BCIC Fall Outlook

8/14/2019 BCIC Fall Outlook

1/19

Whats Next?An Outlook on Themes That Will Drive Markets

James Cullen

Portfolio Manager


2/19


3/19

The Gruesome Twosome

US Economy Leading Rest of World Down?

Credit Contraction Balancing Deflation/Inflation

Commodities Demand, Scarcity, and Inflation

Financials Is There Any Earnings Power?

Whats Priced In?


4/19

US Economy

Are Components for Rebound in Place? Oil Prices Have Eased from Peak

Policies in Place to Add Liquidity

Fed, Treasury Finally Seem to Grasp Problems

Or Oncoming Train at the End of Tunnel? Commodity Prices High vs. Historical Average

Home Wealth Effect Effectively Destroyed Financials Constrained, Only Plugged Losses

Rest of World Economy Generally Weakening


5/19

What Top Executives Are Saying

Not only is the U.S. in a recession, but the rest of the world is slowing downI've never seen anything quite like it We think we're going to be relatively flatthrough 2009 and we don't see the start of a recovery... until the latter half of '09and '10And that's basically moved out a year, year and a half from whateverybody thought about four or five months ago." Alan Mulally, CEO, Ford Motor

In my 33-year career I cannot recall a more challenging environment in the foodindustry, particularly with the unprecedented cost inflation. Douglas Conant, CEO, Campbell Soup

The challenging market conditions continue and theres not yet any evidence ofthe overall housing market bottoming out... However, there are a few early signsof a market rebound in some individual markets... Ara Hovnanian, CEO, Hovnanian Enterprises

Wal-Marts customer is reflective of society in general Our customers

represent a broad income segment and they are all challenged today. Whenenergy and oil prices go up - on top of inflation and health care and core fooditems theres a great deal of pressure on the customer. Lee Scott, CEO, Wal-Mart

This is an extremely, and I stress extremely, rare event. It also speaks to themore general notion that, in today's highly disrupted financial markets, theunthinkable is thinkable.

Mohamed El-Erian, CEO, PIMCO Investments, on Lehmans Bankruptcy


6/19

European Economy

Housing Bubble Unwinds

Huge Property Bubble in Ireland, UK, Spain

ECB At Top of Tightening Cycle Euro is Strong But Overvalued?

US Economic Weakness and Strong Euro

Hurting Exports

Economic History Might Not Repeat But it Rhymes


7/19

European Housing Bubble


8/19

The Global Slowdown Thesis

European Housing Bubble Bursting Could Create

US-Style Effects Across Continent

Demand Destruction Crimping Export-Dependent

BRIC Manufacturers; Slowing Growth in EmergingMarket Economies

Global Decoupling a Myth


9/19

Credit Investment Grade

Blue Chips Face Growing Funding Costs

WSJ, Aug. 15th: Citigroup, American Express, AIG all

offered debt at 10 Yr. Treasuries + 300-475 bps.

Wells Fargo (only AAA/Aaa-rated Bank in US)Had Callable Preferred Offering @ 5 Yr. + 550 CFO Noted At Least We Have Access to Capital Markets

Lack of Liquidity Brought Down AIG

Facility from Government at LIBOR + 850


10/19

Credit Investment Grade


11/19

Credit - Speculative

Moodys: Defaults to Rise Substantially

Already Doubled Year-over-Year (1.4%2.7%)

Acceleration in Defaults Likely (4.9% by Y-E)

1-Yr Forecast: Only Getting Worse (7.4%) General Motors 7-day commercial paper @

5.25%, up from 4% previous day: Sept. 17th


12/19

Credit Ratings of Portfolio Holdings

Aaa - 8.94%

Aa - 7.2%

A - 13.07%

Baa - 11.01%

Ba - 14.82%

B - 4.99%

NR - 30.91%


13/19


14/19


15/19

Is The Commodity Bull Run Over?

Unwinding of the End of the World Trade

Crushed Many Commodity Positions

Emerging Market Demand Has Weakened

But Speed, Magnitude Says Technical Correction

Areas of Interest:

Steel, Coal, Copper, Mining Equipment

Stocks We Own:

CALM, HGT, UPL, XOM, XTO


16/19

Financials "And if this were about a company here or there failing, I wouldn't be for

intervening in any way, shape or form. This is about our way of life, our society,our economy, the American people's jobs, their savings. This isn't about Wall

Street. That's how serious this crisis is. And while I hope it works and we want it

to work, there's no guarantees here.

House Minority Leader John Boehner, R-Ohio.

Will New RTC Save or Japan-ify Financials? Investment Bank Model Died This Weekend

Is Earnings Power Permanently Impaired?

Stocks We Own:

BAC, GS, JPM


17/19

To Summarize

Expect the Unprecedented

US Economic Growth Got in a Fight with a Brick Wall

Credit is Oil to Economys Engine; Extremely Scarce

Europe Could Follow US into Downturn

If Europe Falls, What Supports Asia/South America?

Potential for Equity Market to Bottom


18/19

Equity Market Bottom?

Confirming Short Seller Witch Hunt

Credit Quality Has Impact, Requires Consideration

Implied Volatility High

Liquidity State (Extremely Dry, But Fed Moving to Counteract) Corporate Buybacks

Disagreeing Panic?

Corporate Defaults (esp. Speculative) Not High Short-Lived Bear Market

Global Financial Leverage Still High

Housing Prices Need to Fall Further


19/19

Documents

BCIC Fall Outlook