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Economy – Markets – Investment StrategyFebruary 2011
2
Important InformationThe views and opinions expressed are those of the speaker and are subject to change based on factors such as market and economic conditions. These views and opinions are not an offer to buy a particular security and should not be relied upon as investment advice. Past performance cannot guarantee comparable future results.
Performance quoted is past performance and cannot guarantee comparable future results; current performance may be higher or lower.
Results shown assume the reinvestment of dividends.
An investment cannot be made directly in an index.
Investments with higher return potential carry greater risk for loss.
Investing in small companies involves greater risks not associated with investing in more established companies, such as business risk, significant stock price fluctuations and illiquidity.
Foreign securities have additional risks, including exchange rate changes, political and economic upheaval, the relative lack of information about these companies, relatively low market liquidity and the potential lack of strict financial and accounting controls and standards.
Investing in emerging markets involves greater risk than investing in more established markets such as risks relating to the relatively smaller size and lesser liquidity of these markets, high inflation rates, adverse political developments and lack of timely information.
Fluctuations in the price of gold and precious metals often dramatically affect the profitability of the companies in the gold and precious metals sector. Changes in political or economic climate for the two largest gold producers, South Africa and the former Soviet Union, may have a direct effect on the price of gold worldwide.
Asset allocation/diversification does not guarantee a profit or eliminate the risk of loss.The S&P 500® Index is an unmanaged index considered representative of the U.S. stock market.The MSCI EAFE Index is an unmanaged index considered representative of stocks of Europe, Australasia and the Far East.The Vanguard 500 Index is an unmanaged index considered representative of the companies in the S&P 500 Index.The Vanguard Balanced Index is representative of the standard 60% equity, 40% fixed income allocation.The S&P/Case-Shiller U.S. National Home Price Index is an unmanaged index considered representative of single-family home prices for the nine U.S. Census divisions.The S&P GSCI Total Return Index is world-production weighted; the quantity of each commodity in the index is determined by the average quantity of production in the last five years of available data.The Barclays Capital Long-Term Treasury Bond Total Return Index is an unmanaged index considered representative of long-term treasury bonds.The Dow Jones Total Stock Market Index is an unmanaged index that measures all U.S. equity securities that have readily available prices.Government securities, such as U.S. Treasury bills, notes and bonds offer a high degree of safety and they guarantee the timely payment of principal and interest if held to maturity. U.S. Treasury bills are short-term securities with maturities of one year or less. Long-term government bonds used in this illustration have a maturity of approximately 20 years. The Consumer Price Index (CPI) is a measure of change in consumer prices, as determined by the U.S. Bureau of Labor Statistics.
3
Point of ViewContents
1. Economic Data• Leading economic indicators• GDP• Labor market• Housing & autos• Consumers• Demographics• Inflation• Federal budget deficit
2. Market Data• Stocks• Bonds• U.S. dollar• Commodities• Gold• Crude oil
3. Investment Strategy• Wall Street’s advice• Modern Portfolio Theory• Asset Allocation
4
Leading Economic Indicators (LEI) components: 1) average weekly hours worked, manufacturing; 2) average weekly initial unemployment claims; 3) manufacturers’ new orders – consumer goods and materials; 4) index of supplier deliveries – vendor performance; 5) manufacturers’ new orders, nondefense capital goods; 6) building permits – new private housing units; 7) stock prices, S&P 500; 8) money supply – M2; 9) interest rate spread; 10-year Treasury less fed funds; 10) index of consumer expectations.Source: Copyright 2010, The Conference Board; data as of Dec. 31, 2010
“The four-month rise suggests the economy now has some wind in its sails; however, it still faces some strong headwinds in the medium-term. Overall economic activity is likely to continue to gain momentum in 2011.”
The Conference BoardJan. 20, 2011
Jan-8
0D
ec-8
0N
ov-8
1O
ct-82
Sep-8
3A
ug-8
4Ju
l-85
Jun-8
6M
ay-8
7A
pr-8
8M
ar-8
9Fe
b-9
0Ja
n-9
1D
ec-9
1N
ov-9
2O
ct-93
Sep-9
4A
ug-9
5Ju
l-96
Jun-9
7M
ay-9
8A
pr-9
9M
ar-0
0Fe
b-0
1Ja
n-0
2D
ec-0
2N
ov-0
3O
ct-04
Sep-0
5A
ug-0
6Ju
l-07
Jun-0
8M
ay-0
9A
pr-1
0
0
20
40
60
80
100
120
Clear bands indicate recession.
Index (2
004=
100)
Economic Data
Index of Leading Economic Indicators
Your Logo5
Source: Copyright 2011, Institute for Supply Management; data as of Jan. 31, 2011.
“The continuing strong performance is highlighted as January is also the sixth consecutive month of month-over-month growth in the sector. New orders and production continue to be strong, and employment rose above 60 percent for the first time since May 2004.”
Institute for SupplyManagement (ISM)Feb. 1, 2011
Jan-8
9A
ug-8
9M
ar-9
0O
ct-90
May-9
1D
ec-9
1Ju
l-92
Feb-9
3Sep-9
3A
pr-9
4N
ov-9
4Ju
n-9
5Ja
n-9
6A
ug-9
6M
ar-9
7O
ct-97
May-9
8D
ec-9
8Ju
l-99
Feb-0
0Sep-0
0A
pr-0
1N
ov-0
1Ju
n-0
2Ja
n-0
3A
ug-0
3M
ar-0
4O
ct-04
May-0
5D
ec-0
5Ju
l-06
Feb-0
7Sep-0
7A
pr-0
8N
ov-0
8Ju
n-0
9Ja
n-1
0A
ug-1
0
30
35
40
45
50
55
60
65
70
Clear bands indicate recession.
Index
Economic Data
ISM Manufacturing Purchasing Managers Index
Your Logo6
Sources: Bureau of Economic Analysis, data through Dec. 31, 2010; Wall Street Journal survey taken Feb. 4-11, 2011.
1997-I
1997-III
1998-I
1998-III
1999-I
1999-III
2000-I
2000-III
2001-I
2001-III
2002-I
2002-III
2003-I
2003-III
2004-I
2004-III
2005-I
2005-III
2006-I
2006-III
2007-I
2007-III
2008-I
2008-III
2009-I
2009-III
2010-I
2010-III
2011-I(E
)
2011-III(E
)
-7
-5
-3
-1
1
3
5
7
9
Actual and Forecast
Q/Q
% c
hange(a
nnualiz
ed)
Economic Data
Gross Domestic Product (GDP) Growth
7
19
90
-IV
19
91
-IV
19
92
-IV
19
93
-IV
19
94
-IV
19
95
-IV
19
96
-IV
19
97
-IV
19
98
-IV
19
99
-IV
20
00
-IV
20
01
-IV
20
02
-IV
20
03
-IV
20
04
-IV
20
05
-IV
20
06
-IV
20
07
-IV
20
08
-IV
20
09
-IV
20
10
-IV
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
Gross private domestic investment
% c
ha
ng
e a
t a
nn
ua
l ra
te
19
90
-IV
19
91
-IV
19
92
-IV
19
93
-IV
19
94
-IV
19
95
-IV
19
96
-IV
19
97
-IV
19
98
-IV
19
99
-IV
20
00
-IV
20
01
-IV
20
02
-IV
20
03
-IV
20
04
-IV
20
05
-IV
20
06
-IV
20
07
-IV
20
08
-IV
20
09
-IV
20
10
-IV
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Government consumption expenditures and gross investment
% c
ha
ng
e a
t a
nn
ua
l ra
te
19
90
-I
19
91
-I
19
92
-I
19
93
-I
19
94
-I
19
95
-I
19
96
-I
19
97
-I
19
98
-I
19
99
-I
20
00
-I
20
01
-I
20
02
-I
20
03
-I
20
04
-I
20
05
-I
20
06
-I
20
07
-I
20
08
-I
20
09
-I
20
10
-I
-3.5
-2.5
-1.5
-0.5
0.5
1.5
2.5
3.5Net exports of goods and services
% c
ha
ng
e a
t a
nn
ua
l ra
te
Source: Bureau of Economic Analysis, data through Dec. 31, 2010
19
90
-IV
19
91
-IV
19
92
-IV
19
93
-IV
19
94
-IV
19
95
-IV
19
96
-IV
19
97
-IV
19
98
-IV
19
99
-IV
20
00
-IV
20
01
-IV
20
02
-IV
20
03
-IV
20
04
-IV
20
05
-IV
20
06
-IV
20
07
-IV
20
08
-IV
20
09
-IV
20
10
-IV
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0Personal consumption expenditures
% c
ha
ng
e a
t a
nn
ua
l ra
te
Economic Data
GDP = C + I + G + Net Exports
Contributions to Percent Change in Quarterly GDP
8
Source: Minutes of the Federal Open Market Committee meeting, Jan. 25-26, 2011.
Economic Data
Gross Domestic Product Growth Fed’s latest central tendency forecast
+2.5% to +2.8% longer
run
2002-I
2002-II
2002-III
2002-IV
2003-I
2003-II
2003-III
2003-IV
2004-I
2004-II
2004-III
2004-IV
2005-I
2005-II
2005-III
2005-IV
2006-I
2006-II
2006-III
2006-IV
2007-I
2007-II
2007-III
2007-IV
2008-I
2008-II
2008-III
2008-IV
2009-I
2009-II
2009-III
2009-IV
2010-I
2010-II
2010-III
2010-IV
2011
2012
2013
-8
-6
-4
-2
0
2
4
6
8
Annu
aliz
ed p
erce
nt c
hang
e (%
)
Accelerating rate of
recovery through 2013
9
Source: World Bank, Global Economic Prospects, published Jan. 12, 2011
Euro Area U.S. Japan China Brazil India-8
-6
-4
-2
0
2
4
6
8
10
12
2008
2009
2010(E)
2011(E)
2012(E)
GD
P G
row
th (
% C
ha
ng
e Y
/Y)
Economic Data
World GDP Growth Forecasts Healthy global recovery expected
10
Sources: National Bureau of Economic Research, Bureau of Labor Statistics; data as of Jan. 31, 2011.
Jan-9
5M
ay-9
5Sep-9
5Ja
n-9
6M
ay-9
6Sep-9
6Ja
n-9
7M
ay-9
7Sep-9
7Ja
n-9
8M
ay-9
8Sep-9
8Ja
n-9
9M
ay-9
9Sep-9
9Ja
n-0
0M
ay-0
0Sep-0
0Ja
n-0
1M
ay-0
1Sep-0
1Ja
n-0
2M
ay-0
2Sep-0
2Ja
n-0
3M
ay-0
3Sep-0
3Ja
n-0
4M
ay-0
4Sep-0
4Ja
n-0
5M
ay-0
5Sep-0
5Ja
n-0
6M
ay-0
6Sep-0
6Ja
n-0
7M
ay-0
7Sep-0
7Ja
n-0
8M
ay-0
8Sep-0
8Ja
n-0
9M
ay-0
9Sep-0
9Ja
n-1
0M
ay-1
0Sep-1
0Ja
n-1
1
-800
-700
-600
-500
-400
-300
-200
-100
0
100
200
300
400
500
600
Clear bands indicate recessions.
Mo
nth
ly C
ha
ng
e in
Pa
yro
lls (
00
0)
Economic Data
Improvement in jobs picture
11
Source: U.S. Department of Labor, data through the week of Jan. 29, 2011.
Weekly unemployment claims have tumbled following summer uptick.
Jan-8
9A
ug
-89
Mar-9
0S
ep-9
0A
pr-9
1N
ov-91
Jun
-92
Jan-9
3A
ug
-93
Mar-9
4O
ct-94
May-9
5D
ec-95
Jun
-96
Jan-9
7A
ug
-97
Mar-9
8O
ct-98
May-9
9D
ec-99
Jul-0
0Feb
-01
Sep
-01
Mar-0
2O
ct-02
May-0
3D
ec-03
Jul-0
4Feb
-05
Sep
-05
Ap
r-06
Nov-0
6Ju
n-0
7D
ec-07
Jul-0
8Feb
-09
Sep
-09
Ap
r-10
Nov-1
0
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
Mar-01
Clear bands indicate recession.
Weekly
Un
em
plo
ym
en
t C
laim
s 4
-week m
ovin
g a
vera
ge S
A
Economic Data
Weekly unemployment claims
12
Sources: National Bureau of Economic Research, Bureau of Labor Statistics; data as of Jan. 31, 2011.
Jan
-60
Se
p-6
1M
ay-6
3Ja
n-6
5S
ep
-66
Ma
y-68
Jan
-70
Se
p-7
1M
ay-7
3Ja
n-7
5S
ep
-76
Ma
y-78
Jan
-80
Se
p-8
1M
ay-8
3Ja
n-8
5S
ep
-86
Ma
y-88
Jan
-90
Se
p-9
1M
ay-9
3Ja
n-9
5S
ep
-96
Ma
y-98
Jan
-00
Se
p-0
1M
ay-0
3Ja
n-0
5S
ep
-06
Ma
y-08
Jan
-10
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
12.0
9.0%
Clear bands indicate recession.
Un
em
plo
ym
en
t R
ate
(%
)
Economic Data
Unemployment is a lagging indicator
13
Source: Bureau of Labor Statistics, data as of Dec. 31, 2010
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
Total nonfarm employed
Goods-producing
Service-providing
Government
Employment by category
(000
's)
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
0
5,000
10,000
15,000
20,000
25,000
Retail trade
Information
Financial activities
Professional and business services
Education and health services
Leisure and hospitality
Service-providing jobs by category
Economic Data
Where will the jobs come from?
14
Source: Bureau of Labor Statistics, data as of September 2010.
All Civilian Workers
Private Industry
Goods-producing industriesService-providing industries
State and local governments, all workers
Management, business and financial occupa-tions Teachers
Professional and related occupationsRegistered nurses
Educational servicesHospitalsConstruction, extraction, farming, fishing and
forestryInstallation, maintenance and repairHealth care and social assistance
ProductionTransportation and material moving
Office and administrative support occupationsSales and office occupations
Service occupations
All workers in informationAll workers in educational services
All workers in financial activitiesAll workers in transportation and warehousingAll workers in professional and business
servicesAll workers in manufacturingAll workers in wholesale tradeAll workers in health care and social assis-
tanceAll workers in retail tradeAll workers in leisure and hospitality
Private industry, union workersPrivate industry, non-union workers
0 10 20 30 40 50 60
Employee Compensation per Hour ($)
Economic Data
Where will the “good jobs” come from?
15
Sources: U.S. Census Bureau, data through Jan. 31, 2010; Mortgage Bankers Association’s housing starts forecast dated Jan. 14, 2011
Sep-0
6N
ov-0
6Ja
n-0
7M
ar-0
7M
ay-0
7Ju
l-07
Sep-0
7N
ov-0
7Ja
n-0
8M
ar-0
8M
ay-0
8Ju
l-08
Sep-0
8N
ov-0
8Ja
n-0
9M
ar-0
9M
ay-0
9Ju
l-09
Sep-0
9N
ov-0
9Ja
n-1
0M
ar-1
0M
ay-1
0Ju
l-10
Sep-1
0N
ov-1
0Ja
n-1
1
Q1 1
1 (E
)
Q3 1
1 (E
)
Q1 1
2 (E
)
Q3 1
2 (E
)
Q1 1
3 (E
)
300
500
700
900
1,100
1,300
1,500
1,700
1,900
(00
0's
)
Housing Starts (actual)
Housing Starts (estimated)
Economic Data
Housing starts gradually recovering
16
Source: U.S. Census Bureau. Actual population data through 2008; projections 2009-2020. Actual annual housing starts through 2010.
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Housing Starts
U.S. Population Growth (actual)
U.S. Population Growth (projected)
(000's
)
Economic Data
Housing starts - the big picture
17
Source: National Association of Realtors, data through November 20101 The affordability index measures whether a typical family could qualify for a mortgage loan on a typical home. A typical
home is defined as the national median-priced, existing single-family home as calculated by NAR. The typical family is defined as one earning the median family income as reported by the U.S. Bureau of the Census. The prevailing mortgage interest rate is the effective rate on loans closed on existing homes from the Federal Housing Finance Board. A value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20% down payment.
Jan-9
0
Jan-9
1
Jan-9
2
Jan-9
3
Jan-9
4
Jan-9
5
Jan-9
6
Jan-9
7
Jan-9
8
Jan-9
9
Jan-0
0
Jan-0
1
Jan-0
2
Jan-0
3
Jan-0
4
Jan-0
5
Jan-0
6
Jan-0
7
Jan-0
8
Jan-0
9
Jan-1
0
60
80
100
120
140
160
180
200
Housing Affordability Index1
Index
Economic Data
Housing affordability
18
Source: Bureau of Economic Analysis, data as of Nov. 30, 2010
The recession took vehicle sales far below the run-rate of recent years. It looks like a recovery is underway ... and has a long way to go.
Jan-9
0Ju
l-90
Jan-9
1Ju
l-91
Jan-9
2Ju
l-92
Jan-9
3Ju
l-93
Jan-9
4Ju
l-94
Jan-9
5Ju
l-95
Jan-9
6Ju
l-96
Jan-9
7Ju
l-97
Jan-9
8Ju
l-98
Jan-9
9Ju
l-99
Jan-0
0Ju
l-00
Jan-0
1Ju
l-01
Jan-0
2Ju
l-02
Jan-0
3Ju
l-03
Jan-0
4Ju
l-04
Jan-0
5Ju
l-05
Jan-0
6Ju
l-06
Jan-0
7Ju
l-07
Jan-0
8Ju
l-08
Jan-0
9Ju
l-09
0
5
10
15
20
25
Cars
Light trucks
Total cars & light trucks
New
Un
it S
ale
s se
aso
nally
ad
just
ed
an
nu
al ra
te (
SA
AR
) (m
illio
ns)
Economic Data
Vehicle sales … a long way to recover
19
1990Q
1
1990Q
4
1991Q
3
1992Q
2
1993Q
1
1993Q
4
1994Q
3
1995Q
2
1996Q
1
1996Q
4
1997Q
3
1998Q
2
1999Q
1
1999Q
4
2000Q
3
2001Q
2
2002Q
1
2002Q
4
2003Q
3
2004Q
2
2005Q
1
2005Q
4
2006Q
3
2007Q
2
2008Q
1
2008Q
4
2009Q
3
2010Q
2
0%
2%
4%
6%
8%
10%
12%
14%
16%
% o
f G
DP
(st
ack
ed
)
Source: Bureau of Economic Analysis, data as of Sept. 30, 2010.
Structures
Vehicles The recession cut construction plus vehicles combined share of GDP by about three percentage points, from 12% to 9%.
Economic Data
Construction and vehicles combined share of GDP
20
“I think the economy’s turning around. That guy looked as if he were about to give me
something.”
Economic Data
Consumer spending
21
Source: Bureau of Economic Analysis, data through Dec. 31, 2010
Jan-95Jun-95N
ov-95A
pr-96S
ep-96F
eb-97Jul-97D
ec-97M
ay-98O
ct-98M
ar-99A
ug-99Jan-00Jun-00N
ov-00A
pr-01S
ep-01F
eb-02Jul-02D
ec-02M
ay-03O
ct-03M
ar-04A
ug-04Jan-05Jun-05N
ov-05A
pr-06S
ep-06F
eb-07Jul-07D
ec-07M
ay-08O
ct-08M
ar-09A
ug-09Jan-10Jun-10N
ov-10
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
0
200
400
600
800
1,000
1,200
Disposable Personal Income (left scale)
Personal Outlays (left scale)
Personal Saving (right scale)
($ B
illio
ns S
AA
R) ($ B
illions SA
AR
)
December savings rate = 5.3%
Economic Data
Consumer income, spending and saving are up
22
Source: Bureau of Economic Analysis, data through Dec. 31, 2010
Rising hours worked, average wages and meager, but positive, payroll gains are driving employee compensation.
Jan-0
5M
ar-0
5M
ay-0
5Ju
l-05
Sep-0
5N
ov-0
5Ja
n-0
6M
ar-0
6M
ay-0
6Ju
l-06
Sep-0
6N
ov-0
6Ja
n-0
7M
ar-0
7M
ay-0
7Ju
l-07
Sep-0
7N
ov-0
7Ja
n-0
8M
ar-0
8M
ay-0
8Ju
l-08
Sep-0
8N
ov-0
8Ja
n-0
9M
ar-0
9M
ay-0
9Ju
l-09
Sep-0
9N
ov-0
9Ja
n-1
0M
ar-1
0M
ay-1
0Ju
l-10
Sep-1
0N
ov-1
0
6,000
6,500
7,000
7,500
8,000
8,500
0
500
1,000
1,500
2,000
2,500
3,000
Employee compensation (left scale)
Proprietors' income (right scale)
Rental income (right scale)
Interest and dividend income
(right scale)
Government transfer payments (right scale)
($ b
illio
ns
SA
AR
)($
billio
ns S
AA
R)
Economic Data
Consumer income by source
23
Sources: Federal Reserve, Bureau of Economics Analysis; data through Sept. 30, 2010
Aggregate household spendable cash equals 75% of annual disposable personal income … or, approximately nine months’ income.
Jan-9
5
Jul-9
5
Jan-9
6
Jul-9
6
Jan-9
7
Jul-9
7Ja
n-9
8
Jul-9
8
Jan-9
9
Jul-9
9
Jan-0
0
Jul-0
0
Jan-0
1Ju
l-01
Jan-0
2
Jul-0
2
Jan-0
3
Jul-0
3
Jan-0
4
Jul-0
4Ja
n-0
5
Jul-0
5
Jan-0
6
Jul-0
6
Jan-0
7
Jul-0
7
Jan-0
8Ju
l-08
Jan-0
9
Jul-0
9
Jan-1
0
Jul-1
0
60%
62%
64%
66%
68%
70%
72%
74%
76%
78%
80%M2 as a % of Disposable Personal Income
M2 = cash, checking, savings and retail money market funds
Economic Data
Consumer liquidity is at a record high
24Sources: Federal Reserve, Bureau of Economic Analysis; data through Sept. 30, 2010
“Declining household wealth has a relatively small implied negative impact on aggregate consumption expenditures.”
Federal Reserve Bank of Boston Paper No. 09-9, Nov. 13, 2009
19
60
Q1
19
61
Q2
19
62
Q3
19
63
Q4
19
65
Q1
19
66
Q2
19
67
Q3
19
68
Q4
19
70
Q1
19
71
Q2
19
72
Q3
19
73
Q4
19
75
Q1
19
76
Q2
19
77
Q3
19
78
Q4
19
80
Q1
19
81
Q2
19
82
Q3
19
83
Q4
19
85
Q1
19
86
Q2
19
87
Q3
19
88
Q4
19
90
Q1
19
91
Q2
19
92
Q3
19
93
Q4
19
95
Q1
19
96
Q2
19
97
Q3
19
98
Q4
20
00
Q1
20
01
Q2
20
02
Q3
20
03
Q4
20
05
Q1
20
06
Q2
20
07
Q3
20
08
Q4
20
10
Q1
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Household Net Worth ÷ Disposable Personal Income (left scale)
Disposable Personal Income (right scale)
Personal Consumption Expenditures (right scale)
Ratio
$ B
illions
Economic Data
Consumer Spending Versus Household Net Worth How significant is the negative wealth effect on consumer spending?
25
Source: Federal Reserve, data as of Sept 30, 2010; released Dec. 8, 2010
19
92
Q1
19
92
Q4
19
93
Q3
19
94
Q2
19
95
Q1
19
95
Q4
19
96
Q3
19
97
Q2
19
98
Q1
19
98
Q4
19
99
Q3
20
00
Q2
20
01
Q1
20
01
Q4
20
02
Q3
20
03
Q2
20
04
Q1
20
04
Q4
20
05
Q3
20
06
Q2
20
07
Q1
20
07
Q4
20
08
Q3
20
09
Q2
20
10
Q1
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
Household Debt
Disposable Personal In-come (DPI)
($ m
illio
ns)
1992Q1
1992Q4
1993Q3
1994Q2
1995Q1
1995Q4
1996Q3
1997Q2
1998Q1
1998Q4
1999Q3
2000Q2
2001Q1
2001Q4
2002Q3
2003Q2
2004Q1
2004Q4
2005Q3
2006Q2
2007Q1
2007Q4
2008Q3
2009Q2
2010Q1
0.5
1
1.5 Household Debt-to-DPI Ratio
Rati
o
Economic Data
Household Debt By this often-cited measure consumers are near-record leveraged
26
Source: Federal Reserve, data as of Sept. 30, 2010; released Dec. 17, 2010
19
80
Q1
19
80
Q4
19
81
Q3
19
82
Q2
19
83
Q1
19
83
Q4
19
84
Q3
19
85
Q2
19
86
Q1
19
86
Q4
19
87
Q3
19
88
Q2
19
89
Q1
19
89
Q4
19
90
Q3
19
91
Q2
19
92
Q1
19
92
Q4
19
93
Q3
19
94
Q2
19
95
Q1
19
95
Q4
19
96
Q3
19
97
Q2
19
98
Q1
19
98
Q4
19
99
Q3
20
00
Q2
20
01
Q1
20
01
Q4
20
02
Q3
20
03
Q2
20
04
Q1
20
04
Q4
20
05
Q3
20
06
Q2
20
07
Q1
20
07
Q4
20
08
Q3
20
09
Q2
20
10
Q1
14
16
18
20
Fin
an
cia
l ob
liga
tio
ns
as
a %
o
f d
isp
osa
ble
pe
rso
na
l in
com
e (
DPI
)
The financial obligations ratio consists of estimated required payments on outstanding mortgage and consumer debt plus automobile lease payments, rental payments on tenant-occupied property, homeowners’ insurance and property tax payments divided by disposable personal income.
Economic Data
Consumers’ Financial Obligations Ratio Major improvement in consumers’ ability to carry their debt burden
27
Because income and spending are skewed to the upper brackets, the recovery in spending growth rides significantly on spending behavior in the higher brackets.
Lowest 20 percent
($10,608)
Second 20 percent
($27,843)
Third 20 per-cent ($46,936)
Fourth 20 percent
($72,628)
Highest 20 percent
($150,692)
0%
10%
20%
30%
40%
50%
60%
Percent of Total Income After Tax
Percent of Total Consumer Spending
Income Quintiles (average income in parentheses)
Sources: Bureau of Labor Statistics. Consumer Expenditure Survey, 2008, table 45Note: In the NBER’s Working Paper 15408 published October 2009, the top income decile (10%) accounted for 50% of 2007 total income, using a definition of income somewhat broader than the BLS’s.
Economic Data
Personal income and spending by quintile Most consumers don’t appear to be tapped out
28
1 CAGR: Compound annual growth rateSource: U.S. Census Bureau; data as of Jan. 31, 2011
Jan-00A
pr-00Jul-00O
ct-00Jan-01A
pr-01Jul-01O
ct-01Jan-02A
pr-02Jul-02O
ct-02Jan-03A
pr-03Jul-03O
ct-03Jan-04A
pr-04Jul-04O
ct-04Jan-05A
pr-05Jul-05O
ct-05Jan-06A
pr-06Jul-06O
ct-06Jan-07A
pr-07Jul-07O
ct-07Jan-08A
pr-08Jul-08O
ct-08Jan-09A
pr-09Jul-09O
ct-09Jan-10A
pr-10Jul-10O
ct-10Jan-11
240,000
260,000
280,000
300,000
320,000
340,000
360,000
380,000
400,000
Monthly Retail Sales
($ m
illio
ns)
Economic Data
Consumers’ Financial Obligations Ratio Major improvement in consumers’ ability to carry their debt burden
CAGR1 3/09-1/11 = 7.1%
29
Sources: 1909 to 2004: U.S. Census Bureau, 2007 Statistical Abstract; 2005 to 2007: U.S. Department of Health and Human Services, National Center for Health Statistics; 2008: Bureau of Labor Statistics
19
09
19
11
19
13
19
15
19
17
19
19
19
21
19
23
19
25
19
27
19
29
19
31
19
33
19
35
19
37
19
39
19
41
19
43
19
45
19
47
19
49
19
51
19
53
19
55
19
57
19
59
19
61
19
63
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Live B
irth
s (0
00
)
Birth Wave 1(1946–1976)117 million
Birth Wave 2 (echo boomers)
(1977–2008)125 million
Economic Data
GDP Growth Potential = ∆ Productivity + ∆ Labor Force Labor force to grow 0.8% per year through 2016
U.S. Live Births 1909–2008
30
Source: United Nations, World Population Prospects: The 2008 Revision, constant-fertility scenario
2010
2015
2020
2025
2030
2035
2040
2045
2050
0.6
0.8
1.0
1.2
1.4
1.6
1.8
AustraliaBrazilCanada
China
India
U.S.
Western Europe
Japan
Population Aged 15–64
Index
Economic Data
Labor Force Growth — Forecasts
311 From the minutes of the Federal Open Market Committee meeting, Nov. 2-3, 2010; released Nov. 23, 2010Source: Bureau of Labor Statistics; data as of Jan. 31, 2011.
Federal Reserve’s personal consumption expenditures (PCE) inflation forecast1
Economic Data
Benign Inflation Expected to Continue
Jan-70M
ay-71Sep-72Jan-74M
ay-75Sep-76Jan-78M
ay-79Sep-80Jan-82M
ay-83Sep-84Jan-86M
ay-87Sep-88Jan-90M
ay-91Sep-92Jan-94M
ay-95Sep-96Jan-98M
ay-99Sep-00Jan-02M
ay-03Sep-04Jan-06M
ay-07Sep-08Jan-10
-4
-2
0
2
4
6
8
10
12
14
16
+1.7%+0.9%
CPI and Core CPI
Perc
ent C
hang
e Y/
Y
2002-I
2002-III
2003-I
2003-III
2004-I
2004-III
2005-I
2005-III
2006-I
2006-III
2007-I
2007-III
2008-I
2008-III
2009-I
2009-III
2010-I
2010-III
-6
-4
-2
0
2
4
6
Annualize
d p
erc
ent
change (
%)
32
Food and energy constitute 13% of total personal consumption expenditures (PCE) ... substantially less than housing and health care.
Source: Bureau of Economic Analysis, data through Dec. 31, 2010
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
0%
5%
10%
15%
20%
25%
Food + Energy
Motor vehicles
Clothing and footwear
Housing and utilities
Health care
Personal Consumption Expenditures by Category
% o
f Tota
l PC
E
Economic Data
What about food and energy inflation?
331 Personal consumption expendituresSource: Bureau of Economic Analysis, data through Dec. 31, 2010
198
01
98
11
98
21
98
31
98
41
98
51
98
61
98
71
98
81
98
91
99
01
99
11
99
21
99
31
99
41
99
51
99
61
99
71
99
81
99
92
00
02
00
12
00
22
00
32
00
42
00
52
00
62
00
72
00
82
00
92
01
0
0
100
200
300
400
500
Motor vehicles
Food
Clothing and footwear
Fuel
Housing and utilities
Health care
Price Indexes for PCE1 Categories
Ind
ex
(198
0 =
100
)
Economic Data
What about food and energy inflation?
34
Source: Federal Reserve, data as of Dec. 31, 2010
The Federal Reserve has engineered an explosion in the Monetary Base — reserves that commercial banks keep on deposit at the Fed — in an effort to restore confidence in banks and stimulate the economy.
M2 — which is a function of both supply and demand for funds — has not surged.
Jan-9
0A
ug-9
0M
ar-9
1O
ct-91
May-9
2D
ec-9
2Ju
l-93
Feb-9
4Sep-9
4A
pr-9
5N
ov-9
5Ju
n-9
6Ja
n-9
7A
ug-9
7M
ar-9
8O
ct-98
May-9
9D
ec-9
9Ju
l-00
Feb-0
1Sep-0
1A
pr-0
2N
ov-0
2Ju
n-0
3Ja
n-0
4A
ug-0
4M
ar-0
5O
ct-05
May-0
6D
ec-0
6Ju
l-07
Feb-0
8Sep-0
8A
pr-0
9N
ov-0
9Ju
n-1
0
100
1,000
10,000
Monetary Base
M2 Money Supply
($ b
illio
ns)
Economic Data
Money Supply versus Monetary Base
35
1 Source: Federal Open Market Committee’s statement released Jan. 26, 2011Sources: Bureau of Labor Statistics, Federal Reserve; data as of Dec. 31, 2010
“Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.” 1
Jan-7
0M
ar-7
1M
ay-7
2Ju
l-73
Sep-7
4N
ov-7
5Ja
n-7
7M
ar-7
8M
ay-7
9Ju
l-80
Sep-8
1N
ov-8
2Ja
n-8
4M
ar-8
5M
ay-8
6Ju
l-87
Sep-8
8N
ov-8
9Ja
n-9
1M
ar-9
2M
ay-9
3Ju
l-94
Sep-9
5N
ov-9
6Ja
n-9
8M
ar-9
9M
ay-0
0Ju
l-01
Sep-0
2N
ov-0
3Ja
n-0
5M
ar-0
6M
ay-0
7Ju
l-08
Sep-0
9N
ov-1
0
-4
-2
0
2
4
6
8
10
12
14
16
30
40
50
60
70
80
90
100
Inflation(left scale)
Capacity Utilization(right scale)
CPI Y/Y
Ch
an
ge (
%)
Cap
acity
Utiliza
tion
(%)
Economic Data
Inflation versus capacity use
36
1 Source: WikipediaSources: Bureau of Labor Statistics, Federal Reserve; data as of Dec. 31, 2010
The monetarist explanation of inflation operates through the Quantity Theory of Money, which states MV = PT. M is money supply, V is velocity of circulation, P is price level and T is transactions or output. Because monetarists assume that V and T are determined, in the long run, by real variables such as the productive capacity of the economy, there is a direct relationship between the growth of the money supply and inflation.1Ja
n-6
3
Jan-6
6
Jan-6
9
Jan-7
2
Jan-7
5
Jan-7
8
Jan-8
1
Jan-8
4
Jan-8
7
Jan-9
0
Jan-9
3
Jan-9
6
Jan-9
9
Jan-0
2
Jan-0
5
Jan-0
8
Jan-1
1
Jan-1
4
-2
0
2
4
6
8
10
12
14
16
M2 Growth(lagged 3 years)
CPI
Y/Y
Perc
ent
Change
Economic Data
Inflation versus money supply growth
37
The difference between the Treasury Inflation (TIPS) yield and the U.S. Treasury bond yield of the same maturity provides a market–based theoretical measure of investors’ expected rate of annual inflation over the period to maturity.
Investors are not anticipating a surge in inflation.
Source: Copyright 2011© B0596A. Ned Davis Research, Inc. All rights reserved. Data as of Jan. 27, 2011. The data and analysis shown are provided “as is” and without warranty of any kind, either expressed or implied. Ned Davis Research, Inc. (NDR), any NDR affiliates or employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on this information contained.
Daily Data 7/27/2004 - 1/27/2011
(B0596A)
5-Year Treasury Yield minus Real 5-Year Treasury Yield 1/27/2011 = 1.9%
-2
-1
0
1
2
3
-2
-1
0
1
2
3
7-Year Treasury Yield minus Real 7-Year Treasury Yield 1/27/2011 = 2.1%
-1
0
1
2
3
-1
0
1
2
3
10-Year Treasury Yield minus Real 10-Year Treasury Yield 1/27/2011 = 2.3%
0.4
0.8
1.2
1.6
2.0
2.4
2.8
0.4
0.8
1.2
1.6
2.0
2.4
2.8
20-Year Treasury Yield minus Real 20-Year Treasury Yield 1/27/2011 = 2.5%
( )
30-Year Treasury Yield minus Real 30-Year Treasury Yield 1/27/2011 = 2.5%
( )
0.9
1.2
1.5
1.8
2.1
2.4
2.7
3.0
0.9
1.2
1.5
1.8
2.1
2.4
2.7
3.0
S N J 2005
M M J S N J 2006
M M J S N J 2007
M M J S N J 2008
M M J S N J 2009
M M J S N J 2010
M M J S N J 2011
TIPS Breakeven Curve (Implied Inflation)
Copyright 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
Economic Data
“TIPS Spread” implied inflation expectations
38
“You’re in luck, in a way. Now is the time to be sick — while Medicare still has some money.”
Economic Data
Federal budget deficit
39
1942
1945
1948
1951
1954
1957
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011(E
)
2014(E
)
2017(E
)
2020(E
)
-14%
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
Surp
lus/
Defici
t %
of
GD
P
Sources: Actual: Bureau of Economic Analysis through Dec. 31, 2010; Projected: Congressional Budget Office (CBO), Budget and Economic Outlook: An Update, January 2011, Baseline Projection
Projected(dotted line)
2010 Deficit = $1.3 trillion
2011 Deficit (E) = $1.5 trillion
Economic Data
Actual and projected federal budget deficit Baseline scenario
40
Sources: U.S. Office of Management and Budget data through Dec. 31, 2010; Congressional Budget Office’s (CBO) Budget and Economic Outlook, January 2011, Baseline Projection
1940
1943
1946
1949
1952
1955
1958
1961
1964
1967
1970
1973
1976
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
201
201
201
202
0
20
40
60
80
100
120
Perc
ent
(%)
Projected(dotted line)
Economic Data
Actual and projected federal debt as a percent of GDP Baseline scenario
41
Source: Congressional Budget Office’s (CBO) Budget and Economic Outlook, January 2011; baseline projection
“The projected deficits over the latter part of the coming decade are much smaller relative to GDP than is the current deficit, mostly because, under (the baseline) assumptions and with a continuing economic expansion, revenues as a share of GDP are projected to rise steadily — from about 15% of GDP in 2011 to 21% by 2021.
As a result, the baseline projections understate the budget deficits that would arise if many policies currently in place were extended, rather than allowed to expire as scheduled under current law. For example, if most of the provisions in the 2010 tax act that were originally enacted in 2001, 2003 and 2009 or that modified estate and gift taxation were extended (rather than allowed to expire on Dec. 31, 2012), and the alternative minimum tax was indexed for inflation, annual revenues would average about 18% of GDP through 2021 (which is equal to their 40-year average), rather than the 19.9% shown in CBO’s baseline projections. If Medicare’s payment rates for physicians’ services were held constant as well, then deficits from 2012 through 2021 would average about 6% of GDP, compared with 3.6% in the baseline. By 2021, the budget deficit would be about double the baseline projection, and with cumulative deficits totaling nearly $12 trillion over the 2012–2021 period, debt held by the public would reach 97% of GDP, the highest level since 1946.” (underline added)
Economic Data
Projected federal debt as a percent of GDP Note the CBO’s important qualifying explanation
42
Sources: Congressional Budget Office (CBO), The Long-Term Budget Outlook; June 2010. Alternative fiscal scenario.
Medicare and Medicaid
Social Security
Other Federal Noninterest Spending
19
62
19
66
19
70
19
74
19
78
19
82
19
86
19
90
19
94
19
98
20
02
20
06
20
10
20
14
20
18
20
22
20
26
20
30
20
34
20
38
20
42
20
46
20
50
20
54
20
58
20
62
20
66
20
70
20
74
20
78
20
82
0
10
20
30
40
50
60
70
80
90
Other Federal Spend-ing
Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1Series1
Social SecuritySeries2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2Series2
Medicare and Med-icaidSeries3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3Series3
Interest
Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4Series4
% o
f G
DP
Actual Projected
Economic Data
Congressional Budget Office long-term spending projections
43
“This stock market situation — what are the military options?”
Market Data
44
1 Estimated 2011 and 2012 bottom-up S&P 500 earnings per share (left scale): for 2011, $96.33; for 2012, $109.98; as of Jan. 14, 2011.
Sources: Thomson Baseline; data through Jan 27, 2011. Reuters and Thomson Financial survey of consensus estimates.
20121
20111
Market Data
S&P 500 — earnings drive stock prices, estimates rising
45
Source: Copyright© Thechartstore.com, with permission; monthly data through Dec. 31, 2010
Market Data
S&P 500 — 10-year total returns
46
5
10
15
20
25
30
S&
P 5
00
P/E
Rati
o
Sources: Standard & Poor’s Corporation, BLS; data through Nov. 30, 2010
Mar-
48
Mar-
51
Mar-
54
Mar-
57
Mar-
60
Mar-
63
Mar-
66
Mar-
69
Mar-
72
Mar-
75
Mar-
78
Mar-
81
Mar-
84
Mar-
87
Mar-
90
Mar-
93
Mar-
96
Mar-
99
Mar-
02
Mar-
05
Mar-
08
-6.0
-3.0
0.0
3.0
6.0
9.0
12.0
15.0
CPI Y/Y
(%
)
`
Market Data
S&P 500 P/E ratio versus inflation
47
1 The NDR Total Market Value proxies the market value of all U.S.-domiciled companies traded on U.S. exchanges.Source: Copyright 2010© S423. Ned Davis Research, Inc. All rights reserved. Data as of Dec. 31, 2010. The data and analysis shown are provided “as is” and without warranty of any kind, either expressed or implied. Ned Davis Research, Inc. (NDR), any NDR affiliates or employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on this information contained.
Money market assets compared to total stock market value1
(S423)
Monthly Data 10/31/1980 - 12/31/2010 (Log Scale)
NDR Total Market Value Gain/Annum When:
Money Market Fund Assets/ Gain/ % NDR Total Market Value: Annum of Time
* Above 10.80 11. 2 90. 0
10.80 and Below -12. 5 10. 0
NDR Total Market Value(Billions, Scale Right)
12/31/2010 = 14629.9
17102.0518082.49
1055.64
9715.02 9322.61 8289.32
11571351157618392146250529233411398146455421632673838615
10054 11733 13692 15978 18646
Total Money Market Fund Assets(Scale Left In Billions)12/31/2010 = $2798
276.66
613.84
2382.00
3906.35
196.81
570.10
1862.00
Source: Investment Company Institute
101 123 150 183 223 272 331 404 492 599 730 889
1083132016081959238629073542
Money Market Fund Assets / NDR Total Market Value ( ) 12/31/2010 = 19.1%
Linear Regression ( ) High Liquidity
Low Liquidity
24.12
19.64
23.91
47.13
9.299.96
12.79
7.4 8.5 9.8
11.212.814.716.919.322.225.429.133.438.343.9
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
NDR Total Market Value vs Money Market Fund Assets / NDR Total Market Value
Copyright 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
Market Data
Still-high cash stash versus stocks
48
1 Average forecasts from the Wall Street Journal’s survey of 56 economists taken Jan. 7-11, 2011
Ma
y-10
Jun
-10
Jul-1
0
Au
g-1
0
Se
p-1
0
Oct-1
0
No
v-10
De
c-10
Jan
-11
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Forecast Date
Fore
cast
10
-Ye
ar
Tre
asu
ry B
on
d Y
ield
(%
)
Forecast for year-end 2011
Market Data
10-Year U.S. Treasury bond yield forecasts Economists1 have been raising their bond yield forecasts
49Source: Copyright© Thechartstore.com, with permission; monthly data through Dec. 31, 2010
Market Data
10-Year U.S. Treasury bond yield Viewed from the long-term perspective, bond yields could remain low
50
Sources: Standard & Poor’s, Baseline; data as of Dec. 14, 2010
Rising bond yields have accompanied bull markets.
Jan-6
3
Jan-6
6
Jan-6
9
Jan-7
2
Jan-7
5
Jan-7
8
Jan-8
1
Jan-8
4
Jan-8
7
Jan-9
0
Jan-9
3
Jan-9
6
Jan-9
9
Jan-0
2
Jan-0
5
Jan-0
8
Jan-1
1
Jan-1
4
-2
0
2
4
6
8
10
12
14
16
M2 Growth(lagged 3 years)
CPI
Y/Y
Perc
en
t C
han
ge
Market Data
Stock market versus U.S. Treasury bond yields Can stocks rally as bond yields rise?
51
Weekly Data 1/05/2007 - 1/21/2011
(B303)
Total Bond 1/21/2011 = -2165 In $ Millions
Mean = 3786.344 -16000-14000-12000-10000
-8000 -6000 -4000 -2000
0 2000400060008000
10000 12000 14000 16000
-16000-14000-12000-10000
-8000 -6000 -4000 -2000
0 2000400060008000
10000 12000 14000 16000
Taxable Bond 1/21/2011 = 3584
Mean = 3347.613 -12000-10000
-8000 -6000 -4000 -2000
0 2000400060008000
10000 12000
-12000-10000
-8000 -6000 -4000 -2000
0 2000400060008000
10000 12000
Municipal Bond 1/21/2011 = -5748
Mean = 438.731
Source: Investment Company Insititute, www.ici.org
-5000
-4000
-3000
-2000
-1000
0
1000
2000
3000
-5000
-4000
-3000
-2000
-1000
0
1000
2000
3000
F M A M J J A S O N D J 2008
F M A M J J A S O N D J 2009
F M A M J J A S O N D J 2010
F M A M J J A S O N D J 2011
Estimated Net Inflows to Bond Mutual Funds
Copyright 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
Source: Copyright 2011© B303. Ned Davis Research, Inc. All rights reserved. Data as of Jan. 21, 2011. The data and analysis shown are provided “as is” and without warranty of any kind, either expressed or implied. Ned Davis Research, Inc. (NDR), any NDR affiliates or employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on this information contained.
Far more muni selling recently than the surge associated with the 2008 auction-rate fiasco.
Market Data
Municipal bonds A tidal wave of selling
52
Weekly Data 1/08/1965 - 1/21/2011 (Log Scale)
(B470)
20-Year Treasury Yield 1/21/2011 = 4.32%
( )
20-Year Municipal Bond Yield 1/21/2011 = 5.41%
( )
3.0
3.4
3.9
4.4
4.9
5.6
6.3
7.2
8.1
9.2
10.4
11.8
13.3
15.1
3.0
3.4
3.9
4.4
4.9
5.6
6.3
7.2
8.1
9.2
10.4
11.8
13.3
15.1
Munis Overvalued
Munis Undervalued Muni Yields as a % of Treasury Yields
Mean = 86.6%
1/21/2011 = 125.2%
708090
100 110 120 130 140 150 160 170
708090
100 110 120 130 140 150 160 170
Implied Tax Rate = 1 - Muni Yield Treasury Yield
If in the 35% tax rate, favor Munis on a yield basisIf in the 15% tax rate, favor Munis on a yield basis
Current Implied Rate = -25.2%
Munis Undervalued
-78.0 -70.2 -62.4 -54.6 -46.8 -39.0 -31.2 -23.4 -15.6
-7.80.0 7.8
15.623.431.2
-78.0 -70.2 -62.4 -54.6 -46.8 -39.0 -31.2 -23.4 -15.6
-7.80.0 7.8
15.623.431.2
19
66
19
67
19
68
19
69
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
Munis, Treasurys and the Implied Tax Rate
Copyright 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
Source: Copyright 2011© B470. Ned Davis Research, Inc. All rights reserved. Data as of Jan. 21, 2011. The data and analysis shown are provided “as is” and without warranty of any kind, either expressed or implied. Ned Davis Research, Inc. (NDR), any NDR affiliates or employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on this information contained.
20-year muni bond yield is approaching the peak associated with the 2008 auction-rate fiasco.
Market Data
Municipal bonds Yields have surged with panic selling
53
Source: Copyright 2002 © Moody’s Investors Services, Inc. B470. Special Comment, November 2002, page 4.
Market Data
Municipal bonds Moody’s description of the “general obligation” pledge
54
Source: Copyright 2011© B158A. Ned Davis Research, Inc. All rights reserved. Data as of Jan. 27, 2011. The data and analysis shown are provided “as is” and without warranty of any kind, either expressed or implied. Ned Davis Research, Inc. (NDR), any NDR affiliates or employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on this information contained.
Investment-grade corporate yields 4%.
High yield bonds yield 7%.
Emerging markets yield 6%.
Commercial mortgage backed securities (CMBS) yield 4%.
Daily Data 8/01/2007 - 1/27/2011
(B158A)
% Investment Grade Corporates ( ) Mortgage-Backed Securities ( ) Treasurys ( ) Agencies ( )
2
3
4
5
6
7
8
2
3
4
5
6
7
8
High Yield ( ) Emerging Markets ( ) Commercial MBS ( ) Asset-Backed Securities ( )
Announcement References1 - QE I $100b Agy, $500b MBS 2 - Evaluating Tsy Purchases3 - Prepared to Purchase Tsys 4 - Committed to Buy
$300b Tsy, $200b Agy, $1.25t MBS 5 - QE 2 Begins
All data sources: Barclays Capital2 3 4 5 6 7 8 9
10111213141516171819202122
2 3 4 5 6 7 8 9
10111213141516171819202122
A S O N D J 2008
F M A M J J A S O N D J 2009
F M A M J J A S O N D J 2010
F M A M J J A S O N D J 2011
1 2 3 4 5
Yields From Selected U.S. Sectors
Copyright 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
Market Data
Agency, mortgage-backed and corporate bond yields Up from recent lows
55
1 See Broad Dollar Index definition, next pageSource: Copyright© Thechartstore.com, with permission, monthly data through Dec. 31, 2010
Broad Dollar Index1
Ind
ex
Market Data
U.S. Dollar
56
Source: Copyright© Thechartstore.com, with permission; data as of Dec. 31, 2010
Market Data
U.S. Dollar
57
Source: Copyright© Ned Davis Research, Inc. B0705B. Data as of Dec. 31, 2010. The data and analysis shown are provided “as is” and without warranty of any kind, either expressed or implied. Ned Davis Research, Inc. (NDR), any NDR affiliates or employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on this information contained.
Commodities have historically provided long-term returns comparable to stocks.
Commodities have historically outperformed during periods of rising inflation.
(B0705B)
Quarterly Data 3/31/1970 - 12/31/2010 (Log Scale)
Standard & Poor's 500 Total Return Index
( )
Barclays Capital Long-Term Treasury Bond Total Return Index
( )
S&P GSCI Total Return Index ( )
Stocks Tsy SP GSCICPI Y/Y Gain/ Gain/ Gain/ % Mode: Annum Annum Annum of Time
High Rising 7. 2 4. 5 18. 1 13. 5
High Falling 14. 2 11. 9 -1. 0 13. 5
Low Rising 7. 3 4. 8 23. 7 30. 1
* Low Falling 11. 5 11. 6 2. 1 42. 9
3/3
1/1
97
0 =
10
0
7090
116 150 193 249 321 414 534 688 887
114414741900244931574070524667628716
7090
116 150 193 249 321 414 534 688 887
114414741900244931574070524667628716
12/31/2010 = 1.5%
High Inflation
Low Inflation -10 1 2 3 4 5 6 7 8 9
1011121314
-10 1 2 3 4 5 6 7 8 9
1011121314
1970 1975 1980 1985 1990 1995 2000 2005 2010
Stock, Bond, and Commodity Total Returns Under Various Price Direction Environments
Consumer Price Index (Year-to-Year Change) Copyright 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
. www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at
Market Data
Commodities, stocks and inflation
58
Source: Baseline; data as of Dec. 31, 2010
Sep
-99
Jan
-00
May-0
0S
ep
-00
Jan
-01
May-0
1S
ep
-01
Jan
-02
May-0
2S
ep
-02
Jan
-03
May-0
3S
ep
-03
Jan
-04
May-0
4S
ep
-04
Jan
-05
May-0
5S
ep
-05
Jan
-06
May-0
6S
ep
-06
Jan
-07
May-0
7S
ep
-07
Jan
-08
May-0
8S
ep
-08
Jan
-09
May-0
9S
ep
-09
Jan
-10
May-1
0S
ep
-10
Jan
-11
60
70
80
90
100
110
120
130
140
200
400
600
800
1,000
1,200
1,400
1,600
$USD
Gold
$U
SD
In
dex
Gold
($/o
z)
Market Data
Gold
59
Source: U.S. Department of Energy, Energy Information Agency, International Energy Outlook, May 2010, reference case1 BRIC = Brazil, Russia, India and China
2005 2006 2007 2015(E) 2020(E) 2025(E) 2030(E) 2035(E)0
20
40
60
80
100
120
BRIC1 BRIC BRIC BRIC BRIC BRIC BRIC BRIC
United States United States /a United States /a United States /a United States /a
United States /a United States /a
United States /a OECD Europe OECD Europe OECD Europe OECD Europe OECD Europe
OECD Europe OECD Europe
OECD Europe
Rest of WorldRest of WorldRest of WorldRest of WorldRest of WorldRest of World
Rest of WorldRest of World
Mill
ion B
arr
els
per
Day
Actual Estimated
Market Data
Crude Oil Rising post-recession demand forecast
60
Source: Baseline; data as of Dec. 31, 2010
Sep-9
9D
ec-9
9M
ar-0
0Ju
n-0
0Sep-0
0D
ec-0
0M
ar-0
1Ju
n-0
1Sep-0
1D
ec-0
1M
ar-0
2Ju
n-0
2Sep-0
2D
ec-0
2M
ar-0
3Ju
n-0
3Sep-0
3D
ec-0
3M
ar-0
4Ju
n-0
4Sep-0
4D
ec-0
4M
ar-0
5Ju
n-0
5Sep-0
5D
ec-0
5M
ar-0
6Ju
n-0
6Sep-0
6D
ec-0
6M
ar-0
7Ju
n-0
7Sep-0
7D
ec-0
7M
ar-0
8Ju
n-0
8Sep-0
8D
ec-0
8M
ar-0
9Ju
n-0
9Sep-0
9D
ec-0
9M
ar-1
0Ju
n-1
0Sep-1
0D
ec-1
0
60
70
80
90
100
110
120
130
140
10
30
50
70
90
110
130
150
$USD Crude Oil
$U
SD
Index
Cru
de O
il ($/b
bl)
Market Data
Crude Oil Historically inversely correlated to the $USD; reflecting rising global demand outlook
61
Economic data:• Most economists believe that global economic recovery will
gain momentum, including in the U.S. “New normal” isn’t playing out as advertised.
• The unemployment rate might trail economic recovery.• Consumers’ savings and liquidity have risen substantially.• The “negative wealth effect” may be overestimated.• Significant skew in income, spending is relevant to economic
recovery.• The U.S. economy is positioned to continue its +2½% to +3%
long-term trend rate of growth.• Inflation is subdued and has the potential to remain so for at
least a few years.• The CBO’s “baseline projection” projects massive budget
deficits lasting at least two years.
Market data:• Still significant cash on the sidelines.• Stocks are attractively valued on estimated earnings.• Municipal bonds may be presenting a buying opportunity.• The U.S. dollar is holding up.• Commodities have historically provided equity-like returns.• Gold and crude oil both rising.
“It’s just a correction.The fundamentals are still
good.”
Conclusions
62
“Winning is crucial to my retirement plans.”
Investment Strategy
63
1 Published Dec. 21, 20092 Media3 These are S&P 500 sector returns for calendar 2010. Past performance is not a guarantee of future results.For Illustrative purposes only.
Consumer Discretionary
Consumer Staples Energy Financials
Health Care Industrials
Information Technology Materials
Telecommunication Services Utilities
Blackrock - + + + -
U.S. Trust - - + - + + + -
Putnam - + + -
Morgan Stanley +2 - + + -Wells Capital Management + - + - + + + -
Prudential - + - + + + -
BofA Merrill - + + - + -
Barclays - - + + +
Goldman Sachs - + - + + - -
JPMorgan - + + + -
Citigroup + + - + -
ISI Group - + + -
Net (+/-) -2 -4 +4 0 -1 +7 +8 +5 -2 -8
Actual 2010 Sector Returns3
(Rank)
+26%
(1)
+11%
(7)
+18%
(4)
+11%
(6)
+1%
(10)
+24%
(2)
+9%
(8)
+20%
(3)
+12%
(5)
+1%
(9)
Big miss Big mistake
Good call
Good call
Good call
Investment Strategy
Wall Street’s Call for 2010Barron’s 2010 Forecast1 Survey of 12 stock market strategists’ sector picks and pans for 2010
64
1 Published Dec. 20, 20102 Oil services3 RailroadsFor Illustrative purposes only.
Consumer Discretionary
Consumer Staples Energy Financials
Health Care Industrials
Information Technology Materials
Telecommunication Services Utilities
Oppenheimer + + + - -
JP Morgan + + -
BofA Merrill + - + + + - -
Putnam - + - - + +
Credit Suisse - + - + - +
Morgan Stanley +2 +3 -
Barclays Capital - + - + + -
Wells Capital - + - + + + -
Goldman Sachs - + + - + -
UBS - + + - + + - -
Net (+/-)l -1 -1 +6 0 -5 +6 +8 0 -2 -6
Barron’s 2011 Forecast1 Survey of 10 stock market strategists’ sector picks and pans for 2011
Investment Strategy
Wall Street’s Call for 2011
65
“Your mother called to remind you to diversify.”
Investment Strategy
Modern Portfolio Theory
66
Asset allocation and diversification do not guarantee a profit or eliminate the risk of loss.Source: Riskglossary.com
Modern portfolio theory was introduced by Harry Markowitz with his paper “Portfolio Selection,” which appeared in the 1952 Journal of Finance.
Thirty-eight years later, he shared a Nobel Prize with Merton Miller and William Sharpe for what has become a broad theory for portfolio selection.
Modern Portfolio Theory
Diversify
Optimize
Rebalance
Investment Strategy
Modern Portfolio Theory = Asset Allocation
67
This hypothetical portfolio is approximately 50% stocks, 33% bonds, 8% real estate and 8% commodities. For a detailed analysis of a similar approach to asset allocation, refer to 7Twelve – A Diversified Investment Portfolio With A Plan, ©2010, John Wiley & Sons, Inc. Author Craig L. Israelsen is an associate professor at Brigham Young University and a contributor to Financial Planning, Journal of Indexes, Bank Investment Consultant Magazine, Financial Advisor and other publications.
Large-cap U.S. Stocks (S&P 500 Mo Reinv IX)
Mid-cap U.S. Stocks (S&P Midcap 400 TR IX)
Small-cap U.S. Stocks (Russell 2000 TR IX)
Non-U.S. Developed Stocks (MSCI EAFE ND IX)
Non-U.S. Emerging Stocks (MSCI Emerging Mkt ND IX)
Natural Resources Stocks (S&P NA Nat Res Sec TR IX)
U.S. Bonds (Barclays US Agg TRIX)
ML HY Master II
Non-U.S. Bonds (Citi X-US W Gv Bd TR IX)
Inflation Protected Bonds (Barclays US TIPS TRIX)
U.S. Real Estate (DJ US SEL REIT TR IX)
Commodities (DB Liquid Comdty IX ER)
Real Estate
Com
mod
ities
Bonds Stocks
Investment Strategy
Asset Allocation — An Example Let’s construct a global balanced portfolio using 12 asset classes …
68
Past performance is not a guarantee of future results. An investment cannot be made directly in an index.1 This hypothetical portfolio is composed of the 12 indexes referred to on the previous page, rebalanced to 1/12th of the
portfolio at the end of each year.2 This hypothetical portfolio is composed of the S&P 500 and Barclays US Aggregate Bond indexes referred to on the
previous page, rebalanced to 60%/40%, respectively, at the end of each year.3 Compound annual growth rate.
CAGR3
= +8.4%
CAGR3
= +3.4%
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
50
100
150
200
250
Ind
ex (
12
/31
/99
=1
00
)
12-Index Global Balanced Portfolio1
60/40 Portfolio2
S&P 500
CAGR3
= +0.4%
Investment Strategy
Asset Allocation — An Example … and see how it would have performed from Dec. 31, 1999 – Dec. 31, 2010
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Bank Loan, Bear Market Commodities Broad Basket, Communications Conservative Allocation Consumer Discretionary, Consumer Staples Convertibles, Currency, Diversified Emerging MktsDiversified Pacific/Asia, Emerging Markets Bond Equity Energy, Equity Precious Metals Europe Stock, Financial Foreign Large Blend, Foreign Large Growth Foreign Large Value, Foreign Small/Mid Growth Foreign Small/Mid Value, Global Real Estate Health, High Yield Bond, High Yield Muni Industrials, Inflation-Protected Bond Intermediate Govt’ Bond Intermediate-Term Bond, Japan Stock, Large Blend Large Growth, Large Value, Latin America Stock Long Government, Long-Short, Long-Term BondMid-Cap Blend, Mid-Cap Growth, Mid-Cap Value Miscellaneous Sector, Moderate Allocation Multisector Bond Muni National Interm, Muni National Long Muni National Short, Muni Single State Interm Muni Single State Long, Muni Single State Short Natural Resources, Pacific/Asia ex-Japan Stk, Real Estate Retirement Income, Short Government Bond Short-Term Bond, Small Blend, Small Growth Small Value Target Date 2000-2010 Target Date 2011-2015; 2016-2020; 2021-2025 Target Date 2026-2030; 2031-2035; 2036-2040 Target Date 2041-2045; Target Date 2050+ Technology, Ultrashort Bond, Utilities, World Allocation, World
Bond, World Stock
Active23/73
Neutral28/73
Passive22/73
73 Fund Categories Analyzed
1 ©FundQuest BNP Paribas Group study dated June 2010, Jane Li, author. “When Active Management Shines vs. Passive – Examining Real Alpha in 5 full market cycles over the past 30 years.”
“Out of the 73 categories in our study, we recommend a bias to
active management in 23 categories and a bias to passive management in 22 categories.
Twenty-eight (28) categories were deemed neutral.”
Investment Strategy
FundQuest BNP Paribas Study1
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• Wall Street strategists don’t, generally speaking, systematically add value.
• Global diversification with rebalancing provides support for modern portfolio theory (MPT).
“I’m looking for a hedge against my hedge funds.”
Investment Strategy
Conclusions
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And Don’t Believe Everything You Hear
A study by Media Research Center of a year’s worth of economic coverage on ABC, CBS and NBC found more than twice as many stories and briefs focused on negative aspects of the economy (62%) compared to good news (31%).Source: Media Research Center, “Bad News Bears,” October 2006.
“We were wondering if now would be a good time to panic?”
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All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This is not to be construed as an offer to buy or sell any financial instruments and should not be relied upon as the sole factor in an investment making decision. As with all investments there are associated inherent risks. Please obtain and review all financial material carefully before investing.
The opinions expressed are those of the author, are based on current market conditions and are subject to change without notice.
These materials may contain statements that are not purely historical in nature but are “forward-looking statements.” These include, among other things, projections, forecasts, estimates of income, yield or return or future performance targets. These forward-looking statements are based upon certain assumptions, some of which are described herein. Actual events are difficult to predict and may substantially differ from those assumed. All forward-looking statements included herein are based on information available on the date hereof and Fritz Meyer assumes no duty to update any forward-looking statement. Accordingly, there can be no assurance that estimated returns or projections can be realized, that forward-looking statements will materialize or that actual returns or results will not be materially lower than those presented.
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Important Information