81462053 stifel market strategy 2012-02-13 the shape of things to come

Barry B. Bannister, CFA [email protected] (443) 224-1317

Stifel Nicolaus Equity Trading Desk US: (800) 424-8870 Canada: (866) 752-4446

Market Commentary/Strategy

The shape of things to come: How we think the S&P path in 2012 resembles 2011

We see the S&P 500 in 2012 at 1,400 and 1,600 by 2013/14/15, with “old” commodity equities and small capexperiencing a final legacy burst of strength versus the S&P in 1Q/2Q12. By mid-2012 we see stocks sinkingand expect QE3 as fuel cost and deflation issues resurge, presaging a strong finish for the year. Beyond1H12, we see large cap growth leading the S&P 500 to ~2014/15, with greater Financial stock participationdue to U.S. GDP traction, a consensus that deflation has been averted, Fed laxity as the offset to fiscaltightening, and growing foreign portfolio inflows to the U.S. as the EM & Europe painfully rebalance.

We target 1,400 S&P 500 in 2012 and 1,600 by 2013/14/15 as P/E expansion in the face of slowing EPS combines with

a favorable liquidity backdrop that is supportive of stocks. Many observers point to the low S&P 500 P/E as a reason to

buy stocks. We look beyond the low P/E today, however, and observe that U.S. corporations appear to be

"over-earning" by ~20% in the aggregate due to 0% rates and fiscal policy. We believe that is hardly worth a rich P/E.

As a result, we think equity gains are more likely to come from revaluation that comes in "waves" due to increasing

confidence with respect to GDP as opposed to policy-supported EPS growth from such an elevated level as exists

today, especially since policy support will only be ratcheted back from mid-2012 onward, in our view. Make no mistake,

we still expect policy to shape market oscillations, and foresee equities rolling with QE3 by mid-2012 followed by the

4Q12 tax cut extension debate, for example.

In our contrary sense, we believe U.S. policy to rebalance the world (exporting inflation via money creation to avoid

deflation), combined with productivity demographics, may result in a “mini” 2H 1990s growth stock boom. A case can

be made for a 10%/year S&P 500 total return (8% price + 2% dividend) over the next decade, as described in our

attached exhibits. But we're taking this range-bound secular bear market one quarter at a time, and our unchanged list

of favorite industries in 1Q12 from page (12) of our 1/3/12 report HERE are repeated on page 17-18 of this report.

In short, we believe the “shape” of the S&P 500 in 2012 will look much like 2011, but with a stronger finish and less

emphasis on safety and yield. We expect 1H12 optimism regarding slow-but-steady GDP traction, a eurozone 1H12

“deal” with the euro peaking near 1.40 versus the dollar, and China re-stimulating now that hot money inflows have

subsided. That gives way to a U.S. fuel price shock mid-year, QE3 is response (we expect to buy the rumor and sell the

fact with QE3), the euro/dollar sinking back to 1.25 as rescue requires rate suppression, and a summer swoon due to

correlation that is fading...but not fast enough. Fiscal progress on taxes and GDP traction should support equities in a

4Q rally from that point, in our view.

We still see commodity equities and their brethren the Emerging Market stocks status as a leading “investment” fading

after their Oct-11 to Apr-12 seasonal rally, which we described as our view on Oct-11, 2011 HERE. We also see small

cap edging out the S&P 500 in 1Q12 as implied correlation falls, but thereafter it is less clear for small caps. U.S. bank

stocks should beat the S&P 500 in 2012E, in our view, but we view banks in general as more a 2H12/2013 story since

economic confidence must build first before they lead the market. In fact, we look to eventual bank stock leadership as

a bearish sign, since loan growth is "early cycle" during private leveraging but "late cycle" during private de-leveraging;

we would expect loan growth over time to eventually invite a very difficult Fed exit, a subject of future research.

February 13, 2012

Market Strategy*******

Stifel Nicolaus does and seeks to do business with companies covered in its research reports. As a result,investors should be aware that the firm may have a conflict of interest that could affect the objectivity of thisreport. Investors should consider this report as only a single factor in making their investment decision.

All relevant disclosures and certifications appear on pages 27 - 28 of this report.

https://stifel2.bluematrix.com/docs/pdf/59f3b83d-8676-4db4-a6b4-74687c1f2499.pdf?

https://stifel2.bluematrix.com/docs/pdf/bbc6775e-5938-4222-b632-dbedac69d26d.pdf?

Changes from our initial

2012 outlook (Cover page

from that 1/3/12 report is

to the right).

No changes, market forecasts are on track.

We added a S&P 1,600 by 2013/15 view, only

in-line with the nominal highs of 2000 and 2007,

attributable to growth stock P/E expansion + late

cycle financials participation/revaluation.

No changes, economic forecasts are on

track but mid-12 could be bumpy. Payrolls

are improving and house prices remain weak,

and fuel prices are a risk we see mid-year.

No changes in the political theater, which we

believe still favors Obama re-election via fiscal

largesse & economic recovery. Deficit closure

is gradual, as expected. Tax cut fate is a key

issue for 2013, in our view.

No changes, QE3 becoming more consensus

since we predicted it. Mid-year deflationary

shock waves or fuel prices are QE3 catalysts.

A few changes: We have a sense that

Germany’s bargaining position is weak and a

“deal” is coming, but that eurozone resolution

may not be as costly as feared due to

productivity and effective rate suppression.

Slight change. The hard asset rally in Oct-11,

weak Nov-11, strong Jan-12 etc. gives us a

sense that the seasonal Oct-May rally we

expected may be choppy, not a straight line.

Source: Stifel Nicolaus.

Market StrategyFebruary 13, 2012

The ISM Manufacturing New Orders minus Inventories Diffusion 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

Exhibit (1) The S&P 500 rise from the ~1,100 Oct-2011 low to >1,300 has simply mirrored improving

ISM orders minus inventory (red arrow). Recovery optimism and ECB actions to become a lender of

last resort were led by a rally that has closed the gap between ISM orders minus inventory(1) and the

y/y S&P 500, shown below. We look ahead to mid-2012 with a wary eye toward retail fuel prices. We

expect the S&P 500 will discount that risk in advance, hence the importance of mid-2012 vigilance.

Source: ISM, Factset.

(1) The Institute for Supply Management (ISM) orders minus inventory diffusion index measures the ability to grow orders more rapidly than inventory, which is difficult when economic growth is low.

Oct-11

We believe the S&P 500 y/y change (blue

line, left axis) has hovered around 0%

since 1998 due to the cumulative

deflationary weigh of private debt growth.

Feb-

11


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10-Yr. Trailing Compound Annualized Total Return (Price + Dividend) of S&P 500, Adjusted

for Inflation

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Source: Ibbotson/Morningstar, Standard & Poor’s, and Factset prices. Note that the stock market return includes dividends. Chart format and annotations are Stifel Nicolaus & Co.

(1) The ongoing, de facto public for private debt swap is only available to the reserve currency country that can borrow at a rate below nominal GDP growth, in our view.

Exhibit (2) The similarity of returns between 1936-1974 and 1974-2012 (left chart) should not be lost

on investors. Just as 1930s deflation segued to a booming 1950s, the 1970s inflation segued to the

booming 1990s. Superimposing the two eras (right chart), we see that QE coupled with reserve

currency status(1), plus absence of a titanic struggle like the Cold War (U.S. vs. U.S.S.R.), has

allowed a better path for the S&P (Point A, right) today versus its mid-1970s corollary.

A


y = 173.74x + 759.1R² = 0.9174

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Regression 1960 to 2011E of S&P EPS vs. U.S. Nominal GDP

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7 S

&P

2012 E

PS

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$15.7T U.S. Nominal GDP 4Q12E (vs. $15.2T 3Q11A)

y = 697.43x + 1192.4R² = 0.905

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Regression 1960 to 2011E of S&P EPS vs. World Nominal GDP

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&P

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~$73,740T 4Q12E GlobalNominal GDP

Exhibit (3) Comparing S&P 500 EPS to U.S. and Global GDP points to international as the

potential weak spot for profits, but we think such risk is already reflected in the market P/E ratio.

Regressing U.S. nominal GDP to S&P 500 EPS produces normalized EPS of ~$86 in 2012E (left

chart), versus $104 EPS when regressing to world GDP (right chart), a large gap. We target S&P

1,400 in 2012, and 1,600 by 2013/15, expecting better domestic and weaker non-U.S. EPS offset

by rising P/E ratios as inflation remains contained and easy money offsets fiscal tightening.

Source: Standard & Poor’s, BEA, IMF and World Bank world GDP data, Stifel Nicolaus charts.


Source: Factset prices, U.S. BEA, U.S. BLS, Stifel Nicolaus format.

Exhibit (4) U.S. gasoline prices since March 2011 have been hovering around recession-inducing

levels and could prove disruptive to the economy and S&P by mid-2012, in our view. The “pain

threshold” appears to be ~$100/bbl./$3.25/gallon, having been breached in 1Q80, 4Q07, 1Q11 (arrows),

and, as of 1Q12, that level is being breached again. [See Appendix (A) for more on fuel issues].

$0$5$10$15$20$25$30$35$40$45$50$55$60$65$70$75$80$85$90$95$100$105$110$115$120$125$130$135$140$145

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Inflation-adjusted U.S. Retail Gasoline vs. Refiner's Acquisition Price for Crude OiI, $ per bbl.

Spikes above $100/bbl. & $3.25/gallon exacerbate major recessions.

Inflation-adjusted U.S All Grades Retail Gasoline Prices ($ per gallon) Inflation adjusted WTI $ per bbl.

1Q 1980 4Q 2007Mar 2011


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P/E of the S&P 500, 5-Yr. Moving Avg. (Left)

U.S. CPI Inflation, Y/Y % Chng., 5-Yr. Moving Avg. (Right, INVERTED)

U.S. Consumer Price Inflation (Inverted, Right Axis) vs. S&P 500 P/E Ratio (Left Axis), 100 Years

An S&P 500 P/E of 16x is applicable to +3% annual inflation.

Source: U.S. BEA (or Office of Business Economics) debt data pre-1952. Federal Reserve Flow of Funds debt data 1952 and onward. Stifel Nicolaus format.

(1) Inflation erodes NPV and lowers the P/E, whereas deflation weakens EPS and raises the P/E due to a “trough” EPS effect. Thus, inflation and P/Es move inversely.

(2) Non-financial debt shown is government + business + household debt , excluding financial debt . Financial debt such as securitization double-counts debt. For example,

if a homeowner owes a mortgage (household debt) and that mortgage is securitized by an issuer, the debt is counted twice, by the homeowner and the financial issuer.

Exhibit (5) Unlike the 1960s-70 inflation and P/E decline(1), we think high but peaking U.S. debt(2)

today may help stocks. We see the over-hang of debt (left chart) being offset by loose money for

years to come, which supports stocks. The 3% inflation we expect supports a S&P P/E of 16x (right

chart, 5-yr. avg.), and a P/E of 16x ~$100 five-year average S&P EPS (by 2013/15) is S&P 1,600.

Inflation, right

axis, inverted

S&P 500 P/E,

left axis

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Total U.S. Non-Financial Debt as a multiple of GDP (left axis) vs. U.S. Consumer Price Inflation (10-yr.

Moving Avg., right axis)

Total U.S. Non-Financial Debt / GDP, Left Axis

U.S. CPI, 10-yr. Moving Avg., Right Axis


Exhibit (6) Secular bear markets follow “stages” of investor sentiment, which we see as

supportive of our 1,400 in 2012 and 1,600 in 2013/14/15 S&P 500 targets. The current “Mature

Bull” stage features several 50/200dma crosses, and may segue to a “Late Bull” momentum

phase by 2013/15. That stage may be bank stock led since we view banks as late cycle(1)

beneficiaries of sentiment (at that time) that deflation has been avoided and GDP has “traction.”

Source: Stifel Nicolaus chart, Factset prices.

(1) We think credit is late cycle in a private sector de-leveraging, which is the antithesis of private sector leveraging cycles in which credit is early cycle.

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Phases of a Secular Bear Market - The S&P 500 (1,312 intraday 01/30/12)

Bear MarketMature Bull

Early

Bull

Late

Bull

Bear

Market

Early

BullMature Bull

Defensive OversoldStocks

Multiple 50dma/200dma

crosses

Momentum Defensive OversoldStocks

Late Bull

Momentum


Source: BEA, NIPA Flow of Funds, U.S. Federal Reserve.

(1) Corporate profits are pre-tax domestic profits adjusted for inventory valuation and capital consumption.

(2) We think labor share is probably bottoming now due to competitive costs and currency, once again showing that in economics most trends are cyclical.

Exhibit (7) We believe the S&P 500 is over-earning by ~20% due to <(3)% real rates weakening the

dollar, boosting translation gains and diminishing the labor share of GDP. Business retained

earnings less capital & inventory investment is normally in deficit. But because of (3)% real rates

(thus a weak U.S.$), the Business Surplus is 500bps elevated (left chart), mirroring the U.S.

corporate margin excess of 500bps (top, right); in effect, we think the S&P 500 is over-earning by

~20% [1-(18%E margin / 23%A)] in 2012E. Not coincidentally, labor lost 500bps as a share of GDP(2)

while profits rose the same amount since dollar weakness began in 2002 (bottom, right).

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Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10

Oct-10

Nov-10

Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

21%

22%

23%

1Q

1985

1Q

1986

1Q

1987

1Q

1988

1Q

1989

1Q

1990

1Q

1991

1Q

1992

1Q

1993

1Q

1994

1Q

1995

1Q

1996

1Q

1997

1Q

1998

1Q

1999

1Q

2000

1Q

2001

1Q

2002

1Q

2003

1Q

2004

1Q

2005

1Q

2006

1Q

2007

1Q

2008

1Q

2009

1Q

2010

1Q

2011

Real Fed Funds Rate, Advanced 5 Qtrs (Red, Right) vs. Corporate Profit Margins (Blue, Left)

1985 - Current

Corporate Profit Margins (Left)

Real Fed Funds Rate (Inverted, Right)

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

% of NominalGDP

The U.S. Business Surplus

The Business Surplus is corporate retained earnings

minus capital spending and minus inventory investment

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

43%

44%

45%

46%

47%

48%

49%

50%1Q

1985

1Q

1986

1Q

1987

1Q

1988

1Q

1989

1Q

1990

1Q

1991

1Q

1992

1Q

1993

1Q

1994

1Q

1995

1Q

1996

1Q

1997

1Q

1998

1Q

1999

1Q

2000

1Q

2001

1Q

2002

1Q

2003

1Q

2004

1Q

2005

1Q

2006

1Q

2007

1Q

2008

1Q

2009

1Q

2010

1Q

2011

1Q

2012

Wage & Salary Dispursements as % GDP (Red, Left) vs. Corporate Profits(1) as % GDP (Blue, Right)

1985 - Current

Wage & Salary as % of GDP (Left)

Corporate Profits as % of GDP (Right)

2002: U.S. $ devaluation begins, labor and

profits switch-off ~500bps % of GDP.

The Business Surplus is ~500bps above its long-term average,

which we attribute to margins being bloated ~500bps.

The surplus is 3.5% instead of its long-term

norm of (1.5)%, i.e., companies normally

reinvest more relative to profits.

Margins are ~500bps

excessive because real

rates are (3)% not 0%

Note:

Excludes

benefits

cost.


-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

1835

1845

1855

1865

1875

1885

1895

1905

1915

1925

1935

1945

1955

1965

1975

1985

1995

2005

201…

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

Data 1825 to December, 2011

Source: “A New Historical Database for the NYSE 1815 to 1925: Performance and Predictability,” Yale School of Management, used with permission. Post-1925 data for stocks

are Ibbotson/Morningstar and Standard & Poor’s for large-cap equity. Note that the stock market return includes dividends. Chart format and annotations are Stifel Nicolaus & Co.

Exhibit (8) It is too late for bearish epiphanies...what if S&P return mean reverts to ~10%? Some

91% of all 10-year periods for the S&P 500 total return the past 176 years were higher than the 10

years ended 2011. The S&P 500 12/31/98 of 1,229 was close to 1,257 on 12/31/11. Markets discount

the future, so we view the passage of 13 years without appreciation as discounting (of bad news).

12/31/98

S&P 500

1,229.23

Only 16 of the past 176 years had a lower 10-year rolling return than today.

12/31/11

S&P 500

1,257.60


0.60x

0.70x

0.80x

0.90x

1.00x

1.10x

1.20x

-0.50%

-0.25%

0.00%

0.25%

0.50%

0.75%

1.00%

1.25%

1.50%

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

3.25%

3.50%

3.75%

4.00%

4.25%

4.50%

Mar-

54

Mar-

57

Mar-

60

Mar-

63

Mar-

66

Mar-

69

Mar-

72

Mar-

75

Mar-

78

Mar-

81

Mar-

84

Mar-

87

Mar-

90

Mar-

93

Mar-

96

Mar-

99

Mar-

02

Mar-

05

Mar-

08

Mar-

11

Mar-

14

Mar-

17

Mar-

20

U.S

. Rati

on

of

35 -

49 t

o 2

0 -

34 Y

ear

Old

s

Pro

du

cti

vit

y G

row

th, Y

/Y%

, 3-y

r. m

ovin

g a

vg

.

U.S. productivity appears to track the ratio of the middle aged

to young workforce, supporting 1.5%-2.0% the next decade, in our view

Nonfarm Business Output Per Hour y/y % Change 3-Year Moving Avg. (Right axis)

U.S. Ratio of Experienced People Age 35-49 To Less Experienced People Age 20-34 (Lef t Axis)

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

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

1915

1920

1925

1930

1935

1940

1945

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015E

2020E

2025E

2030E

2035E

2040E

2045E

2050E

The inflation-adjusted total return (price + dividend) of the U.S. stock market (red, left) tracks the ratio of middle aged to

young workers (blue, right)

U.S. Stock Market Inf lation-Adjusted Total Return, 20-year smoothing (Lef t axis)

Nerd/Yuppie Ratio Def ined as Age 35-49 divided by 20-34 (Right axis)

Source: Bureau of Labor Statistics (BLS), Census data, Ibbotson/Morningstar and Standard & Poor’s. Stifel Nicolaus charts.

Exhibit (9) A hidden gem supportive of ~10% U.S. equity returns may be productivity. Productivity is

output per hour worked. The benefit of high productivity is that wages may rise without inflation or

diminishment of corporate profits. Productivity follows a cyclical pattern as well as a secular trend

that tracks the ratio of 35-49 / 20-34 year olds (left chart). This demographic also moves with the

U.S. stock market (right chart). High productivity restrains job creation, but with aging societies that

is less of an issue. Note that this age ratio appears to be favorable for the U.S. to the year 2050.


-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%0x

5x

10x

15x

20x

25x

30x

35x

40x

45x 1921

1924

1927

1930

1933

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

S&

P 5

00 F

OR

WA

RD

10

-year

real

tota

l re

turn

, an

nu

ali

zed

Pri

ce to

Earn

ing

s (

P/E

) R

ati

o,

invert

ed

axis

Cyclically Adjusted Price-to-Earnings* Ratio for the S&P 500, (Left, inverted) versus Forward 10-year S&P 500 total (price + dividend) return, inflation-adjusted (right, normal scale)

1921 to present

10 Yr. Median Cyclically Adj. P/E* Ratio, left scale, INVERTED

S&P 500 10-year FORWARD annualized total (price + dividend) return, right scale

*Post-1988 Operating Earnings are used to remove upward P/E bais derived from leverage.

Source: Shiller historical data, Standard & Poor’s operating earnings data, Stifel Nicolaus format.

Exhibit (10) Another objective measure supportive of ~10% U.S. equity returns is the implicit

information content of a lower P/E. As stated in this report, U.S. EPS are (and have been)

supported since the 1990s by productivity demographics, reserve currency status and the liquidity

solution to private indebtedness. The chart below of the inverted S&P P/E ratio vs. forward S&P

500 total return (price + dividend) indicates that the forward S&P return could be double-digits.


Source: “A New Historical Database for the NYSE 1815 to 1925: Performance and Predictability,” Yale School of Management, used with permission. Post-1925 data for stocks are

Ibbotson/Morningstar and Standard & Poor’s for large-cap equity. Note that the stock market return includes dividends. Chart format, concept and annotations are Stifel Nicolaus & Co.

Exhibit (11) Risk-adjusted returns off past market lows supports ~10% U.S. equity (price + dividend)

returns as well. Return per unit of risk the decade after the 1920, 1938 and 1974 S&P moving

average lows was always ~0.60 (Row A), and S&P risk (st. dev.) has always averaged ~19.5% (Row

B). By knowing two of three data points, the S&P total return from 2008-18 may be calculated as

11.7% (Point C), or an annual total return of 10.7%/yr. for the remaining 2012-18 period.

1920 (low) to 1930 Avg. 12.8% 1938 (low) to 1948 Avg. 10.4% 1974 (low) to 1984 Avg. 11.8% 2008 (low) to 2018 Avg. 11.7% (C)

1920-30 Stand. Deviation 22.2% 1938-48 Stand. Deviation 17.1% 1974-84 Stand. Deviation 19.1% 2008-18E Stand. Deviation 19.5% (B)

Ret. / unit of St Dev. 0.58 Ret. / unit of St Dev. 0.61 Ret. / unit of St Dev. 0.62 Ret. / unit of St Dev. 0.60 (A)

-5.0%

-2.5%

0.0%

2.5%

5.0%

7.5%

10.0%

12.5%

15.0%

17.5%

20.0%

22.5%

19

00

19

04

19

08

19

12

19

16

19

20

19

24

19

28

19

32

19

36

19

40

19

44

19

48

19

52

19

56

19

60

19

64

19

68

19

72

19

76

19

80

19

84

19

88

19

92

19

96

20

00

20

04

20

08

S&P Stock Market Composite 10-Year Compound Annual Total Return (Including Reinvested Dividends), Data 1900 to Dec-2011

1998 10-yr. total return

19.2%

2008 10-yr. total return -1.4% through

12/31/08

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

1928

1929

1930

1931

1932

1933

1934

1935

1936

1937

1938

1939

1940

1941

1942

1943

1944

1945

1946

1947

1948

The Large Cap U.S. Equity Total Return the 10 years before and after the 1938

bottom

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984


bottom

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012E

2013E

2014E

2015E

2016E

2017E

2018E

The Large Cap U.S. Equity Total Return the 10 years leading up to the 2008

bottom and since 2008

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

19

10

19

11

19

12

19

13

19

14

19

15

19

16

19

17

19

18

19

19

19

20

19

21

19

22

19

23

19

24

19

25

19

26

19

27

19

28

19

29

19

30


bottom


1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

45.0

50.0

55.0

60.0

65.0

70.0

75.0

80.0

85.0

90.0

95.0

100.0

Jan

-07

Ap

r-07

Ju

l-07

Oct-0

7

Jan

-08

Ap

r-08

Ju

l-08

Oct-0

8

Jan

-09

Ap

r-09

Ju

l-09

Oct-0

9

Jan

-10

Ap

r-10

Ju

l-10

Oct-1

0

Jan

-11

Ap

r-11

Ju

l-11

Oct-1

1

Jan

-12

Ap

r-12

US Major and Regional Banks Relative to S&P500, Total Return (Black, Left) vs. US Constant Maturity 10-Yr

Treasury Yields (Red, Right),Jan-2007 to Present

Banks Relative to S&P500 (Left)

U.S. 10-Yr. Treasury Yield (Right)

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

-150

-125

-100

-75

-50

-25

0

25

50

75

100

Ju

n-0

7

Sep

-07

Dec-0

7

Mar-0

8

Ju

n-0

8

Sep

-08

Dec-0

8

Mar-0

9

Ju

n-0

9

Sep

-09

Dec-0

9

Mar-1

0

Ju

n-1

0

Sep

-10

Dec-1

0

Mar-1

1

Ju

n-1

1

Sep

-11

Dec-1

1

Mar-1

2

Ju

n-1

2

Citigroup U.S. Economic Surprise Index (Blue, Left) vs. U.S. 10-Yr. Treasury Yield (Red, Right)

10-Yr. Treasury Yield

Citigroup USESI Leveling in 2012

Source: Factset, Bloomberg, Stifel Nicolaus format.

Exhibit (12) U.S. bank stocks are bottoming, in our view, but may be more a 2H12/2013 story,

along with 10-year Treasury yields rising to ~2.50%-2.75% in 2012/13E, especially if QE3

ensues. We see U.S. economic releases dispelling investor deflation concerns, thereby

lifting 10-year yields to 2.50%-2.75% by 2012/13 (left chart). We then see U.S. bank stocks as

a late-cycle trade, in tandem with bottoming 10-year yields (right chart), beating the S&P in

2012 by ~10%. Since credit is late cycle in a private sector de-leveraging (credit was early

cycle in private leveraging), bank stocks may put in the S&P 500 top in 2013+, in our view.

X X2.50% -

2.75%

(10 Yr.

2012/13E)


Source: Dow Jones, Morningstar/Ibbotson Associates, Russell 2000 Factset total return, U.S. Census, CBOE, Stifel Nicolaus format.

(1) CBOE S&P 500 Implied Correlation compares S&P500 index anticipated option volatility with the aggregate volatilities of its constituents. The volatility of the index is

affected by two items: the expected volatility of each underlying stock, as well as the implied correlation between those stocks. By comparing options pricing of the S&P500

with its underlying securities, the CBOE isolates the second component, implied correlation.

Exhibit (13) We see small cap edging out the S&P 500 in 1Q12, but thereafter it is less clear. During

secular bear markets (left), small cap can win during deflation (1929-49, 2000-) by avoiding deflating

“bubble” sectors, whereas small cap leads during inflation (1966-82) by being more flexible and

domestic. Given that small cap has become a proxy for risk, and we still believe this is a secular

bear market, the falling implied correlation(1) we see in 1Q12 may result in “risk on” small caps

edging out large cap (right charts), albeit in a precarious head-and-shoulders pattern (top, right).

90

95

100

105

110

115

120

125

2007 2008 2009 2010 2011 2012

Russell 2000 Index relative to the S&P 500

Up 1Q12moderately

40

45

50

55

60

65

70

75

80

85

90

2007 2008 2009 2010 2011 2012

CBOE S&P 500 Implied Correlation Index

CorrelationDown

1

10

100

1,000

10,000

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

19

26

19

30

19

34

19

38

19

42

19

46

19

50

19

54

19

58

19

62

19

66

19

70

19

74

19

78

19

82

19

86

19

90

19

94

19

98

20

02

20

06

20

10

S&

P 5

00

(a

nd

Pre

de

ce

ss

or)

In

de

x

Sm

all C

ap

min

us

La

rge

Ca

p T

ota

l R

etu

rn

Small Cap Total Return Minus Large Cap Total ReturnSmall Cap Often Leads in Secular Bear Markets

Small Cap minus Large Cap Total Return S&P 500 Index (and predecessors)

1930s to 1940s

1970s

2000s


-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Ja

n-9

4

Ja

n-9

5

Ja

n-9

6

Ja

n-9

7

Ja

n-9

8

Ja

n-9

9

Ja

n-0

0

Ja

n-0

1

Ja

n-0

2

Ja

n-0

3

Ja

n-0

4

Ja

n-0

5

Ja

n-0

6

Ja

n-0

7

Ja

n-0

8

Ja

n-0

9

Ja

n-1

0

Ja

n-1

1

Ja

n-1

2

Pu

rch

ases a

s a

% o

f T

ota

l, L

TM

Net Purchases of Domestic Securities by ForeignOfficial Institutions & Private Investors

U.S. Equity Purchased as % of Total (LTM Totals, Blue Line)

U.S. Corporate Bonds Purchased as % of Total (LTM Totals, Green Line)

Long-Term U.S. Treasuries Purchased as % of Total (LTM Totals, Red Line)Source: U.S. Treasury

International Capital (TIC) system

(1) There is precedent for weakness overseas, domestic GDP traction, a break-down of economic synchronization, capital flows to the U.S., a surging U.S. $, rising U.S.

growth stocks with P/E expansion, Europe struggling to create a currency union and cheaper fuel for U.S. cars - it was the late 1990s, and we are on alert for that possibility.

Exhibit (14) Is the ground forming for a “mini” 2H 1990s growth stock boom(1) this decade? To

escape deflation the U.S. dollar was debased after 2008, spiking commodity prices. Surplus

countries (China, Germany) and commodity producers overheated and tightened in response to

inflation. Now, the U.S. may gain traction, attracting foreign buying of U.S. equities concurrent

with reduced purchases of U.S. government debt, shown below, resulting in a “good form” of

dollar appreciation. We would expect this to favor P/E expansion “growth stocks” in much the

way the Mexican Debt Crisis of Dec-1994 foreshadowed the NASDAQ boom of 1995-2000.

EM Debt Crisis / U.S. Tech Bubble

Strong U.S. dollar, weak commodities

Euro Crisis/ China

Slows, U.S.$ up,

commodities down


Source: Factset prices, Stifel Nicolaus analysis.

Exhibit (15) Stifel Macro: Q1 Outperform Industries and covering Stifel analysts - Conforming

to our macro-views, or with significant seasonal, valuation, momentum and cyclical factors

considered (Alphabetical).

Continued next page

FactSet

Stifel Coverage Analyst Total Return

Industry Analyst E-mail Closest FactSet Index As of 12/31/2011

Business Services Shlomo Rosenbaum [email protected] Misc. Commerical Services 1,434.71

Energy: International Oil & Gas David Dudlyke [email protected] Oil & Gas Production 756.95

Energy: Oil & Gas Exploration & Production

Kurt Molnar, Michael Zuk,

Michael Scialla & Amir

Arif

[email protected],

[email protected],

[email protected], [email protected]

Oil & Gas Production 756.95

Finance: Asset Management/Investment ServicesJ. Jeffrey Hopson [email protected] Investment Managers 7,188.74

Finance: Market Structure Chris Brendler [email protected] Investment Banks/Brokers 1,291.85

Finance: Non-Bank Financials Chris Brendler [email protected] Finance/Rental/Leasing 2,236.04

Food & Beverages: BeveragesMark Swartzberg & Mark

S. Astrachan

[email protected],

[email protected]: Non-Alcoholic 4,249.57

Health Care: Biotechnology Stephen Willey [email protected] Biotechnology 3,929.25

Health Care: Pharmaceuticals: Specialty Annabel Samimy [email protected] Pharmaceuticals: Other 1,570.19

Household & Personal Products Mark S. Astrachan [email protected] Household/Personal Care 3,299.86

I.T.: Applied Technologies Ajit Pai [email protected]

Equipment/Instruments435.62

I.T.: Communications Equipment Sanjiv Wadhwani [email protected]

Equipment913.34

I.T.: Data Centers/Hosting Todd C. Weller [email protected] Internet Software & Services 416.26

I.T.: Internet ServicesGeorge I. Askew &

Jordan Rohan

[email protected],

[email protected]. Services 1,927.54

I.T.: Semiconductors: Analog & Mixed Signal Tore Svanberg [email protected] Semiconductors 1,545.71

I.T.: Semiconductors: Processors and ComponentsKeven Cassidy [email protected] Semiconductors 1,545.71

I.T.: Semis: Semiconductor Capital Equipment Patrick J. Ho [email protected] Production

Equipment648.40

I.T.: Software & Internet Infrastructure Todd C. Weller [email protected] Internet Software & Services 416.26



Exhibit (15) Continued - Stifel Macro: Q1 Outperform Industries and covering Stifel analysts -

Conforming to our macro-views, or with significant seasonal, valuation, momentum and

cyclical factors considered (Alphabetical). This list is unchanged from our 1/3/12 report here.

Continued from prior page

FactSet



I.T.: Software: ApplicationsBlair Abernethy & Tom

Roderick

[email protected],

[email protected] Software 6,647.40

I.T.: Software: Infrastructure Tim Klasell [email protected] Packaged Software 6,647.40

I.T.: Telecom and Cable Services Christopher C. King [email protected] Major Telecommunications 1,253.97

I.T.: Telecom Services Blair Abernethy [email protected] Major Telecommunications 1,253.97

Infrastructure: Building Products John A. Baugh [email protected] Construction Materials 287.00

Infrastructure: Electrical & DiversifiedJeffrey L. Beach & Noelle

[email protected], [email protected] Electrical Products 1,066.87

Infrastructure: Engineering & Construction Robert Connors [email protected] Engineering & Construction 51.07

Insurance: Specialty Insurers Meyer Shields [email protected] Specialty Insurance 2,294.51

Media & EntertainmentBenjamin Mogil & Drew

E. Crum

[email protected],

[email protected] Conglomerates 1,720.20

Metals: Base Metals

Paul Forward, George

Topping & Paul A.

Massoud

[email protected],

[email protected],

[email protected]

Other Metals/Minerals 7,034.55

Metals: Iron Ore Paul A. Massoud [email protected] Steel 520.46

Retail: Auto Dealers James J. Albertine [email protected] Specialty Stores 3,881.32

Retail: Hardlines David A. Schick [email protected] Electronics/Appliances Stores 381.44

Retail: Softlines Richard E. Jaffe [email protected] Apparel/Footwear Retail 2,599.78

Sports & Lifestyle Brands Jim Duffy [email protected] Apparel/Footwear 2,405.38

Transports: Barge John G. Larkin [email protected] Marine Shipping 2,075.72

Transports: Rail John G. Larkin [email protected] Railroads 8,801.15

Transports: Trucking/LogisticsDavid G. Ross & John G.

[email protected], [email protected] Trucking 727.76


https://stifel2.bluematrix.com/docs/pdf/59f3b83d-8676-4db4-a6b4-74687c1f2499.pdf



Exhibit (16) - Stifel Macro: Q1 Market Perform Industries and covering Stifel analysts - Conforming

to our macro-views, or with significant seasonal, valuation, momentum and cyclical factors

considered (Alphabetical). This list is unchanged from our 1/3/12 report here.

Continued next page

FactSet



Education & e-Learning R. Craig & J. [email protected],

[email protected] Consumer Services 29,125.81

Energy: Cleantech Jeff Osborne josborne@sti fel .com Alternative Power Generation 526.69

Energy: Coal Mining Paul Forward [email protected] Coal 1,052.61

Energy: Oilfield Services & EquipmentLara King, Kurt Molnar &

Robert Connors

[email protected],

[email protected],

[email protected]

Oilfield Services/Equipment 1,221.26

Energy: Utilities & Energy InfrastructureSelman Akyol & Justin

Kinney

[email protected],

[email protected] & Gas Pipelines 1,192.57

Finance: Banks - Community & Conversions Collyn Bement Gilbert [email protected] Savings Banks 5,120.41

Finance: Banks - Large Cap Christopher M. Mutascio [email protected] Major banks 887.76

Finance: Banks - Mid Atlantic P. Carter Bundy [email protected] Regional Banks 1,301.28

Finance: Banks - Mid CapAnthony R. Davis &

Stephen [email protected] Regional Banks 1,301.28

Finance: Banks - Midwest Stephen Geyen [email protected] Regional Banks 1,301.28

Finance: Banks - Northeast Collyn Bement Gilbert [email protected] Regional Banks 1,301.28

Finance: Banks - Southeast/Southwest David J. Bishop [email protected] Regional Banks 1,301.28

Finance: Banks - West David J. Bishop [email protected] Regional Banks 1,301.28

Finance: Closed-End Funds Alexander Reiss [email protected] Investment Managers 7,188.74

Finance: Non-Bank Consumer Finance Chris Brendler [email protected] Data Processing Services 5,254.99

Finance: Specialty Finance G. Mason & T. [email protected],

[email protected]/Rental/Leasing 2,236.04

Food & Beverages: Food Christopher Growe [email protected] Food: Major Diversified 2,738.57

Health Care: Medical Devices Thomas Kouchoukos kouchoukost@sti fel .com Medical Specialties 1,939.51

Health Care: Real Estate Daniel Bernstein bernsted@sti fel .com Real Estate Investment Trusts 834.84





Exhibit (16) Continued - Q1 Market Perform Industries and covering Stifel analysts (continued…) -

Conforming to our macro-views, or with significant seasonal, valuation, momentum and cyclical

factors considered (Alphabetical). This list is unchanged from our 1/3/12 report here.

Continued from prior page

FactSet



Health Care: Services Thomas A. Carroll [email protected] Managed Health Care 8,852.66

Home Furnishings John A. Baugh [email protected] Home Furnishings 1,000.26

Homebuilding Michael R. Widner [email protected] Home Building 186.99

I.T.: Electronic Supply Chain Matthew Sheerin [email protected] Electronic Components 397.00

I.T.: Enterprise Hardware/Software & Hard DrivesAaron C. Rakers [email protected] Computer Peripherals 1,297.42

I.T.: Government IT Services William R. Loomis [email protected] I.T. Services 1,927.54

Insurance: Insurance Brokers Meyer Shields [email protected] Insurance Brokers/Services 1,326.07

Insurance: Property/Casualty Meyer Shields mshields@sti fel .com Property/Casuality Insurance 2,560.05

Insurance: Standard Insurers Meyer Shields [email protected] Property/Casuality Insurance 2,560.05

Lodging Rod Petrik [email protected] Hotels/Resorts/Cruiselines 119.12

Metals: Gold & Precious MetalsGeorge Topping, Josh

Wolfson & Craig Stanley

[email protected],

[email protected],

[email protected]

Precious Metals 91.45

REITs: Apartments Rod Petrik [email protected] Real Estate Investment Trusts 834.84

REITs: Diversified Joshua A. Barber [email protected] Real Estate Investment Trusts 834.84

REITs: Industrial John W. Guinee [email protected] Real Estate Investment Trusts 834.84

REITs: Office John W. Guinee [email protected] Real Estate Investment Trusts 834.84

REITs: RetailNathan Isbee & Joshua A.

[email protected], [email protected] Real Estate Investment Trusts 834.84

REITs: Self-Storage Rod Petrik [email protected] Real Estate Investment Trusts 834.84

REITs: Timber Joshua A. Barber [email protected] Real Estate Investment Trusts 834.84

Transports: Airfreight/Logistics David G. Ross [email protected] Air Freight/Couriers 1,086.86





Exhibit (17) - Stifel Macro: Q1 Underperform Industries and covering Stifel analysts -

Conforming to our macro-views, or with significant seasonal, valuation, momentum and

cyclical factors considered (Alphabetical). This list is unchanged from our 1/3/12 report here.

FactSet



Aerospace & Defence: Specialty Def. & Homeland Sec. Stephen E. Levenson [email protected] Aerospace & Defense 1,595.99

Aerospace & Defense: Commercial & Military TBD TBD Aerospace & Defense 1,595.99

Finance: Mortgage Finance Michael R. Widner [email protected] Real Estate Investment Trusts 834.84

Food & Beverages: Tobacco Christopher Growe [email protected] Tobacco 33,594.00

Gaming & Leisure Steven Wieczynski [email protected] Casinos/Gaming 1,295.00

Health Care : Providers Daniel Bernstein bernsted@sti fel .com Medical/Nursing Services 97.44

Health Care: Information Technology TBD TBD Services to the Health Industry 804.83

Health Care: Pharmaceutical Services TBD TBD Medical Distributors 2,118.89

I.T.: Information & Financial Technology Services David Grossman [email protected] Information Technology Services 1,927.54

REITs: Commercial Finance Joshua A. Barber [email protected] Real Estate Investment Trusts 834.84

Senior Housing Daniel Bernstein bernsted@sti fel .com Hospital/Nursing Management 113.26




Appendix (A)

The mid-2012 fuel squeeze


-6.0%

-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%

9.0%

10.0%

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

Jan-7

3

Jan-7

5

Jan-7

7

Jan-7

9

Jan-8

1

Jan-8

3

Jan-8

5

Jan-8

7

Jan-8

9

Jan-9

1

Jan-9

3

Jan-9

5

Jan-9

7

Jan-9

9

Jan-0

1

Jan-0

3

Jan-0

5

Jan-0

7

Jan-0

9

Jan-1

1

Inflation-Adjusted U.S. Gasoline Retail Price ($/gallon, left axis, solid area)vs. y/y U.S. Real GDP converted to monthly (line, right axis)

Fuel shocks (not level, but rather spikes) as catalysts for negative y/y GDP

Inflation- adjusted Retail Gasoline $/Gallon (Left Axis) U.S. Real GDP Monthly y/y % chng. (Right axis)

We suppose there are those who still believe fuel price spikes do not affect U.S. GDP. But

40 years of data support the notion that U.S. consumers recoil at gasoline price spikes,

and one may be in the offing in mid-2012, in our view, unless overseas demand slows.

Source: Bloomberg, EIA, Stifel Nicolaus format.



* We use heating oil (HO1) as a proxy for diesel fuel.

0.00

0.10

0.20

0.30

0.40

0.50

0.60

Jan-0

0

Jan-0

1

Jan-0

2

Jan-0

3

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Gross US Distillate Fuel Oil (DFO, mostly diesel)

exports by destination,mil. bbl/d

Central & S. America Europe Other

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

0.00

0.20

0.40

0.60

0.80

1.00

1.20

Jan-0

0

Jan-0

1

Jan-0

2

Jan-0

3

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Gross US Distillate Fuel Oil (DFO, mostly diesel)

exports, (mil. bbl/d, LS)vs. HO1-WTI* crack spread ($ per bbl, RS)

and HO1-Brent* crack spread ($ per bbl, RS)

DFO Total Exports HO1 crack spread $ per bbl Brent-HO1 Crack Spread

U.S. exports of distillate fuel oil (DFO) have soared, lifting refinery pricing power and forcing

U.S. drivers to compete aggressively with the rest of the world. The increase in U.S. DFO

exports has lifted crack spreads (a measure of refinery profitability) sharply since the Great

Recession began (left chart). The export destinations (right chart) are the EU, where oil is so

heavily taxed that demand is less price elastic, and South America, where refineries are not

configured for demand and South American buying power (currencies) are elevated due to

the China currency peg and fixed investment bubble.



0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Jan-0

0

Aug-0

0

Mar-

01

Oct-

01

May-0

2

Dec-0

2

Jul-03

Feb-0

4

Sep-0

4

Apr-

05

Nov-0

5

Jun-0

6

Jan-0

7

Aug-0

7

Mar-

08

Oct-

08

May-0

9

Dec-0

9

Jul-10

Feb-1

1

Sep-1

1

U.S. East coast refining percentage of blending components relative to other U.S. areas, which

tend to process mostly crude oil

PADD 1 (U.S. East Coast) Other PADD Districts

-$5.00

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

Jan-0

0

Aug-0

0

Mar-

01

Oct-

01

May-0

2

Dec-0

2

Jul-03

Feb-0

4

Sep-0

4

Apr-

05

Nov-0

5

Jun-0

6

Jan-0

7

Aug-0

7

Mar-

08

Oct-

08

May-0

9

Dec-0

9

Jul-10

Feb-1

1

Sep-1

1

Brent minus WTI, $ per bbl

Brent minus WTI, $ per bbl

The situation is particularly difficult for U.S. drivers supplied by East Coast refineries.

Because of overseas demand and the lingering effect of the Libyan Civil War the spread

between European Brent crude oil and U.S. WTI oil (left chart) is wide, forcing the less

competitive refining capacity (U.S. East Coast and Europe, i.e., Petroplus and Sunoco) out

of the market (right chart), thereby tightening U.S. fuel prices for many U.S. consumers.


Source: EAI, IEA, Stifel Nicolaus format.

Though global refinery throughput/utilization rates have improved since their depths in 2009 (left

chart), middle distillate stockpiles continue to decline (right chart). Because the eurozone and

China are several years behind the U.S. rebalancing (our view is the U.S. in 1H12, the eurozone in

1H09 and China in 1H08, temporally speaking), our expectation is that their impending slowdown

will weaken fuel demand and provide relief for U.S. consumers, which is an issue we monitor.

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Feb-1

995

Dec-1

995

Oct-

1996

Aug-1

997

Jun-1

998

Apr-

1999

Feb-2

000

Dec-2

000

Oct-

2001

Aug-2

002

Jun-2

003

Apr-

2004

Feb-2

005

Dec-2

005

Oct-

2006

Aug-2

007

Jun-2

008

Apr-

2009

Feb-2

010

Dec-2

010

Oct-

2011

OECD middle distillate stocks, y/y %

70

71

72

73

74

75

76

77

Jan-2

007

Apr-

2007

Jul-2007

Oct-

2007

Jan-2

008

Apr-

2008

Jul-2008

Oct-

2008

Jan-2

009

Apr-

2009

Jul-2009

Oct-

2009

Jan-2

010

Apr-

2010

Jul-2010

Oct-

2010

Jan-2

011

Apr-

2011

Jul-2011

Oct-

2011

Global Refinery Throughputs, mil bbl/d


Important Disclosures and Certifications

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

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

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

BUY -For U.S. securities we expect the stock to outperform the S&P 500 by more than 10% over the next 12 months. ForCanadian securities we expect the stock to outperform the S&P/TSX Composite Index by more than 10% over the next 12months. For other non-U.S. securities we expect the stock to outperform the MSCI World Index by more than 10% over thenext 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, for Canadian securities as compared to the S&P/TSX Composite Index, and for othernon-U.S. securities as compared to the MSCI World Index.

HOLD -For U.S. securities we expect the stock to perform within 10% (plus or minus) of the S&P 500 over the next 12months. For Canadian securities we expect the stock to perform within 10% (plus or minus) of the S&P/TSX CompositeIndex. For other non-U.S. securities we expect the stock to perform within 10% (plus or minus) of the MSCI World Index. AHold rating is also used for yield-sensitive securities where we are comfortable with the safety of the dividend, but believe thatupside in the share price is limited.

SELL -For U.S. securities we expect the stock to underperform the S&P 500 by more than 10% over the next 12 months andbelieve the stock could decline in value. For Canadian securities we expect the stock to underperform the S&P/TSXComposite Index by more than 10% over the next 12 months and believe the stock could decline in value. For other non-U.S.securities we expect the stock to underperform the MSCI World Index by more than 10% over the next 12 months andbelieve the stock could decline in value.

Of the securities we rate, 51% are rated Buy, 47% are rated Hold, and 2% are rated Sell.

Within the last 12 months, Stifel, Nicolaus & Company, Inc. or an affiliate has provided investment banking services for 17%,10% and 0% of the companies whose shares are rated Buy, Hold and Sell, respectively.

Additional Disclosures

Please visit the Research Page at www.stifel.com for the current research disclosures applicable to the companiesmentioned in this publication that are within Stifel Nicolaus' coverage universe. For a discussion of risks to target price pleasesee 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 isnot a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred toherein. Opinions expressed are subject to change without notice and do not take into account the particular investmentobjectives, financial situation or needs of individual investors. Employees of Stifel, Nicolaus & Company, Inc. or its affiliatesmay, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinionsexpressed within. Past performance should not and cannot be viewed as an indicator of future performance.

Stifel, Nicolaus & Company, Inc. is a multi-disciplined financial services firm that regularly seeks investment bankingassignments and compensation from issuers for services including, but not limited to, acting as an underwriter in an offeringor financial advisor in a merger or acquisition, or serving as a placement agent in private transactions. Moreover, StifelNicolaus and its affiliates and their respective shareholders, directors, officers and/or employees, may from time to time havelong or short positions in such securities or in options or other derivative instruments based thereon.

These materials have been approved by Stifel Nicolaus Europe Limited, authorized and regulated by the Financial ServicesAuthority (UK), in connection with its distribution to professional clients and eligible counterparties in the European EconomicArea. (Stifel Nicolaus Europe Limited home office: London +44 20 7557 6030.) No investments or services mentioned areavailable in the European Economic Area to retail clients or to anyone in Canada other than a Designated Institution. Thisinvestment research report is classified as objective for the purposes of the FSA rules. Please contact a Stifel Nicolaus entityin your jurisdiction if you require additional information.


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81462053 stifel market strategy 2012-02-13 the shape of things to come

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