Investing In A World of Volatility

November 2011

George Feiger

CCA1111-0196-R

Expect Several More Years of Extreme Volatility

Everything is connected

All the parts have long-lasting problems

2

But Don’t Despair!

The US is the least bad place to invest now

The longer term is brighter

Your Investments Need to Work With This Reality

Follow a personal financial plan

Explicitly invest for the near-term and the long-term

Volatility Rises Because We Connected Everything

3

1980

Deregulation of interest rates

Deregulation of capital flows

Spread of securitization

Collapse of socialism

Explosion of pension savings

Growth of emerging markets

Options on everything

2011

Every Investment Must Be Evaluated In Light of Global Issues

USIssues

Euro ZoneIssues

Emerging MarketsIssues

Resource Suppliers

Issues

4

Your Investments!

So Let’s Do That

5

• Drowning in debt

• Little real growth

• Excessive debt

• Financial crisis to come

• Recession

• Structural flaws

• Speculative bubbles

• Inflation

• Unsustainable growth structure

The tail on all these dogs!

USIssues

Euro ZoneIssues

Emerging MarketsIssues

Resource Suppliers

Issues

The US Is Drowning in Debt

6

145

185

225

265

305

345

380

145

185

225

265

305

345

380

1925 35 45 55 65 75 85 95 05

Total Credit Market Debt as a % of GDP

Source: Ned Davis Research, 2011

All of Us … Households

7Source: Ned Davis Research, 2011

Liabilities/Disposable Personal Income

60

80

100

120

140

60

80

100

120

140

1955 60 65 70 75 80 85 90 95 00 05 10

Nonfinancial Companies

8

24

30

36

42

48

24

30

36

42

48

1955 60 65 70 75 80 85 90 95 00 05 10

Nonfinancial Corporate Debt as a % of GDP

Source: Ned Davis Research, 2011

And Governments

9

Debt Measure

Gross Federal + GSE* Debt + State & Local Gross Federal + GSE DebtGross Federal DebtPublicly Held Federal Debt

**

24

30

39

50

64

82

105

135

159

24

30

39

50

64

82

105

135

159

1955 60 65 70 75 80 85 90 95 00 05 10

Government Debt (Federal, State, Local) + GSE Debt as a % of GDP

Source: Ned Davis Research, 2011

This Has Killed Residential Real Estate

10

Total Number of Homes for Sale (millions, annually)

…. 1983-2004 Average

83 87 91 95 99 03 07 11

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

5.5

5.0

4.5

4.0

3.5

3.0

2.5

2.0

1.5

(‘000)

Forecast

800

600

400

200

0

Mar2006

Mar08

Mar10

Mar12

Mar14

Mar15

Median new homecosts 34% more

than median existing home

US Home Foreclosure Starts per Quarter

Source: Credit Suisse, 2011Source: Thomson Datastream; Capital Economics, 2011

And Also Commercial Real Estate

11Source: Bloomberg LP

60% LTV here

120% LTV here

Moody’s/Real CPPI Index(National All Property)

% C

han

ge

in V

alu

e

60% LTV here

120% LTV here

Dec Aug Mar Nov Jul Feb Sep 00 02 04 05 07 09 10

Source: Bloomberg, LP

And Banks Are Reluctant to Lend to “Poor Credits”

12

Now as bad as the early 1990s

-15

-10

-5

0

-15

-10

-5

0

86 90 94 98 02 06 10 11

NFIB Small Business Credit Conditions

Source: Ned Davis Research, 2011

Today’s Euro Zone Is in its End-game

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“The era of procrastination, of half-measures, of soothing and baffling expedients, of delays, is coming to its close. In its place we are entering a period of consequences.”

~ Winston Churchill, House of Commons speech, Nov .12, 1936

Europeans Binged and Borrowed on Houses More than We Did

14

Source: Bank of International Settlements; Haver Analytics; McKinsey Global Institute, 2011

The Weaker Economies Are All Linked by Debt

15Source: Bank of International Settlements; Bill Marsh, New York Times, 2010

The Debt Sits Primarily Within The Major European Banks

16Source: European Banking Authority, Credit Suisse, Ritholz, 2011

This Debt Is Now Rapidly Falling in Value

17Source: Italy’s Ministry of Economy and Finance; Thomson Reuters; Ritholz, 2011

And You Ain’t Seen Nothing Yet!

18Source: Thomson Reuters, Ritholz, 2011

The Euro Zone Is on the Edge of the “Death Spiral”

19

Underlying the Immediate Financial Crisis Is an Unviable Structure

20

80

90

100

110

120

130

140

80

90

100

110

120

130

140

Q1 1995 Q1 1999 Q1 2003 Q1 2007 Q1 2011

Real Competitiveness Indicators (Based on Relative Unit Labor Costs) (Q199=100)

Germany

Greece

Italy

IrelandGreece joins

the euro

Source: ECB, 2011

GDP Growth Rate Required to Keep Debt/GDP Stable*

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8.4

2.4

% per annum

Italy Germany

Neither is plausible!

*Assuming current government debt levels and interest rates

Source: Satyajit Das, Financial Times, Nov 28, 2011

If This Is So Obvious, Why Don’t Germany/ECB/EU/IMF Act?

22

00

-1+1

-1-1

-2-2

Euro Zone Prisoner’s Dilemma

ECB Provides Unlimited Funds

Governments Stick to Rules

Governments Overspend and

Overborrow

ECB Does Little

Best Strategy Won’t Be Chosen!

Source: Kathy Sato, PhaseInvesting Technologies, Inc., 2011

Payoff to Weak Member States

Payoff to Solvent States

The Choice Is Between Bad and Worse But the Voters Want Neither

Portugal, Ireland, Greece can’t pay

So bailout or massive bank recapitalization

BUT

Frugal north doesn’t want to bail out profligate south

So euro bailout scheme has no teeth

BUT

Portugal, Ireland, Greece can’t pay

So …

23

Emerging Markets Will Lead World Economic Growth

Source: Netherlands Bureau for Economic Policy Analysis

24

- 50%

0%

50%

100%

150%

200%

250%

- 50%

0%

50%

100%

150%

200%

250%

1991 1993 1995 1997 1999 2002 2004 2006 2008 2010

Change in Industrial Production

Emerging Economies Developed Economies

But Unpleasant Things Still Happen There

Real estate and credit bubbles

Attempts to control inflation

Need to rebalance from exports to consumption

Overvalued currencies

25

China Is on the Edge of a Significant Slowdown

26Source: BCA Research, 2011

Ridiculous Credit Expansion

CHINA:BANKING SYSTEM ASSETSAS % OF GDP

% OF GDP

240

230

220

210

200

% OF GDP

40

30

20

% OF GDP

240

230

220

210

200

% OF GDP

40

30

20

SOCIAL FINANCING AS A % OF GDP

2002 2004 2006 2008 2010 2012

Followed by Dramatic Credit Issues

REAL ESTATE DEVELOPERS

BANKS

Source: MSCI Inc.; BCA Research, 2011

50% Drop

45% Drop

CHINESE CORPORATE SPREADS

Source: JP Morgan Chase; BCA Research, 2011

CHINESE CORPORATE SPREADS

27

28Source: FactSet Research Systems; Ritholz, 2011

29Source: The Institute of International Finance, Ritholz, 2011

Is It Any Wonder the World Teeters On Edge of Recession?

30Source: Ned Davis Research, November 2011

Manufacturing Expanding

Manufacturing Contracting

34

38

43

49

55

34

38

43

49

55

Year-to-Year Point Change

-16

-8

0

8

16

-16

-8

0

8

16

1998 99 00 01 02 03 04 05 06 07 08 09 10 11

Global Manufacturing

The US Market Is the Least Bad Place to Be

Loan growth in every area but real estate

Continuing private sector job creation

Stabilized financial sector

Ongoing Investment in innovation

Massive potential energy supplies

Emerging rescue of housing/mortgages

Principal forgiveness

Covered bonds/private mortgage market

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And Global Long-Term Prospects Are Increasing

32

Emerging market equities

Natural resources

Energy/alternative energy

Emerging market debt

“Northern Europe” assets

Global blue chips

Infrastructure

Our Problems Lie in the Polarization and Ineffectiveness of Our Government

33Source: Wall Street Journal, November 2011

34

Source: White House Office of Management and Budget; Congressional Budget Office; Ritholz, 2011

Follow a Personal Financial Plan!

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Think through futurefinancial sources and uses

Near-term needs portfolio

– Capital preserving

– Accept the implied yield

– Core diversified strategy

– Active management

Rolling 3 years Rolling 5-10 years

Long-term needs portfolio

Match Your Strategy to Your Situation

Time horizon and resources: you or Harvard?

Age and circumstances: what can you earn back?

Allow for the unanticipated: health, family, business

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A Portfolio for September 2010

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Short-Term Domestic Fixed Income, 16.5%

Cash, 2.5%

Domestic Equities, 32.6%

International Equities, 7.9%

Emerging Markets Equities, 4.5%

Inflation Protected Securities, 1.9%

Natural Resources, 3.8%

Real Estate, 1.9%

Alternatives, 15.0%

Intermediate-Term Domestic Fixed Income,

3.0%

Emerging Markets Debt, 1.5%

Total Return Fixed Income, 9.0%

Near-term needs, 19.0%

Near-term needsportfolio

Long-termportfolio

But Don’t Stay There: Move with Opportunities and Threats

• Accelerating Asian growth? Overweight industrial raw materials and energy

• Slow domestic growth? Overweight global blue chips

• Looming euro crisis? Reduce % of assets denominated in euro

• Exploding nuclear plants? Invest in natural gas

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This presentation is based on assumptions and market conditions known to Contango at the time this presentation material was prepared. Unless otherwise noted, all examples provided herein are hypothetical and for illustrative purposes only. Assumptions and market conditions are subject to change, which may affect Contango’s final recommendation after an Investment Policy Statement has been developed with the client.

Unless the investment is a deposit of a bank and insured or guaranteed by the Federal Deposit Insurance Corporation or other government agency, investments used in portfolios created by Contango are subject to losses.

Return information provided is hypothetical unless otherwise indicated. Additionally, return information represents the opinion of Contango. Information provided is not intended to provide specific advice, nor to be construed as a recommendation with regard to any particular investment or to provide any guarantee of results. The information contained herein employs proprietary projections of expected returns. Past performance is no guarantee of future results.

When constructing portfolios, Contango may use certain components that are subject to quarterly, semi-annual or annual redemption provisions. This may affect the liquidity of the portfolio and availability of funds.

Contango is not responsible for any clerical, computational or other errors that may occur as a result of using data from outside sources, such as pricing information obtained from standard quotation services.

All dividends and distributions are reinvested in the asset classes indicated for each portfolio consistent with the weighting for that asset class.

If included in this presentation, model results do not represent actual trading and may not reflect the impact that material economic and market factors might have if Contango were actually managing your portfolio.

If performance figures are provided, they are gross of Contango’s investment advisory fees and do not reflect costs and expenses associated with portfolio transactions or taxes. Actual portfolio returns would be reduced by Contango’s investment advisory fees and other expenses incurred in the management of its investment advisory account. For example, if Contango were to manage a $1 million diversified portfolio from January 1, 2010 to December 31, 2010, an 8.00% annual return figure would be reduced by a management fee of approximately 1.38%. Contango's management fees differ according to size and nature of the specific investment portfolio. Please see Contango's Form ADV for full details.

Disclosures

IMPORTANT NOTEIMPORTANT NOTE: Wealth management services are offered through Contango Capital Advisors, Inc. (Contango), a registered investment adviser and a nonbank subsidiary of Zions Bancorporation. Investments are not insured by the FDIC or any federal or state governmental agency, are not deposits or other obligations of, or guaranteed by, Zions Bancorporation or its affiliates, and may be subject to investment risks, including the possible loss of principal value of the amount invested. Some representatives of Contango are also registered representatives of Zions Direct, which is a member of FINRA/SIPC and a nonbank subsidiary of Zions Bank. Employees of Contango are shared employees of Western National Trust Company (WNTC), a subsidiary of Zions Bank and an affiliate of Contango.