Key Private Bank

The Global Sovereign Debt Crisis And Its Impact On Corporate Profits

Nick Raich, CFA Director of Research

NOT FDIC INSURED • NOT BANK GUARANTEED • MAY LOSE VALUE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL OR STATE GOVERNMENT AGENCY

2Source: IMF

Debt to GDP Levels of Various Developed Countries

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Options in Europe

• Austerity & Growth

• Default & Inflation

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Probabilities of Default over the next 5 years

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He is praying for all of us…

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Ben Bernanke today vs. January 2006

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Housing

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Employment

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Is $4.00 the tipping point?

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To QE or not to QE?

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Is there an anti-austerity movement in Europe?

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European Central Bank

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Whatever it takes to save the Euro

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Super Mario Draghi

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Big problems need even bigger solutions

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You’re going to need a bigger boat – EFSF

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Hey Angela, “How big is the problem?”

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European Central Bank

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You’re going to need a bigger boat - LTRO

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Total debt in peripheral Europe is $3.2 trillion

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Powerful Liquidity injections by Central Bankers

250 Initiatives

Coordinated

$8.5 Trillion

More on the way too!

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How big is 1 Trillion?

A packet of one hundred $100 bills is less than 1/2" thick and contains $10,000.

This pile is $1 million dollars (100 packets of $10,000). You could easily carry this in a small bag.

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How big is 1 Trillion?

Go find a standard pallet to hold $100 million

Get 10 standard pallets (and a tow motor so you don’t break your back) for $1 Billion

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How big is 1 Trillion?

• It’s a million million. It's a thousand billion. It's a one followed by 12 zeros.

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Are the right leaders / policies driving the boat?

Key Private Bank Equity Research Team

Mark D’CruzHealth Care,Technology

Nick Raich, CFA

Director of Research

Rob Plaza, CFAConsumer

Discretionary, Consumer Staples

Tom Jalics, CFAFinancials

Steve HoedtIndustrials,

Materials, Energy

• Bill Zalar

• Brent Moore

• Brett Hillard

• Don Carmichael

• Greg Turner

• JanDell Wasilausky

• Nancy Dobras

• Paul Lebo

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What drives asset prices?

• Changes to macroeconomic expectations drives asset prices.

• When expectations go up, risk on.

• When expectations go down, risk off.

• The best way to measure those changes is to look at the rate of change to earnings estimate revisions (i.e. delta)

Europe’s problems are a drag on profits

Global growth is clearly slowing

Annual earnings expectations for the S&P 500

2Q 2012 Earnings Scorecard

2Q 2012 Sales Surprise Scorecard

3Q 2012 Earnings Guidance Scorecard

Rate of Change of Earnings Estimates vs. S&P 500 indexAbove 0.00% needed for sustainable stock market rallies.

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When a “Don’t Buy” Rating is a good thing…

Will earnings growth re-accelerate?

Don’t make random bets

Don’t make random bets

Summary

• Earnings were good, sales was not, and guidance was lousy

• Debt crisis is impacting Asian exports

• Recent earnings and sales revisions indicate it will be very difficult for the rally to be sustained without more Fed / ECB / BOJ / PBOC intervention

• Austerity is finally being factored into 2013 earnings estimates

• Economic news and Central Bank action will trump earnings in September. Watch out for pre-announcements though

Key Private Bank

Stay Tuned:

The Global Sovereign Debt Crisis: part 2 – Merkel’s RevengeNick Raich, CFA Director of Research

NOT FDIC INSURED • NOT BANK GUARANTEED • MAY LOSE VALUE • NOT A DEPOSIT • NOT INSURED BY ANY FEDERAL OR STATE GOVERNMENT AGENCY