ii.a. 2007 market outlook & strategy - opers€¦ · spx +24.0 mega +33.4 spx +28.6 spx +36.4...

1

OHIO PUBLIC EMPLOYEES RETIREMENT SYSTEM 277 EAST TOWN STREET, COLUMBUS, OH 43215-4642

1-800-222-PERS (7377) www.opers.org

MEMORANDUM DATE: February 7, 2007 TO: OPERS Retirement Board Members Christopher DeRose, Executive Director CC: Jennifer Hom, Director – Investments Greg Uebele, Senior Investment Officer- External Management FROM: Phil Paroian, Senior Investment Officer – External Public Markets RE: 2007 Market Outlook and Strategy (Education) Purpose This memorandum provides an introduction and biography on this month’s Board Educational presenter, Mr. Jurrien Timmer. Background Fidelity Investments (“Fidelity”) manages two separate mandates for the OPERS Investment program. In the U.S. Equity asset class, Fidelity has managed a U.S. Small Cap portfolio since November 2001. Over the past five years, this portfolio has returned 14.87%, on an annualized basis. It has out performed its benchmark by nearly 350 basis points (3.50%) on an annualized basis. This portfolio had assets under management of $351 million as of December 31, 2006. In addition, Fidelity has been managing a core bond portfolio since August 2004. It has returned 2.70%, on an annualized basis, since inception. It has out performed its benchmark by 19 basis points (0.19%) on an annualized basis. Introduction Mr. Jurrien Timmer is the Director of Market Research at Fidelity Investments. As an investment strategist, his research incorporates fundamental, technical and quantitative disciplines. The research in his “State of the Market” presentations is widely used by Fidelity’s portfolio managers and analysts. Through our relationship with Fidelity, OPERS Investment Staff has also been able to gain access to Mr. Timmer’s research. His presentation today will cover the 2007 outlook for the economy, stocks, bonds and commodities. Mr. Jurrien Timmer’s biography is provided on the next page.

2

Jurrien Timmer Jurrien Timmer is the director of market research for Fidelity Investments, the largest mutual fund company in the United States, the No. 1 provider of workplace retirement savings plans and a leading online brokerage firm. He is a member of Fidelity’s Asset Allocation group, where he specializes in tactical asset allocation. His research directly impacts the portfolio strategy of Fidelity’s asset allocation funds and also is widely used by Fidelity’s portfolio managers and analysts. Mr. Timmer also manages several pilot funds using a fund-of-funds approach. As an investment strategist, his work includes fundamental, technical, and quantitative disciplines. Mr. Timmer joined Fidelity in 1995 as a technical research analyst in the fixed-income department. His responsibilities were later broadened to include equity research. In 1998, Mr. Timmer became responsible for the oversight of charting and other market research capabilities that support and reinforce the fundamental investment analysis function of Fidelity Management and Research Company. In this role, he became responsible for Fidelity’s Chart Room research content. Mr. Timmer joined the Asset Allocation group in September 2005, but remains very much involved with the Chart Room, as his research is a primary driver for the room’s content. Mr. Timmer received a bachelor of science degree in finance from Babson College in Wellesley, Massachusetts, in 1985. He was born and raised as a Dutch citizen in Aruba, but has been living in the United States all of his adult life. He became a United States citizen in 2002.

The State of the Market

Revised

February 2007Jurrien Timmer

Director of Market ResearchFidelity Investments

The information presented reflects the opinions of Jurrien Timmer, Director of Market Research, for Fidelity Management & Research Company as of February 17, 2007. These opinions do not necessarily represent the views of Fidelity or any other person in the Fidelity organization and are subject to change at any time

based upon market or other conditions. Fidelity disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Fidelity fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity

fund.

As with all of your investments through Fidelity, you must make your own determination whether an investment in any particular security or fund is consistent with your investment objectives, risk tolerance, financial situation, and your evaluation of the investment option. Fidelity is not recommending or endorsing any particular investment option by mentioning it in this conference call or by making it available to its customers. This information is provided for educational

purposes only, and you should bear in mind that laws of a particular state and your particular situation may affect this information.

2007 Outlook:Stocks: risk of ST correction,

but LT outlook very bullish.Risk of economic re-acceleration outweighs risk

of recession. Secular tailwinds.

No Fed easing.

Higher bond yields

Commodities in secular bull market.

+38.7 Lg Gr

+66.4 EM

+31.8 Comm

+14.0 Sm Val

+25.9 Comm

+56.3 EM

+31.6 REITs

+34.5 EM

+34.4 Europe

+21.8 Japan

+41.3 Mega

+39.3 EMBI

+35.2 Lg Val

+34.0 Mega

+63.1 Japan

+26.4 REITs

+13.9 REITs

+25.6 Gold

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+25.6 Japan

+32.6 EM

+126.5 Gold

+52.3 Sm Gr

+15.5 Japan

+36.3 HY

+38.6 Sm Val

+28.0 EM

+79.8 Europe

+100.3 Japan

+43.0 Japan

+40.4 EM

+65.0 EM

+29.1 Comm

+59.9 EM

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+74.8 EM

+16.6 Comm

+38.3 Lg Val

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+34.5 Mega

+28.9 Europe

+43.1 Sm Gr

+22.8 Sm Val

+8.44 Agg

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+47.3 RUT

+22.2 Sm Val

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+58.4 EM

+39.6 Lg Gr

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+14.7 Cash

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-2.49 Cnv

+28.5 Mega

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+0.85 Port

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+16.5 RUT

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+21.0 SPX

+0.71 Bal

-1.66 Port

-6.00 EM

+28.8 EMBI

+11.1 HY

+5.26 Lg Gr

+14.5 Comm

1979 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+18.4 SPX

+22.6 EAFE

+1.26 Lg Val

+20.5 Lg Gr

+20.3 HY

+7.01 Port

+31.0 Sm Gr

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+16.4 Europe

+16.2 RUT

-3.17 SPX

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+7.67 SPX

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+14.2 Port

+14.4 Cnv

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+16.2 Europe

-3.02 RUT

-2.16 Bal

-6.17 Cnv

+28.7 SPX

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-3.37 Europe

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-0.10 Bal

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-5.44 Gold

-2.37 EM

-6.77 Bal

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+18.4 Bal

-2.28 EAFE

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-6.15 Port

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-1.03 HY

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-5.86 HY

-5.59 Lg Val

-9.76 Japan

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+11.9 HY

+14.2 Mega

+16.2 EM

-4.91 SPX

+14.2 Gold

+16.3 Comm

+3.95 infl

+27.3 Cnv

+15.4 Lg Gr

+4.10 Europe

+12.5 HY

+12.4 Sm Val

-8.08 Lg Val

+22.2 Bal

+5.00 Lg Gr

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-1.55 Sm Val

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-11.4 Sm Val

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+15.1 Gold

-8.45 EM

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-9.59 HY

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-1.82 RUT

+18.3 REITs

+11.3 Sm Gr

+9.65 Agg

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-8.14 Europe

-9.23 Sm Gr

-15.5 Lg Val

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+14.5 Europe

-9.24 Sm Gr

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-1.99 Lg Val

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-0.48 Gold

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-9.11 SPX

-11.9 SPX

-15.9 EAFE

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-2.55 RUT

+2.46 TIPS

-12.1 Mega

-14.6 Mega

-18.1 Europe

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-7.11 Sm Val

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-17.4 Sm Gr

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-2.17 Cnv

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-14.2 EAFE

-19.5 Comm

-20.5 RUT

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+3.00 Cash

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-11.3 Lg Gr

-0.55 Japan

+8.37 Agg

-7.30 RUT

+5.92 REITs

+3.58 Sm Gr

-8.77 RUT

+6.35 Cash

+0.83 HY

-19.5 RUT

+5.60 Cash

-4.25 Europe

+2.90 Lg Gr

-2.43 Sm Gr

+2.54 infl

+3.63 Agg

-3.39 Comm

-14.3 EMBI

+0.85 Gold

-22.4 Lg Gr

-19.6 Europe

-22.1 SPX

+8.28 TIPS

+4.65 Gold

+2.80 TIPS

+4.80 Cash

+0.99 HY

+4.35 HY

-23.0 Comm

-1.86 EAFE

+3.80 infl

-15.8 Sm Gr

+5.76 Gold

+2.04 Comm

-10.5 Sm Gr

+4.42 infl

-1.81 REITs

-21.8 Sm Val

+3.06 infl

-5.13 Gold

+2.90 Cash

-2.92 Agg

+0.98 Gold

+3.32 infl

-11.6 EM

-17.5 REITs

-0.82 Agg

-22.4 Sm Gr

-20.4 Lg Gr

-23.4 Mega

+4.11 Agg

+4.34 Agg

+2.73 HY

+4.33 Agg

-11.8 Japan

+2.70 Agg

-32.1 Gold

-15.9 EM

-16.5 Gold

-19.0 Gold

+3.77 infl

+1.13 infl

-10.7 REITs

-15.3 Gold

-2.84 Gold

-23.4 EAFE

-5.76 Comm

-12.2 EAFE

+2.75 infl

-7.32 EM

+0.42 Japan

-4.59 Gold

-21.7 Gold

-25.3 EM

-1.49 Sm Val

-28.3 Japan

-21.4 EAFE

-27.9 Lg Gr

+1.88 infl

+3.26 infl

+2.43 Agg

+2.58 infl

-36.0 Japan

-10.3 Gold

-21.4 Japan

-1.07 Comm

-18.9 EMBI

-5.21 EM

-15.0 Japan

-24.0 Japan

-27.0 Comm

-4.62 REITs

-30.6 EM

-29.5 Japan

-30.3 Sm Gr

+1.03 Cash

+1.23 Cash

+2.02 Cnv

+0.32 TIPS

The Market Cycle

36 12

0

24

The Investment ClockThe Investment Clock

30

35

2829

Bull mkt ends

Earnings growth peaks

disinflationhigh inflation

20

13

Fed starts to tighten

11

16

Inflation accelerates

Fed eases

Year 3

Year 1

Year 2

Year 4

New Bull Mkt

43

FinancialsConsumerTechnology

EnergyIndustrialsMaterials

TechnologyCommodities

Energynon-cyclicals

PharmaCommodities

Non-cyclicalsPharmaUtilitiesBonds

which one is it?

Anatomy of a Bull MarketMonthly Data. Based on data from 1/42 through 12/06.

Source: Factset, Haver Analytics, CQG Inc.

1,294

Dec-06

Oct-02

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

"Old" 2002 Market Cycle

- 0.5 stdev (mean)

+ 0.5 stdev (mean)

S&P 500 Index



12/071,710

7/061,224

Oct-02

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700


800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

"Old" 2002 Market Cycle

Potential New Market Cycle

S&P 500 Index



12/071,710

7/061,224

08/07 1,355

2/071,455

Oct-02

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700


800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

Potential New Market Cycle

Late Cycle Peak?

S&P 500 Index

Are we in a new bull market cycle, or is the last one just ending?

1. Rising Earnings: favorable, but decelerating.

2. Benign Inflation/Friendly Fed: Fed looks done, but is it?

3. Reasonable Valuation: neutral/favorable.

The “Three Pillars”The “Three Pillars”

Stock MarketStock MarketStock Market

EarningsEarningsEarnings ValuationValuationValuationInterest

Rate Cycle

Interest Interest Rate Rate CycleCycle

Long-Term HistoryQuarterly Data. Source: Haver Analytics.

1.5

2.5

3.5

4.5

5.5

6.5

7.5

S&P 500 Index (log)Trend: 7.7 pct per annumTrend + 25%Trend - 25%

24.7

53.7

86.7

0

1

10

100

S&P 500 After Tax EarningsTrend: 7.1 pct per annumTrend + 25%Trend - 25%

'32 '37 '42 '47 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '070

5

10

15

20

25

30

35

40

45

50

Long-Term HistoryQuarterly Data. Source: Haver Analytics.

1.5

2.5

3.5

4.5

5.5

6.5

7.5

S&P 500 Index (log)Trend: 7.7 pct per annumTrend + 25%Trend - 25%

24.7

53.7

86.7

0

1

10

100

S&P 500 After Tax EarningsTrend: 7.1 pct per annumTrend + 25%Trend - 25%

'32 '37 '42 '47 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07

47.7

15.6

16.8

0

5

10

15

20

25

30

35

40

45

50

P/E Ratio (Reported)

Earnings have soared, letting valuations come back down to earth.

Data from 1/32 through 12/06.

4.0

+0.3

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

+1.0

+2.0

+3.0

Fed Too Easy/Too Tight

Monetary PolicySource: Haver Analytics, Federal Reserve.

Quarterly data from 1/85 through 12/06.

5.00

1.00

5.25

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Taylor Rule

Target Fed Funds Rate

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

'85 '86 '87 '88 '90 '91 '92 '93 '95 '96 '97 '98 '00 '01 '02 '03 '05 '06 '07 '08

-4.0

+0.3

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

+1.0

+2.0

+3.0

Fed Too Easy/Too Tight

Monetary PolicySource: Haver Analytics, Federal Reserve.

Quarterly data from 1/85 through 12/06.

5.00

1.00

5.25

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Taylor Rule

Target Fed Funds Rate

2.96

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

'85 '86 '87 '88 '90 '91 '92 '93 '95 '96 '97 '98 '00 '01 '02 '03 '05 '06 '07 '08

Real GDP GrowthReal Potential GDP Growth

Is the Fed done? The Taylor Rule says “probably”.

Major Themes

The Global S-CurveSource: CIA World Factbook, A. Gary Shilling & Co.

Netherlands

Chile

Spain Singapore

Hong Kong

Italy

Sweden UK

USA

Brazil

India

China

Mexico

Philipines

Japan

South Korea

Iraq

Ireland Norway

Belgium

Portugal

Canada Australia

France GermanyDenmark

Mali

Zimbabwe

Nigeria

Pakistan

Tunesia

1,000

10,000

100,000

-100 -50 0 50 100 150 200 250 300 350

Years of Economic Development

Per C

apita

GD

P (2

005

US$

) The Global S-CurveSource: CIA World Factbook, A. Gary Shilling & Co. Bubbles depict per capita oil consumption (2005).

Netherlands

Chile

Spain Singapore

Hong Kong

Italy Sweden

UK

USA

Brazil

India

China

Mexico

Philipines

Japan

South Korea

Iraq

Ireland Norway

Belgium

Portugal

Canada Australia

France

GermanyDenmark

Mali

Zimbabwe

Nigeria

Pakistan

Tunesia

Russia

1,000

10,000

100,000

-100 -50 0 50 100 150 200 250 300 350


Per C

apita

GD

P (2

005

US$

) The Global S-CurveSource: CIA World Factbook, A. Gary Shilling & Co.

Bubbles depict population as of 2005.

Russia

Netherlands

Chile

Spain Singapore

Hong Kong

Italy

Sweden UK

USA

Brazil

India

China

Mexico

Philipines

Japan

South Korea

Iraq

Ireland Norway

Belgium

Portugal

Canada Australia

France GermanyDenmark

Mali

Zimbabwe

Nigeria

1,000

10,000

100,000

-100 -50 0 50 100 150 200 250 300 350


Per C

apita

GD

P (2

005

US$

)

Globalization and its corresponding disinflation will continue to be a secular tailwind.

startof

cycle

endof

cycle

normal skew

mid-point

startof

cycle

endof

cycle

bullish skew

mid-point

Anatomy of a Mania: China A-SharesSource: Haver Analytics, Factset. Monthly Data.

440

300

-

50

100

150

200

250

300

350

400

450

500

2007 2008 2009 2010 2011 2012-

50

100

150

200

250

300

350

400

450

500

Bubble Composite (DJIA 1929, Japan 1989,NASDAQ 2000, Alum 1950's, Gold 1970's)

NASDAQ-GOLD-ALUM Only

China A-Shares

Is China a bubble?

Oil Consumption & GlobalizationQuarterly Data. Concept by Barry Bannister of Stifel Nicolaus

Data Source: Stifel Nicolaus, Haver Analytics.

0

1

10

100

Crude Oil

25.49

0

5

10

15

20

25

30

35

'00 '05 '10 '15 '20 '25 '30 '35 '40 '45 '50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Barrels/Capita: USABarrels/Capita: JapanBarrels/Capita: Hong KongBarrels/Capita: S. KoreaBarrels/Capita: ChinaBarrels/Capita: India



0

1

10

100

Crude Oil

25.49

15.3515.09

17.40

0

5

10

15

20

25

30

35

'00 '05 '10 '15 '20 '25 '30 '35 '40 '45 '50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15




0

1

10

100

Crude Oil

25.49

15.3515.09

17.40

1.950.84

0

5

10

15

20

25

30

35

'00 '05 '10 '15 '20 '25 '30 '35 '40 '45 '50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15


Quarterly Data from 1900 through 2005.

0

500

1000

1500

2000

Interest Rates, Globalization & the Deficit Quarterly Data. Source: FMRCo, Haver Analytics

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

10yr Tsy YieldGold-Based "Fair Value" for Bonds

-6.6% -7%-6%-5%-4%-3%-2%-1%0%1%2%

'67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09

Current Account Deficit/GDP

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

$1,762

0

500

1000

1500

2000

U.S. Gov't Bonds held byForeign Central Banks


5.52

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0


-6.6% -7%-6%-5%-4%-3%-2%-1%0%1%2%

'67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09


-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

$1,762

0

500

1000

1500

2000

U.S. Gov't Bonds held byForeign Central Banks


5.52

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0


-6.6% -7%-6%-5%-4%-3%-2%-1%0%1%2%

'67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09


-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

Budget Deficit/GDP

Globalization has led to low bond yields.

394.6

306.8

171.1

50

100

150

200

250

300

350

400

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040

U.S. Population + immigration (millions)U.S. Population (millions)

U.S. Population TrendsSource: U.S. Census Bureau.

Annual Data from 1900 to 2050.

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

Dow Jones IndustrialAverage (nominal,expressed as natural log)

65

67

69

71

73

75

77

79

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

394.6

306.8

171.1

50

100

150

200

250

300

350

400

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040




3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0


79.4

74.7

66.1

65

67

69

71

73

75

77

79

U.S. Life Expectancy

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

394.6

306.8

171.1

50

100

150

200

250

300

350

400

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 2030 2040




3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0


79.4

74.7

66.1

65

67

69

71

73

75

77

79

U.S. Life Expectancy

1965

2005

2021

19810.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

U.S. Age Wave(Saver/Borrower Ratio)

Demographic trends will be a secular headwind for stocks.

15%

20%

25%

30%

35%

40%

45%

50%

55%

'67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09

Housing TrendsQuarterly Data. Source: Haver Analytics.

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

New Home Prices

S&P 500

4.54

3.62 3.62

4.66

5.02

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6

4.8

5.0

5.2

Ratio of Home Price toHousehold Income

15%

20%

25%

30%

35%

40%

45%

50%

55%

'67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09


-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

New Home Prices

S&P 500

4.54

3.62 3.62

4.66

5.02

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6

4.8

5.0

5.2


51%

24%

30%

15%

20%

25%

30%

35%

40%

45%

50%

55%

'67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09

Mortgage Payment relativeto Income (fixed)


-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

New Home Prices

S&P 500

4.54

3.62 3.62

4.66

5.02

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6

4.8

5.0

5.2


Is there a housing bubble?

The Shrinking Equity FloatSource: FMRCo, Haver Analytics, Fed Flow of Funds Report.

Shaded areas represent bear markets. Quarterly Data since 1967.

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

S&P 500 Index (log)

-9000

-8000

-7000

-6000

-5000

-4000

-3000

-2000

-1000

0

1000

'67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09

Annual Net Corporate EquityIssues (SAAR, Bil.$) Cumulative Net Corporate EquityIssues (SAAR, Bil.$)

The Shrinking Equity FloatSource: FMRCo, Haver Analytics, Fed Flow of Funds Report.

Shaded areas represent bear markets. Quarterly Data since 1967.

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

S&P 500 Index (log)

-9000

-8000

-7000

-6000

-5000

-4000

-3000

-2000

-1000

0

1000

'67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09

Annual Net Corporate EquityIssues (SAAR, Bil.$) Cumulative Net CorporateEquity Issues (SAAR, Bil.$)

The equity float continues to shrink, which is bullish for now but eventually bearish.

Data from Q1 1967 through Q3 2006.

Debt-based M&A Equity-based M&A Cash-based M&A

Investors Storm Fortress IPOInvestors Storm Fortress IPOShares in the hedge fund operator surged in their Shares in the hedge fund operator surged in their public debut Friday public debut Friday ---- and the rousing reception may and the rousing reception may make more such deals likely.make more such deals likely.

Blackstone’s Bid for Equity Blackstone’s Bid for Equity Office Prevails Office Prevails The feverish competition over Equity Office The feverish competition over Equity Office Properties Trust, the nation’s largest office landlord, Properties Trust, the nation’s largest office landlord, ended today with the original suitor, the Blackstone ended today with the original suitor, the Blackstone Group, coming out on top.Group, coming out on top.

Only one place to hide.

Correlation of Returns (to the S&P 500)100%

93%

92%

90%

89%

87%

85%

83%

81%

79%

79%

71%

70%

67%

59%

58%

56%

44%

37%

37%

28%

26%

14%

11%

9%

-6%

-37%

-39%

-60% -40% -20% 0% 20% 40% 60% 80% 100% 120%

S&P 500

50/40/10

Small Value

PEF EQTY

PEF 50/30/20

Large Value

Small Caps

Small Growth

High Yield

Large Growth

converts

Equity Long/Short

REITs

Emerging mkts

EMBI

EAFE

Europe

PEF ALT

Japan

Stat Arb

PEF FI

Convertible Arbitrage

Gold

Cash

Equity Market Neutral

Inv Grade Bonds

Inflation

Commodities

12mo Corelation of Annual Returns, 10yr average

12mo Corelation of Annual Returns, as of Dec 2006

Most asset classes were correlated to the SPX.

Putting it All Together

The Efficient Frontier 15 Year Horizon (1996 - 2006)

Compound Annual Return vs. Standard Deviation of Monthly Return.

Gold

EM

REITs

Eur

EAFE

Japan

SV

RUT

comm

SG

HY

cnv arb

stat arb

LV

SPX

LG

L/S

CNVEMBI

BAL

mkt ntl

Agg

infl

cash

0

2

4

6

8

10

12

14

16

18

0 1 2 3 4 5 6 7

Standard Deviation of Monthly Returns

Com

poun

d An

nual

Ret

urn

inflation rate



Gold

EM

REITs

Eur

EAFE

Japan

SV

RUT

comm

SG

HY

cnv arb

stat arb

ALT

LV

EQTYSPX

LG

L/S

CNVEMBI

BAL

mkt ntl

AggFI

infl

cash

0

2

4

6

8

10

12

14

16

18

0 1 2 3 4 5 6 7


Com

poun

d An

nual

Ret

urn

inflation rate



cash

infl

FI Agg

mkt ntl

BAL

EMBICNV

L/S

LG

SPXEQTY

LV

ALT

stat arb

PORTcnv arb

HY

SG

comm

RUT

SV

Japan

EAFE

Eur

REITs

EM

Gold

0

2

4

6

8

10

12

14

16

18

0 1 2 3 4 5 6 7


Com

poun

d An

nual

Ret

urn

inflation rate

A blue print for the next several years.

PORT consists of 20 pct U.S. large cap, 15 pct U.S. small cap, 10 pct developed international, 5 pct emerging markets, 20 pct U.S. investment grade bonds, 10 pct U.S. high yield, 5 pct commodities, 5 pct REITs, and 10 pct in HF strategies.

www.fidelity.com/timmer

Important Legal Information•The information presented reflects the opinions of Jurrien Timmer, Director of Market Research, for Fidelity Management & Research Company as of February 17, 2007. These opinions do not necessarily represent the views of Fidelity or any other person in the Fidelity organization and are subject to change at any time based upon market or other conditions. Fidelity disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Fidelity fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity fund.•Past performance is no guarantee of future results.

•As with all of your investments through Fidelity, you must make your own determination whether an investment in any particular security or fund is consistent with your investment objectives, risk tolerance, financial situation, and your evaluation of the investment option. Fidelity is not recommending or endorsing any particular investment option by mentioning it in this conference call or by making it available to its customers. This information is provided for educational purposes only, and you should bear in mind that laws of a particular state and your particular situation may affect this information.

•The S&P 500® and S&P are registered trademarks of The McGraw-Hill Companies, Inc., and are licensed for use by Fidelity Distributors Corp., and its affiliates. The S&P 500 Index is an unmanaged market capitalization-weighted index of common stocks. All indexes are unmanaged and no investment may be made in any index. Stock values fluctuate in response to the activities of individual companies and general market and economic conditions.

•Small-cap stocks are generally more volatile than large-cap stocks.

•Lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.

•Foreign investments, especially those in emerging markets, involve greater risk and may offer greater potential returns than U.S. investments. This risk includes political and economic uncertainties of foreign countries, as well as the risk of currency fluctuation.

•Value stocks can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

•The Fed Funds rate is the rate of interest on overnight loans of excess reserves among commercial banks. Bonds are rated by agencies such as Standard & Poor’s and Moody’s Investor Services with ratings that measure the risk of default. Bonds rated AAA are considered to be the safest while those rated below BBB are considered to be “high yield” or below investment grade. Intermediate ratings of AA+ or BB- are often used to further differentiate bonds. Lower-quality debt securities involve greater risk of default or price changes due to the credit quality of the issuer. 30-year treasury and 10 year treasury are a fixed income securities backed by the full faith and credit of the U.S. government and are used as benchmarks for the pricing of various corporate fixed income instruments. The S&P Gold group is an index of gold stocks as defined by Standard & Poor’s. The NAREIT All Issues REITs Index is an index of real estate investment trusts as defined by the Nat’l Assoc. of Realtors.

•The chart “Anatomy of a bull market” shows the S&P 500 index and is as of 12/06.

•The Periodic Table of Investment Returns shows the returns of various asset classes over time, ranked from best to worst. The chart represents data through 12/31/06. Source: FMRCo. Russell 2000: Russell 2000 Index. Small Growth: Russell 2000 Growth Index. Small Value: Russell 2000 Value Index. Large Growth: Russell 1000 Growth Index. Large Value: Russell 1000 Value Index. S&P 500: Standards & Poor’s 500 Stock Index. Bonds: Lehman Brothers Aggregate Bond Index. Cash: 3month T-Bills (Ibbotson Assoc.). Commodities: Goldman Sachs Commodities Index. Real Estate: NAREIT Equity Index. Convertibles: CSFB Convertible Securities Index. Japan: MCSI (in U.S. Dollars). Europe: MCSI (in U.S. Dollars). EAFE: MCSI (in U.S. Dollars). High Yield: Ibbotson Assoc. Domestic High Yield Index. Gold: Ibbotson Associates.

Important Legal Information•Definitions of categories and indices on slide 2:

•Small Cap: Russell 2000 Index. The Russell 2000 Index is an unmanaged market cap-weighted index of 2,000 small company stocks.

•Small Growth: Russell 2000 Growth Index. The Russell 2000 Growth Index is an unmanaged index of 2,000 small company stocks, determined by Russell to be growth stocks as measured by their price-to-book ratios and forecasted growth values.

•Small Value: Russell 2000 Value Index. The Russell 2000 Value Index is an unmanaged market cap-weighted index of 2,000 small company stocks, determined by Russell to be value stocks as measured by their price-to book ratios and forecasted growth values.

•Large Growth: Russell 1000 Growth Index. The Russell 1000 Growth Index is an unmanaged market capitalization-weighted index of large company stocks determined by Russell to be growth stocks as measured by their price-to-book ratios and forecasted growth values.

•Large Value: Russell 1000 Value Index. The Russell 1000 Value Index is an unmanaged market capitalization-weighted index of large company stocks determined by Russell to be value stocks as measured by their price-to-book ratios and forecasted growth values.

•S&P 500: Standard & Poor’s 500 Stock Index. The S&P 500® and S&P, are registered trademarks of The McGraw-Hill Companies, Inc., and are licensed for use by Fidelity Distributors Corp., and its affiliates. The S&P 500 Index is an unmanaged market capitalization-weighted index of common stocks.

•Bonds: Lehman Brothers Aggregate Bond Index. A Benchmark index made Up of the Lehman Brothers Government/Corporate Bond Index, Mortgage-Backed Securities Index, and Asset-Backed Securities Index, including securities that are of investment-grade quality or better, have at least one year to maturity, and have an outstanding Par value of at least $100 million.

•Cash: 3month T-Bills (Ibbotson Assoc.)

•Commodities: Goldman Sachs Commodities Index. The GSCI is a composite index of commodity sector returns, representing an un-leveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities.

•Real Estate: NAREIT Equity Index. The unmanaged National Association of Real Estate Investment Trusts (NAREIT) Equity Index is a market-value weighted index based upon the last closing price of the month for tax-qualified REITs listed on the NYSE.

•Convertibles: CSFB Convertible Securities Index. CSFB's U.S. Convertible Securities Index is a market-weighted benchmark of convertible performance.

•Japan: MCSI (in U.S. Dollars). The Morgan Stanley Capital International Japan Index is an unmanaged market capitalization-weighted index that is designed to represent the performance of the Japanese stock market.

•Europe: MCSI (in U.S. Dollars). The MSCI AC World Ex-US Index, when including or excluding securities, takes into account any limitations that an international investor would experience when investing directly in such securities. The index contains both developed and emerging market securities.

•EAFE: MCSI (in U.S. Dollars). Morgan Stanley Capital International Europe, Australasia, Far East Index (EAFE) is an unmanaged market capitalization-weighted index that is designed to represent the performance of developed stock markets outside the United States and Canada. The EAFE Index is registered service mark of Morgan Stanley and has been licensed for use by FMR Corp. The fund is neither sponsored by, nor affiliated with Morgan Stanley.

•High Yield: Ibbotson Assoc. Domestic High Yield Index. Ibbotson Domestic High Yield Index is a broad high yield index including high yield bonds across the maturity spectrum, within the BB-B rated credit quality spectrum, included in the below-investment-grade universe.

•Gold: Ibbotson Associates. The Ibbotson Gold Index is an unmanaged market cap-weighted index of gold-related stocks.

Fidelity Brokerage Services, Member NYSE, SIPC, 100 Summer Street, Boston, MA 02110.

ii.a. 2007 market outlook & strategy - opers€¦ · spx +24.0 mega +33.4 spx +28.6 spx +36.4...

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