Byron Wien - The Ten Surprises of 2014

The Ten Surprises of 2014
Byron R. Wien
Vice Chairman, Blackstone Advisory Partners L.P.
Tel: 212.583.5055
Email: wien@blackstone.com
If you would like to receive future monthly market commentary publications by Byron Wien,
please email byronwienscommentary@blackstone.com.
The Ten Surprises of 2014

These surprises were announced Monday, January 6, 2014. The definition of a surprise is an event that the
average investment professional would assign a one out of three chance of taking place, but where I believe the
event is probable, with better than a 50% chance of happening
1. We experience a Dickensian market with the best of times and the worst of times. The worst
comes first as geopolitical problems coupled with euphoric extremes lead to a sharp correction of
more than 10%. The best then follows with a move to new highs as the Standard & Poors 500
approaches a 20% total return by year end.
2. The U.S. economy finally breaks out of its doldrums. Growth exceeds 3% and the unemployment
rate moves toward 6%. Fed tapering proves to be a non-event.
3. The strength of the U.S. economy relative to Europe and Japan allows the dollar to strengthen. It
trades below $1.25 against the euro and buys 120 yen.
4. Shinzo Abe is the only world leader who understands that Dick Cheney was right when he said that
deficits dont matter. He continues his aggressive fiscal and monetary expansion and the Nikkei
225 rises to 18,000 early in the year, but the increase in the sales tax, the aging population and
declining work force finally begin to take their toll and the market suffers a sharp (20%) correction
in the second half.
5. Chinas Third Plenum policies to rebalance the economy toward the consumer and away from a
dependence on investment spending slow the growth rate to 6% in 2014. Chinese mainland traded
equities have another disappointing year. The new leaders emphasize that their program is best
for the country in the long run.
1*
The Ten Surprises of 2014 (Contd)

6. Emerging market investing continues to prove treacherous. Strong leadership and growth policies
in Mexico and South Korea result in significant appreciation in their equities, but other emerging
markets fail to follow their performance.
7. In spite of increased U.S. production the price of West Texas Intermediate crude exceeds
$110. Demand from developing economies continues to outweigh conservation and reduced
consumption in the developed world.
8. The rising standard of living and the shift to more consumer-oriented economies in the emerging
markets result in a reversal of the decline in agricultural commodity prices. Corn goes to $5.25 a
bushel, wheat to $7.50 and soybeans to $16.00.
9. The strength in the U.S. economy coupled with somewhat higher inflation causes the yield on the
10-year U.S. Treasury to rise to 4%. Short-term rates stay near zero, but the increase in
intermediate-term yields has a negative impact on housing and a positive effect on the dollar.
10. The Affordable Care Act has a remarkable turnaround. The computer access problems are
significantly diminished and younger people begin signing up. Obamas approval rating rises and in
the November elections the Democrats not only retain control of the Senate but even gain seats in
the House.
2*
The Also Rans of 2014

Every year there are always a few Surprises that do not make the Ten either because I do not think they are as
relevant as those on the basic list or I am not comfortable with the idea that they are probable.
1. Through a combination of intelligence, extremism, celebrity and cunning Ted Cruz emerges as the
clear front runner for the 2016 Republican presidential nomination. Chris Christie and the
moderates fade in popularity as momentum builds for fiscal and social conservative policies.
2. In 2 years the price of a Bitcoin has increased from $25 to $975. The supply of Bitcoins is fixed at
21 million with 11.5 million in circulation. Bitcoins lack golds position as a store of value over time.
During the year Bitcoins acceptance collapses as investors realize that it cannot be used as
collateral in financial transactions and its principal utility is for illegal business dealings where
anonymity is important.
3. Overcoming objections from the Cuban exile community, President Obama opens discussions on
initiating trade and diplomatic relations with Cuba. A reduction in sanctions is proposed, as well as
limited financial support in the form of bonds, quickly dubbed as Castro convertibles.
4. Hillary Clinton decides not to run for President in 2016. She says her work with various Clinton notfor-profit initiatives is important and unfinished. Specifically, she explains that her health was not
an issue in her decision. The Democratic race for the top seat becomes chaotic.
3*
Radical Asset Allocation

Asset Class
Global large cap Multinationals
%
10%
Change
Same
Good value in terms of yield and multiple
Other U.S. long only
10%
New
Moderate growth continuing
European long only
10%
New
Recovery underway
Emerging Market equities
10%
Down 5%
Growth has slowed
5%
New
Stimulus working
Hedge Funds (all strategies)
10%
Down 5%
Selected strategies attractive
Private Equity
10%
Same
Competition intense for deals
Real Estate
10%
Down 5%
Taking some profits
Gold
5%
Same
Hedge against currency debasement
Natural Resources and agricultural

commodities
Non-conventional High Yield Fixed
Income (Mezzanine, Leveraged Loans,
Emerging market Debt)
Cash
5%
Same
World standard of living rising
15%
Down 5%
Taking some profits
0%
Down 5%
No return
Japanese Equities
Total
100%
4*
NDR Crowd Sentiment Poll (7/31/2002 12/17/2013)

S&P 500 Index
Arrows represent extremes in optimism and

pessimism. They do not represent buy and
sell signals and can only be known for certain
(and added to the chart) in hindsight
1,800
Extremes generated when sentiment reading:

Rises above 61.5% = Extreme Optimism
Declines below 55.5% = Extreme Pessimism
1,550
Sentiment must reverse by 10 percentage points to signal an

extreme in addition to the above extreme levels reached.
1,300
1,050
800
550
2002
2003
2004
S&P 500 Gain / Annum When:

12/1/199512/17/2013
NDR Crowd Sentiment Poll is:
Gain/Annum
Above 61.5
2.1
Between 55.5 and 61.5
7.5
55.5 and Below
9.6
% of Time
39.8
21.1
39.1
2005
2008
2006
2007
Average value of indicator at:

Optimistic extremes (down arrows) = 68.1
Pessimistic extremes (up arrows) = 46.7
Average spread between extremes = 21.4
2009
2010
2011
2012
2013
NDR Crowd Sentiment Poll

80
75
70
65
59.4
60
53.5
55
50
45
40
35
33.9
30 33.9
2002
2003
75.7
Extreme Optimism (Bearish)
73.5
69.6
68.1
71.9
70.5 69.5 72.2
70.7
69.8
67.1
73.0
70.7
71.6
72.4
68.3
63.2
62.2
12/17/13:
67.3
58.1
55.2
54.8
51.9
49.9
49.7
43.8
46.6
50.3
51.3
47.6
42.5
Extreme Pessimism (Bullish)
47.2 48.2
46.8
41.3
38.0 37.1
32.5
40.5
38.4
30.9
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
________________________________________________
Source: Ned Davis Research.
5*
S&P 500
1.
2.
3.
4.
S&P 500
Last 5 +26% Years
Year
1991
1992
1995
1996
1997
1998
1999
2003
2004
5.
Year-After Average
Y/Y %
26%
5%
34%
20%
31%
27%
27%
20%
26%
9%
16%
________________________________________________
Source: ISI Group
The November to April Calendar Effect U.S. Large Cap

Historical Performance Decades
Historical Performance Periods
1926 to 2013
Before and After 1950
20%
12%
18%
10%
6.3%
6.2%
12%
10%
8%
0.7%
6.3% 12.3%
6%
4%
2%
0%
10.7%
12.0%
7.0% 6.8%
4.8%
2.4%
5.6%
14%
4.2%
2.7%
Performance Contribution Periods
Performance Contribution Decades
16%
8%
3.2%
6%
8.5%
4%
6.5%
2.4%
2%
0.3%
-0.9%
1.4%
-1.7%
-2%
0%
19261939
1950s
Returns November to April
1970s
1990s
Returns May to October
19262013
19261949
Returns November to April
19502013
Returns May to October
________________________________________________
Source: Monticello Associates
U.S. Margin Debt

(USD in billions)
450
Oct: 412.5
400
350
300
250
200
150
100
50
0
1980
1984
1988
1992
1997
2001
2005
2009
2013
________________________________________________
Source: ISI Group
Scrambling to cover Heavily Shorted Stocks

3.00%
1,800
2.75%
1,600
2.50%
1,400
2.25%
2.00%
6/8/12
1,200
9/8/12
12/8/12
3/8/13
Shares on Loan (left axis)
6/8/13
9/8/13
S&P 500 Level (right axis)
________________________________________________
Source: RJFarrell
Fed Balance Sheet vs. ECB Balance Sheet (Trillions)

$4.0
3.25
$3.5
3.00
2.75
2.50
$2.5
2.25
ECB
Federal Reserve Bank
$3.0
$2.0
2.00
$1.5
1.75
$1.0
1.50
$0.5
1.25
2008
2009
2010
Federal Reserve Bank
2012
2013
European Central Bank
________________________________________________
Source: Federal Reserve, ECB, Strategas Research Partners.
10*
The Outlook for the U.S. Economy
Fed Treasury Holdings of Over 5Yr to 10Yr TSY Bonds ($Bn)

1,000
900
$866
$865
'12
'13
800
700
$660
600
500
400
$333
300
$213
200
100
$53
$53
$51
$54
$57
'02
'02
'03
'04
'05
$68
$82
$97
'06
'07
'08
0
'09
'10
'11
________________________________________________
Source: Strategas Research Partners.
12*
Economic Cycle Research Institute

145
140
12/6/13
131.4
135
130
12/6/13
132.1
125
120
115
110
105
2004
2005
2006
2007
2008
ECRI Leading Index (Level)
2009
2010
2011
2012
2013
ECRI Leading Index 4 Wk. Avg.
________________________________________________
Source: ISI Group
13*
U.S. Real Median Family Income

(USD in thousands)
66
63
Nov: $59.7
60
57
54
51
48
45
42
1981
1985
1990
1995
1999
2004
2009
2013
________________________________________________
Source: ISI Group
14
Food Stamps The Great Recessions Soup Lines

49
$140
47
$135
45
Participants (millions)
41
$130
$125
39
$120
37
$115
35
$110
33
31
$105
Katrina
$100
29
Participants
Sep-13
Apr-13
Nov-12
Jun-12
Jan-12
Aug-11
Mar-11
Oct-10
May-10
Dec-09
Jul-09
Feb-09
Sep-08
Apr-08
Nov-07
Jun-07
Jan-07
$90
Aug-06
25
Mar-06
$95
Oct-05
27
Average Monthly Benefit
Average Monthly
Benefit (Right Scale)
43
Participants
(Left Scale)
Average Monthly Benefit
________________________________________________
Source: Bianco Research L.L.C
15*
U.S. Vehicle Sales

(in millions)
12 Mo. Avg. Nov: 15.5
18
17
Latest Click: 16.3
16
15
14
13
12
11
10
1998
2000
2003
2005
2008
2011
2013
________________________________________________
Source: ISI Group
16
U.S. MFG PMI

Purchasing Managers Index (ISM)
60%
Nov: 57.3%
55%
50%
U.S. MFG PMI (ISM)
45%
40%
35%
30%
2008
2009
2010
2012
2013
________________________________________________
Source: ISI Group
17
Headwinds for Housing?

Homebuilders Rel S&P 500 12M Returns vs. Housing Market Index (Y/Y Diff)
30
150%
20
100%
HMI, left
10
0
50%
(10)
0%
(20)
(30)
-50%
(40)
Homebuilders, right
(50)
-100%
'95
'97
'99
NAHB Housing Market Index
'01
'03
'05
'07
'09
'11
'13
Homebuilders Industry Group Rel S&P 500 Index 12 Month Returns
________________________________________________
18*
More on Housing
U.S. Housing Affordability Index SA by ISI
U.S. Housing Starts
220
2.4
(millions of units)
2.2
200
2.0
180
1.8
160
1.6
Oct: 163.1
140
1.4
1.2
120
Nov: 1.09
1.0
100
0.8
80
0.6
0.4
60
82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
________________________________________________
Source: ISI Group
19*
More Good News for the Economy

U.S. House Price Index (Case-Shiller)
U.S. Real Trade Deficit 4 Quarter Average
M/M %
($ in billions)
$0
2.5%
($100)
2.0%
($200)
($300)
1.0%
Sep: 1.0%
1.5%
($400)
3Q 2013:
($420.2)
($500)
($600)
0.5%
($700)
0.0%
2005 2006 2007 2008 2009 2010 2011 2012 2013
($800)
94 96 98 00 02 04 06 08 10 12
________________________________________________
Source: ISI Group
20
Total Energy: Overall, in Total, U.S. Still Very Much Energy Dependent
U.S. Energy Production vs. Consumption
105
100
95.1
Quadrillion Btu
95
90
U.S. Energy
Dependency
85
80
79.1
75
70
65
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
60
Primary Energy Consumption
Primary Energy Production
________________________________________________
Source: U.S. Energy Information Administration, Strategas Research Partners.
21
Oil: U.S. in the Hole

U.S. Petroleum Consumption vs. Production
(million barrels per day)
25
20
U.S. Consumption of Crude Oil & Petroleum Products
15
U.S. Field Production of Crude Oil & Petroleum Products
10
5
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
U.S. Petroleum Production
U.S. Petroleum Consumption
U.S. Petroleum Production Minus Consumption

0
(3)
(6)
(9)
Petroleum
Deficit
(12)
(15)
73 75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13
________________________________________________
Source: U.S. Energy Information Administration, Strategas Research Partners

Total petroleum includes: crude oil, lease condensates, & natural gas liquids
22
Monthly Data 1/31/2000 9/30/2013
World GDP vs. Petroleum Production

160
World GDP Growth

(Demand)
150
140
130
World Oil Production

Growth
(Supply)
120
110
1/31/2000=100
100
2000 2000 2001 2002 2003 2004 2005 2005 2006 2007 2008 2009 2010 2010 2011 2012 2013
World Real GDP (Oil Consumption Weighted)
World Petroleum Production
________________________________________________
Source: U.S. Energy Information Administration, Ned Davis Research
23
Monthly Data 1993-12-31 to 2013-09-30
Developing Countries Hold the Key to Oil Prices

Oil Consumption Developed vs. Emerging
Countries(1)
Oil Consumption China vs. Other Emerging

Countries(1)
80
400
350
60
300
50
250
200
2012
2011
2009
2008
2006
2005
2003
2001
2000
1998
50
Emerging Market Oil

Demand Growth
1997
10
1997
1999
2001
2002
2004
2006
2007
2009
2011
2012
100
1996
20
1992
1994
150
1991
30
1995
Emerging
Country
Oil Demand %
40
Chinese Oil Demand

Growth
1993
Developed
Country
Oil Demand %
70
Oil Consumption OECD Countries (% of World Total)
Oil Consumption Growth China(2)
Oil Consumption Non-OECD Countries (% of World Total)
Oil Consumption Growth Non-OECD Countries (Ex-China)
________________________________________________
(1)
(2)
United States Energy Information Agency, EIA, Ned Davis Research

Series allocated to 100 on 1993-12-31
24
Yearly Data 12/31/1960 12/31/2012
Petroleum Consumption per Capita for Selected Countries

(in barrels per person per year)
Consumption
per Capita
Year
United States
21.4
2012
Japan
13.6
2012
Russia
8.4
2012
Brazil
5.0
2012
China
2.8
2012
India
1.1
2012
Country
35
30
United States
25
20
Japan
15
10
Russia
Brazil
China
India
1960
1962
1964
1965
1967
1969
1970
1972
1974
1975
1977
1979
1980
1982
1984
1985
1987
1989
1990
1992
1994
1995
1997
1999
2000
2002
2004
2005
2007
2009
2010
2012
United States
China
Japan
India
Russia
Brazil
________________________________________________
Source: Energy Information Administration and U.S. Census Bureau; Ned Davis Research
25
Corporate Profit Margins vs. ULC

13.0
12.5
12.0
11.5
11.0
10.5
10.0
9.5
9.0
8.5
8.0
7.5
7.0
6.5
(Quarterly data 3/31/1947 9/30/2013)
12
Unit Labor Costs

(Smoothed Year-to-Year Change
(RHS)
9/30/2013 = 2.5%
Corporate Profit Margins

(LHS)
9/30/2013 = 12.6%
10
8
Correlation Coefficient = -0.37
6
4
2
0
(2)
(4)
1947
1952
1958
1963
1969
Corporate Profit Margins
1974
1980
1985
1991
1996
2002
2007
2013
Unit Labor Costs (Smoothed Year-to-Year Change)
________________________________________________
Source: Ned Davis Research.

Shaded areas represent National Bureau of Economic Research recessions.
26*
Jobs Coming Back Slowly After Latest Recession

Manufacturing Employment As
A Percent of Total Employment
Percent Job Losses In Post WWII Recessions
45%
16%
40%
12%
35%
8%
30%
4%
25%
0%
20%
-4%
15%
2008
Recovery
Ex-Census
-8%
10%
0
5%
0%
1939
1951
1964
1976
1988
2001
2013
10
Sep '48
Apr '60
Jul '81
Jan '08
20
30
40
50
# Months from Peak
Jul '53
Mar '70
Jun '90
Ex Census
60
70
Apr '57
Jul '74
Feb '01
________________________________________________
27*
U.S. Unemployment Rate Unemployed for 27 Weeks or Longer

5%
4%
3%
Nov: 2.6%
2%
1%
0%
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07
09
11
13
________________________________________________
Source: ISI Group
28
U.S. Economy
6%
200
9.5%
4%
8.5%
-200
7.5%
Non-farm Payrolls/Thousands
2%
0%
4Q 13
-400
6.5%
-600
5.5%
-4%
-800
4.5%
-6%
-1,000
3.5%
-8%
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
2.5%
3.6%
1.7%
10.5%
400
3.0%
2.0%
3.1%
8%
Non-farm payrolls are 3-month

averages (Left Scale)
Unemployment Rate
11.5%
QoQ Annual (%)
600
Real GDP
1.3%
0.4%
1.1%
U.S. Employment
-2%
________________________________________________
29
U.S. Consumer Sentiment (U of Mich) | U.S. Consumer Net Worth

U.S. Consumer Sentiment (U of Mich)
U.S. Consumer Net Worth
120
80
75
110
70
100
65
90
60
80
55
50
70
45
60
40
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2013
2010
2007
2004
2000
1997
1994
1991
1987
1984
1981
35
1978
50
________________________________________________
Source: ISI Group
30*
U.S. Nominal Retail Sales 3 Months Average Y/Y %

15%
10%
5%
Nov: 4.1%
0%
-5%
-10%
-15%
99
00
01
02
03
04
05
06
06
07
08
09
10
11
12
13
31
Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Capacity Utilization
79.5%
79.0%
78.5%
78.0%
77.5%
77.0%
76.5%
76.0%
75.5%
75.0%
________________________________________________
Source: Bloomberg, Federal Reserve and Monticello Associates
32
2014 Market and Earnings Outlook
Rising Interest Rates Have Not Stopped the Markets Rise
1,600
16
1,550
15
1,500
14
1,450
13
1,400
12
1,350
11
S&P 500 Index (LHS)
Dec-13
17
Nov-13
1,650
Oct-13
18
Sep-13
1,700
Aug-13
19
Jul-13
1,750
Jun-13
20
May-13
1,800
Apr-13
21
Mar-13
1,850
3.0%
2.9%
2.8%
2.7%
2.6%
2.5%
2.4%
2.3%
2.2%
2.1%
2.0%
1.9%
1.8%
1.7%
1.6%
Feb-13
22
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
1,900
Jan-13
10-Year Treasury
Index Level
Index Price
S&P 500
VIX Index (RHS)
________________________________________________
Source: Bloomberg, Federal Reserve and Monticello Associates
34
Valuation U.S. Markets

36
16%
32
14%
28
12%
24
10%
20
8%
16
6%
12
4%
2%
0%
22x
20x
19.8x
18x
S&P 500 Index Average P/E
18%
S&P 500 P/E (TTM)
Bond Yields
S&P 500 P/E Multiples and Treasury Bond Yields 1954 to 2013
17.4x
16x
15.4x
14x
13.0x
12x
10x
1954
1956
1959
1961
1964
1966
1969
1972
1974
1977
1979
1982
1985
1987
1990
1992
1995
1997
2000
2003
2005
2008
2010
2013
9.8x
10-Yr U.S. Trsy (LHS)
LT. Avg. - Yld (LHS)
S&P 500 - TTM P/E (RHS)
LT. Avg. - TTM P/E (RHS)
8x
Below 4%
4% to 6%
6% to 8%
8% to 10% Above 10%
Range of 10-Year U.S. Trsy Bond Yield
________________________________________________
Source: Bloomberg and Monticello Associates
35
EPS Growth
Year-Over-Year Operating Earning Growth
80%
70%
End of Great Recession
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
Jun Oct Jan Mar Jul Oct Jan Apr Jul Nov Feb May Aug Nov Mar Jun Sep Dec
2009 2009 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 2013
________________________________________________
36 *
2014 Margins
Revenue Growth
8.55%
8.65%
8.75%
8.85%
8.95%
9.05%
9.16%
Cur Rate
9.25%
9.35%
9.45%
9.55%
9.65%
9.75%
9.85%
9.95%
10.05%
1.50%
2.25%
$103.84
$105.05
$106.27
$107.48
$108.69
$109.91
$104.60
$105.83
$107.05
$108.27
$109.50
$110.72
2014 Revenue Growth

2.75%
3.75%
4.25%
4.77%
5.25%
5.75%
6.75%
7.25%
Cur Rate
S&P 500 Operating EPS under Different Revenue and Margin Assumptions (1)
$105.12 $106.14 $106.65 $107.18 $107.67 $108.18 $109.21 $109.72
$106.35 $107.38 $107.90 $108.44 $108.93 $109.45 $110.49 $111.00
$107.57 $108.62 $109.15 $109.69 $110.19 $110.72 $111.76 $112.29
$108.80 $109.86 $110.39 $110.94 $111.45 $111.98 $113.04 $113.57
$110.03 $111.10 $111.64 $112.20 $112.71 $113.25 $114.32 $114.85
$111.26 $112.35 $112.89 $113.45 $113.97 $114.51 $115.59 $116.14
7.75%
8.25%
$110.23
$111.52
$112.81
$114.10
$115.39
$116.68
$110.74
$112.04
$113.33
$114.63
$115.92
$117.22
$111.25 $112.07 $112.62 $113.71 $114.26 $114.83 $115.36 $115.90 $117.00 $117.55 $118.10 $118.64
$112.34
$113.55
$114.77
$115.98
$117.20
$118.41
$119.63
$120.84
$122.05
$113.17
$114.39
$115.62
$116.84
$118.06
$119.29
$120.51
$121.73
$122.96
$113.72
$114.95
$116.18
$117.41
$118.64
$119.87
$121.10
$122.33
$123.56
$114.83
$116.07
$117.31
$118.55
$119.79
$121.04
$122.28
$123.52
$124.76
$115.38
$116.63
$117.88
$119.12
$120.37
$121.62
$122.87
$124.11
$125.36
$115.96
$117.21
$118.46
$119.72
$120.97
$122.23
$123.48
$124.73
$125.99
$116.49
$117.75
$119.01
$120.27
$121.53
$122.79
$124.04
$125.30
$126.56
$117.04
$118.31
$119.57
$120.84
$122.10
$123.37
$124.63
$125.90
$127.16
$118.15
$119.43
$120.70
$121.98
$123.26
$124.54
$125.81
$127.09
$128.37
$118.70
$119.99
$121.27
$122.55
$123.84
$125.12
$126.40
$127.69
$128.97
$119.26
$120.55
$121.83
$123.12
$124.41
$125.70
$126.99
$128.28
$129.57
$119.81
$121.10
$122.40
$123.69
$124.99
$126.29
$127.58
$128.88
$130.17
Bottom up Consensus
________________________________________________
(1) Assumes buybacks reduce share count by 1.5%.

Source: ISI Group
37
Q3 2013 S&P 500 Revenue Expectations

Sales Estimates Year-Over-Year Change
6.0%
5.5%
5.0%
4.5%
12/6/13
3.7%
4.0%
3.5%
3.0%
12/6/13
3.2%
2.5%
2.0%
1.5%
Dec-12
Jan-13
Feb-13 Mar-13 Apr-13 May-13 Jun-13
All S&P 500 Companies
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13 Dec-13
S&P 500 Less Financials
________________________________________________
38*
S&P 500 Index Price and Earnings

110
50%
106
40%
YoY Earnings
102
30%
98
20%
94
10%
90
Dec-11
Mar-12
Jun-12
Sep-12
YoY Earnings (LHS)
Dec-12
Mar-13
Jun-13
Sep-13
Cumulative Perforamance
1Q12 to 3Q13
Earnings Growth: 4%
0%
Dec-13
Cumulative Performance (RHS)
________________________________________________
39
Profit Margins Peaking?

After-Tax Corporate Profits as a % of National Income(1)
12%
10%
LT Avg = 7.2%
8%
6%
4%
1947
1953
1959
1965
1971
1977
1983
1989
1995
2001
2007
2003
2008
2013
S&P 500 Net Margin (4-Qtr Average)

10%
8%
6%
4%
2%
0%
1963
1968
1973
1978
1983
1988
1993
1998
2013
________________________________________________
(1)
(2)
Source: Haver Analytics, Strategas Research Partners.

40*
Warning Signs
% of Earnings Pre-Announcements that are
Negative vs. U.S. Manufacturing PMI
% Companies Missing Sales Expectations

(Quarterly, S&P 500)
65
40%
60
PMI,
(LHS) 50%
55
60%
70%
65%
60%
55%
50%
50
70%
45
45%
3Q:
46%
40%
80%
35%
40
% Negative
Guidance,
inverted,
(RHS)
35
30
90%
25%
100%
'96
'97
'99
'01
'03
'05
'07
'09
'11
'13
30%
20%
'02
'03
'05
'06
'07
'08
'09
'10
'12
'13
________________________________________________
41*
S&P 500 Trailing Price/Earnings Ratio with Historical Median

35
30
Very Overvalued
25
Overvalued
20
Median = 16.2
15
Undervalued
10
Bargains
5
0
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
________________________________________________
Source: Strategas, Standard & Poor's.
42*
Higher Inflation Isnt a Problem for Multiples
30
S&P multiples and inflation are

positively correlated till ~2%. The
relationship turns negative above ~3%.
S&P 500 NTM PE
25
20
15
10
Today
R = 0.2229
0%
1%
2%
3%
Core CPIU YoY% Chg
4%
5%
6%
________________________________________________
Source: ISI Group
43
S&P 500 Net Income vs EPS Growth Rate

60%
50%
40%
30%
20%
10%
1.77%
1.24%
S&P 500 Net Income Growth Rate (YoY)
6/30/2013
-3.10%
3/31/2013
9/30/2012
6/30/2012
3/31/2012
12/31/2011
9/30/2011
6/30/2011
3/31/2011
12/31/2010
-10%
-3.81%
12/31/2012
0%
S&P 500 EPS Growth Rate (YoY)
________________________________________________
44*
Buybacks
(in billions)
$700
$600
$589.1
$500
$400
$431.8
$405.1
$398.8
$346.2
$339.6
$300
$346.2
$298.8
$200
$137.6
$100
$0
2006
2007
2008
2009
2010
2011
2012
YTD '13
________________________________________________
45*
Our Troubling Fiscal Dilemma
Total Receipts (Taxes) To GDP

25%
20%
15%
10%
5%
0%
1929 1936 1942 1949 1955 1962 1968 1974 1981 1987 1994 2000 2006 2013
________________________________________________
Source: BEA, Strategas Research Partners.
47*
Components of the Budget Deficit

Federal Government Revenues
(12 Mo. Rolling, $TN)
2.90
Federal Government Spending

(12 Mo. Rolling, $TN)
3.70
Last Click:
Nov = $2.81TN
3.50
2.70
3.30
Last Click:
Nov = $3.42TN
3.10
2.50
2.90
2.30
2.70
2.50
2.10
2.30
2.10
1.90
1.90
1.70
1.70
'01
'03
'05
'07
'09
'11
'13
'01
'03
'05
'07
'09
'11
'13
________________________________________________
48*
Federal Budget Surplus / Deficit, Pct of GDP

4%
2%
3Q 2013
= -4.1%
Avg. Since
1960 = -2.5%
0%
-2%
-4%
-6%
-8%
-10%
-12%
1960
1975
1990
Federal Budget Surplus / Deficit Pct GDP
2005
Historical Average
________________________________________________
49*
The Status of the European Sovereign Debt Crisis
Eurozone Real GDP

6.0%
Jun-00
4.4%
Dec-06
3.8%
4.0%
Mar-11
2.6%
2.0%
0.0%
Sep-13
-0.4%
-2.0%
Mar-13
-1.2%
-4.0%
-6.0%
'96
'97
'98
'99
'00
'01
'02
'03
'04
'05
'06
'07
'08
Mar-09
-5.5%
'09
'10
'11
'12
'13
________________________________________________
Source: Strategas Research Partners
51*
Bloomberg Median Full Year 2013 EU Real GDP Forecast

1.2%
6/12/2012
1.0%
9/12/2012
0.6%
1.0%
0.8%
0.6%
11/15/2012
0.3%
0.4%
0.2%
12/25/2012
3/15/2013
-0.1%
-0.2%
0.0%
9/13/2013
-0.4%
-0.2%
6/13/2013
-0.6%
-0.4%
4/12/2013
-0.4% 5/10/2013
-0.6%
10/11/2013
-0.3%
Dec 2013
Nov 2013
Oct 2013
Sep 2013
Aug 2013
Jul 2013
May 2013
Mar 2013
Feb 2013
Jan 2013
Dec 2012
Nov 2012
Oct 2012
Sep 2012
Aug 2012
Jul 2012
Jun 2012
May 2012
Apr 2013
-0.5%
-0.8%
________________________________________________
52*
Eurozone Industrial Production

115
110
105
100
Oct: 99.2
95
90
85
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
________________________________________________
Source: ISI Group
53
Germany Consumer Confidence (GfK)

10
9
8
Dec: 7.4
6
5
4
3
2
1
0
05
06
07
08
08
09
10
11
12
13
________________________________________________
Source: ISI Group
54
Eurozone and U.S. Unemployment Rate

14.0%
Oct-13
12.1%
12.0%
10.0%
8.0%
Nov-13
7.0%
6.0%
4.0%
2.0%
0.0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Eurozone Unemployment Rate
U.S. Unemployment Rate
________________________________________________
Source: Strategas Research Partners
55*
Outlook for Commodities
2,000
240
1,800
200
1,600
160
1,400
120
1,200
80
1,000
40
800
Jan-09
Chinese Gold Imports From Hong Kong

(metric tonnes)
Gold (Perpetual Futures)
China Gold Imports vs. Gold Prices
0
Jul-09
Jan-10
Aug-10 Feb-11
Sep-11 Mar-12 Sep-12
Chinese Gold Imports
Apr-13 Oct-13
Gold
________________________________________________
Source: Commodity Systems, Inc. (CSI), www.csidata.com; Hong Kong Census & Statistics Dept. Strategas Research Partners
57
GS Commodity Index
900
800
700
600
Dec 18: 627.9
500
400
300
200
03
04
05
06
07
08
09
10
11
12
13
________________________________________________
Source: ISI Group
58
Commodities & Correlations

0.75
725
0.70
675
0.65
625
Commodity Corrleations
Correlations Say
The End Has
Likely Passed
0.55
575
525
0.50
475
0.45
425
0.40
375
0.35
325
0.30
Commodity
Correlations
0.25
0.20
Commodities
Continuous Commodity Index (CCI)
0.60
275
225
0.15
175
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
CCI
Median Six-Month Rolling Correlation of Individual Commodities To The CCI (50-Day SMA)(1)
________________________________________________
Source: Commodity Research Bureau, www.crbtrader.com; Commodity Systems Inc., www.csidata.com; Strategas Research Partners
(1)
Correlations based on daily returns
59
China and the Emerging Markets
Valuation Global Markets

Developed and Emerging Markets 2010 to 2013
Forward Price to Earnings
Cumulative Performance
17
55%
16
45%
15
S&P 500
MSCI EM
S&P 500
Nov-13
Jun-13
Nov-13
Jun-13
Jan-13
-25%
Aug-12
Mar-12
-15%
Oct-11
May-11
-5%
Dec-10
10
Jan-13
5%
Aug-12
11
15%
Mar-12
12
25%
Oct-11
13
May-11
Forward P/E
14
Dec-10
Cumulative Performance
35%
MSCI EM
________________________________________________
Source: Bloomberg, MSCI and Monticello Associates
61
China Real GDP Y/Y%

16
15
14
13
12
11
10
9
8
7
6
1991 1993 1994 1995 1997 1998 1999 2001 2002 2003 2005 2006 2007 2009 2010 2011 2013
________________________________________________
Source: ISI Group
62*
Chinas Credit as % of GDP

Outstanding Credit Year-over-Year
GDP Growth
25%
6%
20%
4%
15%
2%
10%
2007
2008
2009
2010
2011
2012
2013
0%
2007
2008
11.9%
2009
2010
10.3%
9.6%
9.8%
9.7%
9.5%
9.1%
8.9%
8.1%
7.6%
7.4%
7.9%
7.7%
7.5%
7.8%
7.9%
8%
6.8%
6.2%
30%
10.7%
10%
9.1%
35%
9.0%
12%
GDP YoY%
Change YoY%
40%
11.1%
11.9%
11.5%
11.2%
10.6%
10.1%
14%
45%
3Q 13
2011
2012
2013
________________________________________________
Source: Bloomberg, Macroband and Monticello Associates
63*
China Electricity Production (Y/Y%, 3M MA)

30%
25%
20%
15%
10%
5%
Nov 2013
7.1%
0%
-5%
-10%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
________________________________________________
Source: CEIC. Strategas Research Partners
64*
China 100-City Res. Property Price

Peak
Nov 2013: 116.3
118
116
Index, May 2010 = 100
114
112
18 Months Up
110
108
High
Aug 2011: 105.8
106
Latest Nov: 116.3,

0.68% M/M
9 Months Down
104
12 Months Up
102
Low
May 2012: 103.5
100
98
Jan-10
Jun-10
Dec-10
Jun-11
Dec-11
Jun-12
Dec-12
Jun-13
Dec-13
________________________________________________
Source: ISI Group
65*
China Share of Nominal GDP

80%
70%
60%
50%
40%
30%
20%
10%
0%
1962
1967
1972
1977
1982
1987
Consumer Spending
1992
1997
2002
2007
2012
Investment
________________________________________________
Source: China National Bureau of Statistics. Strategas Research Partners
66*
% Global Nominal GDP

(Based on PPPs)
65%
60%
2013
Emerging 55%
55%
50%
45%
2013
Developed 45%
40%
35%
1992 1993 1994 1995 1996 1997 1999 2000 2001 2002 2003 2004 2006 2007 2008 2009 2010 2011 2013
Developed % Global Nominal GDP
EM % Global Nominal GDP
________________________________________________
Source: ISI Group
67*
The Continuing Rally in Japan
6/30/2013
9/30/2012
12/31/2011
3/31/2011
6/30/2010
9/30/2009
12/31/2008
3/31/2008
6/30/2007
8%
9/30/2006
12/31/2005
3/31/2005
6/30/2004
9/30/2003
12/31/2002
3/31/2002
6/30/2001
9/30/2000
12/31/1999
3/31/1999
6/30/1998
9/30/1997
12/31/1996
3/31/1996
Japan Real GDP (YoY Growth)

Jun-07
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
________________________________________________
Source: Bianco Research L.L.C.
69*
Japan
Japanese Yen (JPY/US$)
105
Japan Federal Government Debt As % GDP

12/16/13 = 103.0
100
250
200
95
150
90
100
85
80
75
Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13
50
0
1980
1985
1991
1996
2002
2008
2013
________________________________________________
Source: Bloomberg, Strategas Research Partners
70*
The Japanese Stock Exchange (NKY)

16,000
15,000
14,000
12/16/13
15,152.91
13,000
12,000
11,000
10,000
9,000
8,000
Jan-10
May-10
Oct-10
Mar-11
Aug-11
Dec-11
May-12
Oct-12
Mar-13
Jul-13
Dec-13
________________________________________________
Source: Bloomberg, Strategas Research Partners.
71*
Disclaimer
The views expressed in this commentary are the personal views of Byron Wien of Blackstone Advisory Partners L.P.
(together with its affiliates, "Blackstone") and do not necessarily reflect the views of Blackstone itself. The views
expressed reflect the current views of Mr. Wien as of the date hereof and neither Mr. Wien nor Blackstone
undertakes to advise you of any changes in the views expressed herein.
Blackstone and others associated with it may have positions in and effect transactions in securities of companies
mentioned or indirectly referenced in this commentary and may also perform or seek to perform investment
banking services for those companies. Blackstone and/or its employees have or may have a long or short position
or holding in the securities, options on securities, or other related investments of those companies.
Investment concepts mentioned in this commentary may be unsuitable for investors depending on their specific
investment objectives and financial position. Where a referenced investment is denominated in a currency other
than the investor's currency, changes in rates of exchange may have an adverse effect on the value or price of or
income derived from the investment.
Tax considerations, margin requirements, commissions and other transaction costs may significantly affect the
economic consequences of any transaction concepts referenced in this commentary and should be reviewed
carefully with one's investment and tax advisors. Certain assumptions may have been made in this commentary as
a basis for any indicated returns. No representation is made that any indicated returns will be achieved. Differing
facts from the assumptions may have a material impact on any indicated returns. Past performance is not
necessarily indicative of future performance. The price or value of investments to which this commentary relates,
directly or indirectly, may rise or fall. This commentary does not constitute an offer to sell any security or the
solicitation of an offer to purchase any security.
To recipients in the United Kingdom: this commentary has been issued by Blackstone Advisory Partners L.P. and
approved by The Blackstone Group International Partners LLP, which is authorized and regulated by the Financial
Services Authority. The Blackstone Group International Partners LLP and/or its affiliates may be providing or may
have provided significant advice or investment services, including investment banking services, for any company
mentioned or indirectly referenced in this commentary. The investment concepts referenced in this commentary
may be unsuitable for investors depending on their specific investment objectives and financial position.
This commentary is disseminated in Japan by The Blackstone Group Japan KK and in Hong Kong by The Blackstone
Group (HK) Limited.
72
Appendix Lifes Lessons
Lifes Lessons
Here are some of the lessons I have learned in my first 80 years. I hope to continue to practice them in the next 80
1.
Concentrate on finding a big idea that will make an impact on the people you want to influence. The Ten
Surprises, which I started doing in 1986, has been a defining product. People all over the world are aware of it
and identify me with it. What they seem to like about it is that I put myself at risk by going on record with these
events which I believe are probable and hold myself accountable at year-end. If you want to be successful and
live a long, stimulating life, keep yourself at risk intellectually all the time.
2.
Network intensely. Luck plays a big role in life, and there is no better way to increase your luck than by knowing
as many people as possible. Nurture your network by sending articles, books and emails to people to show
youre thinking about them. Write op-eds and thought pieces for major publications. Organize discussion groups
to bring your thoughtful friends together.
3.
When you meet someone new, treat that person as a friend. Assume he or she is a winner and will become a
positive force in your life. Most people wait for others to prove their value. Give them the benefit of the doubt
from the start. Occasionally you will be disappointed, but your network will broaden rapidly if you follow this
path.
4.
Read all the time. Dont just do it because youre curious about something, read actively. Have a point of view
before you start a book or article and see if what you think is confirmed or refuted by the author. If you do that,
you will read faster and comprehend more.
5.
Get enough sleep. Seven hours will do until youre sixty, eight from sixty to seventy, nine thereafter, which might
include eight hours at night and a one-hour afternoon nap.
6.
Evolve. Try to think of your life in phases so you can avoid a burn-out. Do the numbers crunching in the early
phase of your career. Try developing concepts later on. Stay at risk throughout the process.
74*
Lifes Lessons (Contd)

7.
Travel extensively. Try to get everywhere before you wear out. Attempt to meet local interesting people where
you travel and keep in contact with them throughout your life. See them when you return to a place.
8.
When meeting someone new, try to find out what formative experience occurred in their lives before they were
seventeen. It is my belief that some important event in everyones youth has an influence on everything that
occurs afterwards.
9.
On philanthropy my approach is to try to relieve pain rather than spread joy. Music, theatre and art museums
have many affluent supporters, give the best parties and can add to your social luster in a community. They
dont need you. Social service, hospitals and educational institutions can make the world a better place and help
the disadvantaged make their way toward the American dream.
10. Younger people are naturally insecure and tend to overplay their accomplishments. Most people dont become
comfortable with who they are until theyre in their 40s. By that time they can underplay their achievements
and become a nicer, more likeable person. Try to get to that point as soon as you can.
11. Take the time to give those who work for you a pat on the back when they do good work. Most people are so
focused on the next challenge that they fail to thank the people who support them. It is important to do this. It
motivates and inspires people and encourages them to perform at a higher level.
12. When someone extends a kindness to you write them a handwritten note, not an e-mail. Handwritten notes
make an impact and are not quickly forgotten.
13. At the beginning of every year think of ways you can do your job better than you have ever done it before. Write
them down and look at what you have set out for yourself when the year is over.
14. The hard way is always the right way. Never take shortcuts, except when driving home from the Hamptons.
Short-cuts can be construed as sloppiness, a career killer.
75*
Lifes Lessons (Contd)

15. Dont try to be better than your competitors, try to be different. There is always going to be someone smarter
than you, but there may not be someone who is more imaginative.
16. When seeking a career as you come out of school or making a job change, always take the job that looks like it
will be the most enjoyable. If it pays the most, youre lucky. If it doesnt, take it anyway, I took a severe pay cut
to take each of the two best jobs Ive ever had, and they both turned out to be exceptionally rewarding
financially.
17. There is a perfect job out there for everyone. Most people never find it. Keep looking. The goal of life is to be a
happy person and the right job is essential to that.
18. When your children are grown or if you have no children, always find someone younger to mentor. It is very
satisfying to help someone steer through lifes obstacles, and youll be surprised at how much you will learn in
the process.
19. Every year try doing something you have never done before that is totally out of your comfort zone. It could be
running a marathon, attending a conference that interests you on an off-beat subject that will be populated by
people very different from your usual circle of associates and friends or traveling to an obscure destination alone.
This will add to the essential process of self-discovery.
20. Never retire. If you work forever, you can live forever. I know there is an abundance of biological evidence
against this theory, but Im going with it anyway.
76*

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The Ten Surprises of 2014

The Ten Surprises of 2014

The Ten Surprises of 2014 (Contd)

The Also Rans of 2014

Radical Asset Allocation

Good value in terms of yield and multiple

Other U.S. long only

Moderate growth continuing

European long only

Emerging Market equities

Growth has slowed

Hedge Funds (all strategies)

Selected strategies attractive

Competition intense for deals

Taking some profits

Hedge against currency debasement

Natural Resources and agricultural

World standard of living rising

Taking some profits

NDR Crowd Sentiment Poll (7/31/2002 12/17/2013)

Arrows represent extremes in optimism and

Extremes generated when sentiment reading:

Sentiment must reverse by 10 percentage points to signal an

S&P 500 Gain / Annum When:

Average value of indicator at:

NDR Crowd Sentiment Poll

Extreme Optimism (Bearish)

70.5 69.5 72.2

Extreme Pessimism (Bullish)

Source: Ned Davis Research.

Source: ISI Group

The November to April Calendar Effect U.S. Large Cap

Historical Performance Periods

Before and After 1950

Performance Contribution Periods

Performance Contribution Decades

Returns November to April

Returns May to October

Returns November to April

Returns May to October

Source: Monticello Associates

U.S. Margin Debt

Source: ISI Group

Scrambling to cover Heavily Shorted Stocks

Shares on Loan (left axis)

S&P 500 Level (right axis)

Fed Balance Sheet vs. ECB Balance Sheet (Trillions)

Federal Reserve Bank

Federal Reserve Bank

European Central Bank

Source: Federal Reserve, ECB, Strategas Research Partners.

The Outlook for the U.S. Economy

Fed Treasury Holdings of Over 5Yr to 10Yr TSY Bonds ($Bn)

Source: Strategas Research Partners.

Economic Cycle Research Institute

ECRI Leading Index (Level)

ECRI Leading Index 4 Wk. Avg.

Source: ISI Group

U.S. Real Median Family Income

Source: ISI Group

Food Stamps The Great Recessions Soup Lines

Average Monthly Benefit

Average Monthly Benefit

Source: Bianco Research L.L.C