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2015 New Year Issue

A HISTORY OF SILVER BEAR MARKETS SINCE 1900 AND THE EFFECTS ON INFLATION, THE STOCK MARKET AND INTEREST RATES

S

By Louis P. Stanasolovich, CFP , CCO, CEO and President of Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc. and Editor of The Global Investment Pulse ince mid-July of 2014, the price of silver has slumped by approximately -25.0%. It had peaked to the mid-40s in 2011. These days, silver is much more an industrial metal as opposed to a precious metal. However, over the decades, it has retained some of its monetary characteristics. The question is: Is there a relationship between variations in the price of silver and ®

ARE DECLINING CRUDE OIL PRICES GOOD FOR EMERGING MARKETS? By Jun Zhu, CFA, Senior Analyst, The Leuthold Group, LLC The price of crude oil staged a dramatic change of fate in the past few months, and the bottom is still nowhere in sight. As this is written, the West Texas Intermediate (WTI) oil price is quoted at $67.00, roughly 36.0% decline from the peak reached back in June (See “Crude Oil Price Dropping” chart on the top of page 12). What caused the significant decline and how will lower energy prices affect Emerging Market investments? As for the second question, the answer to us is intuitive: Positively. The majority of Emerging Market countries are facing imminent energy shortages as their consumption has grown substantially in the past three decades (See “Growth of Total Energy Consumption” chart on the bottom of page 12). Lower energy prices could certainly give these companies some breathing room in the form of lower input costs to their economies (or lower energy subsidies in some countries).

CHASING AWAY THE BEARS

Silver Bear Markets, continued on page 4

THE RUNDOWN OF RECENT YEARS By Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC

Crude Oil Prices, continued on page 12

Market gains have been less broad than in 2012 and 2013 (the Russell 2000 is 11.0% behind the S&P 500), and for U.S.-based investors in foreign stocks, there are no gains. These shortfalls are especially acute because in bull markets that last long enough (and the current one qualifies) the S&P 500 inevitably becomes the only benchmark. Market direction and leadership have been mismatched. Stocks (as measured by the S&P 500) are positive in the low doubledigits, but the best strategy has (perversely) been to “Recession-proof” one’s equity holdings with big positions in Health Rundown, continued on page 4

THANK YOU As 2015 approaches, we would like to thank you for being a loyal reader of The Global Investment Pulse, and for continuing to make it one of your “must reads” for the month! Season’s Greetings and Happy New Year! THE GLOBAL INVESTMENT PULSE 2015 New Year Issue

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ABOUT LEGEND FINANCIAL ADVISORS, INC.®

Legend Financial Advisors, Inc.® (Legend) is a No Commission, Fee-Only U.S. Securities and Exchange Commission (SEC) registered investment advisory firm with its headquarters located in Pittsburgh, Pennsylvania. Legend’s Personal Chief Financial Officers (Personal CFOs) provide a multitude of services, including Wealth Advisory Services, which incorporate Financial Planning and Investment Management strategies to affluent and wealthy individuals as well as business entities, medical practices and

non-profit organizations. Our Personal CFOs offer so much more than wealth managers, financial advisors, financial planners and/or investment managers. We analyze each client’s financial strengths and weaknesses, then recommend creative solutions for improvement. Additionally, our Personal CFOs work closely with our client’s other professional advisors to achieve optimal results. WHY LEGEND IS DIFFERENT? 1. Legend is compensated exclusively by client fees, known as No Commission, Fee-Only. Legend is unlike Fee-Based Advisors and brokerage firms who have numerous conflicts of interest due to the fact that both types of firms receive commissions. 2. Members of Legend’s Financial Advisory Team have been selected by National Publications such as Worth, Medical Economics and Barron’s more than 50 times as “The Best Financial Advisors In America”. 3. Legend and its advisors have chosen to be governed by the Fiduciary Standard of law, differentiating itself from most other advisory and brokerage firms. Fiduciaries are required to always work in their clients’ best interests. 4. Legend designs dynamic, creative and personalized financial planning and investment solutions for its clients.

ABOUT EMERGINGWEALTH INVESTMENT MANAGEMENT, INC. EmergingWealth Investment Management, Inc. (EmergingWealth), is the sister firm of Legend Financial Advisors, Inc.® (Legend) and is a No Commission, Fee-Only Securities and Exchange Commission (SEC) registered investment advisory firm. EmergingWealth provides Investment Management services to individuals as well as business entities, medical practices and non-profit organizations whose wealth is emerging. All investment portfolios are sub-advised by Legend. Both Legend and EmergingWealth share a common advisory team, Investment Committee and Fee Schedule.

LOUIS P. STANASOLOVICH, CFP®, EDITOR Louis P. Stanasolovich, CFP® is founder, CCO, CEO and President of Legend Financial Advisors, Inc.® (Legend) and EmergingWealth Investment Management, Inc. Lou is one of only four advisors nationwide to be selected 12 consecutive times by Worth magazine as one of “The Top 100 Wealth Advisors” in the country. Lou has also been selected 11 times by Medical Economics magazine as one of “The 150 Best Financial Advisors for Doctors in America”, twice as one of “The 100 Great Financial Planners in America” by Mutual Funds magazine, three times by Dental Practice Report as one of “The Best Financial Advisors for Dentists In America” and once by Barron’s as one of “The Top 100 Independent Financial Advisors”. Lou was selected by Financial Planning magazine as one of six individuals to receive the inaugural Influencer Awards for 2010. Lou was selected for the Wealth Creator award recognizing the advisor who has made the most significant contributions to best practices for portfolio management. He has been named to Investment Advisor magazine’s “IA 25” list three times, ranking the 25 most influential people in and around the financial advisory profession as well as being named by Financial Planning magazine as one of the country’s “Movers & Shakers” recognizing the top individuals who have done the most to advance the financial advisory profession. 2

THE GLOBAL INVESTMENT PULSE 2015 New Year Issue


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LONG TERM IMPLIED INFLATION RATE NOW BELOW 2.0%

As of: December 12, 2014

Source: Bloomberg Investment Services COPYRIGHT 2014 LEGEND FINANCIAL ADVISORS, INC.® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.®

THE GLOBAL INVESTMENT PULSE 2015 New Year Issue

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Silver Bear Markets, continued from page 1

variations in the U.S. inflation rate? In simple terms: Does a big move in the price of silver foreshadow big moves in either the U.S. Consumer Price Index (CPI) or Producer Price Index (PPI)? Therefore, are there any embedded ‘inflation expectations’ within the price of silver? To determine the answer to that question, let’s look at periods of time where silver declined by 20.0% or more and how it affected the PPI and CPI. Since 1920, there are eight time periods where silver has declined 20.0% or more. 1. 1920: The U.S. went into a nasty post-World War I depression between 1920 and 1922, with both the PPI and CPI dropping into negative territory. 2. 1930: This was the first year of the Great Depression, which lasted until 1933. Both the PPI and the CPI fell and remained low. 3. 1937: The U.S. economy, which had recovered nicely since 1934, relapsed into a deep double dip Depression (This wasn’t a “Great Depression” though. A Great Depression occurs when Gross Domestic Product, otherwise known as GDP, declines at least 25.0%. In a Depression, GDP declines between 10.0% and 25.0%.), which ended with the Second World War. PPI and CPI fell. The stock market fell four of the next five years. 4. 1970: Believe it or not, between 1937 and 1970 (33 years) silver did not fall by more than 20.0%. After 1970, following heavy government spending on Lyndon Johnson’s ‘Great Society’ program and the Vietnam War, inflation started to rear its head in the U.S. The U.S. Government did not address inflation and instead floated the U.S. Dollar (The U.S. Government took the U.S. Dollar off of the “Gold Stan-

dard”.). This, of course, lead to the high inflation of the 1970s. 5. 1981: Paul Volcker as the Chairman of the Federal Reserve increased interest rates to unprecedented levels, at least in the U.S., to stamp out inflation. Inflation (CPI) fell by half from 12.0% to 6.0%, while the PPI turned negative year-over-year. 6. 1984: Silver fell again, but the biggest decline initially was not the Consumer Price Index, but the price of oil, which heavily influences inflation. In 1985, oil went from $30.00 a barrel to $10.00. The CPI was cut in half again and the PPI turned negative. 7.

1991-1992: The reunification between East and West Germany lead to extraordinarily high real interest worldwide. The CPI declined, the PPI went negative.

8. 2009: Both the CPI and PPI turned negative. However, the severe recession (Gross Domestic Product declined 5.1%) ended and the stock market increased 26.45% as evidenced by the S&P 500 after initially loosing 18.0% in the first two months of the year. 9. 2014: Today, despite silver falling approximately 25.0%, both the CPI and PPI are still positive, so far. The Conclusions: 1. Following every previous decline in the price of silver of 20.0% or more, the PPI fell steeply and on six occasions, it turned negative for a time. Similarly, in every case the CPI at least saw its growth rate decelerate, and on four out of the eight occasions,

it turned negative (1920, 1930, 1937, and 2009). 2. During or after every one of the previous eight previous 20.0% or more declines in silver, U.S. long-term (as evidenced by the 10-year U.S. Treasury Note) interest rates declined. 3. On every one of the previous eight 20.0% or more declines in silver, the interest rate spreads (the differences) between BAA-rated 10-year corporate bond yields (these would be the higher of the two) and 10-year U.S. government bond yields increased, sometimes significantly. 4. Following seven out of the previous eight 20.0% or more slumps in the price of silver, the U.S. stock market declined. The lone exception was 1985, when the U.S. Stock Market rallied in response to the fall in oil prices. In summary, it would seem logical to expect the U.S. PPI to turn negative yearover-year, long-term interest rates to fall (even though they have declined a great deal already in 2014), and perhaps corporate bond interest rate spreads will widen (the gap between Junk Bond yields and U.S. Treasury yields has already started to widen for Junk Bonds). In the case of the U.S. Stock Market, if oil prices fall fast enough it appears possible that an early tax cut in effect, will be delivered. 1985 then would be repeated. Source: A number of facts for this article were excerpted from “The Signal In Silver” by Charles Gave, Founding Partner and Chairman, GaveKal, (Gavekal Dragonomics Global Research, November 20, 2014), www.gavekal.com. PULSE

Rundown, continued from page 1

Care, Utilities, and Consumer Staples. Tech has done well, but other cyclical sectors normally levered to a rising market (Discretionary, Industrials, and Materials) are all well behind the S&P 500—while foreign stocks have lagged Treasury bills. Asset allocators—who’ve universally declared stocks “cheap relative to bonds”— were best served to load up on 30-year Treasuries. So much for annual forecasts. Quantitative factors have been choppy during 2014. Early troubles with “momentum” (big declines in Social Media and Biotech) were largely reversed during the balance of 2014. 4

As the result of some or all of the above, Lipper estimates that 85.0% of active equity managers are trailing the S&P 500 on a year-to-date basis. Passive equity investing is probably more popular today than at any time since 2000—which, of course, was a terrible time to go passive. Many market pundits view the general malaise among both retail investors and professional equity managers as contrarily very bullish for the stock market’s longterm prospects. While investor sentiment seems low, it’s not matched by market valuations, which (at least in the U.S.) are quite high.

THE GLOBAL INVESTMENT PULSE 2015 New Year Issue

Source: This article was excerpted from “Stock Market Observations”, by Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC, (Perception Express, December 5, 2014) www.leutholdgroup.com. COPYRIGHT 2014 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC

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A RAPID RISE IN OIL OR FOOD PRICES

By Louis-Vincent Gave, Founding Partner and Chief Executive Officer, GaveKal Violent spikes in oil and food prices can be highly destabilizing for developing countries, where the median family spends so much more of their income on basic necessities than the typical Western family. Sudden spikes in the price of food or energy can quickly create social and political tensions. In addition, for oil-importing countries, a spike in oil prices can lead to a rapid deterioration in trade balances. Such spikes tend to scare foreign investors away, which puts pressure on the local currency and pushes domestic interest rates higher, which in turn leads to weaker growth, etc. Source: This article was excerpted from “The Burning Questions for 2015” by Louis-Vincent Gave, Founding Partner and Chief Executive Officer, GaveKal, (Gavekal Dragonomics Global Research, December 3, 2014), www.gavekal.com. COPYRIGHT 2014 GAVEKAL REPRINTED WITH PERMISSION FROM GAVEKAL

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OIL STOCK MARKET PERFORMANCE Energy Industry Groups

Since Crude Oil Peak 6/13/14

Oil & Gas Drilling

-47.4%

Oil & Gas Exploration & Production

-34.5%

Oil & Gas Equipment & Services

-26.8%

Integrated Oil & Gas

-21.7%

Coal & Consumable Fuels

-21.5%

Oil & Gas Refining & Marketing

-3.2%

Oil & Gas Storage & Transportation

+2.4%

As of: December 5, 2014 COPYRIGHT 2014 THE LEUTHOLD GROUP, LLC

Source: The Leuthold Group, LLC, Perception Express, December 5, 2014, www.leutholdgroup.com REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

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U.S. CRUDE OIL IMPORTS 400,000

Thousand Barrels/Month

350,000

300,000

250,000

200,000

150,000

100,000

50,000

As of: December 5, 2014 COPYRIGHT 2014 THE LEUTHOLD GROUP, LLC

Jan-13

Jan-11

Jan-09

Jan-07

Jan-05

Jan-03

Jan-01

Jan-99

Jan-97

Jan-95

Jan-93

Jan-91

Jan-89

Jan-87

Jan-85

Jan-83

Jan-81

Jan-79

Jan-77

Jan-75

Jan-73

0

Source: Factset via The Leuthold Group, LLC, Perception Express, December 5, 2014 www.leutholdgroup.com REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

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OIL AND GAS REFINING AND MARKETING GETTING CHEAP NORM PE 40

35

30

25

20

15

10

P/E Ratio Using 5-Year Normalized EPS

2005

2006

2007

5

2008

As of: December 5, 2014 COPYRIGHT 2014 THE LEUTHOLD GROUP, LLC

6

THE GLOBAL INVESTMENT PULSE 2015 New Year Issue

2009

2010

2011

2012

2013

2014

Source: The Leuthold Group, LLC, Perception Express, December 5, 2014 www.leutholdgroup.com REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

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“Do You Want A Second Opinion?” To see if your investment portfolio is built to navigate the pitfalls and opportunities ahead, call us today for a “Free Second Opinion” at (412) 635-9210.

www.legend-financial.com THE GLOBAL INVESTMENT PULSE 2015 New Year Issue

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SECULAR BEAR MARKET WATCH April 1, 2000 to November 30, 2014 (14 years and 8 months) Annual Compound Return

Total Return

Consumer Price Index (Inflation)

2.22%

37.94%

90-Day Treasury Bills Index-Total Return

1.79%

29.66%

Barclays Aggregate Bond Index-Total Return

5.67%

124.50%

HFRX Global Hedge Fund Index

2.83%

50.57%

S&P 500 Index (U.S. Stock Market)

4.19%

82.65%

MSCI EAFE Index (Developed Foreign Equities)

3.55%

66.71%

MSCI Emerging Market Index (Equities)

7.69%

196.72%

Newedge CTA Index (Managed Futures)

5.58%

121.66%

Dow Jones–UBS Commodity Index-Total Return (USD)**

0.94%

14.64%

Dow Jones U.S. Real Estate Index-Total Return (USD)**

11.60%

400.07%

Gold Bullion

10.31%

322.13%

* Compound and Total Returns include reinvested dividends. MSCI Indexes do not include dividends prior to 2002. Newedge Index is equally-weighted. ** USD = U.S. Dollar

SECULAR BEAR MARKET WATCH (CONTINUED)

Source: Bloomberg Investment Service As of: November 30, 2014

April 1, 2000 to November 30, 2014 (14 years and 8 months)

COPYRIGHT 2014 LEGEND FINANCIAL ADVISORS, INC. ® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC. ®

Note: During Secular Bear markets U.S. Stocks have historically returned a little more than inflation or a little less than inflation—plus or minus 1.50%—and generally last between 15 to 25 years. The last Secular Bear market (1966 to 1982) lasted 17 years and underperformed inflation by approximately one-half of one percent per year. The other Secular Bear markets since 1900 were 1901 to 1920 and 1929 to 1949. In both cases, the U.S. Stock market outperformed inflation by approximately 1.50% per year. All of the aforementioned performance numbers are pre-tax. The performance of the U.S. Stock market so far in the current period (April 1, 2000 to the present) certainly appears to indicate that we are in a Secular Bear market. Long-term returns (over the next 10 years) for the S&P 500 will probably be slightly worse than the last 14 years and 8 months. Current 10 year normalized P/Es (long-term valuations) indicate approximate annual compound returns of slightly less than 3.00% over the next 10 years. Of course during the next 10 years, returns during various periods will be significantly higher and lower than the expected return. For example, the more the stock market rises in the near term, the less returns after that period will be and vice versa. PULSE 8

THE GLOBAL INVESTMENT PULSE 2015 New Year Issue


EUROPEAN CENTRAL BANK

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors The European Central Bank (ECB) is going to create another stimulus program to help jumpstart the eurozone’s flagging economy. The plan is called (another long and confusing name) Targeted Long-Term Repo Operation (TLTRO) and will allow the ECB to purchase covered bonds and asset-backed securities over the next two years. Such a plan will hopefully stimulate bank lending to non-financial corporations. Below are some of the other programs in the ECB’s arsenal, courtesy of Visual Capitalist:

save the euro” moment. As of September 2014, the ECB’s OMP program remained unused. Longer-Term Refinancing Operations (LTROs): On December 8, 2011, the ECB announced plans to conduct two LTROs with maturity of three years. The ECB allocated €529.5 billion in March 1, 2012. Targeted Long-Term Repro Operation (TLTRO):

Securities Markets Program (SMP): In May 2010, the ECB started its SMP to ease credit conditions in the Eurozone. Under this program the ECB purchased €212.1 billion covered bonds on the secondary market, equal to 2.2% of the Eruozone Gross Domestic Product (GDP). Outright Monetary Transactions (OMT): The SMP program was terminated in September 2012 and replaced with a new OMT program, whereby the ECB pledged to buy up unlimited amounts of government bonds in the secondary market in what is referred to as Draghi’s “whatever it takes to

On October 2, 2014, the ECB released details of its new stimulus program to purchase asset-backed securities and mortgagebacked securities. However, the central bank did not say how much debt it will buy. Source: This article was excerpted from “Don’t Let Motion Sickness Keep You From Missing The Boat” by Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors, (Advisor Alert, December 5, 2014), www.usfunds.com COPYRIGHT 2014 U.S. GLOBAL INVESTORS REPRINTED WITH PERMISSION FROM U.S. GLOBAL INVESTORS PULSE

RISK FALLS AGAIN FROM EXTREME LOW LEVELS MONTHLY RISK AVERSION INDEX (RAI)

Note: The Risk Aversion Index combines ten market-based measures including various credit and swap spreads, implied volatility, currency movements, commodity prices and relative returns among various high- and low-risk assets.

4

4

3

3

2

2

1

1

0

0

1980

1982

1984

As of: December 5, 2014

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

Source: The Leuthold Group, LLC, Perception Express, December 5, 2014, www.leutholdgroup.com REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

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LONG-TERM FUTURE STOCK RETURNS WILL BE MEDIOCRE By John P. Hussman, Ph.D., President, Hussman Funds

“We estimate nominal total returns of less than 1.4% annually for the S&P 500 over the coming decade, with negative total returns over the next eight years. So if one believes that zero interest rates are likely to persist for another eight years, and that stocks should be priced with zero return or premium for risk, stocks are probably fairly valued. If one believes that zero interest rates are likely to persist for another three decades, but stocks should be priced with normal historical risk premiums over and above risk-free rates, stocks are also probably fairly valued. In every other universe, stocks are about double historically normal valuations, even adjusting for the likelihood of several more years of zero short-term rates.” Source: This quote was excerpted from John P. Hussman, Ph.D., President, Hussman Funds, “A More Important Distinction”, Weekly Market Comment, November 24, 2014.

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SHILLER PRICE/EARNINGS RATIOS

Long-Term Stock Market P/E Valuations Continue To Climb Which Means Lower 10-Year Returns P/E 45

40

35

30

Note: Created by Robert J. Shiller, Professor at Yale University, this Price Earnings Ratio is based on average inflation-adjusted earnings from the previous 10 years (Each year of earnings is inflated and quoted in current dollars), known as the Cyclically Adjusted P/E Ratio, also known as the Shiller PE Ratio, or PE 10 Ratio. Because this factors in earnings from the previous ten years, it is less prone to wild swings in any one year. The bad news: Because of the current high P/E valuation of 26.12 returns on the S&P 500 are likely to be in the very low single digits over the next ten years.

Black Tuesday

26.12

25

20

Black Monday

15

10

5

0

1890 1900 1910 1920 1930 1940 1950 1881-01-01 As of: December 15, 2014 REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.®

1960

1970

1980

1990

2000

2010 2014-12-15

Source: www.multpl.com COPYRIGHT 2014 LEGEND FINANCIAL ADVISORS, INC.® PULSE

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THE GLOBAL INVESTMENT PULSE 2015 New Year Issue


SMALL CAP TO LARGE CAP HISTORICAL P/E RATIO Small Caps Are More Expensive, But Becoming Less Expensive

120

120

110

110

100

100

90

90 Note: Small Caps are selling at a 15.0% valuation premium relative to Large Caps, using non-normalized (non-averaged) trailing operating earnings. This is a decrease from last month’s reading of 20.0% due to the decline in Small Cap prices. The recent peak remains at 23.0%. Small Caps still remain at historically high valuation levels.

80

70

60 1983

1985

1987

1989

1991

1993

1995

1997

As of: December 5, 2014 REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

1999

2001

2003

2005

2007

2009

2011

80

70

60

2013

Source: The Leuthold Group, LLC, Perception Express, December 5, 2014 www.leutholdgroup.com

MEDIAN PROFIT MARGINS BY S&P 500 SECTOR 2014: Q3 Profit Margin Consumer Discretionary

2001-2007 Expansion Peak

Change, Last Peak To Today

7.7%

7.1%

0.6%

Consumer Staples

10.2%

8.7%

1.5%

Energy

11.5%

20.4%

-8.9%

Financials

14.5%

17.3%

-2.8%

Health Care

10.6%

11.7%

-1.1%

8.8%

7.5%

1.3%

14.3%

12.4%

1.9%

Materials

7.6%

8.6%

-1.0%

Telecom Services

4.6%

12.6%

-8.0%

Utilities

9.3%

8.8%

0.5%

10.3%

9.4%

0.9%

Industrials Information Technology

S&P 500 All figures are sector medians. As of: December 5, 2014 COPYRIGHT 2014 THE LEUTHOLD GROUP, LLC

Source: The Leuthold Group, LLC, Perception Express, December 5, 2014 www.leutholdgroup.com REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

THE GLOBAL INVESTMENT PULSE 2015 New Year Issue

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Crude Oil Prices, continued from page 1

CRUDE OIL PRICE DROPPING (WEST TEXAS INTERMEDIATE, $/BBL) 150.00

130.00

110.00

90.00

70.00

50.00

30.00

10.00 Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

As of: December 5, 2014 COPYRIGHT 2014 THE LEUTHOLD GROUP, LLC

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Source: Factset via The Leuthold Group, LLC, Perception Express, December 5, 2014, www.leutholdgroup.com REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

GROWTH OF TOTAL ENERGY CONSUMPTION: EMERGING MARKETS VERSUS U.S. 90.0% 80.0% 70.0%

Emerging Markets (Excluding Russia and Czech Republic for lack of historical data) U.S. 55.0%

60.0% 50.0%

80.0%

48.0%

40.0% 30.0% 17.0%

20.0% 10.0%

8.0% -1.0%

0.0% -10.0%

1980-1990

As of: December 5, 2014 COPYRIGHT 2014 THE LEUTHOLD GROUP, LLC

12

THE GLOBAL INVESTMENT PULSE 2015 New Year Issue

1990-2000

2000-2010

Source: EIA via The Leuthold Group, LLC, Perception Express, December 5, 2014, www.leutholdgroup.com REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

Crude Oil Prices, continued on page 13


Crude Oil Prices, continued from page 12

Other data sources not presented here, also point out that the China growth engine is still cranking, albeit at a slower pace. Could it be that the price of oil is down because the market is expecting lower growth? People have been worried about China’s slowdown for as long as they’ve had portfolio allocations there, but as far as the oil market is concerned, while the growth numbers stay positive (either realized growth rates or expected at around 7.5%), China will be consuming and buying more and more crude on an absolute basis. From a supply/ demand standpoint, this should actually help bolster the price, not the other way around. This is true for most other emerging countries in Asia, the largest Emerging Market region. Precluding a demand side (if demand for oil were to drop) issue, especially from Emerging Market countries, we strongly believe that recent oil price action is mainly due to supply concerns (although the sluggish economy in Europe does not help). There are a lot of eye popping charts in front of us when we look at the supply side of the story (U.S. monthly oil production on the chart “U.S. Crude Oil Production” on the top of page 14 and crude imports in the chart “U.S. Crude Oil Imports” on the bottom of page 14). Then there are the headlines about OPEC countries and Russia refusing to cut their production to defend prices. Emerging Market Winners And Losers: If one is convinced that the nose dive of crude oil is caused mainly by the supply glut, then the next question is, how will different Emerging Market countries benefit from lower energy prices? In our earlier study, we identified nine countries which may face higher than average growth in energy needs (See the Table on page 15). Among them, all except Mexico are net importers

500 450 400 350 300

Grey Line: Oil Domestic Demand (Millions of Tons) Black Line: Oil Domestic Supply

250 200 150

As of: December 5, 2014 COPYRIGHT 2014 THE LEUTHOLD GROUP, LLC

Sep-14 Dec-14

Jun-13 Sep-13 Dec-13 Mar-14 Jun-14

Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13

Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11

Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10

Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08

Mar-06 Jun-06 Sep-06 Dec-06

100 Dec-04

In looking at the data, the reader will find that China’s domestic crude oil demand (See “Annualized Oil Supply/Demand” chart to the top right) has seen almost a straight line increase for the past decade. This data series is on a quarterly basis with the most recent reading as of the third quarter. A more timely measure is the monthly crude oil import data published by China Customs (See “China Monthly Net Crude Oil Import” chart to the bottom right.). Even though it’s hard to compare to the 2004 and 2009 to 2010 super growth periods, the numbers in the most recent three months are strong (August at 18.2%, September at 7.4% and October at 18.7%). The November data is not yet available, but we expect to see another positive reading.

ANNUALIZED OIL SUPPLY/DEMAND (CHINA)

Mar-05 Jun-05 Sep-05

However, the answer to the first question (what exactly caused the oil price decline?) complicates the answer to the second question. If the decline is mainly due to supply side issues (U.S.’s energy renaissance, OPEC’s failure to coordinate on production cuts), then that is great news. Major crude import countries such as China and India will sit back and enjoy the lower prices. However, if the oil price decline, as some claim, is mainly due to weak demand (or the forecast of weaker demand in the future), especially in large economies like China, then this price action of oil could be a bad omen for Emerging Market equities.

Source: Oxford Economics via The Leuthold Group, LLC, Perception Express, December 5, 2014, www.leutholdgroup.com REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

CHINA MONTHLY NET CRUDE OIL IMPORT YEAR-OVER-YEAR GROWTH 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% -0.0% -20.0% -40.0% Jan-03

Jan-04

Jan-05

Jan-06

As of: December 5, 2014 COPYRIGHT 2014 THE LEUTHOLD GROUP, LLC

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Source: China Customs via The Leuthold Group, LLC, Perception Express, December 5, 2014, www.leutholdgroup.com REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

of crude oil. Theoretically, lower oil prices benefit the countries with the highest energy demand growth, and countries with the highest dependence on imports. China, India, Brazil, Thailand, and Turkey seem to fall into that category. On the other hand, oil exporters within the Emerging Market space, including Mexico, Russia and United Arab Emirates, could end up losers. Qatar, which is a major natural gas exporter, may face challenges if the lower price trend spills over to natural gas (when energy companies switch to produce more natural gas instead of crude, depressing natural gas prices). Indonesia and Egypt belong in this camp as well. Impact On China And India: Lower energy prices translate to lower input prices for oil importers, and also helps to decrease inflation (The Consumer Price Index a.k.a. CPI.). India and China have been pressured by high inflation, but recent data Crude Oil Prices, continued on page 14

THE GLOBAL INVESTMENT PULSE 2015 New Year Issue

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Crude Oil Prices, continued from page 13

U.S. CRUDE OIL PRODUCTION 350,000

Thousand Barrels/Month 300,000

250,000

200,000

150,000

100,000

50,000

As of: December 5, 2014 COPYRIGHT 2014 THE LEUTHOLD GROUP, LLC

Jan-10

Jan-05

Jan-00

Jan-95

Jan-90

Jan-85

Jan-80

Jan-75

Jan-70

Jan-65

Jan-60

Jan-55

Jan-50

Jan-45

Jan-40

Jan-35

Jan-30

Jan-25

Jan-20

0

Source: Energy Information Administration via The Leuthold Group, LLC, Perception Express, December 5, 2014, www.leutholdgroup.com REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

U.S. CRUDE OIL IMPORTS 400,000

Thousand Barrels/Month

350,000

300,000

250,000

200,000

150,000

100,000

50,000

As of: December 5, 2014 COPYRIGHT 2014 THE LEUTHOLD GROUP, LLC

14

Jan-13

Jan-11

Jan-09

Jan-07

Jan-05

Jan-03

Jan-01

Jan-99

Jan-97

Jan-95

Jan-93

Jan-91

Jan-89

Jan-87

Jan-85

Jan-83

Jan-81

Jan-79

Jan-77

Jan-75

Jan-73

0

Source: Factset via The Leuthold Group, LLC, Perception Express, December 5, 2014 www.leutholdgroup.com REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

THE GLOBAL INVESTMENT PULSE 2015 New Year Issue

Crude Oil Prices, continued on page 15


Crude Oil Prices, continued from page 14

As of: December 5, 2014 COPYRIGHT 2014 THE LEUTHOLD GROUP, LLC

Source: EIA, CIA World Factbook via The Leuthold Group, LLC, Perception Express, December 5, 2014, www.leutholdgroup.com REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC Crude Oil Prices, continued on page 16

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Crude Oil Prices, continued from page 15

Falling energy prices will also relieve the Indian government and its governmentowned energy companies from the ever increasing burden of the energy subsidy. Under-recovery (difference between regulated retail energy prices and trade parity prices multiplied by trade volume) burgeoned to $25 billion in 2012 before moderating some last year. The underrecovery represents the total subsidies extended to energy consumers and is shared by public sector energy companies (listed, but controlled by the government). These companies have shouldered close to 50.0% of the total subsidies in the past few years. Any relief to the energy subsidy cost will boost profits, and allow the Indian government to further implement its energy sector liberalization plans. Improving fiscal conditions could also allow the government to direct resources to infrastructure building, a much needed action for a country known for its poor roads and broken power grids. (See “Annual Under-Recovery Due To Energy Subsidies” chart to the bottom right.)

Black Line: China Consumer Price Index Year-Over-Year

10.00

5.00

0.00

As of: December 5, 2014 COPYRIGHT 2014 THE LEUTHOLD GROUP, LLC

Jan-14

Jan-13

Jan-12

Jan-11

Jan-10

Jan-09

Jan-08

Jan-07

Jan-06

Jan-05

Jan-04

-5.00

Jan-03

For India, inflation is still relatively high with the most recent reading at 6.3%. If its CPI continues to fall amid falling crude oil prices, India could, as well, engage in rate cuts to further stimulate the economy.

Grey Line: India Consumer Price Index Year-Over-Year 15.00

Jan-02

The chart “Declining Inflation in China and India” to the top right, shows that China’s inflation has already come down significantly from the late 2011 peak. A couple of weeks ago, China’s central bank cut its benchmark one-year interest rate to 5.6% from 6.0%. Energy prices could continue to drive CPI down, giving China’s central bank leeway in the future if further ease is needed.

DECLINING INFLATION IN CHINA AND INDIA 20.00

Jan-01

shows that the pressure has alleviated, partially due to lower energy prices.

Source: IMF via The Leuthold Group, LLC, Perception Express, December 5, 2014 www.leutholdgroup.com REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

ANNUAL UNDER-RECOVERY DUE TO ENERGY SUBSIDIES 30.0

Total Under-Recovery (Billion U.S. Dollar)

120.0%

Percent Shouldered By Public Sector Energy Companies

100.0%

25.0

80.0%

20.0

60.0%

15.0

10.0

40.0%

5.0 20.0%

0.0%

0.0 04

05

06

As of: December 5, 2014 COPYRIGHT 2014 THE LEUTHOLD GROUP, LLC

07

08

09

10

11

12

13

Source: IMF via The Leuthold Group, LLC, Perception Express, December 5, 2014 www.leutholdgroup.com REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

Bottom Line: The recent crude oil price decline was mainly caused by increasing supply issues, not weakening demand from Emerging Markets. Most Emerging Markets countries are net energy importers, who stand to benefit from falling energy prices. China and India, in particular, with higher growth in energy consumption, and high dependence on foreign oils, should benefit the most. Last month, we increased our positions in China and India in our Emerging Markets portfolio, and sold out all Russian companies. Source: This article was excerpted from “Declining Crude Prices Good For Emerging Markets?”, by Jun Zhu, CFA, Senior Analyst, The Leuthold Group, LLC, (Perception Express, December 5, 2014) www.leutholdgroup.com. COPYRIGHT 2014 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC PULSE

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THE GLOBAL INVESTMENT PULSE 2015 New Year Issue


UPDATE ON U.S. HIGH YIELD CORPORATE BONDS

By Chun Wang, CFA, PRM, Senior Analyst and Co-Portfolio Manager, The Leuthold Group, LLC The yield on the Barclays U.S. High Yield bond rose 29 basis points (bps), or 0.29% in November, and the spread versus Treasuries widened 36 bps. High Yield bonds suffered from the recent rout in oil prices, as around 15.0% of High Yield Bonds are energy related. On the brighter side, High Yield bond funds saw the first net inflow in five months. The favorable seasonal window also offers support for these bonds, especially after the recent sell-off. (See “Barclays US High Yield Bond Minus Treasury Bond Yield” chart below.) Source: This article was excerpted from "U.S. High Yield Corporate Bonds: Maintain Neutral ", by Chun Wang, CFA, PRM, Senior Analyst and Co-Portfolio Manager, The Leuthold Group, LLC, (Perception Express, December 5, 2014) www.leutholdgroup.com. COPYRIGHT 2014 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC

BARCLAYS U.S. HIGH YIELD BOND MINUS TREASURY BOND YIELD High Yield Bonds Rate Spreads Over Treasuries Continue Rising 20

15

10 Median: 5.12%

Nov-14: 4.81%

5

1987

1990

As of: December 5, 2014

1993

1996

1999

2002

2005

2008

2011

2014

Source: The Leuthold Group, LLC, Perception Express, December 5, 2014, www.leutholdgroup.com REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC PULSE

THE GLOBAL INVESTMENT PULSE 2015 New Year Issue

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A SPIKE IN THE U.S. DOLLAR

By Louis-Vincent Gave, Founding Partner and Chief Executive Officer, GaveKal Whenever the U.S. currency rises rapidly, it presents a hurdle for growth in most emerging market countries. The first reason is that most trade takes place in U.S. Dollars, so a stronger U.S. Dollar means companies have to set aside more money for working capital needs. The second is that most emerging market investors tend to think in two currencies: their own and the U.S. Dollar. Catch a cab in Bangkok, Cairo, Cape Town or Jakarta and ask for that day’s U.S. Dollar exchange rate and chances are that the driver will know it to within a decimal point. This sensitivity to exchange rates is important because it means that when the U.S. Dollar rises, local wealth tends to flow out of local currencies as investors sell domestic assets and buy into U.S. Dollar assets, typically treasuries (when the U.S. Dollar falls, the reverse is true). Source: This article was excerpted from “The Burning Questions for 2015” by Louis-Vincent Gave, Founding Partner and Chief Executive Officer, GaveKal, (Gavekal Dragonomics Global Research, December 3, 2014), www.gavekal.com.

The government once spent

$2.6 MILLION

COPYRIGHT 2014 GAVEKAL REPRINTED WITH PERMISSION FROM GAVEKAL

GOVERNMENT WASTE

PULSE

THE LONG-TERM UPSIDE FOR THE U.S. STOCK MARKET IS NOT SO UP

in tax dollars to train Chinese prostitutes to drink responsibly.

The government once spent

By John P. Hussman, Ph.D., President, Hussman Funds “The equity market is now more overvalued than at any point in history outside of the 2000 peak, and on the measures that we find best correlated with actual subsequent total returns, it is now 115.0% above reliable historical norms and only 15.0% below the 2000 extreme. Unless Quantitative Easing (QE) will persist forever, even three to four more years of zero short-term interest rates don’t’ “justify” more than a 12.0% to 16.0% elevation above historical norms.” Source: This quote was excerpted from John P. Hussman, Ph.D., President, Hussman Funds, “Hard-Won Lessons And The Bird In The Hand”, Weekly Market Comment, December 1, 2014.

PULSE

$239,100 in tax dollars to study how Americans use the Internet to find love. The U.S Postal Service once spent

$13,500 in tax dollars on a single dinner at Ruth’s Chris Steakhouse.

RENMINBI INTERNATIONALIZATION

By Louis-Vincent Gave, Founding Partner and Chief Executive Officer, GaveKal

The government once spent

China’s policy of Renminbi internationalization means that emerging markets are able gradually to reduce their dependence on the U.S. Dollar. As they do, spikes in the value of U.S. currency (such as we have seen in 2014) are becoming less painful.

$25 BILLION

Source: This article was excerpted from “The Burning Questions for 2015” by Louis-Vincent Gave, Founding Partner and Chief Executive Officer, GaveKal, (Gavekal Dragonomics Global Research, December 3, 2014), www.gavekal.com. COPYRIGHT 2014 GAVEKAL REPRINTED WITH PERMISSION FROM GAVEKAL PULSE 18

THE GLOBAL INVESTMENT PULSE 2015 New Year Issue

in tax dollars a year maintaining federal buildings that are either unused or totally vacant. Source: Jefferson National


LEGEND FINANCIAL ADVISORS, INC.® & EMERGINGWEALTH INVESTMENT MANAGEMENT, INC.’S INVESTMENT MANAGEMENT SERVICES Legend Financial Advisors, Inc.® (Legend) and EmergingWealth Investment Management, Inc. (EmergingWealth) offer Personalized Investment Management Services to individuals and institutions. Investment portfolios are developed to match the client’s return and risk requirements, which are determined by the clients’ completion of a Risk Tolerance Questionnaire, with the guidance of a Legend Personal Chief Financial Officer (Personal CFO) or EmergingWealth Advisor, respectively. Each type of investment portfolio is managed to achieve the short, intermediate and long-term investment objectives of the client, as may be applicable.

INVESTMENT PROCESS Investment Portfolios: Unlike most financial advisory firms that offer one style of investment or portfolio type, we offer a wide array of investment portfolios that usually fit with the large majority of client needs. If necessary, we will create customized solutions as well. For the types of investment portfolios, please see our Investment Portfolios, Potential Return and Risk Spectrum Chart on the next page. For a detailed description of our portfolios, please contact Louis P. Stanasolovich, CFP®, founder, CCO, CEO and President of both firms for a confidential discussion at (412) 635-9210 or e-mail us at legend@legend-financial.com. Investment Research: Our Investment Committee performs extensive research to identify opportunities, mitigate risks and structure investment portfolios. Emphasis is placed on developing portfolios that maximize the potential return relative to the amount of risk taken. In-depth due diligence including face-to-face interviews in many instances with portfolio managers for open-end mutual funds is performed on each investment we select for a portfolio. Factors (both from a qualitative and quantitative standpoint) that we conduct a thorough analysis of each investment include, but is not limited to, liquidity (including the primary investment and/or the underlying investments, if utilizing pass through vehicles such as openend mutual funds or exchange-traded products), income taxation, all related costs, return potential, drawdown potential (historical declines from peak-to-trough), volatility and management issues (Anything having to do with the management team of a stock, open-end mutual fund or an exchange-traded product.). All portfolios for EmergingWealth are subadvised by Legend. Client Education: Education is very important to us. We are dedicated to educating each client about the different investment portfolio types and how they relate to market volatility, time horizons, and investment returns. It is our goal to ensure that the client understands and agrees with our investment philosophy. Furthermore, we assist each client in selecting a risk tolerance level with which they are comfortable. Ultimately, an investment portfolio is designed to meet the client’s objectives.

PERFORMANCE REPORTING Many investment firms only offer monthly brokerage statements, which provide minimal information; typically only account and investment balances. We, on the other hand, provide detailed quarterly reports that outline performance, income and management fees (among other items) in a simple, easy-to-read report. In addition, each performance report is sent with an extensive index page that illustrates the investment environment during the reporting period.

FEES To find out more about the fees for either Legend or EmergingWealth’s Investment Management services, please contact Louis P. Stanasolovich, CFP®, founder, CCO, CEO and President of both firms for a confidential discussion at (412) 635-9210 or e-mail us at legend@legend-financial.com. PULSE THE GLOBAL INVESTMENT PULSE 2015 New Year Issue

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The Global Investment Pulse, 2015 New Year Issue