kevin m. wilson, chfc , phd president/ceo/cio

Kevin M. Wilson, ChFC, PhDPresident/CEO/CIO

1405 Medical Arts Building324 W. Superior StreetDuluth, MN 55802

Office: 218-464-4399 Toll Free: 877-327-5062

Fax: 218-464-4397Email: [email protected]

www.bluewatercapitaladvisors.com

Monthly Market Review

“Back-Testing the Performance of Stocks & MarketsYields Opportunities”

(An Evaluation of What Has Worked)

May 16, 2013

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Ted A. Pavlovich, WMSVP Wealth Management

Dheenu Sivalingam, MBAAVP/CCO/Senior Analyst

INTRODUCTION

TED A. PAVLOVICH

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Caveats & Disclaimers

1. Back testing involves hypothetical results and does notrepresent actual results

2. Past performance is no indication of future returns.3. Models by their very nature are over-simplified.4. Limitations to the model results have been imposed by

the lack of appropriate benchmark securities for some periods, the arbitrary 10-year limit to available models, and the necessarily over-simplified natureof the models. Investors should view all results as tentative and use caution in interpreting these results.

5. Tail risks are nearly impossible to model, but can have a major but unpredictable impact.

PUBLISHED WORK ON WHAT HAS WORKED

TED A. PAVLOVICH4

Source: Novy-Marx, 2013

Back Testing Indicates ThatHigh Performance Has Been Associated With Using Certain Fundamentals To Select Stocks

Quality = low debt/high assetsrelative to earnings

Value = low price relative to earnings or net worth

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Stocks With Cheap Valuations Outperform; High Fliers Underperform Over Time

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Sell in May and Go Away Has Worked Over Time

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Empirical Back Testing Of Bear Market Signals Appears To Have Worked (With A Lag)

Source: Hussman

OVBBYR Syndrome

1. Over-Valued2. Over-Bought3. Over-Bullish4. Yields Rising

-32%

-48%

-49%

-58%

-20%

?

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Historical Valuation Data Can Also(On Their Own) Pinpoint Market Tops

OUR BACK-TESTED TECHNICAL MODELS

DHEENU V. SIVALINGAM10

Simple 12-26 Moving Average Test – Catching Wave Shifts

Assume:Either 100% CashOr 100% Stocks

Assume: Partial Allocations(NOT Full PortfolioAllocations)

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Simple 12-26 Moving Average Test (Assumes Model Followed Without Deviation)

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Buy Sell Return Weeks In Trade

6-Jul-01 24-Aug-01 -0.03% 7

4-Jan-02 12-Apr-02 -5.00% 14

27-Dec-02 28-Feb-03 -2.84% 9

16-May-03 4-Jun-04 20.98% 55

29-Oct-04 6-May-05 4.65% 27

8-Jul-05 7-Jul-06 6.25% 52

15-Sep-06 14-Sep-07 14.40% 52

2-Nov-07 4-Jan-08 -6.05% 9

6-Jun-08 25-Jul-08 -7.46% 7

29-May-09 2-Jul-10 13.20% 57

8-Oct-10 29-Jul-11 12.60% 42

23-Dec-11 29-Jun-12 8.71% 27

24-Aug-12 10-May-13 17.44% 37

Simple 12-26 Moving Average Test

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Method: Long, Entry at $147.87, on 01/07/13: Profit Status: Profit, $19.41 per share or 13.12%

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Turtle System: (PPS,MACD,Volume,Accum/Distru)

Current Trade: Long @ $148.75 on 01/14/13 Current Profit: 12.46% (MKT @ $167.28)Stop Loss: @ $141.23 (5.05%) Exit: $152.31 (2.39%)

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OUR BACK-TESTED FUNDAMENTAL MODELS

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KEVIN M. WILSON

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BWCA Bloomberg Back Test #1: Q + V (All Cap)

BWCA Bloomberg Back Test #2: Q + V (Cap. > $2.0 Billion)

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OUR BACK-TESTED ALLOCATION MODELS

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KEVIN M. WILSON

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GMO’s Econometric Models for Expected Return Have Been Very Useful Over Long Term

S & P 500

BWCA Growth Portfolio BT: Down Capture in Meltdown Scenario

Benchmark: SPY

Composition:Stocks: 45%Bonds: 40%Cash: 15%

Max. Draw:BWCA: -15%SPY: -55%

07/02/0702/12/10Top: TRBottom: Volatility

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BWCA Growth Portfolio BT: Up Capture – Full Cycle

Benchmark: SPY


Max. Draw:BWCA: -29%SPY: -55%


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BWCA Moderate Portfolio Back Test: Down Capture in Meltdown Scenario

Benchmark: VIG


Max. Draw:BWCA: -13%VIG: -47%


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BWCA Moderate Portfolio Back Test: Up Capture in a Bull Rally

Benchmark: VIG




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BWCA Moderate Portfolio Back Test: Up Capture – Full Cycle

Benchmark: VIG




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BWCA Conservative Portfolio BT: Down Capture in Meltdown Scenario

Benchmark: AOK


Max. Draw:BWCA: -8%AOK: -11%


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BWCA Conservative Portfolio BT: Up Capture – Full Cycle

Benchmark: AOK




BWCA Conservative Portfolio BT: Up Capture – Bull Rally

Benchmark: AOK




SUMMARY/Q & A

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KEVIN M. WILSON

1) Back testing has been useful in determining allocation strategies2) Back testing has moved our fundamental stock selection to a new level3) Back testing has allowed our technical analysis of market trends to greatly improve4) Opportunities going forward involve improved stock selection, longer holding periods,

less trading, better long term portfolio allocations, and reduced risk of loss

This report is provided for informational purposes only and does not constitute an offer or solicitation to purchase or sell any security or commodity and is not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Any opinions expressed herein are subject to change at any time without notice. Information has been obtained from sources believed to be reliable, for its accuracy and interpretation are not guaranteed.

Investing in securities involves risk, including possible loss of principal. Past performance should not be taken as an indication of guarantee of future performance and no representation, express or implied, is made regarding future performance.

The firm does not provide tax advice; clients should contact their attorney, accountant, or other tax adviser regarding tax matters.

“BWCA is a state registered investment adviser in all states in which it is required to be registered. All Blue Water Capital Advisors’ customer assets are held in the customer name with Fidelity Institutional Services, clearing through National Financial Services (NFS), Member SIPC, a Fidelity Investments Company as Qualified Custodian.”

Disclaimer

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kevin m. wilson, chfc , phd president/ceo/cio

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