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September, 2015

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EXCHANGE-TRADED NOTE TAXATION

CLOSER TO OVERVALUED THAN UNDERVALUED

By Louis P. Stanasolovich, CFP®, CCO, CEO and President of Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc.

he bottom section of the chart on the bottom of page 4 by Ned Davis Research, Inc. (NDR) provided by CMG Capital Management Group, Inc. indicates that currently, we are near the historical median of the S&P 500 Median Price/Earnings Ratio. Closer To Overvalued Than Undervalued, continued on page 4

By James J. Holtzman, CFP®, CPA, Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc. Background: An Exchange-Traded Note (ETN) is an investment vehicle that consists of publicly-traded notes issued by a company (typically a bank) that tracks an underlying benchmark index and has a set maturity date while being backed by the credit of the issuing company. ETNs are traded throughout the day, unlike open-end mutual funds which trade at the end of the day. ETNs are a promise by the issuer to pay the investor an amount based upon the performance of the underlying benchmark index. ETNs can track obscure benchmarks, including income-tax Exchange-Traded Note Taxation, continued on page 4

OIL PRICE “CRASHES” IN HISTORICAL PERSPECTIVE

THE EMERGING MARKET TRAP

By Jun Zhu, CFA, Senior Analyst, The Leuthold Group, LLC

By Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC

In view of the last year’s steep decline in oil prices, Energy has been a frequent headline topic. Investors are at odds as to the likely duration of the decline, and the effects there of. We pored through history to identify similar past events in order to get a glimpse of what might happen this time around.

If the obituary on the bull market was written today (although we wrote such an obituary in May), Emerging Market equities would surely rank as the cycle’s most stunning disappointment (if not its only disappointment). The 2008 debacle shrunk the Emerging Market Normalized (last five years of earnings averaged and divided by current price) Price-To-Earnings Ratio (P/E) by almost three-quarters (to a low of 8.7x), a compression that “should” have been followed by spectacular gains. But Emerging Market’s historical ties to the commodity cycle proved to be too tight to unwind, and the healthy relative action among Emerging Market defensive sectors wasn’t enough to stem the decline (Chart 1 on page 6).

We identified twenty-one prior instances of significant oil price “crashes” going back to 1859, and attempted to pinpoint the underlying cause for each crash. (“Crashes” in this study are defined as a price correction over 40.0% regardless of duration.) The current oil market experience appears to share the most similarities with two in the mid/ late 1980s. Following those 1980s’ “crashes,” crude oil prices and energy companies performed very poorly for a number of years. Current Oil Price Crash Bears Similarity With 1980s: During the 80 years prior to 1940, oil prices followed a perfect rhythm of boom and bust cycles. The balance of shifts between supply and Oil Price “Crashes” In Historical Perspective, continued on page 13

The Emerging Market Five-Year Normalized P/E ratio closed August at 10.1x (Chart 2 on the bottom of page 6), a figure that’s now within the choppy bottoming zone The Emerging Market Trap, continued on page 6

THE GLOBAL INVESTMENT PULSE September, 2015

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ABOUT LEGEND FINANCIAL ADVISORS, INC.® Legend Financial Advisors, Inc.® (Legend) is a Non-Commission, Fee-Only U.S. Securities and Exchange Commission (SEC) registered investment advisory firm with its headquarters located in Pittsburgh, Pennsylvania. Legend provides 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. We analyze each client’s financial strengths and weaknesses, then recommend creative solutions for improvement. Additionally, we 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 a Non-Commission, Fee-Only firm. 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 Non-Commission, FeeOnly Securities and Exchange Commission (SEC) registered investment advisory firm. EmergingWealth provides Investment Management services to individuals as well as business entities, medical practices and nonprofit 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, four 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 part of their inaugural Influencer Awards 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.

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THE GLOBAL INVESTMENT PULSE September, 2015


MONTHLY RISK AVERSION INDEX (RAI)

RISK INCREASES BUT MOST UNDERLYING FACTORS HAVE NOT RISEN – STILL NEAR ALL-TIME LOWS 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.

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4

3

3

2

2

1

1

0

0

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

As of: September 9, 2015 Source: The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/bond-market COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

WHAT ARE THE NEW COST BASIS RULES By James J. Holtzman, CFP®, CPA, Legend Financial Advisors, Inc.® and EmergingWealth Investment Management, Inc. As part of the 2008 Emergency Economic Stabilization Act, brokerage firms are now required to report cost basis. The trick to simplify one’s life is to understand how these rules have been phased-in, which is dictated by the type of security that has been purchased. The following is a list of the phase-in dates as to when cost basis is to be reported: 1. Stocks acquired on or after January 1, 2011. 2. Mutual funds and dividend reinvestment programs where securities are acquired on or after January 1, 2012. 3. Bonds, options, derivatives, etc. that are acquired on or after January 1, 2013. The practical side of this information is for taxpayers to be aware that when the IRS Form 1099-B is received, it will reflect securities sold for the year. The 1099-Bs may be bewildering for a few years to some taxpayers.

For example, if there were ten mutual funds sold during a calendar year, it is possible that seven of the mutual funds will have the cost basis and three mutual funds will not have the cost basis reflected on the 1099-B. The most likely reason is that the seven mutual funds sold would have been purchased since January 1, 2012, or the taxpayer provided the current brokerage firm with the cost basis if the mutual fund was purchased prior to January 1, 2012. The other three mutual funds that do not list the cost basis on the 1099-B, in all likelihood, have been purchased prior to January 1, 2012. Eventually, taxpayers will have their entire cost basis reported by brokerage firms, but as the reader can see, this may take at least a few years due to legacy holdings of investments that taxpayers own. COPYRIGHT 2015 LEGEND FINANCIAL ADVISORS, INC.® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.® PULSE THE GLOBAL INVESTMENT PULSE September, 2015

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Exchange-Traded Note Taxation, continued from page 1

inefficient investments such as commodities, and provide a way to obtain investment exposure to areas of the investment markets that cannot be achieved through conventional stocks, bonds, mutual funds, Exchange-Traded Funds, etc.

In 2008, there was an IRS Revenue Ruling that determined that currency ETNs are to be taxed as a debt instrument, meaning ordinary income taxation.

the index. Income Taxation: An ETN’s income taxation has some ambiguity attached to it. The most technical definition is that for income taxation purposes, it is treated as a prepaid forward contract, which means that the investor will have a capital gain or loss event upon the sale, redemption, or maturity of the ETN. This type of tax treatment is very favorable because it provides another form of tax-deferred earnings. In addition, ordinary income treatment does not apply unless held less than one year. Long-term capital gains treatment will apply if held on year or longer. Interest or dividends will not be reported to the investor because there are none distributed.

The ETN Value at maturity will be equal to the investment plus or minus what the return would have been if invested in the underlying index, less a fee calculated as a percentage of the ETN’s value. The payment for the ETN is not made until maturity, which are oftentimes 30 or 40 years in the future from the original issue date. Investors are unsecured creditors of the issuing company. A major investment advantage of an ETN is that there is basically no tracking error with the index since the ETN does not own the actual securities represented by

One type of ETN that does have ordinary income tax treatment are currency ETNs.

Investors need to pay attention to any future announcements from the IRS regarding the income tax treatment of all ETNs. As with any investment, investing in an ETN just because of the favorable income tax treatment might not be wise given that the investor is an unsecured creditor should the bank that issued the ETN fail. If the reader does not believe that is likely, think about investors that owned debt securities of Lehman Brothers back in 2008. COPYRIGHT 2015 LEGEND FINANCIAL ADVISORS, INC.® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.® PULSE

Closer To Overvalued Than Undervalued, continued from page 1

In the top section of the chart, in the blue lettering, it indicates the closeness to “Overvalued” territory, yet, we are very far away from “Very Overvalued” territory. The conclusion: It would seem an “Okay” time to invest in the stock market, but not a time to go all in. COPYRIGHT 2015 LEGEND FINANCIAL ADVISORS, INC.® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC.® Standard & Poor’s 500 Stock Index

1912 1573 1293 1063 874 719 591 486 400 329 270 222 183 150 124 102 84 69 57

Price Move of: 5.6% to Overvalued (+1SD) = S&P 500 Level of 2081.78 -19.3% to Median Fair Value = S&P 500 Level of 1592.12 -44.1% to Undervalued (-1SD) = S&P 500 Level of 1102.46

8/31/15 = 1972.18

Source: S&P Dow Jones Indices

1970

1975

1980

1985

1990

1995

2000

2005

2010

32 30 28 26 24 22 20 18 16 14 12 10 8 6

Very Overvalued Overvalued 51.5-Year Median = 16.8

-2.50

(Davis100)

Bargains Source: S&P Capital IQ Compustat

S&P 500 Median Price/Earnings Ratio (NDR Calculation) with Historical Mean

As of: August 31, 2015 COPYRIGHT 2015 NED DAVIS RESEARCH, INC.

1912 1573 1293 1063 874 719 591 486 400 329 270 222 183 150 124 102 84 69 57

2015

-1.50

Median +1.50

+2.50 +3.50

1965 32 30 28 26 24 22 20 18 16 14 12 10 8 6

Monthly 3/31/64 – 8/31/15 (Log Scale)

8/31/15 = 20.8

Source: CMG Capital Management Group, Inc. On My Radar, September 11, 2015, www.cmgwealth.com

REPRINTED WITH PERMISSION FROM CMG CAPITAL MANAGEMENT GROUP, INC.

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THE GLOBAL INVESTMENT PULSE September, 2015


“OVERSOLD” DOESN’T MEAN BUY By Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC Market strategists’ and technicians’ descriptions of a down-market as being “oversold” invariably implies the decline has been overdone. Yes, blindly buying into a deeply oversold stock market is a strategy with a high batting average, but (more importantly for investors) a very poor slugging percentage. Some of the worst declines in market history occurred after conventional market momentum readings first became deeply oversold—including 1987 and the last half of the 200809 collapse. For years, we’ve sought to distinguish between “good” oversold conditions (weakness offers a good short-term entry opportunity), and bad “oversold” readings (initial oversold condition points to further market losses). All indications are that August’s four-day, 10.0% decline in the S&P 500

was of the latter variety. A simple measure of the strength of that downside impulse is the number of new 52-week lows generated during the decline (See “Measuring August’s Downside Market “Thrust” chart below). For the week ended August 28th, 2015, 1,456 NYSE-traded securities (44.0%) registered new 52-week lows. We scanned 60 years of data and found only two other readings above 40.0% which were not associated with a cyclical bear market. And, even in those two cases (July 1965 and March 1980), the market would enter a cyclical bear market within the next several months. With the “new lows” indicator, and many other momentum measures having just established new bearish extremes, we are now on the lookout for lower lows in stock prices accompanied by diminishing

Measuring August’s Downside Market “Thrust”

downside momentum. Among the last 13 bear market lows, only one (May 1970) coincided with a weekly peak in NYSE weekly lows. So there is precedent for the August 25th low to hold, but the odds lean heavily the other way. Source: This article was excerpted from “’OVERSOLD’ DOESN’T MEAN BUY””, by Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC, (Perception Express, September 9, 2015), http:// leuth.us/sotck-market COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC

S&P 500

More than 40.0% of NYSElisted issues made new 52-week lows in the week ended August 28th. Since the mid-1950s, there have been only two other readings above 40.0% (in 1965 and 1980) that were not associated with cyclical bear markets.

NYSE Weekly 52-Week Lows As A Percentage Of Issues Traded

As of: September 9, 2015

Source: The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

PULSE THE GLOBAL INVESTMENT PULSE September, 2015

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The Emerging Market Trap, continued from page 1

carved during the last few months of 2008. Our Emerging Market Allocation Model is hard negative, yet valuations have dropped to the point where we’ve discussed the possibility of “overriding” that trend-based model. However, we’ve concluded there must be serious fundamental problems with any asset class that commands a Normalized P/E of only 13x at the peak (in May 2015) of one of the greatest liquidity-driven bull markets in history. We now expect Emerging Market valuations will fall below their 2008 lows before the current market decline has run its course. If that occurs, it may also provide the best stock market bargains in many years.

CHART 1 Emerging Market Defensive Sector Index (Consumer Staples, Health Care & Utilities)

550

500

450

400

350

Source: This article was excerpted from “The EM Trap”, by Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC, (Perception Express, September 9, 2015), http://leuth.us/ stock-market

Emerging Market Cyclical Sector Index (Consumer Discretionary, Industrials & Materials)

300

free fall

COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

2010

REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC

2011

2012

2013

2014

2015

As of: September 9, 2015 Source: The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/stock-market COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

CHART 2 33 32 31 30 29 29 27 26 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7

MSCI Emerging Markets P/E on Five-Year Normalized (Five Years Of Earnings Averaged Divided By Current Price) Earnings Per Share (EPS)

10.1x

Emerging Market valuations entering a bottoming zone? 2000

2001

2002

2003

2004

As of: September 9, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

2005

2006 2007

2008

2009

2010

2011

2012

2013

2014 2015

2016

33 32 31 30 29 29 27 26 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7

Source: The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

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THE GLOBAL INVESTMENT PULSE September, 2015


“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 September, 2015

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SMALL CAP TO LARGE CAP HISTORICAL PRICE TO EARNINGS (P/E) RATIO Small Caps Are Still More Expensive – 9.0%

120

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110

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100

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90

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80

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60 1983

1985

1987

1989

As of: September 9, 2015

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1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Source: The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/market-internals REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

BARCLAYS U.S. HIGH YIELD BOND MINUS TREASURY BOND YIELD High Yield Bonds Yields Improve 20

Differential Median: 5.11

15

10 Aug-15: 5.80%

5

1987

1990

1993

As of: September 9, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

8

1996

1999

2002

2005

2008

2011

2014

Source: The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/bond-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

THE GLOBAL INVESTMENT PULSE September, 2015


BULL OPTIMISM? By Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC The table below provides some guidance on what to expect if the correction low of August 25th somehow manages to hold. The damage from “severe corrections,” defined as an S&P 500 loss of 12.0% to 18.0% (Note: This is the Leuthold Group’s definition), has historically taken an average of 13 weeks to be fully reversed. That implies a new bull market high just in time for Thanksgiving, 2015. Among all of the qualifying corrections since 1930, the latest decline of 12.4% is the second shallowest on the list. The “least severe” severe correction was the

1999 pullback of 12.1%, which required a recovery time of just five weeks. Two borderline 1930’s corrections, each totaling 12.8%, also required shorter-than-average recovery times. Though not our intent, market bulls could conceivably use the table below to make their case for a new bull market high in the next month. While this table is ostensibly presented as fodder for the bulls, we can’t resist making at least one bearish observation: The latest decline commenced with the cyclical bull market at a more advanced age (203 weeks) than any other severe decline in the last 85 years of market history… and

we’re being generous in the table below by dating the bull’s inception as October 3, 2011. Source: This article was excerpted from “A Page For The Bull”, by Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC, (Perception Express, September 9, 2015), http://leuth.us/ stock-market COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC

SEVERE S&P 500 CORRECTIONS THAT DID NOT DEVELOP INTO BEAR MARKETS

A severe correction (Note: This is the Leuthold Group’s definition) is defined as a decline of 12.0% to 18.0% in the S&P 500 that is followed by a recovery to a new bull market high. Current bull market dated to October 2, 2011 low. As of: September 9, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

Source: The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

PULSE THE GLOBAL INVESTMENT PULSE September, 2015

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2015 PERFORMANCE YEAR-TO-DATE January 1, 2015 to August 31, 2015 (8 months) Year-to-Date Total Return Consumer Price Index (Inflation)

1.49%

90-Day Treasury Bills Index-Total Return

0.02%

Barclays Aggregate Bond Index-Total Return

0.45%

HFRX Global Hedge Fund Index

-1.00%

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

-2.88%

MSCI EAFE Index (Developed Foreign Equities)

0.24%

MSCI Emerging Market Index (Equities)

-12.67%

Newedge CTA Index (Managed Futures)

-1.19%

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

-12.84%

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

-6.31%

Gold Bullion

-4.40%

Compound and Total Returns include reinvested dividends. Newedge Index is equally-weighted. ** USD = U.S. Dollar Source: Bloomberg Investment Service

As of: August 31, 2015

COPYRIGHT 2015 LEGEND FINANCIAL ADVISORS, INC. ® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC. ®

GHOULS AND GOBLINS If you think August and September were bad investing months, wait until October—talk about a scary month. Historically, since 1950, during the month of October, five of the seven worst percentage loss days for the S&P 500 occurred. Also, don’t forget “Black Friday” 1929 and “Black Monday” 1987, both occurred during October as well. Ironically, the three best S&P 500 days since 1950 also occurred during October. Go figure!

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THE GLOBAL INVESTMENT PULSE September, 2015


SECULAR BEAR MARKET WATCH April 1, 2000 to August 31, 2015 (15 years and 5 months) Annual Compound Return

Total Return

Consumer Price Index (Inflation)

2.17%

39.20%

90-Day Treasury Bills Index-Total Return

1.70%

29.69%

Barclays Aggregate Bond Index-Total Return

5.42%

125.71%

HFRX Global Hedge Fund Index

2.57%

47.95%

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

3.77%

76.94%

MSCI EAFE Index (Developed Foreign Equities)

3.15%

61.29%

MSCI Emerging Market Index (Equities)

6.00%

145.72%

Newedge CTA Index (Managed Futures)

5.32%

122.59%

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

-0.52%

-7.70%

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

10.58%

372.16%

9.52%

306.61%

Gold Bullion

SECULAR BEAR MARKET WATCH (CONTINUED)

* 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 Source: Bloomberg Investment Service As of: August 31, 2015

April 1, 2000 to August 31, 2015 (15 years and 5 months)

COPYRIGHT 2015 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 15 years and 5 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. THE GLOBAL INVESTMENT PULSE September, 2015

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TIME TO PLAY PRECIOUS METALS? By Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC Recently, we wrote that we had no interest in playing even an “oversold bounce” in the precious metals, and our view hasn’t changed. Crude oil has already fallen to its long-term, inflationadjusted mean; if gold does the same, its downside extends below $700.00 per ounce. Those still having an interest in the metals and who share our bearish stock market view should, at a minimum, focus on gold rather than silver. Silver—despite its myriad industrial uses—has historically exhibited a much higher beta (greater variability) than gold, especially during bear markets in U.S. stocks. Gold has declined only twice during the last nine bear markets in stocks, with a median gain of 7.8% across all cases. Silver,

meanwhile, has fallen in the last seven equity bear markets, with a median loss of –11.9% across all nine cases. In mathematical terms, cash > gold > silver. Source: This article was excerpted from “The Lesser Of Two Evils?”, by Doug Ramsey, CFA, CMT, Chief Investment Officer, The Leuthold Group, LLC, (Perception Express, September 9, 2015), http://leuth.us/stock-market COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC

PERFORMANCE OF PRECIOUS METALS DURING BEAR MARKETS IN STOCKS

As of: September 9, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

Source: The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/stock-market REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

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CHINA’S STAGGERING FINANCES China currently has $28 trillion in national debt. That is up from $7 trillion in 2007. Even more amazing is that China’s Gross Domestic Product (GDP) has quintupled in the last ten years from $2 trillion to $10 trillion. Source: McKinsey 12

THE GLOBAL INVESTMENT PULSE September, 2015


Oil Price “Crashes” In Historical Perspective, continued from page 1

demand were normally swift and the up/ down cycles of oil prices were relatively short. OPEC had yet to become a major producer, hence the dynamics of supply and demand were fundamentally different than today. The 1940-1979 period was also not comparable, because oil prices spent the majority of that era under the tight control of the Texas Railroad Commission (TRC), hardly reflecting any normal supply and demand relationship. Among the eight, modern era 40.0%+ oil

price plunges, the present day case bears the most similarity with the two in the second half of the 1980s. First, the current experience and the two in the mid/late 1980s are not associated with recessions. Rather than falling demand triggered by a recession, oversupply was the main catalyst behind these declines. (See Table 1 below.) In the 1980s, the oversupply came from non-OPEC oil producing countries outside of the U.S. (Chart 1, below), while this time around, U.S. shale producers are the main driver behind the growth of the global oil supply (Chart 2, below). In

each of these cases of oversupply, OPEC opted to pursue market share rather than cut production to support oil prices, thereby sparking the oil price plunge. Another similarity shared between the mid/late 1980s’ crashes and today’s is that they each followed a few years of decline in U.S. demand for oil. While the demand side story does not directly contribute to the sudden drop of oil prices, it certainly does not help. In both the 1980s and today, prior to the oil price heading south, it peaked above

TABLE 1 THE DRIVING FORCE BEHIND MODERN ERA OIL PRICE CRASHES*

* Crash defined as price correction over 40.0% regardless of duration, therefore, the dates cited will vary from full cycle peak-to-trough declines. This report is excerpted from a longer-term study with price data back to 1859; month-end data was used because daily prices weren’t available for the longer term history. As of: September 9, 2015 Source: The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/special-interest COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

CHART 1

As of: September 9, 2015 Source: The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/special-interest COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

CHART 2

As of: September 9, 2015 Source: The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/special-interest COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

Oil Price “Crashes” In Historical Perspective, continued on page 14

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Oil Price “Crashes” In Historical Perspective, continued from page 13

$100/bbl in real terms. These were the only two times, since 1876, that oil prices surpassed that high mark. When oil prices peaked, aggregate demand was down significantly (Chart 3. below) due to consumption reduction, energy conservation and, in the current case, increased use of alternative energies. From 1978 to 1983, there was a 15.0% decline in U.S. petroleum consumption. Likewise, over the five-year span from 2007 to 2012, U.S. consumption declined nearly 11.0%. The two periods mark the largest oil consumption declines (measured over five year spans) in U.S. history. So while the current crash and the 1980s’ plunges are not associated with a concurrent decline in demand, they each came on the heels of a multi-year period of significantly declining demand. 1980’s Crash Aftermath = What To Expect This Time Around?: Considering the current oil price crash has comparable circumstances with the latter

two in the 1980s, we can speculate on the potential after-effects based on what followed the 1980s’ episodes. The underlying supply and demand balance of the two eras is so alike, odds are, the oil industry is likely to face similar challenges in the next few years. 1. Oil prices may suffer much more before bottoming and may stay in the abyss for a prolonged period. On a yearly average basis, oil prices peaked in 1980 at $109/bbl, and landed at $31/bbl in 1988, a 70.0% decline. In early January this year, when we first compared the current oil price demise with that in the 1980s, we projected the decline had farther to go, as 2014 ended only 15.7% below the annual peak reached in 2008. Recent action has proven us right; oil prices briefly dipped below $40/bbl. After the big crashes in the 1980s, oil stayed in the lower bound of the price range for another 15 years (1986-2001). The average price of oil during that period was $33/bbl. Today we anticipate a pro-

longed oil price slump as well, lasting at least a few years. 2. Impact of oil price crash on energy companies’ top lines and margins could be stretched out a decade. Chart 4, below, shows the high correlation of the energy industry’s aggregate revenue (line on chart) with average yearly oil prices (columns). From 1980 to 1998, when crude oil plummeted and stayed in a range near its low for most of that period, aggregate revenue fell 61.8%. Profit margins fell as well, bottoming at 0.7% in 1992, eleven years after oil prices peaked (Chart 5, below). Margins, however, recovered earlier than revenue, probably due to cost control and industry consolidation. The fate of the U.S. Energy sector will likely follow suit with that of oil prices in the next few years. A similar duration and depth of the oil price down cycle in the 1980s and 1990s suggests a significant revenue and profit decline across the

CHART 3

As of: September 9, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

Source: The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/special-interest REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

CHART 5

CHART 4

As of: September 9, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

14

Source: Federal Trade Commission, U.S. Census Bureau via The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/special-interest

REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

THE GLOBAL INVESTMENT PULSE September, 2015

As of: September 9, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

Source: Federal Trade Commission, U.S. Census Bureau via The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/special-interest

REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

Oil Price “Crashes” In Historical Perspective, continued on page 15


Oil Price “Crashes” In Historical Perspective, continued from page 14

sector this time around. 3. More failing energy companies on the horizon? Using Global Financial Data, we calculated delisted Energy stocks by year, as a percentage of total listed Energy companies (Chart 6, below). From 1983 to 1986, the yearly delist rates were all above 10.0%, with roughly one in five companies being delisted in 1986 alone. The majority of these delistings was due to the financial difficulties of companies facing busted oil prices. Anticipating lower oil prices for a prolonged period, we advise caution for investors attempting to bottom fish: be selective! 4. Sentiment toward Energy sector can stay depressed for a long time.

Investor sentiment is also part of the equation behind stock performance. Our sector valuation data only goes back to 1986, nevertheless, Chart 7, below, clearly shows that in the second half of the 1980s and the first half of the 1990s, Energy stocks exchanged hands at a deep and prolonged discount. In January this year, we noted that a few months’ decline in Energy stock prices in late 2014 brought the sector to roughly 18.0% below its average valuation. We predicted Energy valuations would continue to contract with a prolonged oil price slump. Today, the Energy sector continues to slide, and valuations are now at a 20.0% discount. As we observed for the 1980’s experience, sentiment may take a long time to improve.

5. Energy sector performance may not bottom until many years after the price crash. From November 1980 to July 1982, the S&P Energy total return index declined by 41.0%, with the first five months of decline registering a 29.0% drop. The current “crash” sent the sector down 17.0% in the last four months in 2014, and another 19.0% year-to-date (through September 2, 2015). If history repeats, the sector has significantly more downside, and the Energy down-cycle could last up to early 2017 (Chart 8, below). On a relative basis, the Energy sector fared badly after the 1980’s oil price crashes. It took almost 24 years, until September 2004, before the sector finally

CHART 6

As of: September 9, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

Source: The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/special-interest REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

CHART 8

CHART 7

As of: September 9, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

Source: The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/special-interest REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

As of: September 9, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

Source: The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/special-interest REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

Oil Price “Crashes” In Historical Perspective, continued on page 16

THE GLOBAL INVESTMENT PULSE September, 2015

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Oil Price “Crashes” In Historical Perspective, continued from page 15

caught up with the broad market (Chart 9, below). From its prior peak to its relative performance low in January 1999, the sector underperformed the S&P 500 total return index by 932.0%. 6. Worse and prolonged toll on Energy Equipment and Service Providers Drilling down to the industry level, we compared two Energy groups’ performance during the early 1980s. Oil, Gas & Consumable Fuels is a GICS industry group composed of mainly energy producers covering upstream (Exploration and Production), midstream (Transportation and Storage), and downstream (Refiners); or integrated companies. Oil & Gas Equipment & Services is a group composed of mainly service providers including Drilling Services and Equipment Providers. The 1980’s script shows Oil & Gas Equipment & Services suffered a deeper perfor-

mance set back, and also experienced a much slower recovery (grey line, Chart 10, below; price index excluding dividends). For investors with a relatively shorter time horizon, bottom-fishing should currently be focused on Oil & Gas Producers. Energy Sub-Industry Ranks By Leuthold Group Selection (GS) Scores: Among the seven Energy sub-industries, only the Refining & Marketing group is rated Attractive by our GS Scores. Five groups are rated Unattractive. Among common factors driving the GS rankings, Profitability and Technical are drags across the board for this sector (Table 2, below). Bottom Line: The similarities between the current oil price crash and those in the mid/late 1980s likely point

CHART 9

As of: September 9, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

Source: The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/special-interest REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

to a prolonged oil price slump and Energy stock underperformance. Bottom-fishing should be selective, as Energy company collapses could very well happen this time around as they did in the past. In addition, buying the dip now may require a longer time horizon as one waits for improvement in the supply and demand balance of crude oil, and a recovery in general sentiment toward the Energy sector overall. Source: This article was excerpted from “Oil Price “Crashes” In Historical Perspective “, by Jun Zhu, CFA, Senior Analyst, The Leuthold Group, LLC, (Perception Express, September 9, 2015), http://leuth.us/ special-interest COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION OF THE LEUTHOLD GROUP, LLC

CHART 10

As of: September 9, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

Source: The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/special-interest REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

TABLE 2

As of: September 9, 2015 Source: The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/special-interest COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

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THE GLOBAL INVESTMENT PULSE September, 2015


HISTORICAL VALUATIONS, GROWTH VERSUS VALUE U.S. LARGE, MID AND SMALL CAP STOCKS All growth stock and value stock style categories except small growth and mid-growth appear expensive when compared to the Historical Averages (1982 to date) and the Percent Above/Below Historical Average Valuation sections in the chart below. Large, Medium and Small Growth Stock categories again appear cheaper relative to the Value categories than the historical averages as evidenced by the Today’s G/V* Ratio versus the Historical Average G/V* Ratio. Median Price-ToEarnings (P/E)

Historical Averages 1982 to Date

Percent Above/Below Historical Average Valuation

Today’s

Historical Average

2000 Extreme

Growth Stocks

Value Stocks

Growth Stocks

Value Stocks

Growth Stocks

Value Stocks

G/V* Ratio

G/V* Ratio

G/V* Ratio

Large-Cap

20.2x

12.1x

19.8x

10.7x

2.0%

13.0%

1.66

1.97

5.80

Mid-Cap

22.9x

13.7x

23.4x

11.9x

-2.0%

15.0%

1.67

2.09

9.30

Small-Cap

26.3x

13.4x

27.5x

11.9x

-4.0%

12.0%

7.97

2.45

12.50

* Growth To Value

The Market drubbing in August took some of the stuffing out of valuations.

As of: September 9, 2015 COPYRIGHT 2015 THE LEUTHOLD GROUP, LLC

Source: The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/market-internals

REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

S&P PERFORMANCE BY MARKET CAP QUINTILES Editor Comment: The smallest 100 stocks of the S&P 500 year-to-date performance is by far the worst performing category in 2015. See the box below.

* Performance Is Equally Weighted As of: September 9, 2015 REPRINTED WITH PERMISSION FROM THE LEUTHOLD GROUP, LLC

Source: The Leuthold Group, LLC, Perception Express, September 9, 2015, http://leuth.us/market-internals

THE GLOBAL INVESTMENT PULSE September, 2015

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LEGEND FINANCIAL ADVISORS, INC.® AND EMERGINGWEALTH INVESTMENT MANAGEMENT, INC.’S SUMMARY OF MUTUAL FUND CONFERENCE CALLS AND MEETINGS AUGUST 1, 2015 THROUGH AUGUST 31, 2015 As part of our due diligence responsibility, Legend’s Investment Committee participated in conference calls with the following fund management teams: Ticker

Date

PRHSX

August 19, 2015

1. Avenue Credit Strategies Fund

ACSAX

August 05, 2015

2. Timbervest

-----------

August 12, 2015

3. Fidelity Puritan Fund

FPURX

August 14, 2015

4. Ironclad Fund

IRONX

August 19, 2015

5. Caldwell & Orkin Market Opportunity Fund

COAGX

August 21, 2015

6. Leuthold Core Investment Fund

LCORX

August 24, 2015

Investment Management Private Meetings 1. T. Rowe Price Health Sciences Fund

Investment Management Private Conference Calls/Webcast

As of: August 31, 2015

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THE GLOBAL INVESTMENT PULSE September, 2015

COPYRIGHT 2015 LEGEND FINANCIAL ADVISORS, INC. ® REPRINTED WITH PERMISSION OF LEGEND FINANCIAL ADVISORS, INC. ®


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 Comfort Zone Questionnaire, with the guidance of a Legend Wealth Advisor 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. THE GLOBAL INVESTMENT PULSE September, 2015

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THE GLOBAL INVESTMENT PULSE September, 2015 © 2014 Legend Financial Advisors, Inc. ® All Rights Reserved

The Global Investment Pulse - September, 2015 Issue