Transcript Title of Presentation

Turnaround Management
Association - Colorado
Erik Davidson, CFA
Senior Director of Investments
Mountain Midwest Region
February 19, 2008
A Note about Disclosures
Please be sure to read the important
disclosures at the end of this presentation
Disclosures
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The information and opinions in this report were prepared by the investment management arm within Wells Fargo Private Bank, a division of
Wells Fargo Bank, N.A. Information and opinions have been obtained or derived from information we consider reliable, but we cannot
guarantee their accuracy or completeness. Opinions represent Wells Fargo Bank, N.A.’s opinion as of the date of this report and are for
general information purposes only. Wells Fargo Bank, N.A. does not undertake to advise you of any change in its opinions or the information
contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different
conclusions from, this report.
The investments discussed or recommended in this report are not insured by the Federal Deposit Insurance Corporation (FDIC) and may be
unsuitable for some investors depending on their specific investment objectives and financial position.
Past performance is not a guide to future performance. Income from investments may fluctuate. The price or value of the investments also
may fluctuate.
Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment losses.
Investing in foreign securities presents certain risks that may not be present in domestic securities and may not be suitable for all investors.
Real estate investment carries a certain degree of risk and may not be suitable for all investors.
Some alternative investments may be available to pre-qualified investors only.
Fixed income securities are subject to availability and market fluctuation. These securities may be worth less than the original cost upon
redemption. Certain high-yield/high-risk bonds carry particular market risks and may experience greater volatility in market value than
investment grade corporate bonds. Government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity,
offer a fixed rate of return and fixed principal value. Interest from certain municipal bonds may be subject to state and/or local taxes and in
some instances, the alternative minimum tax.
The S&P 100 Index measures large-cap company performance and consists of up of 100 major, blue chip companies across diverse
industry groups. The primary criterion for index inclusion is the availability of individual stock options for each constituent.
The S&P/Case-Shiller® home price indices measure the residential housing market, tracking changes in the value of the residential real
estate market in 20 metropolitan regions across the United States. These indices use the repeat-sales pricing technique to measure housing
markets. First developed by Karl Case and Robert Shiller, this methodology collects data on single-family home re-sales, capturing re-sold
sale prices to form sale pairs. This index family consists of 20 regional indices and two composite indices as aggregates of the regions.
The S&P Small-Cap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share
turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number
of shares outstanding), with each stock’s weight in the index proportionate to its market value.
Wells Fargo & Company does not provide tax advice. Please see your tax advisor to determine how this information may apply to your own
situation.
You cannot invest directly in an index.
Additional information is available upon request.
© 2008 Wells Fargo Bank, N.A. All rights reserved.
2
Rain or Shine?
National Forecast – Light Rain
Local Forecast – Drizzle
3
“Misery Index”
Misery Index
Percent
25
Unemployment rate plus inflation
20
15
10
5
0
Jan-70
Jan-75
Source: Bloomberg
4
Jan-80
Jan-85
Jan-90
Jan-95
Jan-00
Jan-05
National Forecast – Light Rain
1. Modest U.S. growth (vibrant global)
2. Slower Profit Growth
3. Moderate consumer spending/weak housing
4. Federal Reserve to continue easing
5. Weak dollar/improving trade
5
Local Forecast - Drizzle
1. Modest growth / better than peers
2. Healthy, diversified labor market
3. Stable housing / better than peers
4. Favorable business climate
6
Growth – Slowing, But Still Positive
ECONOMIC GROWTH
Q/Q%
Change
6
HISTORY
4.9
4.8
5
FORECAST
4.5
3.8
4
3.1
2.8
3
2.4
2.1
2.0
2
1.5
1.2
1.1
1
0.6
0.5
0
2005.1
7
2006.1
2007.1
2008.1
2.0
2.1
Exports – The “Silver Bullet”?
Yr-Ago % Chg., 3 Mo. Moving Avgs.
Index: 2000=100
15
115
10/07
110
10
105
5
100
0
-5
95
Inflation-Adjusted
Exports
(Left Scale)
90
85
"Real" TradeWeighted Dollar*
(Right Scale)
-10
80
12/07
-15
Dec-98
75
Jun-00
Dec-01
Jun-03
Dec-04
Jun-06
Dec-07
U.S. export growth remains strong despite a recent deceleration, benefiting from investment-led growth in the global economy and
from strong overall competitiveness associated with a weakening dollar. Lost in all the focus on the dollar's strength against the Chinese
yuan is the fact that its "real" (inflation-adjusted), trade-weighted exchange rate--a measure of export competitiveness--is hovering at its
lowest reading in twenty-eight years, due to declines against the euro and currencies of other major trading partners.
* Against 44 other currencies, adjusted for inflation differences between the U.S. and its trading partners.
Source: J.P. Morgan Chase, Inc.
8
Interest Rates – How long so low?
15%
13%
11%
Energy
"Shocks"
9%
7%
12/07
5%
3%
Jan-73
Jan-78
Jan-83
Sources: U.S. Commerce Dep't
9
Jan-88
Jan-93
Jan-98
Jan-03
Jan-08
Inflation – Rising With Upside Risk
4.8
4.0
CPI
10/07
3.2
2.4
"Core" CPI (CPI
Excluding Food &
Energy)
1.6
0.8
Dec-2001
Dec-2002
Dec-2003
Dec-2004
Dec-2005
Dec-2006
Dec-2007
Rising food and energy costs have begun to "spill over" to some energy-intensive sectors of the economy, but they have yet to lift the
broader "core," or underlying rate that excludes those two components. Core inflation will be affected in coming months by cross
currents from slowing growth, weakening productivity gains, a recent turnaround in gasoline prices and the lift to import prices from a
weakening dollar. Future increases in labor, energy and other costs are likely to have a more muted impact on underlying inflation than
they did in the 1970s and early 1980s, however, as competition at home and abroad dampens the recovery of "pricing power."
Source: U.S. Dep't Of Labor
10
Unemployment – Rising, But Still Low
Percent
7.0
6.5
6.0
U.S.
5.5
5.0
4.5
4.0
3.5
3.0
Nov-02
Denver
Nov-03
Nov-04
Nov-05
Source: Bureau of Labor Statistics; Wells Fargo Economics
11
Nov-06
Nov-07
vs. Other States
Through October 2007
5.6
California
Washington
4.8
Minnesota
4.7
4.1
Texas
3.7
Colorado
Arizona
3.0
Source: BLS
12
U.S. = 4.7
3.5
3.5
4.0
4.5
Percent
5.0
5.5
6.0
Employment Growth
Y/Y%
3.0%
2.5%
Payroll Survey
Denver
2.0%
1.5%
1.0%
0.5%
U.S.
0.0%
-0.5%
-1.0%
-1.5%
-2.0%
-2.5%
Nov-02
Nov-03
Nov-04
Nov-05
Source: Bureau of Labor Statistics; Wells Fargo Economics
13
Nov-06
Nov-07
vs. Other States
Colorado
2.1%
Texas
2.0%
Washington
2.0%
Arizona
1.7%
California
0.7%
U.S. = 1.2%
Minnesota
0.0%
Source: BLS
14
0.1%
0.5%
1.0%
1.5%
Percent Change October 2006 - October 2007
2.0%
2.5%
Denver Employment Composition
November 2007
Info
4%
Other Svcs.
4%
Mfg
6%
Prof/Bus
17%
Financial
8%
Ed/Hlth
10%
Leis/Hosp
11%
Constr/Mining
7%
Govt
14%
Trade/Trans/Ut
19%
Source: Bureau of Labor Statistics; Wells Fargo Economics
15
Denver Job Growth
November 2006 – November 2007
Percent Change
4.4%
4.6%
4.0%
2.1%
1.2%
Prof./Bus. Services
Educ./Health Services
Leis./Hosp. Services
Gov't
Trade, Trans, Util
3.4%
-0.4%
-1.6%
-3.9%
Info. Services
Financial Services
Constr/Mining
Manufacturing
-4
-2
0
2
4
6
8
10
Thousands of Jobs
Saturday, July 18, 2015
Source: Bureau of Labor Statistics
200710052 TPB-IM21006 (01/08)
16
Housing Theme: Yet to Bottom
 Falling prices in 2008 and possibly in 2009
 Strained affordability / credit environment
 Speculative markets likely to feel more pain
—
—
—
—
17
Arizona
California
Florida
Nevada
Subprime Exposure
Share of total first mortgages classified as subprime - 2007 Q3
Texas
20.8%
Arizona
10.8%
Colorado
10.0%
Minnesota
10.0%
California
8.9%
U.S. = 13.1%
Washington
7.6%
0%
5%
Source: Equifax; Wells Fargo Economics
18
10%
15%
20%
25%
Subprime Delinquency Rates
Through 2007 Q3
32.3
California
29.6
Colorado
26.4
Arizona
26.0
Minnesota
22.1
Washington
16
18
20
Source: Equifax; Wells Fargo Economics
19
U.S. = 24.4
20.9
Texas
22
24
26
Percent
28
30
32
34
Subprime AND Delinquent %
Share of total first mortgages classified as subprime and delinquent - 2007 Q3
Texas
4.4
Colorado
3.0
California
2.9
Arizona
2.9
2.6
Minnesota
US = 3.2
1.7
Washington
1
2
3
Percent
Source: Equifax; Wells Fargo Economics
20
4
5
Rollercoaster vs. Merry-Go-Round
18%
16%
20 U.S. Metro
Areas
14%
12%
10%
8%
Denver Metro Area
6%
4%
2%
0%
-2%
10/07
-4%
-6%
Dec-02
Sep-03
Jun-04
Mar-05
Dec-05
Source: Standard & Poors, Inc.; Case-Shiller Associates, Inc.
21
Sep-06
Jun-07
vs. Other States
Washington
Texas
7.4%
U.S. = -1.7%
2.3%
Colorado
0.1%
-0.1%
California
Arizona
Minnesota
-6%
-2.2%
-2.8%
-4%
-2%
Source: National Association of Realtors;
Economy.com estimates
22
0%
2%
4%
Percent Change 2006 Q2 - 2007 Q2
6%
8%
10%
Housing Theme: Denver
Home prices are fairly stable.
S&P/Case-Shiller® Home Price Index
250
200
150
100
Composite 20
Denver
50
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Bloomberg, 1/08
Past performance is no guarantee of future results.
23
Housing Theme: Las Vegas
Home prices are dropping.
S&P/Case-Shiller® Home Price Index
250
200
150
100
Composite 20
Las Vegas
50
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Bloomberg, 1/08
Past performance is no guarantee of future results.
24
Housing Theme: Phoenix
Home prices are dropping.
S&P/Case-Shiller® Home Price Index
250
200
150
100
Composite 20
Phoenix
50
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Bloomberg, 1/08
Past performance is no guarantee of future results.
25
Housing Theme: Los Angeles
Home prices are dropping.
S&P/Case-Shiller® Home Price Index
300
250
200
150
100
Composite 20
Los Angeles
50
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Bloomberg, 1/08
Past performance is no guarantee of future results.
26
Housing Theme: San Diego
Home prices are dropping.
S&P/Case-Shiller® Home Price Index
250
200
150
100
Composite 20
San Diego
50
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Bloomberg, 1/08
Past performance is no guarantee of future results.
27
Housing Theme: San Francisco
Home prices are dropping.
S&P/Case-Shiller® Home Price Index
250
200
150
100
Composite 20
San Francisco
50
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Bloomberg, 1/08
Past performance is no guarantee of future results.
28
Housing Theme: Portland
Home prices are still rising.
S&P/Case-Shiller® Home Price Index
250
200
150
100
Composite 20
Portland
50
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Bloomberg,1/08
Past performance is no guarantee of future results.
29
Housing Theme: Seattle
Home prices are still rising.
S&P/Case-Shiller® Home Price Index
250
200
150
100
Composite 20
Seattle
50
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Bloomberg, 1/08
Past performance is no guarantee of future results.
30
Housing Theme: Minneapolis
Home prices are fairly stable.
S&P/Case-Shiller® Home Price Index
250
200
150
100
Composite 20
Minneapolis
50
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Bloomberg, 1/08
Past performance is no guarantee of future results.
31
Housing Theme: Chicago
Home prices are fairly stable.
S&P/Case-Shiller® Home Price Index
250
200
150
100
Composite 20
Chicago
50
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Bloomberg, 1/08
Past performance is no guarantee of future results.
32
Housing Theme: Dallas
Home prices are fairly stable.
S&P/Case-Shiller® Home Price Index
250
200
150
100
Composite 20
Dallas
50
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Bloomberg, 1/08
Past performance is no guarantee of future results.
33
Housing Theme: Detroit
Home prices are dropping.
S&P/Case-Shiller® Home Price Index
250
200
150
100
Composite 20
Detroit
50
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Bloomberg, 1/08
Past performance is no guarantee of future results.
34
Valuations – Fair?
27
23
19
Avg. P/E, 1983-2006=15.0 Times Forward
Operating Earnings
15
11
1/4/08 P/E=13.8x
Forward Earnings
7
3
Jan-79
Jan-83
Jan-87
Jan-91
Jan-95
Jan-99
Jan-03
Jan-07
A "flight to quality," centered on the S&P 500's sizable financial services sector, pushed the benchmark's price-earnings (P/E) multiple
materially below its long-term average of fifteen times forward earnings estimates, a plus in the outlook for stocks as market conditions stabilize.
Attractive valuations, plus prospects for improved earnings growth after a "flat," third quarter performance, should foster at least a moderate
rally in stocks.
Sources: Standard & Poors, Inc., IBES, Federal Reserve Board
35
Valuations – Cheap?
170
160
Stocks "Rich" Vs.
Bonds
150
140
130
Avg., 198306=0.98
120
110
100
90
1/4/08
80
70
Stocks "Cheap" Vs.
Bonds
60
50
40
Jan-79
Jan-82
Jan-85
Jan-88
Jan-91
Jan-94
Jan-97
Jan-00
Jan-03
Jan-06
* S&P 500 EPS divided by its price.
The so-called "risk premium" on stocks compared to bonds has increased from an already sizable reading in the wake of the
summer's turbulence in the financial market, judging from the yield ratio of S&P 500 stocks compared to that on a 10-year Treasury
note. The discount on stocks compared to bonds was nearly 47% by early January, the widest that it has been in at least the last
thirty years and large enough to encourage an over-weighted equity position in a balanced (stock-bond) portfolio.
36
Sources: Standard & Poors, Inc.; IBES; WCM Estimates
Jan-09
Size Theme: Large Caps
Take gains on small caps, overweight large.
Large vs. Small Company Stocks*
4
Large Caps
Outperforming
3
2
1
S&P 100 Large Cap Index relative to S&P 600 Small Cap Index
Small Caps
Outperforming
Average 1990-Present
0
1991
1993
1995
1997
1999
2001
2003
2005
2007
Past performance is no guarantee of future results.
* The price of the S&P 100 Index divided by the price of the S&P 600 Index
Source: BCA Research, Global Investment Strategy, Strategy Outlook – Part 2, Third Quarter 2007, 9/29/07
37
Style Theme: Growth over Value
Overweight growth stocks, underweight value.
Growth vs. Value
200
Growth
Value
Growth
100
Value
Value
Growth/Value Ratio
50
1976
1980
1984
1988
Past performance is no guarantee of future results.
Source: The Leuthold Group, 2007
38
1992
1996
2000
2004
2007
The Global Economy Today
How is the world doing?
Expected Economic Growth*
2008
11.5%
2007
9.4%
8.3%
10.0%
8.5%
6.0%
7.5%
2.2%
5.5%
2.6%
1.6%
2.0%
1.5%
U.S.
Global exU.S.
*Economic forecast
Source: Wells Fargo Private Bank, 11/07
39
Euro
Region
1.0%
Japan
Emerging
Markets
China
India
Global Theme: International Investing
Non-U.S. equity remains attractive.
World Market Capitalization
in 1970
World Market Capitalization
Today
U.S.
Rest
of the
World
U.S.
Rest
of the
World
International investing goes beyond stocks and bonds.
Source: FactSet, 9/07
40
Credit Theme: Quality
Overweight higher credit-quality bonds.
Yield Difference (Percentage Points)
Yield Difference between High-Yields and T-Notes
12
10
8
Attractive above 6.7 Percentage Points
6
4
2
1990
1993
1996
1998
2001
2004
Past performance is no guarantee of future results.
Source: The Leuthold Group, LLC, Perception for the Professional, Vol. 27, No. 9, 9/07
41
2007
Sector Theme: Municipal Bonds
Favor municipals.
Yield Ratio of Municipal Bonds to Long Treasuries*
Ratio
Median Ratio
1.0
0.9
Attractive
above 0.86
0.8
0.7
1958
1965
1972
1979
1986
1993
Past performance is no guarantee of future results.
*Quarterly average
Source: The Leuthold Group, LLC, Perception for the Professional, Vol. 27, No. 9, 9/07
42
2000
2007
Global Theme: International Bonds
Diversify your portfolio with foreign bonds.
World Investable Capital Markets*
4%
U.S. Bonds
24%
42%
47%
Other DevelopedMarket Bonds
1%
3%
6%
Emerging-Market Bonds
Stocks
Cash
Real Estate
Private Capital
Bonds
*Total: $103 trillion as of 12/31/06
Source: Rogers Casey, 6/15/07; Bank for International Settlements Quarterly Review, 6/07
43
Why Go Beyond Stocks and Bonds?
Traditional asset classes:
Portfolio A*
47%
53%
Return = 7.55%
Standard Deviation = 8.65%
Bonds
Stocks
*This is our “balanced” asset allocation portfolio. Its annual return and standard deviation are derived from our
capital market assumptions (approximate 10-15 year estimates) for stocks and bonds.
Past performance is no guarantee of future results.
44
Why Go Beyond Stocks and Bonds?
Traditional asset classes:
Potential Return (%)
9
8
Portfolio A
7
7
8
9
Potential Risk (Volatility of Returns %)
Bonds
45
Stocks
10
Why Go Beyond Stocks and Bonds?
Alternatives offer important diversification benefits.
Portfolio A*
Portfolio B*
12%
47%
7%
53%
42%
Return= 7.55%
Standard Deviation= 8.65%
Bonds
39%
Stocks
Return= 7.82%
Standard Deviation= 7.89%
Real Estate
Alternatives
*These are our “balanced” asset allocation portfolios. Their returns and standard deviations are derived from
our capital market assumptions (approximate 10-15 year estimates) for the asset classes in those portfolios.
Past performance is no guarantee of future results.
46
Why Go Beyond Stocks and Bonds?
Potentially reduce portfolio risk by adding alternative
assets to your traditional portfolio.
Potential Return (%)
9
Portfolio B
8
Portfolio A
7
7
8
Potential Risk (Volatility of Returns %)
Bonds
47
9
Stocks
Real Estate
Alternatives
10
Investment Themes
1. Globalize
2. Stocks - Favor growth vs. value
3. Bonds - “Safety” can have its risks
4. Low Correlation – Zig with Zag
5. Plan for likely increase in tax rates
48
Rain or Shine?
National Forecast – Light Rain
Local Forecast – Drizzle
49