JUNE Viewpoints

Reasons why the broader stock market is trading sideways 

• Currently, there are no catalysts driving the market to higher highs. With no catalyst, the DJIA failed to break 13,000 in late Apriland is now hanging on to stay above 12,000 (Chart 1). The Fed's QE2 is ending, and corporate profits (Chart 2) and themanufacturing sector (Chart 3) are showing signs waning. Many developing nations have been posting stronger GDP growth ratesversus developed nations, but at the expense of rising inflation. It is also worth noting that at the 12,000 level, the Dow JonesIndustrial average has recaptured 85% of the last cycle peak of 14,000 set in 2007 despite the weak housing, employment, wageenvironment, and ballooning national debt.

• Our domestic exporting manufacturers have been benefiting from strong global demand. However, since February, the ISMp g g g g yPurchasing Manager Index, a widely followed manufacturing measure, has leveled off (Chart 4). This is an important move, becausethe ISM and S&P 500 tend to move together. The correlation in Q4 2010 was 0.90 and reached as high as 0.95 in November 2009.

• I have been monitoring China as the lead nation in this global recovery. The policies taken to curb China’s inflationary pressuresover past several quarters are taking affect. The Chinese purchasing manager index has been slipping since February 2011. China’sreal GDP year‐over‐year rate (Chart 5) has been falling since December 2009 while China’s inflation rate (Chart 6) continues toreal GDP year over year rate (Chart 5) has been falling since December 2009 while China s inflation rate (Chart 6) continues toclimb. Interestingly, perhaps to encourage market stabilizing sentiment, Chinese Premier Wen recently announced that China cankeep its full‐year inflation rate within 5% and achieve the goal of an economic "soft landing".

• Given what seems to be a year's worth of disruptive geopolitical, market, economic, and natural disaster events, it will take timefor these events to be absorbed into the global economic system; and for policymakers to respond.

"L i ibl th d i f l biliti th t ti htl i t ti b t i l l h i"Less visible are the drivers of vulnerabilities that tightly weave interconnections between commercial supply chains, technological systems and investment vehicles underlying the global economy. Unanticipated events such as natural disasters, failures in key technical systems or malicious attacks could disrupt these complex systems and produce shocks that propagate around the world."

The Organisation for Economic Co‐operation and Development (OECD) ‐ on global shocks

Active Asset Allocation Portfolio Targets ‐ Expansionary Economic Phase 

Views presented are as of June 29, 2011 and are subject to change based on market conditions and other factors. Data included in this piece are deemed to be from reliable sources, but we do not guarantee its accuracy. These views are for informative considerations and should not be construed as a recommendation, either expressed or implied.

Conservative – cash 5%/equities 60%/fixed 35%  | Moderate – cash 5%/equities 75%/fixed 20%  | Aggressive – cash 5%/equities 90%/fixed 5%

JUNE Viewpoints

Chart 1

Views presented are as of June 29, 2011 and are subject to change based on market conditions and other factors. Data included in this piece are deemed to be from reliable sources, but we do not guarantee its accuracy. These views are for informative considerations and should not be construed as a recommendation, either expressed or implied.

JUNE Viewpoints

Chart 2 ‐ US Industrial Production

Views presented are as of June 29, 2011 and are subject to change based on market conditions and other factors. Data included in this piece are deemed to be from reliable sources, but we do not guarantee its accuracy. These views are for informative considerations and should not be construed as a recommendation, either expressed or implied.

Source: FactSet

JUNE Viewpoints

Chart 3 ‐ US Corporate Profits Growth

Views presented are as of June 29, 2011 and are subject to change based on market conditions and other factors. Data included in this piece are deemed to be from reliable sources, but we do not guarantee its accuracy. These views are for informative considerations and should not be construed as a recommendation, either expressed or implied.

Source: FactSet

JUNE Viewpoints

Chart 4 ‐ ISM Manufacturing Purchasing Managers Index (blue line)

PMI values 50 or higher indicate economic expansion

Views presented are as of June 29, 2011 and are subject to change based on market conditions and other factors. Data included in this piece are deemed to be from reliable sources, but we do not guarantee its accuracy. These views are for informative considerations and should not be construed as a recommendation, either expressed or implied.

Source: FactSet

JUNE Viewpoints

Chart 6 ‐ China Consumer Price IndexChart 5 ‐ China Real GDP Year over Year Change

Views presented are as of June 29, 2011 and are subject to change based on market conditions and other factors. Data included in this piece are deemed to be from reliable sources, but we do not guarantee its accuracy. These views are for informative considerations and should not be construed as a recommendation, either expressed or implied.

Source: FactSetSource: FactSet