Are we in a Bull Market?

• Low-yield environment manufactured by central banks has encouraged and precipitated yield-seeking speculation

• We believe that the U.S. equity markets are priced for very low subsequent investment returns

• This presentation will provide an overview of the potential risk that investors face, should we enter a bear market.

Rate of change is in extreme territory

The trajectory of the up-move is similar to the highs of 1929 and the highs in 1938

Table 1: Average Real GDP Growth Rates

Source: FRED, Real Gross Domestic Product, 3 Decimal, BEA, accessed on July 1, 2015

• Table above shows the average real GDP growth rates experienced during the three market up moves

• Economic growth rates have been sub-par for much of this equity market rally

Bull Market Period Avg GDP Growth in %

Q1 1925 – Q3 1929 0.036

Q1 1950 – Q3 1954 0.05

Q3 1993 – Q3 2000 0.04

Q2 2009 – Q1 2015 0.017

Experts like John Hussman, Jeremy Grantham believe

that the U.S. equities are overvalued

But many find the markets to be fairly

valued

If we are in a bull market, we will

indeed have a bear market following it

Table Source: Data from Robert J. Shiller, MAEG’s calculations

Bear Market #Date of

PeakDate of Trough

PercentDecline

Equivalent Low From

**2100

Bear Market1 1872.05 1877.06 47% 1107

Bear Market2 1881.06 1885.01 36% 1353

Bear Market3 1887.05 1896.08 35% 1356

Bear Market4 1902.09 1903.1 29% 1485

Bear Market5 1906.09 1907.11 38% 1309

Bear Market6 1909.12 1914.12 29% 1499

Bear Market7 1916.11 1917.12 33% 1399

Bear Market8 1919.07 1921.08 32% 1424

Bear Market9 1929.09 1932.06 85% 320

Bear Market10 1932.09 1933.03 25% 1584

Bear Market11 1934.02 1935.03 26% 1560

Bear Market12 1937.02 1938.04 45% 1147

Bear Market #Date of

PeakDate of Trough

PercentDecline

Equivalent Low From

**2100

Bear Market13 1938.11 1942.04 40% 1260

Bear Market14 1946.05 1949.06 25% 1569

Bear Market15 1961.12 1962.06 22% 1628

Bear Market16 1968.12 1970.06 29% 1491

Bear Market17 1973.01 1974.12 43% 1190

Bear Market18 1987.08 1987.12 27% 1536

Bear Market19 2000.08 2003.02 44% 1183

Bear Market20 2007.1 2009.03 51% 1033

Average of All Bear Markets 37% 1322

Median of All Bear Markets 34% 1377

Least Bear Market Decline 22% 1628

Worst Bear Market Decline85%

320

**Recent S&P500 high

An investor will do well to understand that a ≈40% decline in a bear market is a rather normal event.

There is a significant relationship between valuation levels at the beginning of a bear

market and the subsequent decline experienced.

Source: Data from Robert J. Shiller, MAEG’s calculations

Bear Market #Percent Decline

CAPE at Beginning CAPE at End

Bear Market1 47% NA NA

Bear Market2 36% 19 13.1

Bear Market3 35% 18.1 15.7

Bear Market4 29% 22.9 15.3

Bear Market5 38% 19.2 10.6

Bear Market6 29% 14.8 10.2

Bear Market7 33% 12.1 6.4

Bear Market8 32% 7.1 5.2

Bear Market9 85% 32.6 5.6

Bear Market10 25% 9.8 7.9

Bear Market11 26% 13.9 10.4

Bear Market12 45% 22.2 11.8

Bear Market #Percent Decline

CAPE at Beginning CAPE at End

Bear Market13 40% 16.1 8.5

Bear Market14 25% 16 9.1

Bear Market15 22% 22 16.8

Bear Market16 29% 22.3 13.8

Bear Market17 43% 18.7 8.3

Bear Market18 27% 18.3 13.4

Bear Market19 44% 42.9 21.2

Bear Market20 51% 27.3 13.3

Correlation Between Beginning CAPE

and The Extent of Decline57

Cape at the end of June 2015 26.7

The correlation between beginning Cyclically Adjusted PE (CAPE) levels and the subsequent declines experienced is 57%.

Higher the CAPE at beginning, the larger the subsequent decline

CAPE multiple at the end of June 2015 was higher than 17 of the past 20 bear markets

We believe it will be fairly clear how steep the decline will be from the current peak in case of a future bear market.

We don’t recommend jumping ship, but ensure that you have your life jackets ready