War Room 31 May2012

Euro Zone Troubles and the

World Unraveling

War Room

•Monthly macro discussion

•Using tools in context

•Update on HiddenLevers Features

•Your feedback welcome

Euro Zone Troubles and the World Unraveling

•Europe Update

•US Decoupling Update

•Around the World

WORLD UNRAVELING: EUROPE UPDATEHiddenLevers

Euro + S&P move inverse to USD

Note - Euro and S&P slide approaching 10% since April Fools Day

Euro + USD – projections

1.20

1.00.90

98-100

USD/Euro = Inverse correlation

USD/S&P = Inverse correlation1.40

Scenario Modeling – How the big boys do it

HiddenLevers value – We can help answer:

1. How do other economic levers react to movements in Euro?

2. How do portfolios react to movements in Euro + other levers?

http://online.wsj.com/article/BT-CO-20120529-705577.html

Spain Bond Yields – another lever to watch

Significance

• Spain bond yields approaching last fall’s danger zone near 7%

• Yields breach 7% = Spain will likely default before Greece

• Spain default = Euro Zone over, too big to rescue

EU Leadership – Bumbling FoolsEU leaders efforts so far

• Merkel suggests Greek referendum on Euro during election

clueless

• ECB gives low cost loans to EU banks to buy own government bonds

backfired

• EU bails out Greece doesn’t work for TBTF PIIGS

• Austerity programs brutal + not working

• Euro Bonds no agreement + 7 year timeframe

Guidance

1. Spain default or other PIIGS follow Greece out

2. Poorly handled, with no plan of action = bloodbath

3. At risk – anything priced in US Dollars

4. Defending Euro/Swiss Peg will be difficult

5. Think Lehman

Market reaction depends on EU leadership

Guidance

1. Greek default + Euro exit almost fully priced in

3. Well handled, with guidance and action = rally

4. Proof - Gold is a commodity, not a reserve currency

5. Think GM, Bear Stearns

WORLD UNRAVELING: US DECOUPLINGHiddenLevers

US Decoupling: Not in Markets

US markets have joined Europe heading lower, though not yet at the same rate.

The inversion between the USD and world equity markets continues.

US Decoupling: Could Housing Be A Plus?

Bad RE loans at banks continue to drop, with commercial leading the way.

New home sales and housing starts point to improvements in construction sector.

Sources: US DOT, American Gas Association, HiddenLevers

US Decoupling: Oil + Nat Gas to the Rescue?

$10 oil price drop = $40B direct annual savings for American consumers

Natural gas almost 50% cheaper than last year = $30B savings for US economy

WORLD UNRAVELING: AROUND THE WORLD

HiddenLevers

BRICs = Horror Stories

China Hard Landing = below 7% growth, will hurt world economy

China Recession = negative growth, now a possibility, much more than hurt

CHINA

BRICs = Horror Stories

India growth weakest in Nine Years as Rupee Slides – 20% down in last year

India hard landing = below 6%, and no exports bounce expected

INDIA

BRICs = Horror Stories

Brazil is the worst performing major currency in the past year

Brazilian competitiveness should improve, but funds moving with Real

BRAZIL

Commodity Land: Russia, Canada, Australia, ME

YTD market moves have tracked oil as well.

AUD and CAD currencies followed oil prices over the last decade.

Commodity Land: Energy Ties

Saudi Arabia #1, Russia #2, Canada #10 in total oil exports

Australia is world's #1 coal exporter

As go energy prices, so go currencies and economies of these nations

Long Term: China + EM Demand Drive Commodity Land

China became #1 auto market in 2009, but still has only 1 cars per 25 people (US almost 1:1)

Source: E2AF.com (Nikkei Business Publications)

Non-BRICS Emerging Market: Asia

Philippines GDP up at 6.2% rate in Q1

Turkey GDP growth over 8% in 2010 and 2011

Both economies have large, young populations and good access to major markets nearby

Philippines and Turkey both outperformed the S&P and Asia index in 2012 YTD.

HiddenLevers – Product Update

• Multiple Portfolios in Scenario Modeling

• Scenario Hedging Wizard

• Portfolio Macro Profile – improved

• Integrations

Coming soon:

• Custom Asset Upload

• Fidelity Integration