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Growth outcomes are driven by the balance between

aggressive monetary policy and declining

global economic data

2013 is expected to be better than

2012, but it’s still a sub-par recovery by any measure

!"#$#%&"'#()*##+The economic outlook for the near term is quite mixed. Growth has been disappointing around the globe and most regions remain fragile with slowing growth in Asia, a subpar recovery in the US, and ongoing, significant strains in peripheral Europe. The offset to this negativity are extremely aggressive policy support by central banks around the world. Both the fragile nature of the global economy and the policy responses from central banks has been more intense than consensus expectations. Sticking with the “data” side of the economic scales, the following table shows forecasts that have all been revised down considerably over the past 90 days. In fact, several forecasters have noted that the recent period has seen the sharpest pace of downgrades in recent years. The subsequent chart shows these reductions to forecasts over a longer period of time for key regions. Economic recovery is anemic at best or perhaps stabilized in an optimistic interpretation. Consensus Forecasts (Real GDP (%Y/Y)

2012 2013 Global 3.1 3.6 Developed 1.3 1.3 US 2.2 2.1 Euro Area -0.5 0.2 Germany 0.8 1.0 France 0.1 0.4 Italy -2.4 -0.6 Spain -1.6 -1.4 UK -0.3 1.3 Japan 2.4 1.3 Emerging 5.2 5.9 Asia 5.6 6.0 China 7.7 8.1 India 5.9 6.9 South Korea 2.6 3.5 Latin America 3.0 3.9 Brazil 1.7 4.2 Mexico 3.7 3.4 EM Europe 2.9 3.3 Russia 3.8 3.7 Turkey 2.9 4.3

Source: Bloomberg

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October 2012


Some of the economic data gives hope of

stabilization, but generally there continues to be

pressure

An improvement in the real estate

sector would help the economy

As would an uptick in employment

The magnitude of the problems is tremendous. But there can be improvement in these fundamental areas although much time is required. In the medium-term it seems as though the policy fuel that drives financial assets will run out and more fundamental changes will have to happen. The problems are well known – Three-quarters of the US deficit was financed by the Fed while foreign governments’ purchases account for the rest. We need to see 250,000 new jobs per month on average over the next five years to get back to 5.5% unemployment rates. The list of negatives could go on and on. An “all clear” signal will not be required for markets to do better, but in the medium-term the ups and downs of the economy are likely to keep the markets from trending dramatically. ISM Purchasing Managers Index

Source: Bloomberg

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Source: Bloomberg

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Source: Bloomberg

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Source: Accuvest Global Advisors, Bloomberg

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Source: Bloomberg

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Source: Accuvest Global Advisors, Bloomberg

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Stocks are “high” in the short-term given the big run

recently.

Longer-term, the market could be

considered “low” given the relative

attractiveness versus other asset

classes.

!,(&)&!-'“Buy low and sell high” is a trite yet powerful concept. Remembering that basic tenet, however, can keep one focused on pertinent points. The trick comes in knowing when the market is low or high. However, you don’t have to pick tops or bottoms, rather general levels of altitude. In portfolio management, ‘high’ might refer to an extended valuation or perhaps an unattractive relative valuation to other asset classes. On this basis, the equity market is not necessarily high. Stocks seem attractive in the medium to longer-term based on absolute valuation metrics that are below historical averages and in-line with levels that have created solid returns in the past. (See country ranking data in table that follows). On a relative value basis, stocks also seem attractive compared to bonds on a variety metrics with the earnings yield gap expressing that concept in perhaps the most powerful way (see chart). However, this relative valuation has been stretched even more in the past and can persist over extended periods of time. Relative value therefore also creates a longer-term view of the equity market Country Ranking Data – As of 9/31/2012

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October 2012


Volatility is low making options less expensive.

Hedging a portion of the equity

portfolio during the ‘sugar high’ of

QE3 could be prudent

Country rotation continues to be one of the best tools to get efficent stock market exposures

portfolio can be sold at a predetermined price, thus minimizing downside price moves. There is no limit to participating in gains in the market if prices move higher. The cost of the option would be lost in such a scenario, but that is the case with most insurance. The analogy of insurance is appropriate in that the cost of a hypothetical hurricane policy is low if there are presently no clouds in the sky. And just because you have insurance on your home, that doesn’t mean you want a hurricane to appear. However, if it does you are protected. This works well in portfolio management as one can retain intact full exposure to strategies that have been in place with a longer-term view. Volatility Index

Harvest gains. Some marginal selling of positions that have run their full course and are expensive relative to other stocks can certainly make sense as well. This kind of management clearly fits in the Tactical ring of CST portfolios which means the portion of a portfolio that can be “in” or “out” of the market must be limited. This is important because there is a risk in making a call that an index, a theme, a country, or a strategy is fully exhausted, can be sold and then re-bought at better levels. Persistent and consistent gains cannot be counted on in this kind of approach. Rotation of country exposure. A fitting analogy would be that of a horse race; you are not exiting the race, merely changing horses to one that seems to have better prospects from this point in the race. This kind of concept fits with the ‘buy low, sell high’ theme as a portfolio is swapping out of a fully-valued asset into one that is relatively cheap. With a wide disparity amongst countries’ fiscal and monetary policy as well as political stability, the opportunity for meaningful and beneficial relative returns is clear. View again the country ranking data above and note the range in P/E ratios alone of 5.5x to 22.6x. The stock market’s attractive relative valuation should drive prices higher over time. Once again, however, the short-term has been driven by liquidity while fundamentals have waned. The following table shows year-end S&P 500 levels as well as the P/E ratio that would be in place at that time given the analyst’s earnings estimates. This kind of valuation seems reasonably attractive, although notice that forecasts are for index levels more or less in line with where the market is now. The subsequent chart shows how these earnings estimates have been falling as of late which gives one pause when considering current price levels.

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October 2012


The Fed has pledged to provide massive liquidity for an indefinite period, meaning

rates will stay low for a long time

Notwithstanding the Fed’s stance, forecasts do show an uptick in yields over the next year

The thirty year bull market in bonds is over if for no other reason than there is not much lower rates can decline

“Don’t Fight the Fed” means,

however, that rates are likely to stay

low and portfolios can hold bonds

knowing that there is an implicit ‘put

option” to Bernanke

.&/!0'&$"#%! Modest economic growth coupled with an unambiguously dovish Fed argues for yields to decline further from current levels. Also, as attention shifts to the fiscal cliff at year-end with no resolution in sight, investors’ concerns about an adverse shock to the economy could rise. At current levels, the US economy has been weaker than the Fed forecast at the start of the year, and growth expectations for the next few quarters have steadily trended down. QE3 was announced with language that can only be interpreted as Fed intervention continuing for perhaps years. With the USD retaining safe-haven status, there is little doubt that rates will stay low for an extended period. The accompanying table shows the forecast of top banks of the US Treasury 10-year yield out to the end of 2013. A very slight uptick can be seen, but essentially rates are expected to stay low. 10-Yr Treasury Yield Forecasts (78 forecasts) Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13Median Forecast 1.7 1.75 1.89 2 2.2 2.4Average Forecast 1.68 1.8 1.93 2.11 2.27 2.46High Forecast 2.1 3.25 3.76 4.03 4.2 4.8Low Forecast 1.25 1.35 1.3 1.4 1.5 1.5

To be fair, such forecasts have proven to be very incorrect in the past. The most recent example was the near unanimous view that rates were to rise during 2011 to near 4%. However, the fact was that rates declined hard to their current levels. There is little doubt that rates will rise in the future. The 30-year bull market in bonds is essentially over, but it will not be reversed easily. Long Term Bond Yields

Source: Bloomberg

The famous (and accurate) “don’t fight the Fed” maxim is in play now, meaning bonds need to be held in portfolios with a maturity profile that gets out on the curve into an area where there is yield and, perhaps more importantly, where a certain amount of risk can be hedged out of the portfolio. Over the past few years, the truly only non-correlated asset class to stocks and other risky assets was US Treasury bonds; the longer, the better. Even if yields were to back up and treasury positions declined, it

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Source: Bloomberg

BBB Corpo

Source: Bloomberg

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Source: Bloomberg

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Emerging market bond spreads have also narrowed as

risk-on environment has

taken hold

Emerging Market Bond Spreads

Source:Bloomberg

Strategy

Duration will continue to be extended in US Treasury issues Caution is still warranted as bonds are overbought and subject to large

corrections in a risk-on rally. Returns in treasury bonds are mathematically limited at these low levels.

Clipping such low coupons will not be tremendously rewarding, even if upside risks are limited.

Corporate bonds still have the benefit of above average spreads at a time when rates are extremely low. When expressed as a ratio, the yield on corporates appears even more attractive.

Cautious, tactical moves out the yield curve and down the quality spectrum will create meaningful outperformance. Such moves must be on weakness in the bond market and not at times of extreme risk-off sentiment.

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1*)!2$1)&3!- After turbulent performance in Q2 2012, Q3 2012 was characterized by calm price action and a stealthy rally in risk assets. Compared to the volatility and risk aversion seen during the summer of 2011, this summer was pleasant surprise for risk managers. The CBOE Volatility Index (VIX) is currently three times lower than the level registered just twelve months ago. Nonetheless, the hedge fund industry is currently on pace to underperform the S&P500 index for the fourth consecutive year. Managers have struggled with low macro-economic visibility and the absence of stable, tradable, trends lasting for more than a couple of weeks. This year’s equity market returns have been driven by a handful of quick bursts, which have been difficult for managers to time. Furthermore, hedge funds have maintained an extremely cautious approach towards risk over the last 12 to 18 months. As of mid-August, the median equity beta of alternative strategies remained in single digit territory, suggesting near neutral exposure to equities. Hedge fund managers were underexposed to risk assets coming into the summer, and clearly believed that markets needed a new catalyst before they could move higher. The month of September 2012 may be remembered as the month when central bankers around the world took decisive steps to reduce systematic risk. The subsequent announcements by China, the ECB, Fed, and the Bank of Japan may well have been coordinated in an attempt to end the speculation of a hard landing in China, an implosion of the euro zone, an imminent recession in the US, and further economic decline in Japan. As systematic risk has abated and re-priced, markets have rallied and investor sentiment has shifted to cyclical uncertainties. In that respect, we note that the Citigroup Economic Surprise index continues to improve, but is now quite extended to the upside. For the moment, it appears that hedge fund managers have acknowledged a positive shift in systematic risk as recent performance shows increased exposure to equity market directionality. Hedge Fund Risk and Return – Last 12 months

Source: PerTrac and HedgeFund.net

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Long/Short Equity Index

Macro Index

CTA/Managed Futures Index

Merger/Risk Arbitrage Index

Relative Value Aggregate Index

Event Driven Index

Distressed Index

Fixed Income Arbitrage Index

Market Neutral Equity Index

Emerging Markets Index

October 2012


Looking forward, a core allocation to a diversified portfolio of alternative strategies will be further build out. Satellite allocations to liquid alternative strategies well-positioned for medium-term relative outperformance will also be emphasized. Satellite strategy allocations are driven by four distinct investment models designed to optimize: volatility contribution, return relative to conditional value at risk, momentum, and fundamentals. Satellite allocations, listed by level of attractiveness, are as follows:

Credit-oriented strategies exposed to spread tightening and the corresponding credit rally.

Event-Driven strategies with exposure to solid equity markets and the revival in Merger and Acquisition deal flow.

L/S Equity strategies with a long bias or net long equity market exposure. Global Macro strategies positioned to reap profits from commodity and equity

exposures while mitigating losses driven by long exposures to fixed income and the USD.

Lastly, tactical allocations designed to mitigate the downside risk of an admittedly cloudy macro-economic horizon. Given the ever-present potential for a shock to the financial system, a conservative allocation to managed futures is also part of the portfolio. Trend following strategies, both short-term and long-term, now have a net long exposure to equities; however, these exposures are dynamic and will adjust to capitalize on asset class momentum whether it is positive or negative. Furthermore, in the event of a return to risk aversion and increasing systematic risk, exposure to long duration US Treasuries and put options on global equity indices are in pay. Hedge Fund Returns

Source: HFR

The outlook for commodities is being discussed within the Alternatives Asset portion of the BPV going forward. One of the Investment Committee’s key themes is increasing demand for natural resources, so consistent review of the space is relevant, but it fits best in a broader discussion about non-financial assets as a whole. With global growth having stalled, it seems unlikely for commodity prices to continue without a correction which has already unfolded. Weaker demand from China and

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Convertible Arbitrage Distressed Distressed Distressed Event Driven Equity Hedge Macro

Convertible Arbitrage


Merger Arbitrage


8.75% 28.32% 17.50% 6.98% 15.81% 10.50% 4.83% 60.17% 13.19% 1.48% 6.10%

Macro Event Driven Event Driven Equity Hedge Distressed MacroMerger

Arbitrage Distressed Distressed Distressed Distressed8.33% 25.56% 13.17% 5.83% 14.72% 9.12% -5.37% 28.14% 12.10% -1.79% 4.50%

Distressed Equity Hedge Equity Hedge

Equity Market Neutral

Merger Arbitrage

Merger Arbitrage

Equity Market Neutral Equity Hedge Event Driven

Equity Market Neutral Event Driven

3.05% 20.54% 7.68% 4.69% 12.88% 8.58% -5.92% 24.57% 11.74% -2.12% 3.88%Equity Market Neutral Macro

Merger Arbitrage Macro

Convertible Arbitrage Event Driven Event Driven Event Driven Equity Hedge Event Driven Equity Hedge

0.13% 18.88% 3.50% 3.97% 12.62% 8.38% -21.82% 25.04% 10.49% -3.30% 3.52%

Merger Arbitrage



Merger Arbitrage Equity Hedge Distressed Distressed

Merger Arbitrage Macro Macro


-1.86% 10.16% 3.46% 2.48% 11.71% 6.36% -25.20% 11.65% 8.10% -4.15% 2.18%

Event DrivenMerger

Arbitrage Macro Event Driven MacroConvertible Arbitrage Equity Hedge Macro

Merger Arbitrage


Merger Arbitrage

-4.58% 7.67% 3.29% 1.58% 7.79% 5.25% -26.65% 4.34% 4.71% -5.16% 1.44%

Equity Hedge








Equity Market Neutral Equity Hedge Macro

-4.71% 1.94% 2.95% -0.72% 7.70% 3.47% -33.73% 1.43% 2.81% -8.36% 1.08%

October 2012


Europe has caused oil prices to decline. Grain prices were elevated due to severe drought conditions, but have started to retrench. Monetary policy notwithstanding, the degree of risk undertaken to hold commodity positions currently is too great as Europe, the US and China all lack near-term game changers economically speaking. Best/Worst Commodities YTD

Source: Bloomberg

Gold is an interesting exception and has an ongoing place in portfolio construction via gold mining stocks. An uptick in gold prices is likely given the ongoing debasement of USD, unattractiveness of EUR, and too few other currencies to create a deep enough pool for investment. Miners continue to be a leveraged play on this view. Their volatility has been significant recently and there could be some tactical increases and reductions to positions, but the theme continues to have legs. Broad Commodities

Source: Bloomberg

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Oil Prices

Source: Bloomberg

Gold Prices

Source: Bloomberg

Strategy

Alternative assets and strategies continue to be important building blocks in portfolios. Broad core exposure will be seen via liquid and transparent vehicles.

Focusing satellite exposures in fixed-income arbitrage and event-driven strategies.

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General Disclosures

The material provided in this report is for informational use only and should not be seen as an offer to sell or as a solicitation of an offer to purchase any security or to subscribe to any investment or advisory service. This information was obtained from the disclosed sources and is believed to be reliable. The information is subject to change without notice. Accuvest Global Advisors does not guarantee the accuracy or completeness of the information nor make any warranties with regard to the results that may be obtained from its use.

Debt and equity investments associated with certain foreign countries may involve increased volatility and risk due to, among others, political risk, sovereign risk, economic quality, liquidity risk. Differences in the extent of these risks vary from country to country, among investment instruments, and over time. Investing in non-U.S. securities, including ADRs, may entail certain risks. The securities of non-U.S. issuers may not be registered with, nor subject to the reporting requirements of the U.S. Securities and Exchange Commission (SEC). There may be limited information available on foreign securities. Foreign companies are generally not subject to uniform audit and reporting standards, practices and requirements comparable to those of U.S. Securities. Some foreign companies may be less liquid and their prices more volatile than securities of comparable U.S. companies. In addition, exchange rate movements may have an adverse effect on the value of an investment in a foreign stock and its corresponding dividend payment for U.S. investors. Past performance is not indicative of future results. You should not assume that any future performance of any security or country referred to in this Report will be profitable or equal to any corresponding performance levels that might be provided. Investment risks are borne solely by the investor and not by AGA.

Where included in this report, MSCI sourced information is the exclusive property of AGA. Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or used to create any financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind.

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