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STILL WAITING FOR THE “ALL CLEAR” SIGNAL
Aberdeen Investment Management, LLC A Guide Service for Micro-Cap Technology Investment
July 31, 2012 Jeb B. Terry, Sr. – President
Caution: It’s a risky world we live in. My opinions are based on information believed to be reliable but hey, I could be wrong. When investing, try to use good judgment and don't hesitate to seek
professional assistance. Remember to set limits and have a plan. . . Good Luck!
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ALL CLEAR?
In the long run . . . it’s remarkably good
People . . . Employment picking up. We remain in a sweet spot
Productivity . . . Profits are strong and will get even stronger
Capital . . . We are awash in liquidity, under loaned & under invested
Consumers have the capacity to spend and invest
Stocks are cheap
Interest rates and high frequency data signal sustainable recovery
Housing will be a wind at our backs
There is a Mobile Revolution going on
Big government is the biggest risk
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“Future returns in equities . . . are as good as they have been in a generation” – Goldman Sachs Mar. 21, 2012
Reversion to the mean is in progress . . .
29%
-58%
313%
87%
-25%
34%57%
272%
369%
88%
-38%-100%
-50%
0%
50%
100%
150%
200%
250%
300%
350%
400%
450%
S&P 500PRICE HISTORY: 1926 TO PRESENT
10 Year % Change 10 year % Change - Linear Regression
70%
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PEOPLE, PRODUCTIVITY AND CAPITAL
Employment is rising from trough conditions – best phase of labor cycle to invest.
63,684
136,559
146,483
137,960
60,000
70,000
80,000
90,000
100,000
110,000
120,000
130,000
140,000
150,000
160,000
Th
ou
san
ds
PERSPECTIVES ON U.S. EMPLOYMENT METRICS1959 to Present
Persons Employed (000's)
Linear (Persons Employed (000's))
Source: Bureau of Labor Statistics, Household Survey
142,415
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Don’t be misled by headline employment numbers - the trend is up. Rate of new jobs tracking with the median rate since 1980.
876
1,244
381
(3,000)
(2,500)
(2,000)
(1,500)
(1,000)
(500)
-
500
1,000
1,500
2,000
Change in Number of New Jobs Since 1980Quarterly Change in Employed
Qtrly Change in # Employed
Median Qtrly Change in # Employed Since 1980
4 per. Mov. Avg. (Qtrly Change in # Employed)
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Initial unemployment claims are dropping to levels of 2004 and the 90’s. Dropping unemployment claims are consistent with an expanding economy and a rising stock market.
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U.S. has best labor force demographics on the planet
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Still in a sweet spot of rising workers, plenty of spenders and declining dependents.
2.0
2.3
2.5
2.8
3.0
3.3
3.5
3.8
4.0
4.3
4.5
4.8
5.0
MIL
LIO
NS
OF
PE
OP
LE
NUMBER OF PEOPLE REACHING AGE 49VERSUS AGE 18 AND 25
1954 TO 2018
49 YR OLDS 18 YR OLDS 25 YR OLDS
Source:Cenus Bureau
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The most productive and economically engaged people in recorded economic history. We are the best educated, best informed and most investment literate population in history.
There is a growing urgency for the population to earn a better return on investment.
70.1
79.5
98.6101.1
60.0
70.0
80.0
90.0
100.0
110.0
Mil
lio
ns o
f P
eo
ple
GROWTH IN THE INVESTING PUBLICU.S. POPULATION AGE 45 TO 70
Source: US Census and Aberdeen Invesment estimates
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PEOPLE, PRODUCTIVITY AND CAPITAL
Profits will compress as a % as more is spent on labor and capacity expansion. Markets won’t peak for another 1 to 2 years from the top.
7.1%
10.0%
8.3%
6.8%
8.6%
7.3%
10.8%
7.4%
12.3%
6.9%6%
7%
8%
9%
10%
11%
12%
13%
14%
% o
f N
om
inal G
DP
Corporate Profits as % of Nominal GDP1972 to Present
(Seasonally Adj. Annual rates per NIPA)
Linear (Corp Profit/Nominal GDP)
12.3%
Source: Bureau of Eco Analysis. National Income and Product Accounts.
Profits LEAD GDP and stock market value.
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“Digits vs. Widgets”
Why profits are trending higher . . . Apple vs. Exxon
APPLE EXXON($millions)
Market Cap 548,535$ 408,931$
2012 Revenue 156,280$ 468,580$
2012 Revenue Growth 44% -4%
EBITDA Margin 38% 12%
Fixed Asset Turn 14.90 2.18
Cash, Net of LT Debt 117,221$ 9,916$
2012 EPS Growth Rate 60% -10%
2012 P/E Multiple 13.22 11.55
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Public company earnings have been rising strongly from productivity gains, the shift in mix to technology and globalization. Earnings are up 76% since the 2000 high while the SPX is down 8%.
996.3
681.6
1,604.9
694.9
1,467.9
1,357.6
1
201
401
601
801
1,001
1,201
1,401
1,601
1,801
2,001
19
71
= 1
00
S&P 500 Earnings vs PriceRelative Change Since 1971
LTM S&P 500 EPS 1971=100 S&P 500 Price 1971=100
Source: Standard and Poors
1,731.2
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PEOPLE, PRODUCTIVITY AND CAPITAL
Lots of Capital, Too Little Confidence
Awash in liquidity. Over $200 billion went into cash in 2 weeks following the July 25, 2011 speech by Obama. This compares to $160 billion following the Lehman bankruptcy in Sept 2008. That flight to cash contributed to the present sluggish economy.
$208 $390
$780
$1,156 $1,209
$1,632
$-
$500
$1,000
$1,500
$2,000
$2,500
$B
illi
on
s
STILL HOARDING CASHM1 SINCE 1970
Jul-12
Source: Federal Reserve, Not seasonally adjusted
9-11-2001 Terrorist Attack
Sept/Oct 2008 Financial Melt Down
$2,245
2011 Debt Ceiling /Downgrade/Euro
Crisis
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Banks are starting to make loans.
$106 $282
$605
$1,087
$871
$1,601
$-
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$B
illio
ns
LOAN BALANCES GROWING FASTEST SINCE 2008 BANK C&I LOANS SINCE 1970
Jun-12
Source: Federal Reserve, seasonally adjusted
Peak Dec 2000
Peak Oct 2008
$1,435
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But velocity remains at recession low levels.
Over $500 billion in unutilized lending capacity. Plenty of capacity to fund growth in the economy.
0.30
0.45
0.43
0.55
0.67
0.20
0.30
0.40
0.50
0.60
0.70
0.80
Ve
loc
ity -
Lo
an
s/M
2BANK C&I and REAL ESTATE LOANS vs. M2
VELOCITY SINCE 1970
Source: Federal Reserve, seasonally adjusted
0.50
Real Estate Loans take off
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The hoarding of cash has temporarily stunted profit growth. We are at a turning point. Look for profit acceleration once M2 growth starts to slow and people convert cash into goods.
-6.0%
-2.0%
2.0%
6.0%
10.0%
14.0%
18.0%-30%
-22%
-14%
-6%
2%
10%
18%
26%
34%
42%
50%
NIP
A C
orp
. P
rofi
t Y
-O-Y
% C
ha
ng
eY
-O-Y
% C
han
ge M
2 -
Inverte
d
CHANGE IN M2 (Inverted scale) vs CHANGE IN CORPORATE PROFITS
(All Corporate Profits per NIPA)
1971 to Present
Source: Federal Reserve, BEA - National Income and Products Accounts
When M2 growth slows, profit growth picks up.
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A perfect contrarian set up. Retail money has fled equities in unprecedented amounts since 2008.
Over $133 Billion have been taken out of Equity mutual funds since May 2011. Hang on to your hats when this reverses. Equity inflows have a gearing impact on market value of as high as 10X or more.
$309
-$28
-$238
-$24
-$128
-$24-$64.6 -$49.8
$140.3
$375.0
$244.8
$119.1$139.1
-$300
-$200
-$100
$0
$100
$200
$300
$400
$500
$ B
illi
on
s
Equity vs. Bond Mutual Fund Net New Cash Flow1990 to May 2012
Equity Bond
Unprecedented move into retail
bond funds
Unprecedented move into retail
equity funds
Unprecedented move out of retail
equity funds
Source: ICI, Sifma.org
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CONSUMERS CAN SPEND AND INVEST
They have nearly 11 months of personal consumption expenditure sitting in cash!
11.0
10.48
8.4
9.3 9.22
10.39
8.0
8.4
8.7
9.1
9.4
9.8
10.1
10.5
10.8
11.2
11.5
Mo
nth
s -
M2
Rebuilding Liquidity: Months of PCE Held as Cash, Savings Dep & Retail Money Market Funds
1980 to June 2012
M2 includes a broader set of financial assets held principally by households. M2 consists of M1 plus: (1) savings deposits (which include money market deposit accounts, or MMDAs); (2) small-denomination time deposits (time deposits in amounts of less than $100,000); and (3) balances in retail money market mutual funds (MMMFs).
10.77
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They have the most income versus debt service in 20 years.
11.90%
10.64%
12.5%
13.95%
10.00%
10.50%
11.00%
11.50%
12.00%
12.50%
13.00%
13.50%
14.00%
14.50%
Rebuilding Liquidity: Debt Service as % of DPI1990 to Present
Source: Bureau of Eco. Analysis, Federal Reserve
Consumer debt service as a % of Disposable Personal Income is in the best shape since 1994.
10.98%
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Few would guess retirement funds and retail cash assets are at record high levels and outgrowing GDP!
SPX averaged 66.3% of retirement assets and money market accounts since 1995. It is 57.3% today. The SPX would be 15.7% higher if it were to return to its average mix of retirement assets.
$3,127
$20,167
$16,704
$4,319.3
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$ B
illio
ns
Retirement Accounts & Cash vs. Nominal GDP1985 to Present
Retirement & M1 & Retail Money Market Funds Nominal GDP
$21,836
$15,596
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STOCKS ARE CHEAP
The P/E ratio is not at a level characteristic of a top.
5.906.97 6.68
18.31
11.51
21.61
14.47
29.44
15.29
16.91
0
5
10
15
20
25
30
35
LTM P/E Ratio S&P 500 1926 to Present
Median P/E Ratio 1926 Median P/E Ratio Since 1982
4 Year Moving Average
14.02
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SPX would be $1,625, up 17%, if it were to trade at the June 2007 P/E. SPX would be 2010, up 45%, if it were to trade at the Dec 2003 P/E – when earnings were at a similar point of recovering above the prior high.
$14.88
$30.66
$-
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
$40.00
S&P 500 Quarterly Operating EPS1988 to Present and Projected to Dec. 2013
Qtrly Operating Earnings
Projected Qtrly Operating Earnings
Linear Regression of Earnings
P/E Ratio of 20.3X at December 2003
Current LTM P/E Ratio of 14.0X
P/E Ratio of 16.4X at June 2007
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Treasury Bonds are incredibly overvalued. Paying an effective P/E of 64X for 10 year Treasuries borders on insanity.
The peak P/E for stocks was only 34X in 2000.
19.99
34.1932.17
12.3513.26
30.03
64.31
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
70.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
70.0
10
Yr T
rea
s. P
/E R
atio
P/E
Ra
tio
S&P 500 FTM Operating Earnings P/E Ratio vs. The "P/E Ratio" of the 10 Year Treasury
1988 to Present
S&P 500 FTM Oper. Earnings P/E Ratio 10 Year Treasury P/E
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The S&P 500 is incredibly undervalued relative to interest rates and earnings growth.
A flipside to the overvalued tops going into the 1987 crash and the 2000 tech crash.
72%
-43.9% -59.1%-80%
-40%
0%
40%
80%
120%
160%
200%
240%
280%
(1,500)
(500)
500
1,500
2,500
3,500
4,500
5,500
6,500
7,500
% O
ver / U
nd
er V
alu
ed
S&
P 5
00
S&P 500 Actual Price vs. Cap Rate Value
% Over Valued % Under Valued
S&P 500 Actual Cap Rate Fair Value
-78.2%
6,357
1987 market crash
-78.2%
2000 tech crash
-78.2%-78.2%
1,386
79%
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INTEREST RATES AND HIGH FREQUENCY DATA SIGNAL CONTINUING RECOVERY
The yield curve is STEEP . . . It is 28% steeper than average.
3.85 3.73
-7.0
0.0
7.0
14.0
21.0
28.0
35.0
42.0
(10.0)
(5.0)
-
5.0
10.0
15.0
20.0
25.0
Yie
ld C
urv
e H
isto
gra
m%
In
tere
st
Ra
teThe Yield Curve
10 YEAR U.S. TREAS NOTE vs. FED FUNDS RATE1980 to Present
Yield Curve Histogram 10 Yr Treas rate FED FUNDS RATE
Source: Federal Reserve
2.09
The economy has grown and equity markets have had prolonged bull phases every time the curve has been this steep.
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The Institute of Supply Managers surveys continue to signal businesses are growing. (scores over 50 signal expansion)
30.00
35.00
40.00
45.00
50.00
55.00
60.00
65.00
70.00
ISM Business Activity Index:Manufacturing v. Non-Manufacturing
1997-Present
Monthly Mfg Activity Index
Monthly Non-Mfg Business Activity Index
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HOUSING IS A WIND AT OUR BACKS
Page 29 of 39
Job growth leads growth in permits. Recent job growth signals a potential for a sharp improvement in housing permits.
Permits could more than double if they return to the historical relation to job growth.
(10,000)
(8,000)
(6,000)
(4,000)
(2,000)
-
2,000
4,000
6,000
8,000
0
50
100
150
200
250
Pers
on
s -
Th
ou
san
dsP
erm
its -
Th
ou
san
ds
Monthly Housing Permits vs New Jobs1959 to Present
12 per. Mov. Avg. (Total Housing Permits)
12 per. Mov. Avg. (YOY Change in # Employed)
Page 30 of 39
Record low mortgage rates and rising personal income = improving housing affordability.
154.8
68.9
133.2
106.1
174.0
205.9
60.0
80.0
100.0
120.0
140.0
160.0
180.0
200.0
220.0
US Housing Affordability Index
Source: Natl. Assoc. of Realtors www.realtor.org
Best Time On Record to Buy a House!
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HANG ON TO YOUR HATS – THE MOBILE REVOLUTION HAS MUCH MORE TO GO
Déjà vu all over again . . . similar growth trajectory as late 90’s. We are in year 3 of a multi-year boom.
1,419.8
4,188.4
100
1,448.3
0
1000
2000
3000
4000
5000
6000
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
Global Data Traffic Growth: Fixed Internet 1996-2001 vs. Mobile Internet 2008-2014
Global Fixed Line Internet Traffic
Global Mobile Internet Traffic
Source: Cisco VNI Mobile 2012
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SO . . . WHAT ABOUT THE ELECTION? It is the Economy Stupid!
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BY THE TIME THE HERD JUMPS IN – YOU ARE LATE
Patient buying of growth stocks is needed to invigorate investor returns. Aberdeen focuses on young micro-cap tech stocks and is engaged in the mobile revolution.
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Investment Opportunities in Small and Micro-Cap Technology Businesses
Aberdeen Investment Management, LLC A Guide Service for Micro-Cap Technology Investment
Jeb B. Terry, Sr. – President [email protected]
THIS SUMMARY IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO PROVIDE ANY SERVICES DESCRIBED HEREIN. SUCH AN OFFER OR SOLICITATION WILL ONLY BE MADE VIA MEANS OF ADVISORY SERVICES MATERIALS TO INVESTORS WHO MEET THE SUITABILITY STANDARDS DESCRIBED THEREIN.
Page 36 of 39
Keep it Simple: Invest in a select group of small and micro-cap publicly traded technology businesses that are in an early phase of their growth.
Harness the migration from analog to digital
The Dominant Themes: Online commerce & media, mobile, cloud computing, SaaS
Portfolio company profile: o Wt. Average revenue: $104.5 million growing 16% in 2012 o Wt. Average EBITDA: $9 million growing 42% o Wt. Average market cap: $221.6 million o Wt. Average EV: $169.5 million
Investment Cycle: o 8 of our 21 investments since 2003 have been bought out, 3 have
been exited at a loss, 10 remain active o Average investment duration ~30 months
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Climbing the “S”. . . 15 year old boys instead of embryos
The "S" Curve
Technology Adoption Cycle
Time
Cu
sto
mers
/ R
even
ue / M
ark
et
Siz
e
INFANCY
ADOLESCENCE
MATURITY
CHASM
Early Adopters
"Buy" the
product
LaterAdopters are
"Sold" the product
TARGET INVESTMENTS
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The Aberdeen Investment Program
Long term investment.
Targeted 3 to 5 year returns are 2X to 4X the original investment.
Concentrated investments to maximize returns. 10 to 15 positions.
Low turnover.
Compensated principally on performance. An asset based fee is also charged.
No lock ups. Investors hold investments in separate accounts. The investor can add or withdraw capital with appropriate notice.
The investor provides Aberdeen with discretion to execute transactions on the clients’ behalf.
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Management
JEB B. TERRY, Sr.: President, [email protected],
Mr. Terry draws upon investment experience in the areas of venture capital, leveraged buy outs, foreign emerging markets and public stock markets.
Mr. Terry has an MBA from Columbia Graduate School of Business and a BBA from Southern Methodist University.
Russell L. Jennings.: VP, CPA, [email protected]
Mr. Jennings has over 15 years of corporate financial experience with technology, investment advisory and start-up companies. Mr. Jennings graduated from Texas A&M University with a BBA in Accounting.
Aberdeen Investment Management, LLC. 6440 N. Central Expressway, Suite 618, Dallas, TX 75206
214-347-9115