SUMMER FORECAST

THE OWL FUNDS FIRST SUMMER APART

Gone are the days of huge year-over-year earnings gains as the economy climbs out of the recessionary whole. Instead, we will see earnings growth slow-down to a modest pace at this point in our business cycle. The pattern of earnings growth as the market recovered from the most recent financial crisis is in line with what typically occurs in cycles past. Keeping this in mind, the probability of a big slide up or down is quite small this summer. So far, with less than 25% of companies in the S&P 500 reporting, earnings are up nearly 2% on a year-over-year basis. This is in line with most companies and the streets expectations. Nothing to exciting.

Many of the more significant down-side risks to growth have eased, and with central banks committed to keeping interest rates low, the underpinnings are in place for the second half of 2013 to mark the beginning of a sustained period of above-trend growth for the world economy. Having said this, we must understand why. Today, three weights on economic growth have eased, while one lingers. The first three household balance sheet deleveraging, the housing market correction, and the financial market crisis have improved enough to allow economic growth to materialize. The fourth, the outlook for the implementation of fiscal restraint, is still weighing on confidence and growth. In the financial market, signs of renewed activity are seen with both the supply and demand for credit picking up. Lending standards continue to ease for commercial, industrial and nonresidential construction loans this year. This year, commercial and industrial loans rose at the fastest pace since 2008.With a backdrop of low interest rates and readily available capital, I project that business investment will continue, with the focus shifting to non-residential real estate investment from capital good purchases. FEAR: If the fiscal policy in place today continues, the revenues collected by the government will fall far short of government spending. With the fear of debt rising, policy makers must determine if changes are to be made to spending, taxes policies, or both weighing on recovery confidence.

Over the next few weeks, while we cope with finals and leave for start-of-thesummer-fun, earnings will entertain headlines. Although earnings will not be spectacular in the upcoming weeks, investors are confident in the dependable upcoming growth that is moving in the right direction. Investors need not dwell on 2013Q1. Besides, earnings are a lagging indicator summing up what happened in the past season. We must look at the macro indicators most likely to drive the market beyond the next quarter or two because this earnings reporting season wont shock the market by any means.

Katherine Anne Doerr, Associate Analyst for Economic Analysis 30 April 2013 Sources: Bloomberg, CBO, CFR, NY Times, WSJ

US Net Wealth Continually Rising!

As unemployment declines in the upcoming years, the gap will close between Real and Potential GDP!

Energy Gas prices have regained in price since they fell late last year. This is due to steeper taxes. Overall, gas
prices are quite high historically. Since gas prices depend on the cost of oil, which has more than doubled since the end of the recession, we can understand the rise in prices. As the global economy continues to recover, demand for oil will increase; keeping prices high. Furthermore, continued conflict with Iran will push oil prices higher. Healthcare Health-care reform is here to stay for the foreseeable future. On Jan 1, 2014 a new system begins. This system makes everyone eligible for coverage, regardless of pre-existing conditions, and cannot charge more based on current health, native tongue, and gender. On Oct. 1, 2013, every state will have an insurance change. An organized marketplace where individuals and small business owners can select from among all qualified private health plans available in the area will arise. Furthermore, Medicaid will expand to cover 16 million more Americans with household incomes up to 133 percent of the poverty line ($14,856 for an individual and $30,657 for a family of four). Adoption got his policy is left top each individual state. Although most states have decided to adopt this new legislation, some are still on the fence or have declined it (however they may change their minds at any time). Consumer The expiration of the payroll tax cut means that most middle-class families are paying $600 to $1200 more a year. This increase in taxes will decrease the volume of discretionary spending families will be able to partake in. On the flip side, credit card debt is down 16.45% since it peaked before the recession. This will enable families to step up their spending a little as the economy improves. However, big student loans are weighing on recent grads as they face the difficulties of finding a career. See Image Financial Today, the Foreign Remittances Rule was finalized, making two significant changes. First, The disclosure of foreign taxes, and of and fees imposed by a recipient institution (unless that institution is an agent of the provider), has been made optional, if a disclaimer that such fees and taxes may apply is disclosed. Second, when funds are deposited to the wrong account because of incorrect information supplied by the sending consumer, the provider will have to attempt to recover the funds, but will not be accountable for funds that cannot be recovered. This revised rule will be effective on Oct 28, 2013. Industrials Currently, the American public is battling over the creation of the Keystone XL pipeline that will transport tar sands oil from Canada to the Northern US. The system will deliver up to 590,000 barrels/day of Canadian crude oil into the Mid-west refining markets. Although the pipeline was originally developed as a partnership between the TransCanada and ConocoPhillips, TransCanada is now the sole owner. Today, the pipeline runs from Hardisty, Alberta to Cushing Oklahoma. Further expansion is under debate to extend the pipeline from Cushing to Nederland, Texas. Environmentalists are against the pipeline addition because it will be routed over the top of the Ogallala Aquifer in Nebraska (the USs largest freshwater aquifer). If the pipeline is passed, 20,000 jobs will be created, increasing the USs energy independence, and will stimulate the US economy with $7B. Furthermore, the keystone pipeline will strengthen the Canadian dollar vs the US dollar. This in turn will reduce competitiveness in Canadas manufacturing industry; leading to a loss of 50 100 K jobs in Canadas manufacturing industry. Many of these jobs will migrate south, and have a positive impact on the manufacturing employment in the US. If the pipeline is not approved, oil will still find a way into the US via rail. This will boost the rail industry exponentially. Oil will come; just how it will come has yet to be determined. Tech A recent survey by the Lieberman Software Corp revealed that 70% of IT security professionals would not be willing to bet $100 of their own money that their companies will not suffer a data breach in the next 6 months.