synovate economic $ummary q2 2010

© 2010 Synovate Inc.

$ynovate Economic

$ummary: Q2, 2010

© 2010 Synovate Inc. 2

Background

• Quarterly overview of trends and driving forces in the US economy and the Financial Services(FS) sector.

- Useful as a backdrop against which to interpret changes in market research tracking data.

• Includes a number of key market metrics:

- Economic & financial indicators (S&P 500, interest rates, forex, commodity prices, etc.)

- Consumer measures (Synovate’s Financial Sentiment Index, the Conference Board’sConsumer Confidence Index)

- Other indicators (housing data, unemployment, etc.)

• Definitions:

- Leading economic indicators change in advance of the overall economy and are useful forprediction. Example: stock market returns, since the market usually declines and improvesbefore the economy does.

- Lagging economic indicators do not change direction until a few quarters after theeconomy does and are useful for confirmation. Example: the unemployment rate; it tendsto increase 2 - 3 quarters after the economy starts to improve.

- Coincident economic indicators move at the same time the economy does and thereforeare the best measures of the current state of the economy. Examples: Gross DomesticProduct and personal income.

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The quarter that was…The economic recovery continued in Q2 2010 although the pace of the recoveryslowed significantly. As predicted in our $E$ over a year ago, the recovery continuesits false-starts; a series of “W-patterns” are to be expected until some of thesignificant risks like commercial real estate, housing, sovereign defaults, etc., arebehind us.

Half Full:

- Consumer Confidence

- Small businesses

- Increasing retail sales

- Positive GDP

Half Empty:

- A sustained high unemploymentrate

- Commercial real estate

- Consumer lending

- Global worries (especially of theeuro-zone kind)

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What’s In The News?


• S.E.C. Accuses Goldman Sachs of Fraud (Apr. 16): The Securities and Exchange Commission filed a civil lawsuit against Goldman Sachs over afraudulent housing deal. The S.E.C. claims that Goldman Sachs created and sold a mortgage investment that was secretly intended to fail. The bankdenies the accusations.

• Deepwater BP Oil Spill (Apr. 20): The Deepwater Horizon exploded in the Gulf of Mexico killing 11 people. The subsequent oil spill disaster hasdevastated a vast area of the U.S. marine environment and has had a serious impact on the local fishing industry. BP has since set aside a $20 billionescrow fund to compensate U.S. businesses or workers who have been hurt by the spill. Analysts are estimating the total cost of this disasteranywhere between $29 billion to as high as $63 billion.

• United, Continental Announce Merger (May. 3): The chairmen of United Airlines and Continental Airlines announced their intent to merge, withUnited's purchase of Continental. The new enormous airline company will have 10 national hubs and will be bigger than the current leader, Delta AirLines.

• Apple Passes Microsoft as Most Valuable Technology Company (May. 26): In a stunning turnaround over the last decade, Apple passed Microsoftas the world's top technology company. Microsoft had dominated the technology industry for over 20 years.

• Fannie & Freddie Stocks Delisted (June. 16): The Federal Housing Finance Agency, the regulator for Fannie Mae and Freddie Mac demanded for thestocks to be delisted as early as July. The announcement caused the stock price to fall almost 40% for both companies. The move, although harsh onthe existing stock holders, signals that these companies should eventually emerge out of conservatorship in a different form.

• Merrill Makes Move Into Online Investing (June. 21): Bank of America Merrill launched Merrill Edge, an online discount brokerage. This brokerageintends to help Bank of America Merrill combat the expanding influence of the likes of Charles Schwab and Fidelity Investments, which now arepopular destinations for younger investors who aren’t ready for a full-service adviser.

• Financial Regulation Bill passes House and Awaits Senate Vote (June. 30): After more than a year of work and two weeks of negotiations,lawmakers passed the financial regulation bill. The bill address the following key areas:

Consumer Protection: Creates a consumer agency, credit scores for consumers, Interchange fees, etc.

Too Big to Fail: New oversight committee, unwinding powers to FDIC, forcing ‘skin in the game’, etc.

Risky Bets: Regulating derivatives, spinning off swaps desks, curbing executive pay, etc.

Key Financial & Industry News

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Key Financial Measures and News

National Mortgage Rates – 1 year

Volatility returned to global financialmarkets with a vengeance in the secondquarter, sending investors fleeing fromstocks world-wide and driving them intodefensive investments, especially U.S.Treasury's and gold.

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• The S&P 500 (a leading indicator) postedits worst quarterly performance since thefinal three months of 2008 when thefinancial crisis was in full swing. The S&P500 fell about 12% for the quarter.

• The prime rate (a coincident indicator) remained level at 3.25% this quarter.

• Mortgage rates fell to a record low during Q2 2010. The 30-year fixed-rate mortgage dropped to 4.69%, the lowest since FreddieMac started the survey in April 1971. The decline in mortgage rates is related to the weak economy and falling treasury yields.

Quarterly Markets Review

Prime Rate

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Currency Rates & Trade

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During the second quarter, the euro faced its biggest test inits relatively brief life as the Greek debt crisis threatened totear apart the European Union.

• The euro was sent into a tailspin which by early Juneamounted to an 11% decline against the U.S. dollarfrom the end of March. At one point, the euro camewithin shouting distance of the $1.18 at which itexited the first day of trading when it was introducedin 1999.

• The euro-zone worries took the GBP down with it,however, the GBP recovered quickly and differentiateditself from the euro.

• As contagion from the debt crisis threatened globalmarkets, investors seeking haven gave a boost to theU.S. dollar and Japanese yen despite those countries'own economic and fiscal woes, including yawningdeficits and low interest rates.

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Yuan’s New Direction

On June 20, China announced that it would allow theRenminbi to appreciate against the USD once again.

• China has kept the yuan pegged against the dollarsince July 2008.

• The effect of this currency undervaluation istwofold:

1. It makes the Chinese goods

artificially cheap to foreigners

(enhancing exports)…

2. ….While making foreign

goods artificially expensive to

the Chinese (reducing imports)


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The Gloom Lifts A Little, But It’s Still DarkOut There

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Most Americans are still feeling blue about the change in their personal financial situationsover the past year, although the picture is a little less gloomy than in March of last year, justbefore the stock market hit its recessionary low.

• The Conference Board said its index of consumer confidence for June increased modestly to 52.9 comparedwith the 52.5 seen in March.

• Synovate’s Consumer Financial Sentiment Index (FSI) now stands at -52, an improvement of 12 points fromthe March 2010 FSI of -64.


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Government Trying To Help Small Business

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The economy is on the mend. The government has launched a boatload of programs to get financing for smallbusinesses. President Obama has urged banks to give companies a "third and fourth look" before rejecting themfor loans. Yet entrepreneurs are still struggling to land credit.

• The government is trying to entice more small businessesto tap one of its loan programs,the Small Business Administration's 504 loan program.

- Hoping to spur expansion among small companies, the SBA is offering inducements

like lower rates and no-fee deals.

• The U.S. House approved legislation to create a $30 billion fund to boostlending to small businesses through community banks.

- This will be combined with the $3.5 billion package of tax cuts for small businesses for Senate approval.

• In a recent National Federation of Independent Business (NFIB) survey, 32% of NFIBborrowers accessing capital markets at least once a quarter report difficulties arrangingcredit.

- A copy of the report, which includes the NFIB’s

Optimism Index, can be found at:

http://www.nfib.com/Portals/0/PDF/sbet/SBET201006.pdf


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Big Banks’ Lending Programs

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Some of the largest U.S. financial institutions have pledged new commitments to small businesses in recentmonths, but it remains to be seen how much these efforts will help business owners secure financing.

• Goldman Sachs, an investment bank that doesn't lend directly to entrepreneurs, is funneling $300million to community development financial institutions (CDFIs), which primarily lend to smallbusinesses in low-income communities.

• Citigroup also announced a program in May to invest $200million in CDFIs, which will allow them to request five-yearloans from Citi in order to boost lending to qualifying smallfirms.

• Bank of America is taking a more direct approach byincreasing its direct lending to small and midsizedbusinesses by $5 billion in 2010.

- In May they reported a total of $19.4 billion loaned in its first

quarter, and will need to lend more than $22 billion over the

remainder of the year to meet this goal.

• JP Morgan Chase & Co. will lower the interest rate chargedon a line of credit to small business customers by half apercentage point for every new hire they make, for up to three hires.


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Fees Are Here, And More To Come

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Bank Fees

$12.55: Average monthly fee for falling below the minimum

balance on interest-bearing checking accounts.$29.58: Average overdraft fee in 2009, up from $22.62 a decade

ago.16%: Average credit-card rate increase in the year since the

Card Act was passed in 2009.$39: Median fee charged by banks for late credit-card

payments.

Banks are preparing new fees on basic banking services as they try to replace billions in revenue lost to regulatoryrules, in a push that is expected to spell an end to “free” checking accounts for many Americans.

• Industry leaders like Bank of America, Wells Fargo, HSBC, FifthThird and others are experimenting by imposing maintenance feeson checking accounts to rolling out new charges for services likefraud alerts, debit cards and credit reports.

• The new world of checking is likely to resemble the cable-televisionindustry, where customers pay one amount for bare-bones serviceand then can load on additional options.

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Unemployment Issues Continue

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The unemployment report released by the government wasn't as grim as it might have been, but it still showedthat the pace of the U.S. economic recovery has slowed as the quarter closed.

• The U.S. lost 125,000 jobs as census workers exited the labor force. The private sector added only 83,000jobs and the unemployment rate fell to 9.5% down from 9.7% in March.

- Economists estimate the private sector has to create more than 150,000 jobs per month to make a serious dent in theunemployment rate.

• The unemployment rate is down to its lowest level in a year, but the move was driven by a huge drop in thework force. The participation rate* fell to 64.7% in June from 65% in May.

*The participation rate is important in determining the number of individuals who are willing to work, are working, or are actively looking for work.Those who have no interest in working are not included in the participation rate.


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Mortgage Rates Plunge, Housing Looks Weak,and Tax Credit Extended

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How’s this for clashing superlatives? Mortgage rates have fallen to their lowest levels of thelast 50 years, and yet signed home-purchase contracts plunged by 30% in May from April.Housing struggles are expected to continue through the summer, but can a last minute taxcredit extension help?

• Mortgage rates fell to 4.69% on 30-year fixed-rate loans, thelowest since Freddie Mac’s weekly count began in 1971.

• In May, new home sales sunk to the lowest level since at least1963, when the Census Department began keeping records.They fell to an annualized rate of 300,000, down 33% comparedto April, which was much worse than economists’ expectationsof 405,000.

• The median price of a new home sold in May was $200,900, 9.6%lower than a year earlier.

• Congress approved an extension to the June 30 closing deadline for the home buyer tax credit, hours beforeit was set to expire. The move will give would-be buyers who signed a purchase agreement by April 30th

more time to close on those deals and receive the credit that is worth up to $8,000. The new deadline isSept. 30.


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European Spotlight: Understanding the crisisGlobal financial markets were highly volatile in Q2 2010 as fiscal concernsand the risk of weaker growth caused investor confidence to deterioraterapidly. Investor worries about unsustainable fiscal positions crystallizedaround the problems of Greece and other euro area sovereigns.

• The announcement of a significant European rescue package(€750 billion, almost a trillion dollars) bought a temporary reprievefrom contagion in euro sovereign debt markets, but could not allaymarket concerns about the economic outlook.

• Investors and market commentators focused on the risk that thesurge of public debt could derail the economic recovery.

• Immediately after the bailout announcement, the U.S.Federal Reserve announced it would reopen swap lineswith other central banks to make sure they had ampleaccess to dollars.

• The crisis in Europe, risks of contagion and thedeflationary pressures associated with those problemswill keep the Fed on the sidelines even longer than weinitially thought.

Why should we care?


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Black SwanWhat is it?

• An event or occurrence that deviates beyond what is normally expected of a situationand that would be extremely difficult to predict.

(Before the discovery of Australia, people in the old world were convinced that all swanswere white, an unassailable belief as it seemed completely confirmed by empiricalevidence).

• Risks of Black Swans, previously perceived to be small by corporations, investors,politicians and regulators, are now being reassessed, owing to (among other issues)globalization, the acceptance of greater risk taking and so forth.

• A greater and more dynamic instability is the new normal.

Witness some of these historical black swan events over the past decade:

- the tech bubble bust

- the September 11 attack on the World Trade Center

- the failure of Lehman Brothers and the sale/liquidation of Bear Stearns

- BP's Gulf oil spill

- the market's flash crash (a 1,000-point drop in the DJIA on May 6, 2010)

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Flash CrashThe lightning descent on May 6 lasted roughly 10 minutes and the Dow’s decline grew to 9.8% at its worst. Trades, manyexecuted in milliseconds, reached 19 billion shares.

• The SEC has since introduced circuit breakers for individual stocks (part of S&P 500) should they rise or fall more than10 percent in a five-minute span (for a six-month test period).

• In the month of June, these circuitbreakers were tested multiple times:once when tech services companyDiebold saw its shares plunge 35percent then recover in a period of afew minutes, and again whenWashington Post shares doubled to$929 from $460 and most recently onJune 29, when Citi shares plunged 18%.

• The circuit breakers essentially did theirjob, halting trading in all cases, but themystery remains over why such eventshappen in the first place.

• These massive intra-day swings raiseserious questions about the "safety"factor expected with stop loss orders -as the markets tumble, individualinvestors' positions are sold, oftenresulting in big losses for the investor.


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An ATM that Dispenses Gold (Gold To Go)

• Following the example set by a Germanentrepreneur, who began testing the cash-for-gold machines in his native country in 2009, thisATM-style kiosk in the Emirates Palacemonitors the daily gold prices and offers goldcoins up to 10 grams with customized designs.

• The opening ceremony coincided with goldhitting a record high of more than $1,250 anounce.

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• Normally, mass hysteria define ‘tops’ in markets,however, given gold’s ‘flight to safety’ status and thedoubts surrounding fiat currencies owing to themassive sovereign deficits, huge amounts of ‘smartmoney’ (money that major hedge funds, mutualfunds invest) is currently being parked in gold.


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Advertising


Jun. 30th: Ink from Chase unveiled a new broad-basedadvertising campaign focusing not only on its portfolio ofbusiness cards but also its customers. The campaign willfeature actual Ink small business owners who willhighlight card benefits that have impacted their bottomline. Marlo Scott, owner of Sweet Revenge in NYC will

appear in television, radio, print and web advertisements.

Jun. 14th: The Goldman Sachs Group,Inc. announced the greater Los Angeles

10,000 Small Businesses initiative. Throughout the Los Angelesmetropolitan area, the program will offer a unique combination of threeresources to help small businesses grow and create jobs: Business andManagement Education, Access to Capital, and Business SupportServices.

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Financial Institution Ad Campaigns

Goldman Sachs Launched 10,000 Small Businesses Initiative Ink From Chase Launches New Advertising Campaign

May 3rd: U.S. Trust unveiled its "What isWorth?“ advertising campaign. Developmentfor the new campaign included extensive

market research that underscored the fact that people do not consider their'worth' and their 'wealth' to be synonymous; they see their worth as areflection of their values, goals, work ethic, relationships, history andlegacy.

Jun. 21st: As a complement to the reassuring "OurStand" advertising representing the brand since2003, Allstate has introduced anti-hero "Mayhem“in a new national television campaign, with rolloutplans for online and place-based advertising,including cinema and television throughout thesummer.

May 18th: Visa Inc., a sponsor for the 2010 FIFAWorld Cup launched the Visa Match Planner, asocial media application that enables users tocreate customizable World Cup viewing schedulesto share with friends on social networking channels.The application is the latest extension of Visa’s FIFA World Cup globalmarketing campaign called “Go Fans,” which also includes print, television,outdoor advertising, merchant promotions in host country South Africa, andVisa card-use promotions.

Jun. 17th: Charles Schwab has announced a new educationalcampaign to help young adults facing “financial firsts” as theygraduate, start working and begin living on their own. Thecampaign will be delivered through Schwab’s awardwinning educational website, SchwabMoneyWise.com,and via Twitter. A new hub on schwabmoneywise.comnow addresses the specific financial challenges facing youngpeople in their 20s who are just starting out.

U.S. Trust Launches Advertising Campaign

Visa Rolls Out FIFA Social Media Feature

Charles Schwab Launches @schwabmoneywise on Twitter

Allstate Declares “Mayhem is Coming” in New Campaign

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What’s Next?

• The second half of 2010 is expected to be extremely bumpy as fiscal woes in Europe, global stock-marketdeclines and a stubbornly high unemployment rate continue to present obstacles in the road to recovery.

• The low interest rates from the Fed and their continual emphasis to keep these rates low for an ‘extendedperiod of time’ almost guarantee no rate hike in 2010 which should continue to provide the much neededliquidity to facilitate a recovery, albeit a gradual one. However, if the easy money and other quantitativeeasing policies aren’t removed gradually from the system, we are at risk of yet another leg down.

• The financial services industry continues to emerge progressively from the credit crisis and is beginning todeal with the new realities laid down in the financial regulation bill, the CARD Act and other similarlegislations that are either in effect already or are about to come into effect.

• Another new reality is increased competition from new revolutionary business models (Mango Financial,to name one of many). These new businesses are trying to capitalize on niche markets (unbanked inMango Financial’s case) at a time when the major players are dealing with issues from Washington andconsumer backlash. These behemoths need to adapt swiftly or risk losing share to the new rivals.


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References• Wall Street Journal. (Q2 2010). Retrieved from www.wsj.com

- Dow Slides 10% in Volatile Second Quarter- Euro Trips Amid Identity Crisis- S.E.C. Accuses Goldman Sachs of Fraud- Deepwater BP Oil Spill- United, Continental Announce Merger- Apple Passes Microsoft as Most Valuable Technology Company- Fannie & Freddie stocks delisted- Merrill Makes Move Into Online Investing- Financial Regulation Bill passes House and awaits Senate vote- Yuan’s New Direction- Consumer Confidence Tumbles- A Credit Crunch That Lingers- The SBA Has a Deal for You- House Passes Bid to Boost Small-Business Loans- Cash for Chocolate? Creative Ways to Raise Funds- Big Banks' Lending Programs Yielding Few Results So Far- J.P. Morgan Offers Small Businesses Rate Cuts If They Hire- End Is Seen to Free Checking- The New Bank Fees: How to Fight Back- Jobs Data Leaves Markets Relieved- Mortgage Rates Plunge to 4.58%, But Housing Looks Weak- Congress Approves Tax Credit Closing Deadline Extension- Parallel Plunges: 'Flash Crash' and Black Monday- Gold To Go

• S&P 500 Retrieved from http://www.wsj.com/• Mortgage-X. (Q2 2010). Mortgage Rates. Retrieved from http://mortgage-x.com• Finance.yahoo.com. (Q2 2010). Currencies. Retrieved from http://finance.yahoo.com/currency-investing• Moneycafe. (Q2 2010). Prime Rate. Retrieved from www.moneycafe.com/library/primerate.htm• CNNMoney.com (Q2 2010). Wall Street Reform: What’s in the Bill. Retrieved from http://money.cnn.com/2010/06/25/news/economy/whats_in_the_reform_bill/index.htm• Consumer Confidence Index Retrieved from http://www.economicpopulist.org• Small Business Credit Conditions Retrieved from http://www.nfib.com• Modest private sector hiring in June Retrieved from http://www.marketwatch.com/• New Home Sales Plunge Retrieved from http://www.theatlantic.com• New York Times (Q2 2010). The Renminbi Runaround. Retrieved from http://www.nytimes.com/2010/06/25/opinion/25krugman.html• New York Times (Q2 2010). The Black Swan: The Impact of the Highly Improbable. Retrieved from http://www.nytimes.com/2007/04/22/books/chapters/0422-1st-tale.html• BIS Quarterly Review (June 2010). International banking and financial market developments. Retrieved from http://www.bis.org/publ/qtrpdf/r_qt1006.pdf• Minyanville.com (Q2 2010). European Spotlight: Understanding the Crisis. Retrieved from http://www.minyanville.com/businessmarkets/articles/eurozone-greece-government-

bonds-debt-sovereign/6/16/2010/id/28769

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The $E$ is brought to you by…Synovate U.S.Financial Services

• Team of 35 research professionals dedicated tofinancial services clients in:

- Banking

- Insurance

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• Specialized subject matter expertise in customerexperience (loyalty, satisfaction), brand value, andnew product development

• Client experience is diverse, including but notlimited to:

- 4 of top 5 national banks

- 3 of top 10 investment banks

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synovate economic $ummary q2 2010

Economy & Finance

leading economic indicators

coincident economic

us economy

ynovate economic

overall economy

indicators housing data

wasthe economic recovery

continental airlines