Prepared by Ken Luskin KenLuskin@gmail.

com

March 10, 2014: INVESTMENT INFLECTION POINT?

Recent Events:
1) U.S. Federal Reserve begins to taper its quantitative easing, but indicates that rates will stay at near zero for extended period, giving green light to capital market speculation. Credit spread are extremely tight in U.S. based upon outlook for near zero short term federal funds. 2) Emerging country currencies and stock markets drop 3) Climate change causes severe droughts in Brazil and California resulting in large increases a number of agricultural commodities. Ag ETF (DBA) rises 16% in 6 weeks. 4) Climate change affects polar vortex oscillation causing extremely cold winter in eastern U.S. Cold weather causes large demand for Natural Gas, results in storage supplies dropping to 10 year low, and pushing price above $4.5 5) Five year old Bull market in U.S. stocks combined with zero interest rates, results in record margin borrowing 6) Large cap. internet favorites (Amazon, Facebook, Twitter,etc) trade at 100 times earnings 7) China issues growth plan that calls for 10% reduction in fixed investments. Chinese pollution and shadow bank debt loom large over world economy 8) Over past 5 years PV solar has lowered cost per watt by 80%, while Wind energy has been reduced by 50%. U.S. created more solar energy capacity over last 18 months than prior 30 years combined. 9) Because of improved technology on shore Wind energy in U.S is now cheaper than all other sources of energy except Natural gas fired plants. Comparisons use an assumed price for Natural Gas of $4.5/Btu. 10) Chinese Premier announces a war on pollution.

Global Macro observations:

11) From 2012 on U.S. and EU were forced to deal with large structural Govt debt by cutting fiscal expenditures while lowering money costs to near zero. After surge in food prices from mid 2010 to early 2011, total index retreated back down to lowest levels of past 6 years. Fiscal austerity combined with falling food prices allowed all the major developed countries to maintain near zero interest rate policies. 12) Result is that easy money flowed to developing countries where Govts were expanding spending. Stocks in developed countries related to the new internet economy have attained PE multiples equal to or greater than the NIFTY FIFTY of early 1970s. 13) Brazil, Russia, India, and China all saw classic booms, which are now turning to busts. 14) China funded the largest capital investment program of a single country in history, which has resulted in consumption of appx. half of all industrial commodities produced world wide. 15) Despite the fracking boom in the U.S. the price of fossil fuels, ( not including long term environmental and health costs) have continued to trend higher over the long term. Meanwhile the long term costs of Wind and Solar continue to decline.

INVESTMENT IMPLICATIONS:

Prepared by Ken Luskin KenLuskin@gmail.com

12) Chinese bust will be felt by resource rich export country economies and companies all over the world. 13) China bust will be somewhat contained but will still result in 1990 version of Japan zombie companies and banks. 14) China bust combined with cyclical busts within other developing economies threatens to send world economy back into recession. 15) Pollution and the long term cost curves will cause Wind and solar usage to continue to grow dramatically throughout the world. 16) Developing economies will face increasing food costs, while most of their economies decline.

INVESTMENT STRATEGY:
1) Avoid industrial commodity sensitive companies, currency exposure to developing countries, and their stocks. 2) Avoid Nifty Fifty valuations, despite the long term growth potential. Avoid most Biotech stocks, as the index is bubblicious. 3) Build cash by selling out of high flyers and large cap index funds. 4) Look for growth ideas in U.S infrastructure related companies, and U.S. clean energy stocks. 5) Look for beneficiaries of micro trends. Some examples: A) China allowing game console sales after 13 year ban. Chinese PC gaming industry grew 38% in 2013. AMD is a direct Beneficiary B) Home soda makers replacing lugging cans and bottles from market. Soda Stream (SODA) is a direct beneficiary.