YIELD CURVE HAS INCREASED AT LONG END — AND DANGER IS INCREASING o Most of the recent action related to the yield curve (Fitch & PPI) has been to long-end of the curve (coinciding with expectations) o 5yr, 10 yr and 30 yr rates have all increased o Rates have increased approx. 60 basis points from June o 30 yr rates at 4.4% are still well below historical levels (e.g. 8/31 2007 — 4.85%; 8/31/1981 — 14.8%) o Long Term treasuries may be overbought — hedge funds are shorting (offset risk on equities) o Speculative stocks will need to adjust with higher rates (most of impact is over) o Economy is resilient — no major danger yet though signs w/manufacturing and other areas of contraction. RESILIENT ECONOMY HAS, SO FAR, AVOIDED DISASTER, BUT TIME IS RUNNING OUT o Inflation had been under control though recent energy spikes have created an increase in Sept CPI o Energy in September MTD continues to rise o Unemployment rate is low though has been rising recently (from low of 3.4% to 3.8%) o Long term rates, though rising in recent days, are still well below historical averages o Rising 30 year bond rates can cause problems for regional banks that invested long-term o Mortgage rates above 7.2% should slow down real estate market (inventory and sales are dropping) o Mortgage rates (30 yr fixed) are now at highest levels since July 2001 (22 yr ago) o Housing inventories have been declining for many years, but apartment construction is at highest level in 50 years INVESTORS SHOULD AVOID THE FOLLOWING AREAS: o Long term bonds — rising interest rates will cause bond prices to fall further o Commercial real estate — rising interest rates, falling occupancy levels and soft prices will continue to cause problems o Regional banks — rising interest rates, coupled with potential cash run, increases exposure to liquidity risk on LT bond investments o Highly speculative stocks with long-term horizon — as interest rates rise, future cash flows have lower value CONCENTRATION RISK AMONG MAJOR INDICES IS NOW GREATER THAN EVER • Russell 1000 Growth Index has generated 50% of returns YTD from 3 stocks (AAPL, MSFT and NVDA) • Russell 1000 Growth Index has generated 75% of returns YTD from 6 stocks (AAPL, MSFT, NVDA, AMZN, TSLA, GOOGL) • Many funds also generate most of their returns from 5-10 concentrated positions • Concentration risk in major indices is now among the highest ever • Investors are exposed now, more than ever, to a handful of stocks that could plummet. • Investors should examine that concentration risk of their investment portfolios and reduce the weight that is generated by only a few stocks • Investors should try to spread out their holdings to many stocks or investments to improve safety
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