the true value of the company. In long periods of a flat or sideways market, you want the holding of the stock to be worth your while.


-Risk/Reward Dangerous, But Market Wants To Go Up Near Term

-Economic Data and Earnings Should Cause Doubt Going Forward

-We are Ready For Either Case, But Currently Positioned Against Risk

-If Market Sells Off, Risk/Reward Will Be VG & Huge Opportunity Awaits

Summary & Conclusions




This report is provided for informational purposes only and does not constitute an offer or solicitation to purchase or sell any security or commodity and is not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Any opinions expressed herein are subject to change at any time without notice. Information has been obtained from sources believed to be reliable, for its accuracy and interpretation are not guaranteed.

Investing in securities involves risk, including possible loss of principal. Past performance should not be taken as an indication of guarantee of future performance and no representation, express or implied, is made regarding future performance.

The firm does not provide tax advice; clients should contact their attorney, accountant, or other tax adviser regarding tax matters.

Blue Water Capital Advisors, LLC is an SEC registered investment advisor. Not FDIC insured. No bank guarantee. May lose value. Not a deposit. Not insured by any federal government agency. Blue Water Capital Advisors, LLC is not affiliated with National Bank of Commerce or NATCOM Bancshares, Inc.


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