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THE OUTLOOK Howard Marks Chairman_ Oaktree Capital Management

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THE OUTLOOK Howard Marks Chairman_ Oaktree Capital Management Powered By Docstoc
					THE OUTLOOK




Howard Marks
Chairman, Oaktree Capital Management, L.P.
The CFA Society of San Diego 2011 Annual Forecasting Dinner
Thursday, March 10, 2011
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“We have two classes of forecasters: Those who don’t know – and those who don’t know they don’t know.”
                                                                    John Kenneth Galbraith




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Today’s Positives
Green shoots:
     •      Things have stopped getting worse
     •      We’ve seen some improvement in economic statistics and corporate profits
     •      The capital markets have reopened and companies are being refinanced:
               –      sales of equity are adding to capital or permitting debt repayment,
               –      debt exchanges are reducing the face amount of debt outstanding, and
               –      maturities are being pushed out.

Investor psychology has improved and markets have rallied substantially

Government programs are being viewed positively

Armageddon is considered to be “off the table”




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Unresolved Negatives
The green shoots are iffy:
      •      Comparisons are against very weak periods, and yet they are not dramatically positive
      •      There’s still heavy reliance on government stimulus and artificially low interest rates

Business is still slow and sales trends poor

Profit growth is coming from cost cutting, not a plus for the overall economy

With companies being cautious about hiring, where will job growth come from?

With jobs scarce, incomes sluggish, savings higher as a percentage of incomes, and credit harder to come by, where
will growth in spending come from?

Trends in home prices and foreclosures aren’t positive
The potential for write-offs by banks in connection with home mortgages, consumer finance and commercial real
estate remains substantial

Defaults, bankruptcies and restructurings undoubtedly lie ahead




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“There are two kinds of people who lose money: those who know nothing and those who know everything.”
                                                                  Henry Kaufman




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The Investment Environment
Three things influence asset prices: fundamentals, psychology and technicals

In the fall of 2008, all three were terrible, meaning everything was a buy (provided the world wouldn’t end)

Since then,
      •      fundamentals have seemed iffy;
      •      psychology has rebounded substantially; and
      •      technicals have favored cash inflows rather than forced selling

Thus markets rose dramatically in 2009 and continued upward in 2010

The proper course of action from here is far less clear than it was in the fall of 2008
      •       Markets are heavily influenced by interest rates near zero
      •      Most public asset classes appear fairly or fully priced
      •      A lot depends on whether the fundamental uncertainties are resolved painlessly, and thus on whether
             today’s improved investor psychology is borne out or relapses

This seems like a decent time to participate, and not a time to abstain totally

But it’s not time for pedal-to-the-metal buying, as few things are cheap

Investors are constrained regarding illiquid strategies, so there may be better bargains there                     5
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Open Questions
     •       U.S./Europe competitiveness
     •       Job growth
     •       Consumer behavior
     •       Pace of economic recovery
     •       Inflation or deflation
     •       Currency issues / capital controls / protectionism
     •       The need for delevering
     •       Effects of austerity / savings trap




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“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
                                                                          Mark Twain




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Preparing for Tomorrow
For the most part, people deal with the future by assuming something that’s very much like the past




But, as we prepare for what’s to come, we should take care not to blindly extrapolate past events

The future may hold a wider distribution of possible outcomes




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Preparing for Tomorrow (continued)
Past results are just a subset of the many things that could have materialized

The past most people remember – 1992-2007, say – was a rosy period in which most things broke right
More things could have happened, and some of them would have been far less pleasant




Never forget Elroy Dimson:

                  “Risk means more things can happen than will happen”
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Preparing for Tomorrow (continued)
With forces unleashed that have never been seen before, only an optimist would assume today that the future is
knowable and rosy. And the possibility of some real “stinkers” lurking in the left-hand tail shouldn’t be ignored

Given today’s higher leverage ratios, the exposing of structural risks throughout the environment, and the open
items discussed earlier (page 16), the distribution of “possible futures” may be less favorable than the distribution
of “past possibilities.”




The cyclical outlook seems positive, but the underlying secular trends are worrisome.


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“The key is not to predict the future, but to be prepared for it.”
                                                                     Pericles, 495-429 BC




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Structuring Portfolios Today
The Key Questions (as always)

     •       Should we prepare for prosperity or not?

     •       Should we worry more about losing money or about missing opportunity?

     •       What holds the key?

              o       Capital and nerve
              o       Discernment, discipline, risk control and selectivity




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What does a Cautious Investor Do?
      •       More bonds than stocks
      •       Higher in the debt structure
      •       Better quality companies
      •       Less cyclical companies; more tangible, durable assets
      •       Less use of portfolio leverage, and less levered companies
      •       Risk-controlled strategies, managers and approaches
      •       Refuse to increase risk in order to chase return


      •       In other words stress selectivity, security and risk control
                                                                             *

* Subject to pricing



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“It’s frightening to think that you might not know something, but more frightening to think that, by and large, the
world is run by people who have faith that they know exactly what’s going on.”
                                                                         Amos Tversky, Stamford University




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Might I Be Too Cautious?
Safety in investing comes from margin for error

Ensuring margin for error is incompatible with maximization
I believe strongly that girding for bad times – thereby ensuring margin for error – is more essential than preparing
for good times

If you prepare for tough times, you’ll do fine if good times unfold instead

If you prepare for (and count on) good times, their failure to materialize can knock you out
No one ever went bust preparing for tough times

Underperforming in a boom isn’t the worst thing imaginable




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Disclosures

The presentation is being provided on a confidential basis solely for the information of those persons to whom it is given. This presentation
may not be copied, reproduced, republished, posted, transmitted, disclosed, distributed or disseminated, in whole or in part, in any way
without the prior written consent of Oaktree Capital Management, L.P. (together with its affiliates, “Oaktree”) or as required by applicable
law.

This presentation contains information and views as of the date indicated and such information and views are subject to change without
notice. Oaktree has no duty or obligation to update the information contained herein. Further, Oaktree makes no representation, and it
should not be assumed, that past investment performance is an indication of future results. Moreover, wherever there is the potential for
profit there is also the possibility of loss.

This presentation and the information contained herein are for educational and informational purposes only and do not constitute and should
not be construed as an invitation, inducement or offer to sell or solicitation of an offer to buy any securities or related financial instruments in
any jurisdiction in which such offer or solicitation, purchase or sale would be unlawful under the securities, insurance or other laws of such
jurisdiction. Responses to any inquiry that may involve attempting to effect transactions in securities will not be made absent compliance
with relevant broker-dealer, investment advisor, broker-dealer agent or investment advisor representative registration requirements, or
applicable exemptions or exclusions from such requirements.

Certain information contained herein concerning economic trends and performance is based on or derived from information provided by
independent third-party sources. Oaktree believes that the sources from which such information has been obtained are reliable; however, it
cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or
the assumptions on which such information is based.




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