jpm - by any means necessary

8/14/2019 JPM - By Any Means Necessary

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2CONFIDENTIA

L

A painful recession likely to come to an end later this year

Source: Bloomberg. Data as of 6/12/2009.

Contra-indicators: wage and salary growth, real consumergoods spending, industrial production

80

85

90

95

100

105

00 01 02 03 04 05 06 07 08 09

Leading IndicatorsIndex level

e.g., vendor

deliveries

-5%

0%

5%

10%

00 01 02 03 04 05 06 07 08 09

YoY % ChangeMotor vehicle miles driven

25

30

3540

45

50

55

60

00 01 02 03 04 05 06 07 08 09

Index levelISM mfg & employment

Business employment

Manufacturing

1900

2900

3900

4900

5900

6900

03 04 05 07 08

200

300

400

500

600

700

ThousandsJobless claims

Initial 4wk moving avg. (RHS)

Continuing (LHS)

Thousands

-148,000

80

90

100

110

00 02 04 06 08

Small Business OptimismIndex level Index level

30

35

40

45

50

55

60

65

00 02 04 06 08

Architectural billings


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3CONFIDENTIA

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-50%

0%

50%

100%

150%

200%

-6% -2% 2% 6% 10% 14% 18% 22% 26% 30%

MONETARY STIMULUS

(growth in monetary base)

FISCAL STIMULUS

(growth in U.S. Treasury debt/GDP ratio)

Bubble size = Reduction in Fed Funds Rate, bps

Includes monetary expansion

as of June 2009 and OMB

projections for FY 2009

Includes additional $1.1 trillion in treasury, agency and

MBS purchases, an estimated $500 billion reduction

from a contraction in Fed Credit Facilities, and OMB

projections through FY 2010

Amazing what $14 trillion can do

Source: J.P. Morgan Securities Inc., Federal Reserve, OMB, BEA. Data as of 6/17/2009, with FY 2010 estimate.

1953-541957-58

1960-611969-701973-751980-801981-821990-912001-012008-Current2008-??

* Add relaxation of accounting treatment for impaired assets* Excludes health care bill (initial CBO scoring $1 trillion+)

Public sector response to recessions: a new zip code


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More aid/guarantees, or a giant fiscal drag, at the state level

Source: Bureau of Economic Analysis. Data as of 3/31/2009.

-0.8%

-0.3%

0.2%

0.7%

1.2%

1.7%

1947 1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 2007

State and local government surplus / deficit, % of GDP

-50%

-40%

-30%

-20%

-10%

0%10%

20%

30%

Withholding Estimated FinalPayments

Refunds Net PIT

YoY nominal % change, May 2008 to 2009

State deficits: bigger drag than the 1970s

Personal tax collections down 26%

Source: The Nelson A. Rockefeller Institute of Government. Data as of 5/31/2009.


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Woodrow Wilson would be pleased:Most coordinated global economic policy effort in history

22%4.4%Russia

3.8%Korea

35%.0%Australia

18%.8%Taiwan

18%0.0%South Africa-10%.9%Brazil

75%2.9%6%Hong Kong

9%.0%China

92%0.1%14%Switzerland

4.7%12%Japan

1.0%27%Finland

218%Ireland

1.1%10%Spain

29%2.0%5%UK

177%3.0%Sweden3.2%18%Germany

119%.5%07%.S.Monetary BaseFiscal Stimulus

Asset Guarantees &Purchases

% change since Sept 07% GDP

Global government stimulus comparison

Source: Bloomberg, International Monetary Fund, UBS, Bridgewater Associates.


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China and Germany: governments pedaling fast to offset declining exportsand foreign direct investment

Source: J.P. Morgan Securities Inc. Data as of 5/31/2009.

Global car sales rebound, with helpSource: National Bureau of Statistics, The Peoples Bank of China. Data as of5/31/2009.

10%

15%

20%

25%

30%

1998 2000 2002 2004 2006 2009

-5%

5%

15%

25%

35%

45%

YoY % changeInvestment and loan growth surge in China

70

80

90

100

110

120

130

140

150

160

170

Jun-07 Nov-07 Apr-08 Aug-08 Jan-09 May-09

Germany Euro Area

China Brazil

India Japan

Index, 100 = 6/30/2007

Real fixedinvestment (RHS)

RMB loan growth (LHS)

YoY % change

AbwrackprmieCost: $3.5 bn +


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Now what? A difference of opinionEstimated impact on GDP of a permanent increase in governmentspending

Source: John F. Cogan, et al. New Keynesian versus Old Keynesian Government Spending Multipliers. February2009.


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8CONFIDENTIA

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Treasury financed 80% of 2009 needs without major disruption, but with$180 bn from the Fed, and with 2010 needs starting in October


2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

Jan-07 Apr-07 Jul-07 Oct-07 Feb-08 May-08 Aug-08 Dec-08 Mar-09 Jun-09

Percent

Treasuries and Agency yields30-yr FNMA Mortgage rate

10-yr Treasury yield

Mortgage refi

activity cameto a halt


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9CONFIDENTIA

L

By any means necessary: reliance on earnings rather than capital to solvebanking system problems

1 Purchase accounting adjustment represents losses already taken on National City, Wachovia & Washington Mutual.

$413

$240

$315

CURR

EQUITY

PROJ

INCOME

LOSSES ACCT ADJ EQUITY CAPITAL

TO RAISE

EQUITY

$363 ($600)

$64

$75

Aggregate results: Supervisory Capital Assessment Program ($ billions)


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10CONFIDENTIA

L0

10,000

20,000

30,000

40,000

50,000

60,000

Sep-03 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09

$200,000

$220,000

$240,000

$260,000

$280,000

$300,000

$320,000

$340,000

$360,000Inventory Monthly Sales ASP (12-mo Rolling Average)

Inventory and sales activity improving, but deflationary pressures remain

Phoenix: an exaggerated metaphor for housing and the reason bank lossesare so high

Source: Ashton Woods Homes, Arizona Regional Multiple Listing Service, Inc . Data as of 5/31/2009.

Sales are up57% y/y !!!

Inventory levelsdown 35% y/y !!!


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11CONFIDENTIA

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0%

10%

20%

30%

40%

1999 2001 2003 2005 2007 2009

Subprime

Prime JumboAlt-A

Option ARMHELOC

60+ day delinquencies by loan type

Source: J.P. Morgan Securities Inc., LoanPerformance, Zelman & Associates, RealtyTrac. Data as of 5/31/2009.Universe: All non-agency securitized loans.

% of remaining loan balance 60+ days delinquentincluding loans in foreclosure and REO S

PJHAO

0%

20%

40%

60%

80%

100%

1999 2001 2003 2005 2007 2009

Recovery values by loan typeRecovery values

SPJHAO

Residential housing: tracking the Feds adverse case, and worse

Average balance of non-agency loansentering foreclosureAverage original balance, thousands

40,000

55,000

70,000

85,000

100,000

115,000

130,000

145,000

Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09

30%

40%

50%

60%

70%

80%

Another foreclosure wave coming

$120

$140

$160

$180

$200

$220

$240

$260

$280

Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09

Watch out for a head-fake on home prices

Notices of Default (LHS)

% of NODs moving to auction (RHS)


12/42

12CONFIDENTIA

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10%

11%

12%

13%

14%

15%

Mar-80 Mar-84 Mar-88 Mar-92 Mar-96 Mar-00 Mar-04 Mar-08

Long way back to equilibrium: household balance sheets in tough shape


Intense pressure on the U.S. consumer, which at 70% of U.S. GDP, is/was thelargest single driver of global activity

Consumer mortgage & non-mortgage interestpayments as a percent of disposable income

Includesgovernmenttransfers


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13CONFIDENTIA

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6%

8%

10%

12%

14%

16%

18%

1960 1966 1972 1978 1984 1990 1996 2002 2008

Percent

People can tell the difference between earned and unearned income


Income quality: government transferpayments as % of personal incomeSource: Census Bureau. Data as of 5/31/2009.

Retail sales, billions

$260

$280

$300

$320

$340

$360

$380

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009


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14CONFIDENTIA

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On commercial real estate

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15CONFIDENTIAL

Office fundamentals worsening

% of loans in special servicing

Faster price declines vs 1990-91

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

0 4 8 12 16 20 24 28

1989 Peak

2008 Peak

Source: NCREIF, JPMorgan, Moody's, Zelman Associates. Data as of 4/30/2009.

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08

Office occupancy

Office employment

On commercial real estate

New orders (sq ft) down 50% y/yQuarters from peak

1540 Bway

JH Tower

Forced sales

down 50%-60% frompeak prices

70 Pine St.

WW Plaza(no bid)


16/42


17/42

17CONFIDENTIAL

Portfolio speedometer

Portfolio Risk Speedometer


18/42


19/42

19CONFIDENTIAL

Many businesses over-retrenchedExample: Japanese car sales and production

Source: Bloomberg. Data as 5/31/2009.

Japanese vehicle production and sales, YoY

-60%

-45%

-30%

-15%

0%

15%

30%

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Percent

Vehicle Sales fell 30%

Vehicle Production fell 55%


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20CONFIDENTIAL

-100

-80

-60

-40

-20

0

20

40

60

80

100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Euroland Business Surveys and Economic Sentiment

Source: Bloomberg. Data as of June 2009.

Survey on CurrentEconomic Conditions

Economic Sentiment

Europe: conviction that stimulus is going to work(even if its not working yet)


21/42

21CONFIDENTI

AL

Equity valuations have excised the last 15 years of over-enthusiasm

0

1

2

3

4

5

6

7

1950 1957 1964 1972 1979 1986 1994 2001 2009

0.0

0.5

1.0

1.5

2.0

Source: Empirical Research Partners; Federal Reserve; DataStream; J.P. Morgan Securities Inc. Price-to-tangible book valueas of June 2009. Replacement cost ratio as of March 2009, and Market cap-to-GNP as of May 2009.

Price-to-tangible book value, 1,500 largest stocks

Synergies, globalization and productivity premiums unwoundReplacement Cost Ratio, and Market Cap-to-GNP

Equity marketReplacementcost ratio (RHS)March 2009

Price-to-tangiblebook value (LHS)June 2009

Market Capto GNP (RHS)May 2009


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22CONFIDENTI

AL

How optimistic are equity markets for 2009 and 2010? Not very

$88$83

$50

$58

$68 $67

$30

$40$50

$60

$70

$80

$90

$100

2006 S&P

earnings

2007 S&P

earnings

2008 S&P

earnings

2009

consensus

earnings

2008 current

constituents

2010 estimate

S&P earnings, actual vs. current constituents

Source: Standard & Poors, Compustat, First Call, Bloomberg.

+18%-15%


23/42

23CONFIDENTIAL

Probably the most consistent connection between any two market variables:labor costs and profits

-50%

-30%

-10%

10%

30%

50%

70%

1948 1953 1959 1964 1970 1975 1981 1986 1992 1997 2003 2008

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

9%

11%

Source: Haver, BLS. Data as of 3/31/2009.

Nonfinancial Corporate Profits, YoY

U.S. corporate profits YoY vs. Unit labor costs YoYUnit Labor Costs (3Q lag, YoY), INVERTED

Unit Labor Costs (RHS)

CorporateProfits (LHS)


24/42

24CONFIDENTIAL

Mattress money

Source: Money Fund Analyzer, a service provided by iMoneyNet.

$0.8

$1.0

$1.2$1.4

$1.6

$1.8

$2.0

Jun-08 Sep-08 Nov-08 Jan-09 Apr-09 Jun-09

Trillions

Money market funds

$0

$100

$200

$300

$400

$500

B uyo uts Real Estate Venture Other P E

Undrawn private equity capital: $1 trillion

Source: Preqin. Data as of January 2009.

$262 U.S.

$45 Asia$165Europe

$196 $138$209

Billions

$472

Prime

T-bills


$100

$200

$300

$400

Jan-98 Oct-00 Jul-03 Apr-06 Jan-09

Billions

NYSE margin balances


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25CONFIDENTIAL

Market inflection points, unemployment and recessionsJuly 1953 May 1954

80

100

120

140

160

180

-18-14-10 -6 -2 2 6 10 14 18

2%

3%

4%

5%

6%

7%

Source: Ibbotson. It is not possible to invest directly in an index.Past performance is no guarantee of future results.

August 1957 April 1958

80

100

120

140

160

-18-14-10 -6 -2 2 6 10 14 18

3.5%

4.5%

5.5%

6.5%

7.5%

April 1960 February 1961

80

100

120

140

-18-14-10 -6 -2 2 6 10 14 18

4.5%

5.5%

6.5%

7.5%

December 1969 November 1970

90

110

130

150

-18-14 -10 -6 -2 2 6 10 14 18

3%

4%

5%

6%

November 1973 March 1975

75

100

125

150

175

-18 -14-10 -6 -2 2 6 10 14 18

4.5%

5.5%

6.5%

7.5%

8.5%

9.5%

January 1980 July 1980

65

85

105

125

145

-18-14 -10 -6 -2 2 6 10 14 18

5%

6%

7%

8%

July 1981 November 1982

90

110

130

150

170

-18-14-10 -6 -2 2 6 10 14 18

7%

8%

9%

10%

11%

July 1990 March 1991

95

105

115

125

135

145

-18-14-10 -6 -2 2 6 10 14 18

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

March 2001 November 2001

7585

95

105

115

125

135

145

-18-14-10 -6 -2 2 6 10 14 18

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

August 1953 December 1957 October 1960

June 1970 September 1974March 1980

July 1982 October 1990 September 2001

S&P 500 Index (LHS) Unemployment Rate (RHS)


26/42

26CONFIDENTIAL

Riding the Tiger: investing during the biggest lab experiment in the historyof modern economics

Other People's Mistakes Credit Reflation investments Asia


27/42

27CONFIDENTIAL

Other peoples mistakes Secondary private equity

The endowment implosion

Distressed sellers of oil & gas properties

Probable and possible reserves now selling for close to nothing

Debtor-in-possession financing to bankrupt companies

Pricing in the range of Libor + 8%-10%

The pending collapse of $900 billion in commercial mortgage backedsecurities market

Our CMBS manager estimates that their portfolio has an effective cost

basis of 33% of the original price, and targets mid-teens returns


28/42

28CONFIDENTIAL

CREDIT: capital gains prospects diminishing, as inflows swamp credit funds ofall kinds ($70 bn YTD in HG and HY)

60

65

70

7580

85

90

95

100

Jun-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09

ML convertible bond total return index,

6/1/2008=100

150

200

250

300

350400

450

500

550

600

Dec-

07

Jan-

08

Mar-

08

May-

08

Jul-

08

Sep-

08

Nov-

08

Jan-

09

Mar-

09

May-

09

Spread to Treasury, bps

Convertible bonds

Investment grade bonds

Source: Bloomberg, J.P. Morgan Securities Inc. Data as of 6/24/2009. Note: Actual client experiences may vary.Note: Green dots represent buying program.

55

65

75

85

95

105

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

S&P LSTA Leveraged Loan Price index, levelLeveraged loans

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Dec-07

Feb-08

Apr-08

Jun-08

Aug-08

Oct-08

Dec-08

Feb-09

Apr-09

Jun-09

JPMorgan Domestic High Yield spread, bps

High yield

Fair value has beenreached


29/42

29CONFIDENT

IAL Source: Bloomberg. Data as of 6/24/2009.

Note: Actual client experiences may vary.

$30

$50

$70

$90

$110

$130

$150

Apr-08 Jul-08 Oct-08 Jan-09 Apr-09

WTI spot price

Peak to trough on oil prices

Reflation investing: timing is everything

Sellrecommendation

on energy

Purchase of oilstructures and ETFs

$30

$40

$50

$60

$70

Nov-08 Dec-08 Mar-09 Apr-09

Daily execution levels on structured oil notes


30/42


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31CONFIDENT

IAL

Asia: while valuation premiums have rarely been maintained above the U.S.,times are changing

Source: MSCI, FactSet. Data as of 5/31/2009.Past performance is no guarantee of future results. It is not possible to invest directly in an index.

7

9

11

13

15

17

19

21

23

25

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

12 month forward PE

Asia valuations vs. U.S.

MSCI AC Far East ex-Japan

MSCI U.S.Asia can affordstimulus

Undervaluedexchange rates

Increasing inter-regional trade

Higher expectedprofits growth

Banking systems inbetter shape

No more balance ofpayments overhangdue to developmentof domestic capitalmarkets


32/42

32CONFIDENT

IAL

The new normal

Balanced portfolio

Commodities,FX & Inflation12%

Cash & Corefixed income23% Equities and longbiasedhedge funds36%bsolute returnhedge funds &Private Equity15% Credit andcredit hedgefunds

14%

The aftershocks from this cycle willtake a long time to play out

Set the speedometer below normal,but not at zero

Fed committed to fighting deflationfirst, inflation later

Evaluating this cycle with a typicalbusiness cycle lens ignoresgenerational changes in public sectorfinances, household balance sheets,

and the shift underway from a worldlinked to U.S. consumption

The model portfolio can be implemented across brokerage or managed accounts depending on the unique objectives of each client and is serviced through distinct legal entities

licensed for specific activities. Bank and trust services are provided by JPMorgan Chase Bank, N.A. Investment management services are provided by JPMorgan Chase Bank, N.A.,and their affiliates. Brokerage and trading activities are provided by J.P. Morgan Securities Inc., Member FINRA, NYSE, and SIPC. Not all investments ideas referenced are suitablefor all investors.


33/42

34CONFIDENT

IAL

Appendix


34/42

35CONFIDENT

IAL

Source: Federal Reserve, OMB, J.P. Morgan Securities Inc. For the 1970's: output gap, monetary base and M2 from Sep-74 toMar-78, Current: output gap and debt/GDP estimated through 2013.

Tracking current monetary & fiscal policy vs. the 1970s

0

20

40

60

80

100

120

Cumulative output gap Change in monetary

base

Change in M2 Trough to peak public

debt/GDP

1970s

Current

Spare capacity

2x larger

Monetary baseexpansion 4x

larger and

growing

Money

multipliers not

picking up

yet

Percent

Fiscalexpansion

9x larger

On the monetary base, money multipliers and the velocity of money


35/42


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37CONFIDENT

IAL

Rates and refi activity


As mortgage rates continue to rise, refinancing boom is sputtering

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Oct-08 Dec-08 Feb-09 Apr-09 Jun-09

4.5%

5.0%

5.5%

6.0%

6.5%

30-Year Mo rtgage Rate (RHS)

MB A Ref inanc ing Ind ex (LHS)

Weekly mortgage refi applications, SA Percent


37/42

38CONFIDENT

IAL

Rates of change will show huge improvements, but levels dont


60

70

80

90

100

110

1979 1984 1989 1994 1999 2004 2009

Index, SA

Japanese industrial production, levelsSource: Bloomberg. Data as of 4/30/2009.

Japanese industrial production, MoM

-10%

-5%

0%

5%

1979 1984 1989 1994 1999 2004 2009

Percent


38/42

39CONFIDENT

IAL

The term asset-backed securities market

$0

$50

$100

$150

$200

$250

$300

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Manufactured Housing

Equipment

OtherNon-U.S. Residential Mortgages

Student Loans

Credit Cards

Autos

Commercial Real Estate

Home Equity (Subprime)

Source: J.P. Morgan Securities Inc. Data as of 6/22/2009.

Total quarterly issuance, billions

Asset backed securities issuance volumes have essentially gone to zero

$45bn


39/42

40CONFIDENT

IAL

33

34

35

36

37

38

39

1964 1969 1974 1979 1984 1989 1994 1999 2004 2009

Hours

U.S. average weekly hours worked

Source: Bloomberg, J.P. Morgan. Data as of 5/31/2009.

Labor market conditions are extremely weak

Share of people who have run out ofstate unemployment insurance, SA


40/42

41CONFIDENTIAL

A barometer of diversification adds to the debate as well

The correlation of equities around the world has reached a new record

Source: International Strategy & Investment.


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jpm - by any means necessary

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