Investing Between Crises

Disclosures

PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. This material has been prepared solely for the purposes of illustration and discussion. Broyhill Asset Management is the marketing name for the investment management business conducted by Broyhill Asset Management, LLC. and its affiliates. Broyhill Asset Management, LLC is an SEC Registered Investment Advisor. Private investment vehicles are offered through Broyhill Wakin General Partners LLC, Surety Capital Management LLC, and Broyhill Strategic Partners LLC, and are only offered by delivery of confidential offering memorandum and subscription materials to eligible investors who meet certain statutory and/or regulatory criteria. Each General Partner is a separate legal entity and is affiliated with Broyhill Asset Management, LLC through common ownership and control. Under no circumstances should the information contained herein be used or considered as an offer to sell, or solicitation of an offer to buy any security. Any security offering is subject to certain investor eligibility criteria as detailed in the applicable offering documents. The information contained herein is confidential and may not be reproduced or circulated in whole or in part. The information is in summary form for convenience of presentation, it is not complete and should not be relied upon as such. Any information, data, statement, opinions, or projections made herein may contain certain forward looking statements, projections, and information that are based on the beliefs of Broyhill Asset Management as well as assumptions made by, and information currently available to, Broyhill Asset Management. Such statements reflect the view of Broyhill Asset Management with respect to future events and are subject to certain risks, uncertainties and assumptions (including, but not limited to, changes in general economic and business conditions, interest rate and securities market fluctuations, competition from within and without the investment industry, new products and services in the investment industry, changes in customer profiles, and changes in laws and regulations applicable to Broyhill Asset Management). Should one or more of these other risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein. All information, including performance information, has been prepared in good faith; there are no representations or warranty expressed or implied, as to the accuracy or completeness, of the information, and nothing herein shall be relied upon as a promise or representation as to the past or future performance. This material may include information that is based, in part or in full, on hypothetical assumptions, models, and/or other analysis (which may not necessarily be described herein). No representations or warranty are made as to the reasonableness of any such assumptions, models, or analysis. The information set forth herein was gathered from various sources which are believed, but not guaranteed, to be reliable. Unless stated otherwise, any opinions expressed herein are current as of the date hereof and are subject to change at any time. Accordingly, neither Broyhill Asset Management nor its principals or affiliates make any representations as to the timeliness of any information in this presentation.

Disclosures| 2

Agenda

The Good News

A Word About Career Risk

The Bad News Opportunities in a World of Risk

Agenda | 3

The Fight of the Century

Keynes vs. Hayek | 4

Good News

We Dodged One Economic Bullet

The Good News| 6

Growth at a Modest Pace

The Good News| 7

Profits Back at All Time Highs

The Good News| 8

Stocks Are Cheap

Source: JPMorgan

The Good News| 9

And Cash is Trash

The Good News| 10

Blowing Bubbles

Never Ever Be Wrong On Your Own

CAREER RISK MAKES THE INVESTMENT WORLD GO AROUND

Concept: Courtesy of GMO

Blowing Bubbles | 12

You Can Be Wrong in Company

PRESIDENTIAL CYCLE EFFECTS ON SPECULATIVE STOCKS 1964 - 2007 Speculative rally is consistent with year three of the presidential cycle.

Source: Broyhill Asset Management, GMO Quarterly Letter Night of Living Fed October 2010

Blowing Bubbles | 13

Ultimately, Investors Must Face Reality

STOCKS ARE EXPENSIVE RELATIVE TO REPLACEMENT COST
The Q Ratio is a long term measure of stock market value relative to the replacement cost of all its underlying companies. Overvalued extremes are indicated in red on this chart. Today, stocks are trading roughly 70% above the historical average.

Secular bear markets historically bottom below replacement cost.

Source: Broyhill Asset Management, dshort.com
Blowing Bubbles | 14

Tricky Part is Getting the Timing Right

Yet it rallied from 1100 to over 1500 during the next eighteen months. In June 1998, the S&P was priced to deliver negative returns for the next decade.
Source: Broyhill Asset Management, GMO

Blowing Bubbles | 15

Timing Creates Career Risk

Yet the market rallied from 1250 back to 1500 over the next year.

Again, in June 2006, the S&P was priced to deliver negative returns for the next decade.
Source: Broyhill Asset Management, GMO
Blowing Bubbles | 16

But Value Pulls Stocks Back to Earth

Shortly beyond the 1998-1999 rally, stocks subsequently lost nearly half their value.

After The Greatest Suckers Rally in History from 20022007, stocks fell to trend losing over half their value.

Blowing Bubbles | 17

Stocks for the Long Run Failed

Everyone has a plan 'til they get punched in the mouth. - Mike Tyson

Blowing Bubbles | 18

Bad News

Comparing Apples to Oranges

THIS HASNT WORKED HISTORICALLY

Source: GMO
The Bad News | 20

Broadly Speaking, Stocks Are Expensive

S&P AT 24X 10-YEAR EARNINGS IS RARELY THIS EXPENSIVE

Source: dshort.com

The Bad News | 21

And Priced To Deliver Lackluster Returns

THE RALLY HAS LEFT LITTLE PROSPECT FOR ADDITIONAL GAINS Current estimates based on normalized earnings are for about 3.3% annual growth, including dividends.

You are here

Source: Broyhill Asset Management, Hussman Funds

The Bad News | 22

Under A Variety of Proven Methods

SHILLER PE QUINTILES

You are here

Source: Broyhill Asset Management, Ned Davis Research

The Bad News | 23

Economic Outlook is Uncertain at Best

FINANCIAL CRISES CREATE A DISRUPTION OF ECONOMIC ACTIVITY

Source: NBER Working Paper 16334, After the Fall

The Bad News | 24

A Sub-Par Economic Recovery

The Bad News | 25

A Number of Factors Choking Growth

The Bad News | 26

Weakness is Broad Based

The Bad News | 27

But Crisis Creates Opportunity

The best investors in the world do not target returns. They focus on risk. -Seth Klarman

The Bad News | 28

Opportunities for a High Risk World

The Case for Cash

Opportunities For a High Risk World | 30

It Hasnt Paid to Reach for Returns

It is possible for an old, overweight ball player, whose legs and batting eye are gone, to tag a fast ball on the nose for a pinch-hit home run, but you dont change your line-up because of it.

- Warren E. Buffett, 1969 Letter to Investment Partners

Opportunities For a High Risk World | 31

Diversification Does Not Reduce Risk

The sound reason for increasing the percentage in common stocks [beyond 50%] would be the appearance of bargain price levels created in a protracted bear market. Conversely, sound procedure would call for reducing the commonstock component below 50% when in the judgment of the investor the market level has become dangerously high. - Benjamin Graham, 1949 The Intelligent Investor

Opportunities For a High Risk World | 32

A Simple Guideline for Asset Allocation

EQUITY ALLOCATIONS UNDER VARIOUS PROJECTED RETURNS

75% Stocks 50% Stocks 25% Stocks

Source: Broyhill Asset Management, Hussman Funds

Opportunities For a High Risk World | 33

Demand a Margin of Safety!

RANGE OF VALUATION ACROSS MARKETS IS EXTRAORDINARILY WIDE
GMO 7-Year Asset Class Return Forecasts As of March 31, 2011
12.0%

10.0%

8.0%

Estimates expected returns for Japanese equities at 5% over the next seven years. If profit margins rise to international levels, expected returns climb to double digits. Long blue chips, short junk is a layup over the next ten years, but anyones guess over the next ten weeks or months.
-0.1% 4.6% 4.3%

10.0%

6.0%

4.0%

2.0%

0.0%

-2.0%

-4.0%

-2.8% US Large Cap Equity US Small Cap Equity US High Quality Emerging Equity Japanese Equity

Source: Broyhill Asset Management, GMO

Opportunities For a High Risk World | 34

Macro Hedges to profit from Mean Reversion

Deleveraging is a delayed and lengthy process often lasting a full decade or longer.

Opportunities For a High Risk World | 35

Private Sector Balance Sheets Improving

Opportunities For a High Risk World | 36

But Debt Transferred to Public Sector

CUMULATIVE INCREASE IN PUBLIC DEBT FOLLOWING A BANKING CRISIS

In the aftermath of banking crises over the past century, public debt has risen on average over 86 percent.

Source: Reinhart & Rogoff, The Aftermath of Financial Crises

Opportunities For a High Risk World | 37

Invariably Leading to a Wave of Defaults

COUNTRIES IN DEFAULT OR RESTRUCTURING: 1800-2006 The current period can be seen as a typical lull that follows large global financial crises.

Source: This Time is Different: A Panoramic View of Eight Centuries of Financial Crisis
Opportunities For a High Risk World | 38

Hope is Not an Investment Process

Opportunities For a High Risk World | 39

The European Disease is Contagious

RESTRUCTURING IS INEVITABLE TOP INVESTMENT THEMES

European Sovereign CDS European Financials CDS Short European Financials Short Euro Rates Lower for Longer

Opportunities For a High Risk World | 40

The Elephant in the Room

Opportunities For a High Risk World | 41

Theres No Easy Way Out

Source: Hayman Capital

Opportunities For a High Risk World | 42

Put Some Lipstick on This Pig

AD FOR GOVERNMENT BONDS IN CABS!! TOP INVESTMENT THEMES

Japanese Sovereign CDS

Japanese Corporate CDS

JPY Put Options JGB Caps

Opportunities For a High Risk World | 43

Heads I Win, Tails You Lose

The range of outcomes in a deleveraging process can be extraordinarily wide.

Opportunities For a High Risk World | 44

The Optimal Portfolio Protects . . .

CHOKING POINT FOR RATES IS MUCH LOWER TODAY

Source: Broyhill Asset Management, DecisionPoint.com

Opportunities For a High Risk World | 45

Against Both Extremes

GOLD RELATIVE TO REAL T-BILL YIELDS : 1968-2011

Opportunities For a High Risk World | 46

China The 800 Pound Gorilla

Opportunities For a High Risk World | 47

Historys Greatest Credit Bubble?

Chinese Suburbs Highly Exposed

Source: Steve Keens Debtwatch

Aussie Face Palm

TOP INVESTMENT THEMES

Australian Sovereign CDS

Australian Bank CDS

AUD Swaptions Short AUD

Opportunities For a High Risk World | 50

Forced Selling Creates Opportunities

Opportunities For a High Risk World | 51

Broyhill Bottom Line

VALUATIONS & MACRO RISKS SUGGEST INCREASING PRUDENCE
Equity Allocations Should be Below Normal Focus on Great Businesses at Reasonable Prices Continue to Seek Out and Invest with Talented Managers Flexible value-oriented managers should produce alpha regardless of market direction. Understanding the Big Picture is Critical in a Globally Inter-Connected World Risk of inflation, currency devaluation and global imbalances must be monitored. Explore and Evaluate Cheap Insurance
Positions designed to protect capital from impairment without pressuring portfolio returns

Bottom Line | 52

Contact Information
Broyhill Asset Management

800 Golfview Park Post Office Box 500 Lenoir, NC 28645

Phone: 828 758 6100 Fax: 828 758 8919

For more information please contact:

Mr. Christopher R. Pavese, CFA chris@broyhillasset.com

Appendix | 53