4q10 macro-trends...all relevant disclosures and certifications can be found on page 34-35 of this...

35
Barry B. Bannister, CFA Managing Director, Equity Research Stifel Nicolaus & Co. [email protected] All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3, 2010 S&P 500 $1,189.70 1. A wall of worry is to be expected. S&P 500 Mid-2011 $1,250 target is unchanged from 3Q view. After ~$1,250 S&P 500 by mid-11, we see ~$1,350 by 2012. 2011 EPS views emerging from 3Q earnings reports are drawing attention to how inexpensive “risk” relative to “risk aversion” has become. We think the U.S.$ is bottoming, CRB is peaking, and EM is peaking as well. Buy mid/large cap U.S. growth stocks. 2. We feel QE2 talk is mostly just moral suasion, and the economy is recovering without Fed assistance. We do think investors are according a “peak earnings discount” to the S&P 500 since profit share of GDP is extended on the upside. In essence, the era of asset inflation via leverage is over, and what is coming may well be better for Main Street than Wall Street (in that sense, the ’10 election represented a climax). 3. There are signs the secular bear market for large-cap equity is in its final innings. Market timing is losing its return premium to buy-and-hold, the gap between reported and operating EPS is set to close, and commodity outperformance vs. stocks (i.e., alternative investing popular in secular bear markets) is ending. 4. Tail risks for the slowly dying secular bear market around 2013-15 are a 2nd oil shock as global spare capacity (6mb/d now) dissipates at the rate of 2mb/d per year, geopolitical unrest that typically occurs late in secular bear markets, and potential problems associated with the Fed exit strategy in 2012-13. 5. 2013-14 tail risk may push the S&P 500 from ~$1,350 in 2012E back to ~$1,000 by 2013-14E, while T-bonds rally in a final flight to safety, ending the large capitalization U.S. equity index secular bear of 2000-2014E. 6. In the very long-term, 2010 to 2020, we think it is reasonable to expect 3%/year average annual returns to commodity futures and an S&P 500 total return of +7%/year (2010-20 point-to-point CAGR for S&P 500).

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Page 1: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

Barry B. Bannister, CFAManaging Director, Equity Research

Stifel Nicolaus & [email protected]

All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com.

4Q10 Macro-TrendsCurrent as of Nov-3, 2010 S&P 500 $1,189.70

1. A wall of worry is to be expected. S&P 500 Mid-2011 $1,250 target is unchanged from 3Q view. After ~$1,250 S&P 500 by mid-11, we see ~$1,350 by 2012. 2011 EPS views emerging from 3Q earnings reports are drawing attention to how inexpensive “risk” relative to “risk aversion” has become. We think the U.S.$ is bottoming, CRB is peaking, and EM is peaking as well. Buy mid/large cap U.S. growth stocks.

2. We feel QE2 talk is mostly just moral suasion, and the economy is recovering without Fed assistance. We do think investors are according a “peak earnings discount” to the S&P 500 since profit share of GDP is extended on the upside. In essence, the era of asset inflation via leverage is over, and what is coming may well be better for Main Street than Wall Street (in that sense, the ’10 election represented a climax).

3. There are signs the secular bear market for large-cap equity is in its final innings. Market timing is losing its return premium to buy-and-hold, the gap between reported and operating EPS is set to close, and commodity outperformance vs. stocks (i.e., alternative investing popular in secular bear markets) is ending.

4. Tail risks for the slowly dying secular bear market around 2013-15 are a 2nd oil shock as global spare capacity (6mb/d now) dissipates at the rate of 2mb/d per year, geopolitical unrest that typically occurs late in secular bear markets, and potential problems associated with the Fed exit strategy in 2012-13.

5. 2013-14 tail risk may push the S&P 500 from ~$1,350 in 2012E back to ~$1,000 by 2013-14E, while T-bonds rally in a final flight to safety, ending the large capitalization U.S. equity index secular bear of 2000-2014E.

6. In the very long-term, 2010 to 2020, we think it is reasonable to expect 3%/year average annual returns to commodity futures and an S&P 500 total return of +7%/year (2010-20 point-to-point CAGR for S&P 500).

Page 2: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

2

Secular bear markets flatten in nominal terms (green line below) but decline in real terms, after inflation (blue line, below) for ~17 years (17 years is the average of the past three cycles, excluding the current secular bear market), basically de-capitalizing equities from excessive peaks (1907, 1929, 1966 and 2000) relative to GDP. We believe this secular bear market began in 2000 with the Tech Bubble peaking, and we will know the secular bear market is over when the S&P 500 decisively pierces the previous decade high of ~$1,565 S&P 500 and continues rising. Note that the nominal low in a secular bear is usually seen ~7-10 years before a new secular bull market begins, occurring when the greatest number of investors comprehend the existence of a secular bear market. As a result, we believe the S&P 500 intra-day $666 (DJIA $6,443) low in March 2009 was the nominal low point for this cycle.

Source: Dow Jones, U.S. Census, Stifel Nicolaus format.

Real (Inflation-adjusted) Dow Jones Industrial Average (2008$) versus Nominal Dow Jones Industrial Average - Chart is through most current data

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secularbull

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secular bear

nominallow, in

our view.

Page 3: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

3Source: FactSet prices, St. Louis Federal Reserve, Stifel Nicolaus format.

* Month-end prices used in the chart to calculate the lead time of S&P 500 turns versus the Employment/Population ratio.

True to history, the S&P 500 price bottomed in early 2009*, and 10 months later in Dec-09 the employment ratio followed suit, matching the historical average lag. Note also the sharp S&P 500 rise that has historically occurred before employment turns up, and more moderate, choppy advances thereafter, which we expect 2010-12. Many consumption, financing and construction jobs are gone for good with the demise of low quality securitization, and Boomers who entered the workforce in the early 1980s may exit now that they are “empty nesters.” Note also the increasingly weak turns in employment, a cumulative effect of debt deflation, culminating in a “lower high/lower low” for employment/population since 2000. Spotting this, the S&P 500 has been range bound (“secular bear market”) since 2000 in the blue line below.

Civilian Non-Institutional* Employment to Population Ratio versus S&P 500 Index (log scale)

Sharp S&P 500 rise before employment turns up, moderate market advances afterward, plus increasingly modest turns in employment (cumulative debt deflation).

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Civilian Employment to Population Ratio (Left Axis)

S&P 500 Index (log Scale, Right Axis)

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*The civilian non-institutional population consists of persons 16 years of age and older residing in the50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities and homes for the aged) and who are not on active duty in the Armed Forces.

10mos.

Page 4: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

4Source: FactSet prices, St. Louis Federal Reserve, Commodities Research Bureau, NBER cycle trough dates, Stifel Nicolaus format.

S&P 500, CRB Futures Index and Non-farm Employment

Indexed to Mar-1975 = 100

95100105110115120125130135140145150155160165170175

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S&P 500 TR Index CRB Futures IndexGov't Bond TR Index Employment (Right)

S&P 500, CRB Futures Index and Non-farm Employment

Indexed to Nov-1982 = 100

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S&P 500 TR Index CRB Futures IndexGov't Bond TR Index Employment (Right)

"Land" (commodities)

lag...

S&P 500, CRB Futures Index and Non-farm Employment

Indexed to Jun-2009 = 100

80859095

100105110115120125130135140145150155160165170175

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ct-0

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14

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S&P 500 TR Index CRB Futures IndexGov't Bond TR Index Employment (Right)

"Labor" (employment)

to lag?

U.S. Real GDP Y/Y Percentage Change

-5%-4%-3%-2%-1%0%1%2%3%4%5%6%7%8%9%

10%

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"Capital" (bonds) lag...

One should not expect equal measures of prosperity for each of the three factors of production, land, labor & capital after a deep recession (points A, B & C below). “Capital” did poorly for five years after the 1974-75 recession, “land” (commodities) was weak after 1981-82, and we expect “labor” (job growth) to be weak for five years after the 2008-09 recession.

Mar-75 = NBER “Cycle Low”

Nov-82 = NBER “Cycle Low”

Jun-09E = Stifel Est. “Cycle Low”

A B C

Page 5: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

5Source: Bank Credit Analyst. Customized chart request.

The current cycle is progressing like an exaggerated version of a “normal” recession, mimicking the past six recessions as described below.

15

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2007 2008 2009 2010 2011 2012

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REAL INCOME FROM GOVERNMENT TRANSFERS*

Ann%Chg

Ann%Chg

FOR ALL PANELS:AVERAGE OF PAST 6 RECESSIONS

REAL WAGES AND SALARIES*

Ann%Chg

Ann%Chg

REAL RETAIL SALES*

Ann%Chg

Ann%Chg

*DEFLATED USING CORE CONSUMER PRICE INFLATIONNOTE: END OF PREVIOUS RECESSIONS ALIGNED TO PRELIMINARY END OF CURRENT RECESSION = JUNE, 2009

© BCA Research 2010

Real retail sales (up strongly, but pace to moderate).

Real wages are the weakest factor of production (as previously stated, one factor of production is often the weakest in a subsequent recovery).

Government transfer payments (pace continues to moderate as counter-cyclical payments expire or are no longer needed).

Page 6: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

6

We see the U.S. S&P 500 index the next year as a mildly rising, much more volatile up-trend, i.e., a “mid bull” stage market, similar to 2004-05. This closely resembles the red, dashed arrows on the chart two pages prior at similar points in the past. The U.S. Federal Reserve (followed later by the ECB, for which crisis/response has lagged) probably begins to raise short rates ~Sep-2011 in typical (1) lagged effect to economic variables, the progress of equities would seem to us inextricably linked to the success of the Fed in putting the “toothpaste” of monetary accommodation “back in the tube.”

Source: Stifel Nicolaus EquityCompass Strategies, Bloomberg.

(1) The Fed has typically commenced hiking the FFR rate with a lag to the following: a positive LEI, recovery in the ISM manufacturing, a peak in the unemployment rate, convergence of actual GDP to potential, a 200bps yield curve and other factors, which we believe puts a rate hike in the vicinity of Sep-2011 based on historical lag times.

XTech Bubble peak Mar-Sep. 2000

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S&P 500 | 12/31/2002 – 8/30/2010 | Source: EquityCompass Strategies, Bloomberg

Phases of a Stock Market Cycle

Bear Market

Mid Bull

S&P 500 Index

OversoldStocks

DefensiveMomentumAttractive Relative ValueOversold Stocks

Key to Outperformance

Early Bull Bear Market Late Bull Mid Bull Early Bull Market Phase

OversoldStocks

DefensiveMomentumAttractive Relative ValueOversold Stocks

Key to Outperformance

Early Bull Bear Market Late Bull Mid Bull Early Bull Market Phase

Page 7: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

7

“The Rule of 18-19 instead of the Rule of 21?” - The five year trailing S&P 500 EPS are $76. A plausible inflation range of 2% to 7% supports an S&P 500 P/E range of 11x to 17x (left chart), in our view. We expect trailing 5-year S&P 500 EPS to rise at about the rate of inflation, or between 2% and 7% per year. If S&P 500 EPS grow at 7%/year for the next five years the result would be ~$100 for EPS but at a P/E 11x (left chart) that is still just $1,100. On the other hand, at very low inflation of 2% a P/E 17x would be warranted (left chart), which applied to $76 of trailing five year EPS today is worth about $1,300, e.g., we expect a trading range 2010-14 similar to that of the past 10 years (right chart). Our view is simply that we see the S&P 500 “up” now, and “down” later in 2013-14, before the S&P 500 breaks out of the range in 2015+.

Source: Standard & Poor’s, Bureau of Labor Statistics, Stifel Nicolaus format.

(1) ROE = Net Income/Sales [i.e., profit margin] X Sales/Assets [i.e., asset turnover] X Assets/Equity [i.e., financial leverage]. ROE x Book Value = Net Income.

6X7X8X9X

10X11X12X13X14X15X

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P/E of the S&P 500, 5-Yr. Moving Average (Left Axis)U.S. Consumer Inflation, Y/Y % Change, 5-Year Moving Average (Right Axis)

U.S. Consumer Price Inflation (Inverted, Right Axis) vs. S&P 500 P/E Ratio (Left Axis)

S&P 500Daily price 1/3/00 to Present

$600$650$700$750$800$850$900$950

$1,000$1,050$1,100$1,150$1,200$1,250$1,300$1,350$1,400$1,450$1,500$1,550$1,600

Jan-00Jul-00Jan-01Jul-01Jan-02Jul-02Jan-03Jul-03Jan-04Jul-04Jan-05Jul-05Jan-06Jul-06Jan-07Jul-07Jan-08Jul-08Jan-09Jul-09Jan-10

Midpoint = $1,120

$1565.15

$676.53

Page 8: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

8

Rising oil prices may, however, be weighing on the ability of the S&P 500 to penetrate $1,250 in 2010. The top, left chart shows the S&P 500 stalled at oil $85/bbl. in Apr-10 at S&P 500 ~$1,220 (Oil and S&P 500 correlate). Top, right shows our long-held view that $85/bbl. (inflation-adjusted) shatters U.S. consumers. Bottom left shows the long-term tendency of large oil swings to drive the U.S. economy. Bottom, right describes our hypothesis that so long as EM oil demand is growing quickly, the “job” of oil is to rise to the price that drives G7 country oil demand growth down to 0%, whatever that price may be.

US Oil Demand vs. Inflation adjusted Retail Gasoline

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Real Crude Oil prices (left axis, solid area) vs. y/y GDP converted to monthly (right axis)

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Inflation- adjusted Crude Oil $ per bbl U.S. Real GDP Monthly y/y % chng (left)

Non-G7 oil demand (bars), y/y % demand growth (line), 1981 to 2010E: The trend supports +3.5%/year growth

(line) for 89% of the world population that in 2010E uses 64% of the world's oil.

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G7 oil demand (bars) and y/y % demand growth (line), 1981 to 2010E: The trend supports

0% growth (line) for 11% of the world population that in 2010E uses 36%

of the world's oil

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G7 oil consumption thous. b/d G7 oil consumption Y/Y%

Source: EIA, BP Statistical Review, United Nations, IEA. The G7 is the U.S., U.K., Japan, Germany, France, Italy, and Canada.

$85/bbl. Oil and $1,200+ S&P 500 Appear to be a Barrier

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Note: $85/bbl. oil is equivalent to ~$2.85 gallon

(retail) at a normal crack spread.

Page 9: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

9

Another concern we have is the poor trend of ISM Manufacturing new orders/inventories, which weighs on the S&P 500. Thus far signs point to a “normal” post-recovery momentum let-down triggering double-dip fears, but we are alert to further deterioration in trend. Low manufacturing inventories would seem to us a favorable factor supporting an improvement in the orders minus inventories diffusion index level shown below.

Source: ISM, Factset.

The ISM Manufacturing New Orders minus Inventories Diffucion Index Impacts the S&P 500 Total Return

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35S&P 500 Real Annual Total Return Manuf. New Orders Index Minus Inventory Index

Left axis Right axis

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10

An additional concern we have is that investors are according a “peak earnings discount” to the S&P 500, for which profit share of GDP (represented below as all corporate profits) appears extended on the upside as a percentage of the economy. As we stated previously, the 5-year trailing S&P 500 EPS are $76. This may be a safe “normalized” inflation-adjusted EPS figure for valuation purposes vis-à-vis S&P 500 2011 consensus EPS of $91.

Source: Bureau of Economic Analysis. From a report “September to Remember, But Economic Outlook Still Favors Agency REITs”dated Oct-1, 2010 by our colleague Michael R. Widner.

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11

One of the hallmarks of a secular bear market is several waves of charges that un-do many of the excess of the previous secular bull market, causing a gap to develop between reported and operating EPS (left charts). One silver lining is that as the secular bear market ages the quality of S&P EPS improves (right chart), a sign the secular bear is ending.

Source: Standard & Poor’s via FactSet. Format Stifel Nicolaus.

$0$10$20$30$40$50$60$70$80$90

$100

12/3

1/19

88

12/3

1/19

89

12/3

1/19

90

12/3

1/19

91

12/3

1/19

92

12/3

1/19

93

12/3

1/19

94

12/3

1/19

95

12/3

1/19

96

12/3

1/19

97

12/3

1/19

98

12/3

1/19

99

12/3

1/20

00

12/3

1/20

01

12/3

1/20

02

12/3

1/20

03

12/3

1/20

04

12/3

1/20

05

12/3

1/20

06

12/3

1/20

07

12/3

1/20

08

12/3

1/20

09

S&P 500 12 MONTH OPERATING EARNINGS PER SHR (bottom up)S&P 500 12 MONTH AS REPORTED EARNINGS PER SHR (top down) PERCENTAGE GAP, OPERATING EPS ABOVE REPORTED EPS

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

500%

550%

12/3

1/19

88

12/3

1/19

89

12/3

1/19

90

12/3

1/19

91

12/3

1/19

92

12/3

1/19

93

12/3

1/19

94

12/3

1/19

95

12/3

1/19

96

12/3

1/19

97

12/3

1/19

98

12/3

1/19

99

12/3

1/20

00

12/3

1/20

01

12/3

1/20

02

12/3

1/20

03

12/3

1/20

04

12/3

1/20

05

12/3

1/20

06

12/3

1/20

07

12/3

1/20

08

12/3

1/20

09

Secular bull market for equity 1988 through 3Q2000, operating EPS is a median 9% above reported EPS.

Secular bear market for equity 3Q2000 to present, operating

EPS is a median 16% above reported EPS.

10X

15X

20X

25X

30X

35X

40X

45X

50X

12/3

1/19

88

12/3

1/19

89

12/3

1/19

90

12/3

1/19

91

12/3

1/19

92

12/3

1/19

93

12/3

1/19

94

12/3

1/19

95

12/3

1/19

96

12/3

1/19

97

12/3

1/19

98

12/3

1/19

99

12/3

1/20

00

12/3

1/20

01

12/3

1/20

02

12/3

1/20

03

12/3

1/20

04

12/3

1/20

05

12/3

1/20

06

12/3

1/20

07

12/3

1/20

08

12/3

1/20

09

S&P 500 P/E OPERATING LTM EPS S&P 500 P/E REPORTED LTM EPS

S&P 500 median P/E on reported is 21.8x, on operating it is 18.8x

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12

Some say this is a Great Depression stock market. We think they are right, but that began 10 years ago, not in 2008. A cursory look back in history shows that the Dow Industrials represented the hot bed of speculation in the Roaring 1920s (true fiduciaries mainly favored bonds and preferred issues) and the Dow suffered commensurately in the Great Depression. Flash forward to the modern era, and we believe the speculative side of equities has been NASDAQ. That is why the Dow Industrials 1927 to 1941 (left chart) more closely resembles the NASDAQ 1997 to present (right chart) than, say, the modern Dow. Just as 1932-37 was temporarily supported by Federal spending and liquidity, perhaps 2002-07 benefited from housing market debt/spending. In both cases, 1938 and 2008, removal of spending support was detrimental to continued growth.

Source: Dow Jones prices, Bloomberg.

NASDAQ Composite Jul-1 1997 to presentvs. 200-day moving average

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

$5,500

Jul-9

7

Jul-9

8

Jul-9

9

Jul-0

0

Jul-0

1

Jul-0

2

Jul-0

3

Jul-0

4

Jul-0

5

Jul-0

6

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1

Nasdaq composite Index NASDAQ Composite 200-day moving average

Dow Industrials Jan-3 1927 to Jan-3 1941vs. 200-day moving average

$0

$50

$100

$150

$200

$250

$300

$350

$400

Jan-

27

Jan-

28

Jan-

29

Jan-

30

Jan-

31

Jan-

32

Jan-

33

Jan-

34

Jan-

35

Jan-

36

Jan-

37

Jan-

38

Jan-

39

Jan-

40

Jan-

41

Dow Jones Industrial Average Dow Industrials 200-day moving average

Page 13: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

13

Secular bears markets have tended to share certain characteristics based on our study of history, as follows:

Secular Bull Markets Secular Bear Markets

Uptrend Range-bound

We Over-Trade Accounts but Indexing is Best We Think Long-Term but Trading is Best

Shallow Analysis In-Depth Analysis

Optimistic Pessimistic

Everybody lives for the moment Everybody is an historian

Do-It-Yourself, Good for the Little Guy Seek Advice, Better for the Wealthy

Building to Nirvana Devolving to Despair

Start Liquid then Leverage It Up Capex or Debt Bust, then De-Leverage

Risk Loving (thirst for gains) Margin of Safety (lock profit / take loss)

Disinflation Reflation

Post-War(s), Emergence of a Dominant Power Power rivalry, Ends in some form of War

Source: Stifel Nicolaus.

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14

Below we show the return on a rolling yearly basis of being long the Dow Industrials for the five highest return days and short the Dow for the five lowest return days during the four secular bear markets of the 20th Century (shown previously). The line depicts just ten ownership days per trading year (and out of stocks completely the other trading days of the year), i.e., a perfect timer within a ~14-year flat stock market as measured from start to finish. Based on the chart we have four observations: (1) The black line is an average of all four secular bear markets described in the chart legend, and clearly shows the three stages of a secular bear market, which are Shock (“This can’t be! You say the previous bull market is over?”), Acceptance (“You were right, we have problems!”) and Capitulation (“What good are U.S. equities, I’m buying gold, Treasuries, EM equity etc.”); (2) The greatest equity volatility occurs during the “acceptance” phase, just past the mid-way point in the secular bear market (2007-10 in our era); (3) Secular bear markets end in boredom, not fireworks, and pundit calls for new lows are the equivalent of “post-traumatic stress syndrome,” and not supported by history; and (4) We see a diminishing advantage to investment funds for which timing and momentum flexibility, with an implicit reliance on underlying market volatility, are the preferred avenues to performance.

Source: Dow Jones data.

Return for Investing long in highest 5 days and short in lowest 5 days over the past year

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1

201

401

601

801

1,00

1

1,20

1

1,40

1

1,60

1

1,80

1

2,00

1

2,20

1

2,40

1

2,60

1

2,80

1

3,00

1

3,20

1

3,40

1

3,60

1

3,80

1

4,00

1

Days From Start of Secular Bear Market

Ret

urn

1906 to 1921 1929 to 1942 1966 to 1982 2000 to Present Average

The chart below shows the return to “perfect timing” during the past four secular bear markets, 1906-21, 1929-42, 1966-82 and 2000-present. In a secular bear market, equity indices trend sideways for about 14 years, on average, offering the best returns to market timing/momentum strategies and the worst returns to buy-and-hold. There have been four secular bear markets in the 20th Century, as shown below, including the current one that began for the Dow Industrials 1/14/2000 (Dow Industrials 11,723 then versus 10,256currently). In all other periods our perfect timer held physical cash with no return. None of the data are inflation-adjusted, nor does the data measure relative performance to buy-and-hold, but as we have stated secular bear markets are largely flat end to end.

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15

Return for investing long in the highest 5 days plus investing short in the lowest 5 days of the past year during a Secular Bull Market (e.g., invested only in 10 days per year, a "market timer")

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1

201

401

601

801

1,00

1

1,20

1

1,40

1

1,60

1

1,80

1

2,00

1

2,20

1

2,40

1

2,60

1

2,80

1

3,00

1

3,20

1

3,40

1

3,60

1

3,80

1

4,00

1

Days From Start of Secular Bull Market

Ret

urn

1921 to 1929 1942 to 1966 1982 to 2000 Average

Below we show the return on a rolling yearly basis of being long the Dow Industrials for the five highest return days and short the Dow for the five lowest return days during the four secular bull markets of the 20th Century (the periods literally between the secular bear markets shown on the previous page). As on the previous page, the lines below depicts just ten ownership days per trading year (and out of stocks completely the other trading days of the year), i.e., an idealized timer within a ~17-year rising stock market, or secular bull market, as measured from start to finish.

Source: Dow Jones data.

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16

Average Return for investing long in the highest 5 days plus investing short in the lowest 5 days of the past year during a Secular Bull Market versus a Secular Bear Market

(e.g., invested only in 10 days per year, a "market timer")

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

1

201

401

601

801

1,00

1

1,20

1

1,40

1

1,60

1

1,80

1

2,00

1

2,20

1

2,40

1

2,60

1

2,80

1

3,00

1

3,20

1

3,40

1

3,60

1

3,80

1

4,00

1

4,20

1

4,40

1

4,60

1

4,80

1

5,00

1

5,20

1

5,40

1

5,60

1

5,80

1

Days From Start of Secular Bull or Bear Market

Ret

urn

Average Return to Timing a Secular Bear

Average Return to Timing a Secular Bull

The average return for timing in a Bear Market

is 32.2%

The cycle average return for timing in a Bull Market is 21.8%

Source: Dow Jones data.

Below we extract the average lines from the previous two pages. The average return for the “secular bull timer” is 21.8%/year on a rolling yearly basis, as compared to the secular bear timer with 32.2% average returns on a rolling basis. Timing (as defined) produced a return ~10.4% higher during secular bear markets. As the secular bear market grows old and dies, the return to market timers (vis-à-vis indexers) will continue to diminish, in our view. The convergence of the green lone below on the black line is, ipso facto, evidence the Secular bear Market is growing old and will soon die. It will increasingly pay to be fully invested, and when a Secular Bull Market ensues, it will probably pay to be indexed.

Note the way the two lines converge over

time, evidence a secular bear market

has a finite life.

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17

“Paper vs. Hard Assets:” This is the time for (over) investment in commodity capacity (that destroys pricing for commodity

producers for a generation). We are reminded, however, that commodity serving stocks (ex., machinery, engineering)

respond to the momentum of commodity prices and incremental growth of backlog, not the level of EPS delivered

out of existing backlog. Nor do the stocks respond to a declining (but still adequate) commodity price that supports

capacity expansion.

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18

Source: Stifel Nicolaus & Co., From a former report by Barry Bannister & Paul Forward dated April 19, 2002 published by Legg Mason Wood Walker, Inc., the prior owner of parts of the Stifel Nicolaus Capital Markets business. FactSet total return calculation with S&P 500 reinvested dividends at the record date.

Is the S&P 500 now the lagging asset that

increasingly represents “value,” whereas

commodities now represent “momentum?”

We think so.

In April 2002, at oil $25/bbl., S&P 500 $1,130 and corn

$1.94/bushel, we realized that supply, demand and currency

factors would cause oil to nearly triple, corn to more than double and the S&P 500 return, including dividends, to rise mid-single digits for years to come.

We aligned our coverage accordingly.

Page 19: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

19

U.S. Commodity Price Index*, y/y% change, 1912 to 2010 latest, 5-yr. M.A. versus Deere relative to the S&P 500 1927 to Present

-9%

-6%

-3%

0%

3%

6%

9%

12%

15%

18%

1912

1918

1924

1930

1936

1942

1948

1954

1960

1966

1972

1978

1984

1990

1996

2002

2008

2014

E

Com

mod

ity P

rices

, y/y

%,

5-yr

. mov

. avg

.

0%

1%

2%

3%

4%

5%

6%

7%

Dee

re s

tock

div

ided

by

the

S&P

500

Commodity Price Index, y/y % change, 5-yr. moving average, left axisDeere stock relative to the S&P 500 (S&P Composite in earliest periods), right axis

* Producer Price Index fo r Commodities 1907-56, CRB Futures 1957-present

Crude oil and FLR stock relative strength versus the S&P 500, 1965 to 2010 latest

0%

5%

10%

15%

20%

25%

30%

35%

40%

Dec-65

Dec-67

Dec-69

Dec-71

Dec-73

Dec-75

Dec-77

Dec-79

Dec-81

Dec-83

Dec-85

Dec-87

Dec-89

Dec-91

Dec-93

Dec-95

Dec-97

Dec-99

Dec-01

Dec-03

Dec-05

Dec-07

Dec-09

WTI

oil

pric

e re

lativ

e to

the

S&P

500

0%

3%

5%

8%

10%

13%

15%

18%

20%

23%

25%

28%

FLR

pric

e re

lativ

e to

the

S&P

500

WTI oil price relative to the S&P 500 FLR price relative to the S&P 500

Commodity prices are of great interest to us because we shaped our coverage to benefit from commodities about 10 years ago. The left chart shows that the relative strength versus the S&P 500 of farm equipment maker Deere & Co. since 1927 tracks commodity prices, as does the relative strength of global engineer Fluor Corp., shown in the right chart since 1965. Commodity serving stocks (ex., machinery, engineering) respond to the momentum of commodity prices.

Source: FactSet prices, Moody’s / Merchant Manual prices split-adjusted, EIA oil prices, Stifel Nicolaus format.

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20

0.0

0.1

1.0

10.0

100.0

1870

1875

1880

1885

1890

1895

1900

1905

1910

1915

1920

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

E20

15E

Rel

ativ

e pr

ice

stre

ngth

, sto

cks

vs. c

omm

oditi

es, l

og s

cale

U.S. stock market composite relative to the U.S. commodity market, 1870 to present

Key: When the line is rising, the S&P stock market index beats the commodity price index and inflation eventually falls. When the line is

falling, the opposite occurs.

U.S. Stock Market Relative to The Commodity Market, 1870 to September 29, 2010.

Post-Civil War Reconstruction

ends in 1877, gold standard begins

1879, deflationary boom, stocks rally.

Pearl Harbor,

WW21939-45

Gold nationalized

U.S.$ devalued in 1933. FDR's

"New Deal" & reflation begins.

'29 Crash

Post-WW 1 commodity bubble bursts, deflation

ensues in 1920, bull market begins.

WW11914 to

1918

OPEC '73 embargo; 1973-74

Bear Market,

Iran fell '79.

LBJ's Great Society + Vietnam

1960s; Nixon closed gold

w indow 1971, all

inflationary.

Post-WW 2 commodity &

inflation bubble bursts

ca. 1950, disinflation

ensues, Eisenhower bull market

begins.

OPEC misreads market and oil prices collapse 1981, Volcker stops inflation 1981-82, then

Reagan tax cuts, long Soviet collapse,

disinflation & bull market begin.

Populism in U.S. politics.

Panic of 1907, a banking crisis

& stock market crash.

Source: Standard & Poor’s (S&P composite joined to S&P 500), U.S. government (PPI for Commodities joined to the CRB spot then the CRB futures).

Below we show the updated version of our cover chart 2 pages prior. The U.S. stock market (S&P) index relative to commodities since 1870, i.e., “Paper vs. Hard Assets” trade has expired, in our view, and while this is the time cyclically speaking for (over) investment in commodity capacity (that destroys pricing for commodity producers for a generation), we are reminded that commodity serving stocks (ex., machinery, engineering) respond to the momentum of commodity prices and incremental growth of backlog. The stocks do not respond to the level of EPS delivered out of existing backlog.

The Ratio of U.S. Stock Prices (S&P 500) to Commodity Prices (CRB Futures)

Daily prices 8/14/1998 to Present

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

Aug

-98

Aug

-99

Aug

-00

Aug

-01

Aug

-02

Aug

-03

Aug

-04

Aug

-05

Aug

-06

Aug

-07

Aug

-08

Aug

-09

Aug

-10

Shock

Acceptance

Capitulation

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21

U.S. Stock Market Total Return Index relative to U.S. all commodity price index during each secular bear market for equities in the 20th Century (start = 100)

20

40

60

80

100

120

140

160

0 +1 +2 +3 +4 +5 +6 +7 +8 +9 +10

+11

+12

+13

+14

+15

+16

Years from start of equity secular bear market

Sta

rt of

equ

ity s

ecul

ar b

ear m

arke

t = 1

00

1906-21 1929-42 1966-82 1999-present Average of four cycles cited

1999-present decline of S&P 500 relative to commodities already the lowest on record.

Below we use a total return index for the S&P 500 (price + dividend) relative to the U.S. commodity price index (CRB and before that PPI for All Commodities). This cycle (green line) is by far the weakest return for equities ever relative to commodities (i.e., strongest return for commodities ever versus equities) for each of the four secular bear markets since 1906. We believe this has prompted the securitization of commodities in the current equity secular bear market, since non-interest bearing commodities are attractive at zero interest rates, and low Western interest rates are matched by currency manipulating Asia, prompting a fixed investment boom in those countries (a spread has developed between nominal GDP in Asia and the level of interest rates). EM commodity demand is an ongoing bubble, in our view.

Source: Standard & Poor’s (S&P composite joined to S&P 500), U.S. government (PPI for Commodities joined to the CRB spot then the CRB futures).

The current decline of stocks since 1999 relative to commodities is already at the historically lowest level we would expect for the duration of the current secular bear market, just 11 years into the process. We believe investors should expect a diminishing advantage to “alternative investments” (i.e., alternatives to equities) as a style, to include commodity investments.

Page 22: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

22

S&P Stock Market Composite 10-Year Compound Annual Total Return (Incl. Reinvested Dividends),

Data from 1830 to Present

-2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

20.0%

22.5%

1840

1850

1860

1870

1880

1890

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

YTD

Commodity prices are cyclical and move in unisonCommodities data 1795 to Present, 10-yr. M.A.

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

1805

1815

1825

1835

1845

1855

1865

1875

1885

1895

1905

1915

1925

1935

1945

1955

1965

1975

1985

1995

2005

Cold War/OPEC

War of

1812

W.W. I I &Korean Conflict

W.W. I

CivilWar

U.S. industrialrevolution & overheating / gold surplus.

Easy credit speculative

boom.

Commodity price momentum is coming off the 2nd best 10-year period in 200 years (left chart), while the S&P 500 total return (price change + dividend) came off a nearly 200 year low in 2008 (right chart). From 2010 to 2020 we foresee 3%/year average annual CRB commodity price gains, low inflation, and an S&P 500 compound annual total return +7%/yr. (2010-20 point-to-point, nominal not real), causing the S&P 500 total return to beat the CRB near futures by 400bps on a compound annual basis.

Source: Commodity prices are from Historical Statistics of the United States, a U.S. Census publication, Factset (Reuters CRB), and the S&P 500 and long-dated U.S. stock market total return “A New Historical Database for the NYSE 1815 to 1925: Performance and Predictability” by the Yale School of Management, used with permission. This paper can be downloaded without charge from the Social Science Research Network Electronic Paper Collection. Post-1925 data for stocks are from Ibbotson/Morningstar, Factset and Standard & Poor’s. Charts formats and annotations are Stifel Nicolaus & Co.

X

X

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23

Most bubbles have three phases up (charts below) corresponding to disbelief, belief and mania, and after a bubble bursts the failed attempt of the asset price to re-achieve the old high is the surest sign a bubble has burst. We think gold (bottom right charts) is heavily dependent on low nominal and real interest rates, and would fade if risk assets leveraged to growth (i.e., equity) return to favor via successful 2 ½ - 3% inflation.

Source: Factset prices, Federal Reserve.

Dow Jones Industrial Average, 1/2/1920-12/31/1940

$0

$50

$100

$150

$200

$250

$300

$350

$4001/

2/20

1/2/

22

1/2/

24

1/2/

26

1/2/

28

1/2/

30

1/2/

32

1/2/

34

1/2/

36

1/2/

38

1/2/

40

2

1

3

Nikkei 225, 1/2/1985 - 12/30/1991

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

1/2/

85

1/2/

87

1/2/

89

1/2/

91

1/2/

93

1/2/

95

1/2/

97

1/2/

99

1/2/

01

1

2

3

Nasdaq Composite,1/2/1990 to present

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

$5,500

1/2/

90

1/2/

92

1/2/

94

1/2/

96

1/2/

98

1/2/

00

1/2/

02

1/2/

04

1/2/

06

1/2/

08

1/2/

10

1

2

3

WTI Oil, 1/2/1997 - present

$0

$20

$40

$60

$80

$100

$120

$140

$160

1/2/

97

1/2/

99

1/2/

01

1/2/

03

1/2/

05

1/2/

07

1/2/

09

1

2

3

Gold, $ per oz, 1/2/2004 - present

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

$1,300

$1,400

$1,500

1/2/

04

7/2/

04

1/2/

05

7/2/

05

1/2/

06

7/2/

06

1/2/

07

7/2/

07

1/2/

08

7/2/

08

1/2/

09

7/2/

09

1/2/

10

7/2/

10

1

2

3

Gold, $ per oz vs. 10-year TIPS Yield (Inverted scale)

1/3/2004 - present

$200$300

$400

$500

$600

$700

$800

$900$1,000

$1,100

$1,200

$1,300

$1,400

$1,500

1/2/

2004

1/2/

2005

1/2/

2006

1/2/

2007

1/2/

2008

1/2/

2009

1/2/

2010

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Gold $/oz.

10-yr. TIPS

Rally FailsRally Fails Rally Fails

Rally

Fails

Moves withrates since Crisis ‘08

Page 24: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

24

On the subject of bubbles, rarely does anyone succeed at being both or alternately value then growth in nature. Below we show a stylized representation of the three stages of a typical bubble, which are (1) disbelief, (2) belief, (3) mania. The largest dollar and percentage gains accrue to the early “Disbelief stage” adopters, but that group also assumes more speculative(1) risk because they must peer into the mist and see the future. If you are a growth/momentum investor you may capture the smaller, last move, or “Mania,” but because you are buying a well established trend perhaps there is, in fact, less speculative risk. “Hybrid” investors, the great middle, are in-between. As for mania investors a word of caution: timing the top is risky as the greater fool theory comes into play.

Disbelief

(Most m

arket

players don’t

believe a

major change

is underway)

Correction:Naysayers say

“I told you so”

Belief

(More

market

players

start

to spot th

e

big chan

ge)

Correction:Destructive

capitulation of the old leaders to the new

leaders (ex., financials -> basic

materials, 2008-2010, or commodities to

growth stocks 1997-2000)

Man

ia(V

alue

inve

stor

s

exit,

mom

entu

m a

nd

grow

th ta

ke o

ver.

Cond

ition

s ap

pear

ove

r-

boug

ht, f

eeds

on

itsel

f.) Collapse:When bears are beaten into silence

and bulls are complacent, then prices collapse at

least to where the mania

phase began.

One-half retrace:

After some time prices recover to half-way

between the post-mania

low and mania high water mark.

Source: Stifel Nicolaus.(1) Speculation is derived from the Latin word specula, which is literally a “watchtower” implying the ability to see into the distance.

$100/share

$70/share

$40/share

$10/share

Building MANIA

STAGE: ~43% "GROWTH investor"

move from $70 to $100

Building BELIEF

STAGE: ~75% "GARP

investor" move from $40

to $70

Building DISBELIEF

STAGE: ~300%

"VALUE investor"

move from $10 to $40

Page 25: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

25

Asian excess savings were funneled into U.S. asset prices via trans-Pacific vendor financing after the mid-1990s. This increased commodity prices because the supply of money (a commodity) outpaced the supply of oil, gold, etc. (another commodity), irrespective of collapsing monetary velocity.

Source: U.S. Federal Reserve, U.S. Federal Reserve for M3 (SA) 1959 to 2005. For M3 2006 forward we use: M2 + Large time deposits + Money Mkt. Balance + Fed Funds & Reverse repos with non-banks + Interbank loans + Eurodollars (regress historical levels versus levels of M3 excluding Eurodollars), Stifel Nicolaus format. US Bureau of Economic Analysis.

** MV = PQ Money Supply x Velocity or turnover of money (GDP/Money) = Price of all goods and services x Quantity of all goods and services produced.

The charts below demonstrate tangible evidence of the deflationary impact of cumulative debt leverage. As “M”rose sharply and “Q” rose as well, “V” of course collapsed, so given that MV = PQ** there was little upside to “P” or prices (i.e., inflation).

Growth of Components of U.S. M3 Money Supply ($ bil.)

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

$11,000

$12,000

$13,000

$14,000

$15,000

Jan-

81Ja

n-82

Jan-

83Ja

n-84

Jan-

85Ja

n-86

Jan-

87Ja

n-88

Jan-

89Ja

n-90

Jan-

91Ja

n-92

Jan-

93Ja

n-94

Jan-

95Ja

n-96

Jan-

97Ja

n-98

Jan-

99Ja

n-00

Jan-

01Ja

n-02

Jan-

03Ja

n-04

Jan-

05Ja

n-06

Jan-

07Ja

n-08

Jan-

09Ja

n-10

Institutional MoneyFunds

Eurodollars

Repos

Large-TimeDeposits

Retail MoneyFunds

Small Denom.Time Deposits

Savings Deposits

Demand & OtherCheck Deposits

Currency &Travelers Checks

M2 = Below

Sum = M3

M1 = Below

Mexican Peso & Asian debt crises.

Total Non-farm Employment y/y%

-6%

-4%

-2%

0%

2%

4%

6%

Jan-

80

Jan-

81

Jan-

82

Jan-

83

Jan-

84

Jan-

85

Jan-

86

Jan-

87

Jan-

88

Jan-

89

Jan-

90

Jan-

91

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Real GDP y/y%

-5.0%

-2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

Jan-

80

Jan-

81

Jan-

82

Jan-

83

Jan-

84

Jan-

85

Jan-

86

Jan-

87

Jan-

88

Jan-

89

Jan-

90

Jan-

91

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Manufacturing Capacity Utilization

60%

65%

70%

75%

80%

85%

90%

Jan-

80

Jan-

81

Jan-

82

Jan-

83

Jan-

84

Jan-

85

Jan-

86

Jan-

87

Jan-

88

Jan-

89

Jan-

90

Jan-

91

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Real 10-year Treasury Yield*

-2%0%2%4%6%8%

10%12%

Jan-

80

Jan-

81

Jan-

82

Jan-

83

Jan-

84

Jan-

85

Jan-

86

Jan-

87

Jan-

88

Jan-

89

Jan-

90

Jan-

91

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

*Deflated using PCE Price Index

Page 26: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

26

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

1805

1815

1825

1835

1845

1855

1865

1875

1885

1895

1905

1915

1925

1935

1945

1955

1965

1975

1985

1995

2005

2015

E

2025

E

PPI All Commodities (1793 to 1956) and CRB Commodity Futures (1957-now) Linked Commodity Prices Y/Y % Change, 10-Yr. Moving Average

Rolling 10-year commodity price growth: we note the ~55 year connected tops for K-wave cycles and stalled rallies in between (implying 2008 was a stalled rally). Since the last peak was 1975-1980, that implies that 2030-35 trailing 10-year average commodity

inflation may be just under 15%/year (i.e., causing commodity prices to triple from about 2025 to 2035)

War of 1812 & Napoleonic Wars (1814 w as 10-yr.

MA commodity

peak)

U.S.Civil War (1864 w as 10-

yr. MA commodity

peak)

World War 1 (1920 w as 10-

yr. MA commodity

peak)

Cold War (1975-1980 w as 10-

yr. MA commodity

peak)

52 years

56 years

60 years

55 years to 2030-35?

Connecting the tops of commodity price rolling 10-year average price growth in the charts below we note the ~55 year peak-to-peak jumps for Kondratiev-wave(1) cycles, and stalled rallies in between (2008-10 is a stalled commodity rally, in our view). Since the last peak was 1975 (real) and 1980 (nominal), perhaps by 2035 the trailing 10-year commodity inflation will be ~13-15%/year? The more salient near term observation we make is that we see commodity strength fading 2010 to 2020 but resurging after 2020.

Source: Stifel Nicolaus format, data Historical Statistics of the United States, a U.S. Census publication. Note that MV = PQ Money Supply x Velocity or turnover of money (GDP/Money) = Price of all goods and services x Quantity of all goods and services produced. Commodity prices are not concerned with the question “What is the velocity of money “V” and thus the implications for consumer prices?” Rather, commodity prices rise if the quantity of money relative to the quantity of commodities rises. As such, commodity prices are a useful price deflator for long-term analysis. (1) http://en.wikipedia.org/wiki/Kondratiev_wave

Reasonable forecast, in our

view. Peak 2010, bottom 2020 at a trailing return of

3%/year, then low/mid-teens trailing 10-year growth by 2030.

Page 27: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

27

Nominal Trade-Weighted U.S.$ Major Currency Index, 1935 to July-2010 (Left) versus U.S. GDP as a share of global GDP expressed in U.S. $, 1950 to IMF 2010E (Right)

30

40

50

60

70

80

90

100

110

120

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

E

2015

E

Nom

inal

trad

e-w

eigh

ted

U.S

. $

16%

18%

20%

22%

24%

26%

28%

U.S

. GD

P sh

are

of g

loba

l GD

P (e

xpre

ssed

in

U.S

. $)

Bretton WoodsAgreement

began U.S. dollar bubble; U.S. share

of world GDP dominates. Vietnam, social

programs, EU and Japan recovery weigh on dollar resulting is

gold outflows.

Emerging markets reserves increase,

dollar rallies.

Fed tightens 1969, dollar rallies, Martin -> Burns Fed transition 1970 then Bretton

Woods abandoned 1971

Fed's Volcker hikes rates sharply.

Source: U.S. GDP with a base year 1990 links the OECD Geary-Khamis 1950 to 1979 series to the IMF World Economic Outlook 1980 to present series, including 2009 & 2010 estimates. U.S. dollar data is from the U.S. Federal Reserve 1971 to present, for 1970 and prior we use R.L. Bidwell - “Currency Conversion Tables - 100 Years of Change,” Rex Collins, London, 1970, and B.R. Mitchell - British Historical Statistics - Cambridge Press, pp. 700-703. For trade weightings pre-1971 we use “Historical Statistics of the United States, Colonial Times to 1970,” a U.S. Census publication.

After defeating Axis fascism (while quietly unraveling colonialism) during and immediately after W.W. II, the dollar surged with the 1945 Bretton Woods Agreement in which the U.S. dollar tied to gold and the world’s currencies floated (often down) versus the dollar. Ending the gold standard in 1971 enabled unlimited reserve accumulation, and as the reserve currency state the U.S. logically chose to accumulate debt and gradually inflate. The defeat (corrosion within, an arms race from without) of communism in the 1980s combined with Fed rate hikes enabled the dollar to put in its century nominal high, but that peak coincided with the era of U.S. leveraging and asset inflation. To continue to attract foreign savings the dollar must rally periodically to project strength. Since the late 1960s, the U.S. dollar has continued the process of gradual debasement interrupted by dollar “short squeezes” every 10 years, shown in the blue line as spikes. We have doubts with regard to the EU (monetary without political union) or Chinese (fixing currency and interest rates) models, and believe another such spike in the dollar could be in the offing, more or less “on schedule,”in 2011. Historically, growth stocks and “anti-commodity” equities rally with dollar strength. We see that 2010 to 2012.

Page 28: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

28

The mechanics of de-leveraging, which involves growing credit more slowly than nominal GDP (Nominal GDP = real GDP + Inflation) and the nationalization of the “bad” slice of

credit as needed to “unclog” the lending pipes (bad bank/good bank analogy) is key now, since the alternative is

outright, rapid default.

Page 29: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

29

Debt as a Percentage of U.S. GDP, by Category

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

130%

1952

Q1

1955

Q1

1958

Q1

1961

Q1

1964

Q1

1967

Q1

1970

Q1

1973

Q1

1976

Q1

1979

Q1

1982

Q1

1985

Q1

1988

Q1

1991

Q1

1994

Q1

1997

Q1

2000

Q1

2003

Q1

2006

Q1

2009

Q1

2012

Q1

2015

Q1

Financial Public NonfinancialPrivate Nonfinancial Household Private Nonfinancial Business

Change in debt since 2Q08 as a % of GDP (bps):

Financial debt 2Q08 to 2Q10 Change: -1,415 bpsPrivate household 2Q08 to 2Q10 Change: -390 bpsPrivate business 2Q08 to 2Q10 Change: -121 bpsPublic debt 2Q08 to 2Q10 Change: +2,376 bps= Total debt/GDP up from 355% (2Q08) to 358% (2Q10)

Source: FactSet prices, Federal Reserve, Stifel Nicolaus format.

Thus far, increased government debt has offset decreasing private debt, hardly a test

of de-leveraging, in our view.

Government Interest Expense as a Percentage of U.S. GDP

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

1952

Q1

1955

Q2

1958

Q3

1961

Q4

1965

Q1

1968

Q2

1971

Q3

1974

Q4

1978

Q1

1981

Q2

1984

Q3

1987

Q4

1991

Q1

1994

Q2

1997

Q3

2000

Q4

2004

Q1

2007

Q2

2010

Q3

State & Local Gov't Interest Payments % of GDPFederal Gov't Interest Payments % of GDP

We believe many jobs associated with consumption and asset inflation (ex., finance, construction and retail) are gone for good, and public debt is being used to forestall the effects of private debt default (brown line rising, left side). Stepping in, the U.S. government has plausibly been able to borrow the gap because demand for U.S. paper is strong, with low interest rates (right chart) that enable public debt service to be low versus history (avg. maturity ~4 years, well within 30-year norms).

Page 30: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

30

U.S. Federal Reserve Bank Assets & Liabilities

-$2,500

-$2,000

-$1,500

-$1,000

-$500

$0

$500

$1,000

$1,500

$2,000

$2,500

5-Se

p-07

5-De

c-07

5-M

ar-0

8

5-Ju

n-08

5-Se

p-08

5-De

c-08

5-M

ar-0

9

5-Ju

n-09

5-Se

p-09

5-De

c-09

5-M

ar-1

0

Liquidity Facilities

Other

Repurchase Agreements

Term Auction Credit

Securities Held Outright

Reserve Balances withFederal Reserve Banks

Treasury SupplementaryFinancing Program (SPF)

Other

Currency in Circulation

Assets

Liabilities

$ Bill ionTotal Financial Assets of the Monetary Authority

as a Percentage of U.S. GDP

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

16%

17%

1952

Q1

1954

Q4

1957

Q3

1960

Q2

1963

Q1

1965

Q4

1968

Q3

1971

Q2

1974

Q1

1976

Q4

1979

Q3

1982

Q2

1985

Q1

1987

Q4

1990

Q3

1993

Q2

1996

Q1

1998

Q4

2001

Q3

2004

Q2

2007

Q1

2009

Q4

Source: U.S. Fed and government data, Stifel Nicolaus format.(1) The Fed may sell assets such as agency securities held, offsetting bank’s use of excess reserves for loans, but that may be unpalatable in a weak housing market. So, to keep reserves parked at the Fed the central bank must meet a market-determined Term Deposit rate (or bid a market-determined reverse repo rate), which appears to us a reactiverather than rate setting strategy.

Excess reserves = future problem?

The U.S. Fed was able to double its balance sheet (left chart) because as a percentage of GDP when the crisis began (right chart) the Fed balance sheet was quite small in 2007. So, in a sense, the U.S. Fed and U.S. Treasury have expended many of their bullets short of major monetization of Federal debt as a means to restart growth. The Fed’s exit strategy is an open question, since soaking up excess reserves with newly created Fed powers to pay interest on reserves may mean that the Fed has effectively ceded control of short rates(1) to the market (the market will set the future term deposit interest rate for reserves).

Page 31: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

31

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

10-Year Treasury Yield

Fed Funds Rate

Having reached a floor of ~0%-1%, that policy rate tool is now blunt, in our view. It did work from 1982 to

2007, though, as pushing rates to new lows was used to keep the asset bubble going.

The yield curve has historically been steepened to stimulate growth. One last trip up as we approach

zero on the short end?

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

10-Year Treasury minus Fed Funds rate -100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

220%

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Fed Funds Rate y/y% chg.

10-Year Treasury Yield y/y%

Federal Funds Rate & 10-Year Yield:Y/Y% change shown below. Note the increasing amplitude as rates fall. That greatly affects asset

values, so Fed Policy post-1982 was doomed to failure from the beginning.

Source: U.S. Fed and government data, Stifel Nicolaus format.

The 10-year Treasury yield minus Federal Funds (FFR) has once again peaked at its Fed-induced ~3% peak (left chart), a hat trick the Fed has used four times since 1982 to restart the lending process. But it is “game over” at 0% short rates (middle chart). A second observation is that as longer term rates fell with short rates (middle chart), many borrowers ominously shortened maturities. A third observation is that since 1982, whenever the FFR was eventually hiked, the “traditional” 400bps move in the FFR from bottom to top was a much larger percentage change in the FFR, leading to short rate volatility (right chart), which eventually destroyed debtors, many of which were floating with short maturities. We believe that when the Fed tries to hike the FFR from ~20bps to, say, 200bps the resulting “delta” for rates (right chart) may overwhelm markets.

Page 32: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

32

Log of U.S. Real GDP per Capita, 1865 to 3Q2010

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6

4.8

1865

1869

1873

1877

1881

1885

1889

1893

1897

1901

1905

1909

1913

1917

1921

1925

1929

1933

1937

1941

1945

1949

1953

1957

1961

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

2005

2009

CAGR of Real GDP from 1865 to present = 3.4%- CAGR of Population from 1865 to present = 1.5% CAGR of GDP/Capita from 1865 to present = 1.9%

+CAGR of Population from 1985 to present = 1.0% Probable GDP to expect in the future = 2.9%*

* Using historical GDP/capita CAGR and the population CAGR from 1985 to present.Note that productivity of ~2% + population growth of 1% equates to ~3% real GDP growth.Nominal GDP would add inflation.

Source: Historical Statistics of the United States, Millennial Edition, U.S. Census.

U.S. GDP per capita for 145 years has grown at 1.9%/year (real GDP growth of 3.4% minus population growth of 1.5%). Recent trends have supported ~2.0-2.5% growth in productivity, and for the past decade the U.S. population has grown at a fairly consistent 1.0% and we see future labor force growth (our hours worked) of ~0.5%. This supports ~3% [(2.0% to 2.5%) productivity + (0.5 to 1.0%) labor force growth] U.S. real GDP growth potential, no different than the historical trend.

We chose the Post-Civil War period because that is when the unified U.S. tilted more in the direction of hard money/central

banking and embraced the Industrial Revolution.

Page 33: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

33Source: U.S. Fed and government data, Stifel Nicolaus format.(1) Nominal GDP, P.R. China + Honk Kong SAR, converted to U.S. dollars, not PPP, using World Bank data 2010E. (2) Ratio of output to all inputs (labor, capital, investment).

We believe demographics support about 2.5% productivity (left chart), and when combined with minimal growth in the size of the labor force or hours worked that may equate to ~3% real GDP. If the $14.58 trillion (nominal GDP) U.S. economy grows at 3.0%/year that contributes $438 billion to global GDP. For comparison, the $5.48 trillion Chinese economy (1) must sustaingrowth of 8%/year to have the same effect on global GDP. Given that U.S. GDP is mostly productivity-derived and Chinese growth appears reliant on exports and fixed investment, we think the U.S. is the safer horse in the race, particularly as “growth” becomes more difficult to find and thus worth a premium. That is why we like large cap U.S. growth.

U.S. real GDP y/y percent change (line) versus the change in the size of the labor force

and labor productvity

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

1Q20

10

U.S. Non-Farm output per hour YY%Size of the U.S. non-farm labor force Y/Y%U.S. Real GDP Y/Y%

0.55x

0.60x

0.65x

0.70x

0.75x

0.80x

0.85x

0.90x

0.95x

1.00x

1.05x

1.10x

1.15x

1.20x

Jun-

53

Jun-

56

Jun-

59

Jun-

62

Jun-

65

Jun-

68

Jun-

71

Jun-

74

Jun-

77

Jun-

80

Jun-

83

Jun-

86

Jun-

89

Jun-

92

Jun-

95

Jun-

98

Jun-

01

Jun-

04

Jun-

07

Jun-

10

Jun-

13

Jun-

16

Jun-

19

U.S

. Rat

io o

f 35

- 49

to 2

0 - 3

4 Ye

ar O

lds

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

Prod

uctiv

ity G

row

th, Y

/Y%

, 2-y

r. A

vg.

U.S. Ratio of Experienced People Age 35-49 To Less Experienced People Age 20-34 (Left axis)Nonfarm Business Output Per Hour y/y % Change 3-Year Moving Avg. (Right axis)

U.S. Census Bureau population estimates

2009-20 (Note: Population is a variab le that is easily projected)

2001 age wave peak.

1981 = age wave trough. Productivity growth at zero.

1961 age wave peak and similar productivity

peak1961 to 1965.

Productivity of ~2.5% may

conform to the demographic

mix of the labor force

through 2020.

Note the normal post-recession productivity spikes. Those are cyclical spikes in which hiring

lags the recovery in output. But the secular trend is the longer

wave shown in the charts.

Page 34: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

34

Important Disclosures and Certifications

I , Barry Bannister, certify that the views expressed in this research report accurately reflect my personal views about the subject securities or issuers; and I, Barry Bannister, certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report. For our European Conflicts Management Policy go to the research page at www.stifel.com.

For applicable current disclosures for all covered companies please visit the Research Page at www.stifel.com or write to the Stifel Nicolaus Research Department at the following address.

Stifel Nicolaus Research DepartmentStifel, Nicolaus & Company, Inc.One South Street16th FloorBaltimore, Md. 21202

Stifel, Nicolaus & Company, Inc.'s research analysts receive compensation that is based upon (among other factors) Stifel Nicolaus' overall investment banking revenues.

Our investment rating system is three tiered, defined as follows:

BUY - We expect this stock to outperform the S&P 500 by more than 10% over the next 12 months. For Canadian securities we expect the stock to outperform the S&P/TSX Composite Index by more than 10% over the next 12 months. For yield-sensitive securities, we expect a total return in excess of 12% over the next 12 months for U.S. securities as compared to the S&P 500 and Canadian securities as compared to the S&P/TSX Composite Index, respectively.

HOLD - We expect this stock to perform within 10% (plus or minus) of the S&P 500 over the next 12 months. For Canadian securities we expect the stock to perform within 10% (plus or minus) of the S&P/TSX Composite Index. A Hold rating is also used for yield-sensitive securities where we believe it is unlikely that a dividend reduction will occur, but that any potential increase in the share price is limited.

SELL - We expect this stock to underperform the S&P 500 by more than 10% over the next 12 months and believe the stock could decline in value. For Canadian securities we expect the stock to underperform the S&P/TSX Composite Index by more than 10% over the next 12 months and believe the stock could decline in value.

Of the securities we rate, 50% are rated Buy, 47% are rated Hold, and 3% are rated Sell.

Within the last 12 months, Stifel, Nicolaus & Company, Inc. or an affiliate has provided investment banking services for 26%, 16% and 12% of the companies whose shares are rated Buy, Hold and Sell, respectively.

Page 35: 4Q10 Macro-Trends...All relevant disclosures and certifications can be found on page 34-35 of this report and on the research page at stifel.com. 4Q10 Macro-Trends Current as of Nov-3,

35

Additional Disclosures

Please visit the Research Page at www.stifel.com for the current research disclosures applicable to the companies mentioned in this publication that are within Stifel Nicolaus’ coverage universe. For a discussion of risks to target price please see our stand-alone company reports and notes for all Buy-rated stocks.

The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of Stifel, Nicolaus & Company, Inc. or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within. Past performance should not and cannot be viewed as an indicator of future performance.

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