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Strange New World
“I pass with relief from the tossing sea of Cause and Theory
to the firm ground of Result and Fact.”
– Winston Churchill (The Story of the Malakand Field Force, 1898 – near the Swat Valley, Pakistan)
January 14, 2010
Lawrence SpeidellChief Investment Officer, CEO
Frontier Market Asset [email protected]
It’s about people
Strange New World
Strange New World
Treasury Bill Rate (90 day)
0
1
2
3
4
5
6
7
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
90 day T-bill
Fed Funds
“When the situation was manageable, it was neglected, and now that it is thoroughly out of hand, we apply too late the remedies that might have affected a cure” – Winston Churchill
Monetary Base
400
800
1200
1600
2000
Jan-
97
Jan-
98
Jan-
99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
Jan-
10
Y2K (Year 2000)11-Sep-01
Source: St. Louis Fed, January 2010
“The Fed’s job is to provide liquidity” - John Rutledge
The Recovery
Source: Raymond James, Jeffrey Saut, Nov 2009
Strange New World
Strange New World
http://cohort11.americanobserver.net/latoyaegwuekwe/multimediafinal.html
Consumers – Job Cuts
http://www.calculatedriskblog.com/2009/11/unemployment-stress-tests-unemployed.html
Consumers Employment to Population Ratio
http://www.calculatedriskblog.com/2009/11/employment-population-ratio-record-part.html
Consumers – Job Cuts
-700-600-500-400-300-200-100
0100200300
1997
1999
2001
2003
2005
2007
Dec
-08
Feb-
09A
pr-0
9Ju
n-09
Aug
-09
Oct
-09
Dec
-09
Non-Farm Payroll ChgMfg Payroll Chg
10 Payrolls
3%
4%
5%
6%
7%
8%
9%
10%
1997
1999
2001
2003
2005
2007
Dec
-08
Feb-
09A
pr-0
9Ju
n-09
Aug
-09
Oct
-09
Dec
-09
32
33
33
34
34
35
35
Unemployment RateAvg Wkly Hours
9 Unemployment Rate & Wkly Hours
300
350
400
450
500
550
600
650
700
1997
1999
2001
2003
2005
2007
23-J
an-0
920
-Mar
-09
15-M
ay-
10-J
ul-0
904
-Sep
-09
30-O
ct-0
925
-Dec
-09
08-J
an-1
0
20002500300035004000450050005500600065007000
11 Unemployment Claims
Continuing Claims
INITIAL CLAIMS
Consumers
Negative Net Worth in 8.3 million Homes
Consumers: Balance Sheet for Median Household
$56,700$87,300$86,000Net worth103,900103,90099,000Total liabilities
2,4002,4002,400Credit cards
12,80012,80011,800Installment loans
88,70088,70084,800Mortgage on primary residence
Liabilities160,600191,200185,000Total assets
125,400150,000148,300Primary residence
14,60014,60014,400Vehicles
17,90023,90019,000Retirement savings
2,7002,7003,300Bank accounts
Assets$47,300$47,300$47,500Income
200920072004
http://baselinescenario.com/2009/02/15/household-assets-debt-savings-federal-reserve-survey/http://www.federalreserve.gov/pubs/bulletin/2009/pdf/scf09.pdf
Negative Net Worth in 10.7 million Homes
Wall Street Journal 11/24/09
Consumers: Car Costs
"You used to be able to find a decent car for $2,500, and you can't anymore, especially in the past two months,"
“Used-vehicle prices have risen above their book values, making it tougher for customers to secure financing”
http://readingeagle.com/article.aspx?id=162023
Consumers: College Costs
Savings Rate Will Rise
Personal saving as a percentage of disposable personal income
-5
0
5
10
15
20
25
30
1929
1935
1941
1947
1953
1959
1965
1971
1977
1983
1989
1995
2001
2007
Source: BEA, Outlook/Savings NIPATable Nov 2009
Strange New World
Assets
Debt
Debt/Assets
Debt Payments / IncomeSource: Laffer Associates 2010
Vicious or Virtuous Circle? Consumer & Production…. or Production & Consumer
20
40
60
80
100
120
140
160
1997
1999
2001
2003
2005
2007
Dec
-08
Feb-
09A
pr-0
9Ju
n-09
Aug
-09
Oct
-09
Dec
-09
Consumer Confidence
Consumer Sentiment (UMich)
13 Consumer Confidence
-3.5
-2.5
-1.5
-0.5
0.5
1.5
1997
1999
2001
2003
2005
2007
Dec
-08
Feb-
09Ap
r-09
Jun-
09Au
g-09
Oct
-09
Dec
-09
Retail SalesRetail Sales ex Autos
14 Retail Sales % Chg
30
35
40
45
50
55
60
65
1997
1999
2001
2003
2005
2007
Dec
-08
Feb-
09A
pr-0
9Ju
n-09
Aug
-09
Oct
-09
Dec
-09
ISM Manufacturing Index
ISM NonManufacturing Index
Contracting
Expanding
5 ISM Manufacturing Index
-7
-5
-3
-1
1
3
1997
1999
2001
2003
2005
2007
Dec
-08
Feb-
09A
pr-0
9Ju
n-09
Aug-
09O
ct-0
9
Industrial Prodn % ChgDur Gds xTransport
6 Production & Orders
Housing and Autos
15 Housing
300
700
1100
1500
1900
1997
1999
2001
2003
2005
2007
Dec
-08
Feb-
09A
pr-0
9Ju
n-09
Aug
-09
Oct
-09
Housing StartsBldg PermitsNew Home Sales
16 More Housing Data
3.5
5.5
7.5
9.5
11.5
13.5
1997
1999
2001
2003
2005
2007
Dec
-08
Feb-
09A
pr-0
9Ju
n-09
Aug
-09
Oct
-09
Dec
-09
Existing Home Sales
New Homes Month SupplyVehicle
Sales
Housing 2.5% of GDP versus 6.3%
Residential Construction % GDP
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
1929
1935
1941
1947
1953
1959
1965
1971
1977
1983
1989
1995
2001
2007
Outlook/GDP NIPATable.xls
Inventory Cycle
Inventory Chg / GDP
-5%
-3%
-1%
1%
3%
5%
1929
1935
1941
1947
1953
1959
1965
1971
1977
1983
1989
1995
2001
2007
Outlook/GDP NIPATable.xls
Corporate Cash is High
Government Stimulus is Underway
Government Risk
Government Risk
Source: Laffer Associates 2010
Government Risk
The Depression 1929-1939
The Depression – Tight Money
The Depression – Tight Money
The Depression - Taxes Up
The Depression – Unemployment 25%
One World…or Two
Emerging/Frontier Countries: Under $10,000 GDP/capita
Frontier Countries: Not in MSCI Emerging Markets Index
.
One World… or TwoPopulation
http://www.worldmapper.org/display.php?selected=117
One World… or TwoElectric Power Production
http://www.dailymail.co.uk/sciencetech/article-1217571/A-new-world-The-amazing-map-based-population-shows-Britain-big-player.html
The Poor World: Human Capital and Financial Opportunity
.
Population 2007
Frontier18.1%
United States5.1%
EAFE10.0%
Emerging Markets66.7%
Market Cap 2007
United States31.3%
EAFE40.8%
Emerging Markets25.2%
Frontier2.8%
World GDP 2007
United States26.2%
EAFE43.8%
Emerging Markets25.0%
Frontier5.0%
One World… or Two
One World…or Two
Convergence is Accelerating GDP per Capita (2000 $)
10
100
1,000
10,000
100,000
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
China India Japan South KoreaSingapore United States Brazil PhilippinesThailand Vietnam Russian CyprusMauritius Turkey
VietnamIndia
ChinaPhilippines
Japan
USA
SingaporeS Korea
Brazil
Thailand
Russia
$100
$187
$1323
$538
ChinaGDPperCapita0607
Mauritius $4300
Cyprus $12400
Turkey 2004 $3200
Demographics Favor the Poor Countries
.
Population Demographics
0
2
4
6
8
10
12
14
16
18
20
0 10 20 30 40 50 60 Age < 15
Age
> 6
4
Developed Markets
Emerging Markets
Frontier Markets
JapanItaly
GermanyGreece
Bulgaria
Singapore
Ireland
Argentina
Uganda
Pakistan
UAE
ZambiaBahrain
Peru
Sri Lanka
Nigeria
Vietnam
China
Source: World Development Indicators, 2006 Front ierCountries0607
Poland
Romania
Demographics
1,000
10,000
100,000
1,000,000
10,000,000
1950
1960
1970
1980
1990
2000
2010
2020
2030
2040
2050
India
China
Europe
Russia
Japan
Australia
New Zealand
Population
US
-0.4%
-0.3%
0.3%
-0.5%
-0.6%
0.4%
0.1%
0.4%
Source: UN Population, ChinaPop
Africa 1.2%
Bulgaria -1.1%
2011 2025Population
Growth RateBulgaria 7.7 7.1 -0.6%Ukraine 46.7 43.2 -0.6%Belarus 9.8 9.1 -0.5%Moldova 3.6 3.4 -0.5%Georgia 4.3 4.0 -0.5%Lithuania 3.4 3.1 -0.5%Russia 144.1 136.5 -0.4%Malawi 16.2 23.3 2.6%Occupied Palestine 4.6 6.6 2.7%Somalia 9.6 14.0 2.7%Benin 9.5 13.8 2.7%Tanzania 46.6 67.7 2.7%Burkina Faso 16.8 24.9 2.8%Afghanistan 30.2 45.1 2.9%Uganda 35.0 53.6 3.1%Niger 16.5 27.4 3.7%
DemographicsChina 2011
(80,000) (40,000) - 40,000 80,000
0-4
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75-79
80+
80-84
85-89
90-94
95-99
100+
Females
Males
1,385,864
Population
Source: United Nations Population Prospects, 2009
2011
(80,000) (40,000) - 40,000 80,000
0-4
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75-79
80+
80-84
85-89
90-94
95-99
100+
FemalesMales
India
1,240,387
Population (000)
2050
(80,000) (40,000) - 40,000 80,000
0-4
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75-79
80+
80-84
85-89
90-94
95-99
100+
FemalesMales
India 1,663,998
PopulationChina 2050
(80,000) (40,000) - 40,000 80,000
0-4
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75-79
80+
80-84
85-89
90-94
95-99
100+
Females
Males
1,536,074
Population
Demographics
Source: United Nations Population Prospects, 2009
Demographics2011
(10,000) (5,000) - 5,000 10,000
0-4
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75-79
80+
80-84
85-89
90-94
95-99
100+
FemalesMales
Japan 137,002
Population2050
(10,000) (5,000) - 5,000 10,000
0-4
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75-79
80+
80-84
85-89
90-94
95-99
100+
FemalesMales
Japan 120,721
Population
Demographics2011
(20,000) (10,000) - 10,000 20,000
0-4
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75-79
80+
80-84
85-89
90-94
95-99
100+
FemalesMales
United States of America
335,705
Population 2050
(20,000) (10,000) - 10,000 20,000
0-4
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75-79
80+
80-84
85-89
90-94
95-99
100+
FemalesMales
United States of America
444,168
Population
Demographics2011
(20,000) (10,000) - 10,000 20,000
0-4
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75-79
80+
80-84
85-89
90-94
95-99
100+
FemalesMales
Nigeria 162,394
Population
2050
(20,000) (10,000) - 10,000 20,000
0-4
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75-79
80+
80-84
85-89
90-94
95-99
100+
FemalesMales
Nigeria 291,619
Population
Demographics2011
(10,000) (5,000) - 5,000 10,000
0-4
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75-79
80+
80-84
85-89
90-94
95-99
100+
FemalesMales
Russian Federation
144,561
Population2050
(10,000) (5,000) - 5,000 10,000
0-4
5-9
10-14
15-19
20-24
25-29
30-34
35-39
40-44
45-49
50-54
55-59
60-64
65-69
70-74
75-79
80+
80-84
85-89
90-94
95-99
100+
FemalesMales
Russian Federation
124,943
Population
China…the Country
Today: The Middle-Class
3.0%
91%
87%
17%
6.5%
57%
45%
35%
0% 20% 40% 60% 80% 100%
InfantMortality
Adult Literacy
WomenLiteracy
Income <$1/day
IndiaChina
The Middle-Class
China vs India Urban Housebolds by Income
-
20
40
60
80
100
120
140
< $2000 $2000-7500 > $7500
Income
Urb
an H
ouse
hold
s (m
illio
n)
India
China
Source: The Economist, 2008
Middle Class Urban Households
0
50
100
150
200
250
300
350
400
1985 1995 2005 2015 2025
mill
ion
urba
n ho
useh
olds
over $25,000 Income$25,000$12,500$5,000Umder $3100
Source: The Economist, McKinsey, 8/5/06
$2,000 to $12,000 is the sweet spot for consumption(Penetration of durable goods relative to annual income)
$12,000 = 90,000 RMB$2,000 = 15,000 RMB
India Passenger Car Sales
Source: Citigroup India
Introduced Financing
(Thousands)
-
100
200
300
400
500
600
700
800
900
1,000
89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04
As of 30-Nov-04
Middle Class = Autos
Rate drops below 20%
Comparison of Chinese and US Autos as Percent of Population
Source: Morgan Stanley; FactSet As of 31-Dec-05
0
50,000,000
100,000,000
150,000,000
200,000,000
250,000,000
300,000,000
1900
1905
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
E
Pas
seng
er A
utos
& T
ruck
s
0%10%20%30%40%50%60%70%80%90%
Pen
etra
tion
Rat
e of
Pas
seng
er A
utos
&
Tru
cks
US Total # Passenger Cars and Trucks on July 1 Chinese Cars
US Penetration Rate: Passenger Vehicles/Population Chinese Penetration Rate: Autos/Population
Middle Class = Autos
Comparison of the Pace of Chinese and US Passenger Vehicle Penetration
Source: Morgan Stanley; FactSet As of 31-Dec-05
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
1900
1902
1903
1905
1907
1908
1909
1910
1911
1912
1913
1914
1915
1916
1917
1918
1920
1921
1923
US Passenger Vehicles
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
E
Chinese Cars
Middle Class = Autos
Source: BP Statistical Review of World Energy, U.S. Census global population database, respective state statistics bureaus for GDP.
Resources
0
3
6
9
12
15
18
21
24
27
30
33
1900
1905
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
Oil
cons
umpt
ion p
er c
apita
(bar
rels
/yea
r) U.S.A.
S. Korea
Japan
Oil per capita rises rapidly in response to the GDP growth afforded by inexpensive labor, then levels off in a service economy at saturation.
India
P.R. China
The two lower lines are EIA 's High Growth case for China and Ind ia. 2006-07E est imates f rom EIA.
Hong Kong
Oil Consumption (000 barrels/day)
100
1,000
10,000
100,000
1967
1972
1977
1982
1987
1992
1997
2002
2007
2012
2017
2022
2027
2032
2037
2042
2047
2052
2057
Source: BP 2008
US
China
IndiaJapan
Russia
Germany
Resources
• Things will look different in 40 years….
• (Based on 2002–2007 growth rates)
Source: BP Statistical Review of World Energy, Frontier Market Asset Management, 2009
No Sub-prime Problems in Emerging/Frontier
Convergence is Accelerating
GDP per Capita (2000 $)
10
100
1,000
10,000
100,000
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
2023
2025
Vietnam
India
China
JapanUSA, $46,096 SingaporeS Korea
BrazilSri LankaRussia
$100
$192
$6,300
ChinaGDPperCapita0912
Bangladesh
Turkey
$234
India, $1,715
France
Turkey
France
Assumptions: Growth to 2015 ~= 2000-2008, 2016-2025 lose 1/3 of premium over 2.5%, 2026-2050 lose another 1/3
Source: World Bank, Frontire Market Asset Management, 2010
Strange New World
GDP 2008
EAFE56%
China5%
India2%
Frontier4%Emerging
Markets10% United
States23%
Est 2025 GDP (Bil)
EAFE47%
China11%
India3%
Frontier5%Emerging
Markets13%
United States21%
Est 2050 GDP (Bil)
EAFE40%
China18%
India4%
United States18%
Emerging Markets
14%
Frontier6%
Source: World Bank. UN Population Survey, Frontier Marekt Asset Management, ChinaGDPperCapita0912.xls
Convergence is Accelerating
Assumptions: Growth to 2015 ~= 2000-2008, 2016-2025 lose 1/3 of premium over 2.5%, 2026-2050 lose another 1/3
2008 GDP/Cap
Est 2015 GDP/Cap
Est 2025 GDP/Cap
Est 2050 GDP/Cap
Korea, Rep. $14,469 $22,356 $35,076 $98,399Japan $39,911 $41,673 $48,602 $78,251United States $37,757 $40,037 $47,239 $75,261Latvia $5,695 $9,706 $17,445 $59,442Slovenia $12,559 $17,472 $24,871 $56,139Australia $23,527 $27,652 $33,637 $55,739Israel $20,513 $24,529 $29,183 $46,617France $24,019 $24,974 $29,240 $45,891Italy $19,796 $19,192 $21,993 $33,994New Zealand $14,890 $16,381 $19,643 $32,331Croatia $6,287 $8,900 $13,163 $32,137Slovak Republi $5,197 $8,273 $12,441 $32,013Argentina $8,693 $12,066 $15,941 $31,392Czech Republic $7,087 $9,822 $13,940 $31,349Kazakhstan $2,166 $4,218 $7,953 $28,508Portugal $11,259 $12,271 $15,179 $27,266Russian Federa $2,637 $4,819 $8,407 $27,107Brazil $4,087 $6,222 $9,403 $23,902Romania $2,444 $4,395 $7,526 $23,799Hungary $6,097 $7,683 $10,606 $22,883China $1,612 $3,351 $6,203 $22,539Chile $5,882 $7,573 $9,974 $19,846Turkey $4,950 $6,636 $8,974 $18,562Mauritius $4,527 $6,182 $8,429 $17,966Mexico $6,404 $7,030 $8,305 $13,982Sri Lanka $1,074 $1,689 $2,583 $6,806Vietnam $576 $1,073 $1,904 $6,216Mongolia $626 $1,120 $1,795 $5,050India $637 $1,056 $1,688 $4,711
Valuations: Frontier Markets are Attractive
Price/Earnings Ratios
0
5
10
15
20
25
30
35
40
45Ja
n-99
Jul-9
9
Jan-
00
Jul-0
0
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Source: MSCI, S&P, Frontier PE PB ROE Charts, Dec 2009
EAFEUS
EM
US 28.6x, EAFE 28.6x, Emerging 20.6x, Frontier ex-GCC 11.6x
Frontier
Valuations: Frontier Markets are Attractive
Price/Book
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Jan-
98
Jul-9
8
Jan-
99
Jul-9
9
Jan-
00
Jul-0
0
Jan-
01
Jul-0
1
Jan-
02
Jul-0
2
Jan-
03
Jul-0
3
Jan-
04
Jul-0
4
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
U.S.
EAFE
MSCI EM
US 2.2x, EAFE 1.6x, Emerging 2.2x, Frontier ex-GCC 1.6x
Frontier
Source: MSCI, S&P, Frontier PE PB ROE Charts, Dec 2009
Valuations: Frontier Markets are Attractive
Return on Equity
0%
5%
10%
15%
20%
25%Ja
n-99
Jan-
00
Jan-
01
Jan-
02
Jan-
03
Jan-
04
Jan-
05
Jan-
06
Jan-
07
Jan-
08
Jan-
09
EM
EAFE
U.S.
US 7.7%, EAFE 5.6%, EM 10.5%, Frontier ex-GCC 13.8%
Frontier
U.S.
Source: MSCI, S&P, Frontier PE PB ROE Charts, Dec 2009
The Numbers…
Risk and Return 10 years (12/99-12/09)
-5%
0%
5%
10%
15%
0% 5% 10% 15% 20% 25%
Annual Standard Deviation
Ann
ualiz
ed R
etur
n
S&P
EAFE
MSCI Emerging Markets
S&P Frontier Markets
Source: MSCI, S&P Dec 2009
S&P 500 EAFE
MSCI Emerging Markets
S&P Frontier
BMI10 year return to 12/09 -9.1% 17.2% 137.1% 277.3%
Correlation to S&P 1.00 0.87 0.79 0.50Standard Deviation 16.2% 18.0% 21.7% 18.1%
Real S&P is Below the Trend Line
StockTotalRtnGFD1800 2009.xls
Real S&P 500 & Cowles Index 1871 to 2009
0.0100
0.1000
1.0000
10.0000
100.0000
1,000.0000
01/3
1/18
71
01/3
1/18
81
01/3
1/18
91
1/31
/01
1/31
/11
1/31
/21
1/31
/31
1/31
/41
1/31
/51
1/31
/61
1/31
/71
1/31
/81
1/31
/91
1/31
/01
1/1/
11
Source: S&P, Cowles Indes, Frontier Market Asset Management, December 2009
Buy when 10 year REAL return is negative
StockTotalRtnGFD1800 2009.xls
Real S&P 500 & Cowles Index Over Rolling 10 Year Periods 1871 to 2009
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
02/2
8/18
71
02/2
8/18
81
02/2
8/18
91
2/28
/01
2/28
/11
2/28
/21
2/28
/31
2/28
/41
2/28
/51
2/28
/61
2/28
/71
2/28
/81
2/28
/91
2/28
/01
Source: S&P, Cowles Indes, Frontier Market Asset Management, December 2009
-3.20%
StockTotalRtnGFD1800 2009.xls
What Next?
American Association of Individual Investors Survey
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Nov
-87
Aug
-88
May
-89
Feb-
90
Nov
-90
Aug
-91
May
-92
Feb-
93
Nov
-93
Aug
-94
May
-95
Feb-
96
Nov
-96
Aug
-97
May
-98
Feb-
99
Nov
-99
Aug
-00
May
-01
Feb-
02
Nov
-02
Aug
-03
May
-04
Feb-
05
Nov
-05
Aug
-06
May
-07
Feb-
08
Nov
-08
Aug
-09
Cash
Bonds
Stocks
Cash was 45% in March, now 18% (avg 25% 1997-2009)
Stocks Bonds CashMar-09 41% 14% 45%Dec-09 64% 18% 18%Average 60% 15% 25%
Source: http://www.aaii.com/membersurveys/AssetAllocation/AssetAllocationSurvey.cfm
Results for 2008 & 2009
Returns 2008 2009 2 yr returnBangladesh 5% 40% 47%COLOMBIA -25% 84% 38%
Namibia -5% 30% 24%CHILE -35% 87% 21%
Lebanon -23% 52% 17%ISRAEL -29% 55% 10%
PERU -40% 72% 3%Panama -14% 18% 2%BRAZIL -56% 129% 0%
INDONESIA -56% 128% 0%SOUTH AFRICA -38% 58% -2%
TAIWAN -46% 80% -2%MEXICO -43% 57% -11%
Botswana -34% 30% -15%MOROCCO -11% -5% -15%
MSCI Emerging -53% 79% -16%PHILIPPINES -52% 68% -19%
CHINA -51% 63% -20%S&P 500 -37% 26% -20%Mauritius -47% 50% -21%KOREA -55% 72% -23%
EAFE -43% 34% -24%TURKEY -62% 98% -25%
INDIA -65% 103% -28%HUNGARY -62% 78% -32%
POLAND -54% 43% -35%Kenya -39% 5% -35%
Kazakhstan -46% 4% -45%S&P Frontier -55% 20% -46%
RUSSIA -74% 105% -46%Ghana -10% -41% -47%
Slovak Rep -33% -23% -49%Estonia -64% 41% -50%
Vietnam -67% 50% -51%Romania -72% 33% -62%
Ukraine -82% 31% -77%
Risk Seeking: Loss Aversion & Utility Function
• Coin toss: lose $100…. Win ??
Myopic Loss Aversion and the Equity Premium Puzzle, Shlomo Benartzi and Richard Taylor, Quarterly Journal of Economics 1998
Risk Seeking: Loss Aversion & Utility Function
• Coin toss: lose $100…. Win ??• Paul Samuelson’s wager:
– Coin toss: win $200, lose $100– Colleague’s response: “no” for one toss, “yes” for 100 x
• Loss Aversion Factor ~ 2.5x• 1 toss Utility = 50%*1*200 + 50%*2.5*(-100) = -25• 2 toss Utility =
25%*win both+50%*split+25%*lose both =.25*400 + .5*100 + .25*2.5*(-200) = +25
Myopic Loss Aversion and the Equity Premium Puzzle, Shlomo Benartzi and Richard Taylor, Quarterly Journal of Economics 1998
Risk Seeking –
Source: Meir Statman, Countries and Culture in Behavioral Finance, CFApubs.org, Sept 2008
Optimism – Pew Survey
.
Life Satisfaction versus Income
0
10
20
30
40
50
60
70
80
$100 $1,000 $10,000 $100,000
GDP/Capita USD
% S
atis
fact
ion
7-10
Series1
Developed
Emerging
Frontier
Log. (Series1)
USA
Source: Pew Opinion Survey 2007, Ondine Frontier Countries0706
Optimism – Pew Survey
Optimism versus Income
0
10
20
30
40
50
60
70
80
90
100
$100 $1,000 $10,000 $100,000GDP / Capita
% O
ptim
istic
Source: Pew Opinion Survey 2007
MaliSenegal
Bangladesh
USA
Pakistan
India
South AfricaKenya
Optimism – Pew Survey
.
"Next Generation Better Off" versus Income
0
10
20
30
40
50
60
70
80
90
100
$100 $1,000 $10,000 $100,000GDP / Capita
% O
ptim
istic
Series1 Developed
Emerging Frontier
Log. (Series1) Source: Pew Opinion Survey 2007
Japan
BangladeshChina
USA
Italy
Optimism:
Source: Human Security Centre, UBC
Optimism:
Optimism: Determination
Optimism: Determination
Optimism: Determination
Optimism: Determination
Optimism: Determination
Optimism: Determination
Optimism: Determination
Optimism: Determination
Conclusion: Reasons for optimism
Inflation: Production: Employment: Consumer: Financial:
Saddam Hisein executed
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
1997
1999
2001
2003
2005
2007
Dec
-08
Feb-
09A
pr-0
9Ju
n-09
Aug
-09
Oct
-09
Dec
-09
PPI monthly % ChgPPI xFood/Energy
2 PPI Monthly % Chg
-2.0%
-1.6%
-1.2%
-0.8%
-0.4%
0.0%
0.4%
0.8%
1.2%19
9719
9920
0120
0320
0520
07D
ec-0
8Fe
b-09
Apr
-09
Jun-
09A
ug-0
9O
ct-0
9
US CPI monthly % ChgCPI xFood/Energy
Annual Monthly1 CPI Monthly % Chg
30
35
40
45
50
55
60
65
1997
1999
2001
2003
2005
2007
Dec
-08
Feb-
09A
pr-0
9Ju
n-09
Aug
-09
Oct
-09
Dec
-09
ISM Manufacturing Index
ISM NonManufacturing
Contracting
Expanding
5 ISM Manufacturing Index
-7
-5
-3
-1
1
319
9719
9920
0120
0320
0520
07D
ec-0
8Fe
b-09
Apr-
09Ju
n-09
Aug-
09O
ct-0
9
Industrial Prodn % ChgDur Gds xTransport
6 Production & Orders
-700-600-500-400-300-200-100
0100200300
1997
1999
2001
2003
2005
2007
Dec
-08
Feb-
09A
pr-0
9Ju
n-09
Aug
-09
Oct
-09
Dec
-09
Non-Farm Payroll ChgMfg Payroll Chg
10 Payrolls
7 Capacity Utilization
65
75
85
1997
1999
2001
2003
2005
2007
Dec
-08
Feb-
09Ap
r-09
Jun-
09Au
g-09
Oct
-09
20
40
60
80
100
120
140
160
1997
1999
2001
2003
2005
2007
Dec
-08
Feb-
09Ap
r-09
Jun-
09Au
g-09
Oct
-09
Dec
-09
Consumer Confidence
Consumer Sentiment (UMich)
13 Consumer Confidence
16 More Housing Data
3.5
5.5
7.5
9.5
11.5
13.5
1997
1999
2001
2003
2005
2007
Dec
-08
Feb-
09A
pr-0
9Ju
n-09
Aug
-09
Oct
-09
Dec
-09
Existing Home Sales
New Homes Month SupplyVehicle
Sales
15 Housing
300
700
1100
1500
1900
1997
1999
2001
2003
2005
2007
Dec
-08
Feb-
09Ap
r-09
Jun-
09Au
g-09
Oct
-09
Housing StartsBldg PermitsNew Home Sales
18 Real GDP and Inflation
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
Sep-
05
Mar
-06
Sep-
06
Mar
-07
Sep-
07
Mar
-08
Sep-
08
Mar
-09
Sep-
09
Real GDPGDP Deflator
Quarterly
8 $ vs Euro & Yen
0.70
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1997
1999
2001
2003
2005
2007
23-J
an-0
920
-Mar
-09
15-M
ay-0
910
-Jul
-09
04-S
ep-0
930
-Oct
-09
25-D
ec-0
908
-Jan
-10
$ per Euro$ per 100 Yen
15
35
55
75
95
1997
1999
2001
2003
2005
2007
23-J
an-0
920
-Mar
-09
15-M
ay-0
910
-Jul
-09
04-S
ep-0
930
-Oct
-09
25-D
ec-0
908
-Jan
-10
Annual Monthly + Last 3 Weeks
3 OIL: West Texas Intermediate
0500
1000150020002500300035004000
1997
1999
2001
2003
2005
2007
23-J
an-0
920
-Mar
-09
15-M
ay-
10-J
ul-0
904
-Sep
-30
-Oct
-09
25-D
ec-0
908
-Jan
-10
19 U.S. Stocks
S&P
R2000
Rel Large/Small = S&P/R2000
-3.5
-2.5
-1.5
-0.5
0.5
1.5
1997
1999
2001
2003
2005
2007
Dec
-08
Feb-
09A
pr-0
9Ju
n-09
Aug
-09
Oct
-09
Dec
-09
Retail SalesRetail Sales ex Autos
14 Retail Sales % Chg
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
1997
1999
2001
2003
2005
2007
23-J
an-0
920
-Mar
-09
15-M
ay-0
910
-Jul
-09
04-S
ep-0
930
-Oct
-09
25-D
ec-0
908
-Jan
-10
10 Yr Note
10 Yr TIPS (Real Yield)
Expected Inflation =
4 Bonds - TIPS = Expected Inflation
2.46%
Expected Inflation
3%
4%
5%
6%
7%
8%
9%
10%
1997
1999
2001
2003
2005
2007
Dec
-08
Feb-
09Ap
r-09
Jun-
09Au
g-09
Oct
-09
Dec
-09
32
33
33
34
34
35
35
Unemployment RateAvg Wkly Hours
9 Unemployment Rate & Wkly Hours
12 U.S. Trade Balance
-70
-60
-50
-40
-30
-20
-10
0
1997
1999
2001
2003
2005
2007
Dec
-08
Feb-
09Ap
r-09
Jun-
09Au
g-09
Oct
-09
300
350
400
450
500
550
600
650
700
1997
1999
2001
2003
2005
2007
23-J
an-0
920
-Mar
-09
15-M
ay-
10-J
ul-0
904
-Sep
-09
30-O
ct-0
925
-Dec
-09
08-J
an-1
0
20002500300035004000450050005500600065007000
11 Unemployment Claims
Continuing Claims
INITIAL CLAIMS
20 Money Supply
400
600
800
1000
1200
1400
1600
1800
2000
Jan-
00Ja
n-01
Jan-
02Ja
n-03
Jan-
04Ja
n-05
Jan-
06Ja
n-07
Jan-
08Ja
n-09
Jan-
10
Base
0
3
6
1997
1999
2001
2003
2005
2007
Dec
-08
Feb-
09Ap
r-09
Jun-
09Au
g-09
Oct
-09
Dec
-09
17 Fed Funds, T-Bill 90 day
FED Funds
90 Day T-Bill
1/14/2010 Frontier Market Asset Management, Larry Speidell, [email protected] 858-454-1440