Today’s Economic Landscape and What’s on the Other Side

December, 2009

Presented by: Morris Segall, President SPG Trend Advisors

THE ECONOMY

Q1-0

1

Q2-0

1

Q3-0

1

Q4-0

1

Q1-0

2

Q2-0

2

Q3-0

2

Q4-0

2

Q1-0

3

Q2-0

3

Q3-0

3

Q4-0

3

Q1-0

4

Q2-0

4

Q3-0

4

Q4-0

4

Q1-0

5

Q2-0

5

Q3-0

5

Q4-0

5

Q1-0

6

Q2-0

6

Q3-0

6

Q4-0

6

Q1-0

7

Q2-0

7

Q3-0

7

Q4-0

7

Q1-0

8

Q2-0

8

Q3-0

8

Q4-0

8

Q1-0

9

Q2-0

9

Q3-0

9-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Q3 20092.8%

Annualized % Change from Prior Period

GDP for the third quarter were revised down from the initial 3.5% growth reading. Downward re -visions were in consumer spending and business investment despite government stimulus pro-grams. The continuation of these programs will keep GDP growing through year end and into the first half of next year. We remain concerned about the economy’s underlying strength absent gov-ernment stimulus.

Gross Domestic ProductQ1 2001 – Q3 2009

Source: Bureau of Economic Analysis

Contributions to GDP Growth by Component

Q2 2008 – Q3 2009

Personal Consumption

Government Spending

Net Exports Gross Investment-10%

-8%

-6%

-4%

-2%

0%

2%

4%

0.1%

0.7%

2.4%

-1.7%

-2.5%

1.0%

-0.1%

-1.0%

-2.2%

0.2%

0.4%

-3.9%

0.4%

-0.5%

2.6%

-9.0%

-0.62%

1.33%1.65%

-3.10%

2.07%

0.63%

-0.83%

0.91%

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

The improvement in Q3 GDP was led by personal consumption and gross investment paired with continuing impact of Government Spending led by Federal stimulus programs. Particu-larly impressive was the increase in gross domestic private investment whose quarterly change turned positive for the first time since Q3 of 2007 with an important contribution from housing sales. Somewhat surprising was the slippage in net exports but this reflects a more severe de-cline in imports relative to the decline in exports. We believe increased Government spending will stimulate increased consumer spending at least through Q4 and possibly into the first half of 2010 if Federal stimulus programs are extended. However, it remains to be seen if con-sumer spending can be maintained when these Federal programs expire given the continued high level of unemployment and the escalating cost of credit and healthcare and energy costs.

Source: Bureau of Economic Analysis

World U.S. High income countries

Developing countries

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

3.8%

2.0%2.6%

8.1%

1.9%

1.1% 0.7%

5.9%

-2.9% -3.0%

-4.2%

1.2%

2.0% 1.8%1.3%

4.4%

3.2%2.5%

2.4%

5.7%

2007

2008

2009

2010

2011

An

nu

al

% C

han

ge

Source: World Bank

The world-wide recession is over with emerging market economies led by China, India and Brazil leading the overseas recovery. For the first time in post WWII history, the U.S. and Europe are not the locomotives of worldwide economic growth. However both the U.S. and Europe are recovering in the second half of 2009 led by government stimulus programs. Barring a “double dip “ recession next year on the expiration of government stimulus programs, the estimates below of worldwide economic growth in 2010 and 2011 are likely to be exceeded, particularly in developing countries.

*2007/08 data are actual

Historic and Projected Real GDP Growth around the World

2007 – 2011*

Year-over-year Percentage Changes: S&P Reported Operating Earning for Listed Companies

Q1 2001-Q3 2009

Source: Bureau of Economic Analysis

Q1-0

1Q

2-0

1Q

3-0

1Q

4-0

1Q

1 -02

Q2-0

2Q

3-0

2Q

4-0

2Q

1 -03

Q2-0

3Q

3-0

3Q

4-0

3Q

1 -04

Q2-0

4Q

3-0

4Q

4-0

4Q

1 -05

Q2-0

5Q

3-0

5Q

4-0

5Q

1 -06

Q2-0

6Q

3-0

6Q

4-0

6Q

1 -07

Q2-0

7Q

3-0

7Q

4-0

7Q

1 -08

Q2-0

8Q

3-0

8Q

4-0

8Q

1-0

9Q

2-0

9Q

3-0

9 e

st.

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

-9.4%

-30.8%

-25.8%

-29.3%

-23.5%

-100.6%

-39.2%-18.9%

Q3,’09 (est.)-2.5%

Operating earnings reported by corporations included in the S&P 500 index. The data comes from company financial accounts and is not distorted by inventory, “write-off”, tax and depreciation adjustments. It is a truer measure of corporate profitability. Corporate earnings have fallen dramatically since the third quarter of 2007, falling 100% year/year in Q4 of 2008. Operating earnings are showing better year/year comparisons and are stabilizing but are still at depressed levels through Q2 of this year. Further improvement is expected in 2H of this year and 2010.

Industrial Production January, 2008 - October, 2009

Source: Federal Reserve Bank

Jan-0

8

Feb

-08

Mar-

08

Apr-

08

May-

08

Jun-0

8

Jul-08

Aug-0

8

Sep

-08

Oct

-08

Nov-

08

Dec

-08

Jan-0

9

Feb

-09

Mar-

09

Apr-

09

May-

09

Jun-0

9

Jul-09

Aug-0

9

Sep

-09

Oct

-09

90

95

100

105

110

115

Industrial Production (IP) had collapsed since the be-ginning of the recession in Q4, 2007. It bottomed in the second quarter and improved significantly in the third quarter aided importantly by increased auto production from the “Cash for Clunkers” program. The monthly production level is measured against the average in 2002. IP for October 2009 was 98.6, indicating that the production level was 98.6% of that in 2002, the bottom of the last recession.

% decline Jan. 08- Oct. ’09: 12.4%

Capacity Utilization by Status of ProductionJanuary, 2008 - October, 2009

Source: Federal Reserve Bank

1972-2008 Aver-age

Jan-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-0960

65

70

75

80

85

90

Crude Primary and semi-finished Finished

(%)

Coincident with the decline in Industrial Production was the decline in Industrial Capacity Utilization which bottomed in the second quarter. Reflecting the improvement in orders and production in Q3 is an increase in capacity utilization in all three major categories.

Manufacturers Orders & ShipmentsExcluding Transportation

January, 2008 – October 2009

Source: Census Bureau

Jan-0

8

Feb

-08

Mar-

08

Apr-

08

May-

08

Jun-0

8

Jul-08

Aug-0

8

Sep

-08

Oct

-08

Nov-

08

Dec

-08

Jan-0

9

Feb

-09

Mar-

09

Apr-

09

May-

09

Jun-0

9

Jul-09

Aug-0

9

Sep

-09

Oct

-09

300,000

320,000

340,000

360,000

380,000

400,000

420,000New Orders Shipments

$M

illion

Since the beginning of the recession book/bill ratios have been below 1 hitting a recessionary low this past April. Orders have increased since April aided by Fed-eral stimulus programs. While still at de-pressed levels, book/bill ratios ended the third quarter close to 1. Continued Federal stimulus spending should support further improvement in these trends.

Net Change in U.S. Jobs (Total Non-farm)November, 2005 – November, 2009

Nov-

05

Jan-0

6

Mar-

06

May-

06

Jul-06

Sep

-06

Nov-

06

Jan-0

7

Mar-

07

May-

07

Jul-07

Sep

-07

Nov-

07

Jan-0

8

Mar-

08

May-

08

Jul-08

Sep

-08

Nov-

08

Jan-0

9

Mar-

09

May-

09

Jul-09

Sep

-09

Nov-

09

-800

-700

-600

-500

-400

-300

-200

-100

0

100

200

300

400

500

Nov-09-11 thousands

Thousands

Since January of 2008, over 8 million jobs have been lost. The rate of job loss peaked in the first quarter of this year and has been improving since January, 2009. The rate of unemployment may be peaking.

Source: Bureau of Labor Statistics

National Nonfarm Employment by Industry Sector GroupsDecember, 2007 – November, 2009

Manufacturing

Trade, transportation and utilities

Construction

Professional and business services

Financial activities

Leisure and hospitality

Information

Other services

Mining and logging

Government

Education and health services

-2500 -2000 -1500 -1000 -500 0 500 1000

-2129

-1729

-1563

-1343

-560

-422

-215

-140

-45

132

858

Th

ou

san

ds

Source: Bureau of Labor Statistics

The loss of jobs is pervasive throughout the entire economy and has not spared previously immune professional , executive and managerial positions. This has been as much, if not more, a white collar, middle class recession.

Initial Unemployment Claims January, 2009 – November, 2009

Source: Department of Labor

400,000

450,000

500,000

550,000

600,000

650,000

700,000

535,000

575,000590,000

624,000

617,000631,000

656,000

643,000

657,000

644,000657,000

674,000

660,000

613,000

645,000

635,000

601,000

643,000

636,000625,000

625,000

605,000612,000

630,000

617,000

565,000

524,000

559,000

589,000

554,000561,000

580,000

574,000

576,000

550,000550,000534,000

554,000

524,000514,000531,000

532,000

514,000502,000

501,000

462,000457,000Reflecting the rise in unemployment, new job losses rose dramatically in the first quarter of this year. Since then the trend of new job losses has been declining. However the absolute level of new job loss remains high.

Continued Unemployment Claims November, 2006 – November, 2009

Source: Department of Labor

Nov-

06

Mar-

07

Jul-07

Nov-

07

Mar-

08

Jul-08

Nov-

08

Mar-

09

Jul-09

Nov-

09

2,000,000.0

3,000,000.0

4,000,000.0

5,000,000.0

6,000,000.0

7,000,000.0

8,000,000.0 Nov.215.465 million

Continued unemployment claims reflect the number of unemployed individuals collecting unemployment insurance benefits for 26 weeks or longer. This is a measure of the inability to find jobs in the current economic climate. This mea-sure peaked at 6.8 million in late May and has declined since then. We believe this decline reflects unemployed who have exhausted all state benefits and are going on extended Federal unemployment benefit programs and thus are no longer being counted in this measure rather than people who have found jobs.

Number of Unemployed on Federal Extended Benefit Programs

May, 2008 – November, 2009

Source: Department of Labor

May-

08

Jun-0

8

Jul-08

Aug-0

8

Sep

-08

Oct

-08

Nov-

08

Dec

-08

Jan-0

9

Feb

-09

Mar-

09

Apr-

09

May-

09

Jun-0

9

Jul-09

Aug-0

9

Sep

-09

Oct

-09

Nov-

09

0.00

500,000.00

1,000,000.00

1,500,000.00

2,000,000.00

2,500,000.00

3,000,000.00

3,500,000.00

4,000,000.00

Extended Benefit (EB)

Extended Unemployment Insurance Program (EUI)

Unemployed are able to take advantage of extended federal programs after eligibilities for state unemployment insurance are exhausted. Note the steady increase in the number of un-employed being covered by these programs consistent with the decline in continued claim coverage in the previous slide. Together, continued state and federal benefit programs in-clude over 9 million workers who cannot find jobs.

Source: (Left) Census Bureau, (Right) Federal Reserve Bank

Retail Sales Less Food and Fuel October, 2007 – October, 2009

Consumer CreditQ2 2006 – October, 2009

Q2

-06

Q3

-06

Q4

-06

Q1

-07

Q2

-07

Q3

-07

Q4

-07

Q1

-08

Q2

-08

Q3

-08

Q4

-08

Q1

-09

Q2

-09

Q3

-09

Ap

r-0

9M

ay-

09

Jun

-09

Jul-

09

Au

g-0

9S

ep

-09

Oct

-09

2,200

2,250

2,300

2,350

2,400

2,450

2,500

2,550

2,600 Q3 ’08 2578.3

Oct.’092482.9

$Billions

Consumer spending stabilized in the second quarter and improved in the third. Since the third quarter of 2008 consumer spending has been declining and the consumer has been paying down outstanding debt. These trends have been negative for the economy in the short term but the reduction of consumer debt and an increase in consumer savings are positive for the economy and the improved creditworthiness of the consumer longer term.

Oct

-07

Dec

-07

Feb

-08

Ap

r-0

8

Jun

-08

Au

g-0

8

Oct

-08

Dec

-08

Feb

-09

Ap

r-0

9

Jun

-09

Au

g-0

9

Oct

-09

250,000

255,000

260,000

265,000

270,000

275,000

280,000

285,000

290,000

295,000

Oct. ’07 $291.0 billion

Mar. ’09 $263.0 billion

Oct.’09 $266.4billion

$Billions

National Saving Rateas Percentage of Personal Disposable Income

Q1 2005 – Q3 2009

Source: Bureau of Economic Analysis

2005 Q

1

2005 Q

2

2005 Q

3

2005 Q

4

2006 Q

1

2006 Q

2

2006 Q

3

2006 Q

4

2007 Q

1

2007 Q

2

2007 Q

3

2007 Q

4

2008 Q

1

2008 Q

2

2008 Q

3

2008 Q

4

2009 Q

1

2009 Q

2

2009 Q

3

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1.6

1.3 -0.7 %

1.5

2.22.5

2.3

2.5

1.1%

1.8 1.6

1.51.2

2.5%

1.3%

3.8

3.7%

5%

3.3

(%)The savings rate declined during the past quarter as a result of the increase in consumer spending spurred by the “Cash for Clunkers” and the tax credit for first time home buyers programs. And yet the savings rate is still well above the anemic levels of two years ago. We do not expect savings rates to return to those insufficient levels , longer term, notwithstanding a continued in-crease in consumer spending expected from further federal stim-ulus and eventual economic recovery.

Existing Home Sales v. Length on Market

April, 2006 - October, 2009

Source: (Left) National Association of Realtors, (Right) Census Bureau

New Home Sales Units Sold v. Length on Market

April, 2006 - October, 2009

Apr-

06

Jul-06

Oct

-06

Jan-0

7

Apr-

07

Jul-07

Oct

-07

Jan-0

8

Apr-

08

Jul-08

Oct

-08

Jan-0

9

Apr-

09

Jul-09

Oct

-09

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Oct.’09 6.1 million units

Oct.’09 7.0 months

Million units

Months Supply

Apr-

06

Jul-06

Oct

-06

Jan-0

7

Apr-

07

Jul-07

Oct

-07

Jan-0

8

Apr-

08

Jul-08

Oct

-08

Jan-0

9

Apr-

09

Jul-09

Oct

-09

0

200

400

600

800

1,000

1,200

.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Oct.’09 430thousands units

Oct. ’09 6.7 months

Thousand units sold

Months Supply

Housing sales have improved since March and inventories have declined, particularly in new home construction. The improvement in housing reflects the government’s buyer tax credit, the cutback in new home construction, much reduced home prices and lower mortgage interest rates.

S&P/Case-Shiller Home Price Index 2006 – September, 2009

Source: Standard and Poor's

2006

Jan-0

7

Feb

-07

Mar-

07

Apr-

07

May-

07

Jun-0

7

Jul-07

Aug-0

7

Sep

-07

Oct

-07

Nov-

07

Dec

-07

Jan-0

8

Feb

-08

Mar-

08

Apr-

08

May-

08

Jun-0

8

Jul-08

Aug-0

8

Sep

-08

Oct

-08

Nov-

08

Dec

-08

Jan-0

9

Feb

-09

Mar-

09

Apr-

09

May-

09

Jun-0

9

Jul-09

Aug-0

9

Sep

-09

135

145

155

165

175

185

195

205

215

Jan. 2000=100 Since 2006, housing prices declined by 30%. In May, the index went up for the first time in almost 3 years and has in-creased steadily since.

2005

2006

2007

39455

39486

39516

39547

39569

39600

39630

39661

39692

39722

39753

39783

39814

39845

39873

39904

39934

39965

39995

40026

40057

40087

40118

0

20

40

60

80

100

120

Nov. 0949.3

Consumer Confidence (Conference Board)

Reflecting the continued poor employment situation and pressure on consumer incomes, It is noteworthy to see con-sumer sentiment decline in October despite the rising stock market. The rate of decline and the absolute level of the in-dex calls attention to the high level of consumer pessimism still prevalent even as we transition from recession to re-covery.

Conference Board Consumer Confidence2005 – November, 2009

Source: Conference Board

Q2 2

006

Q3 2

006

Q4 2

006

Q1 2

007

Q2 2

007

Q3 2

007

Q4 2

007

Q1 2

008

Q2 2

008

Q3 2

008

Q4 2

008

Q1 2

009

Q2 2

009

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan. 080.38

(%) The collapse in housing has spread to non-residential real estate. Commercial mortgage backed securities delinquency has increased at an accelerating rate from the third quarter of 2008 through the second quarter of 2009. We expect this trend to continue through the remainder of 2009 and well into 2010 creating a new round of real estate losses for lenders and securities holders.

Commercial Mortgage Backed Securities (CMBS): Delinquency Rates for All Private-labels*

Q2 2006 – Q2 2009

Source: Mortgage Banker’s Association

*CMBS issued by private entities (i.e. other than Fannie Mae, Ginnie Mae, or Freddie Mac). The percentage of loans that are 30-days delinquent. The delinquency includes foreclosed estates.

Real Estate & Consumer Loan Delinquency Rates: All Banks and Financial Institutions

Q2 2007 –Q3 2009

Source: Federal Reserve Bank

Q2-0

7

Q3-0

7

Q4-0

7

Q1-0

8

Q2-0

8

Q3-0

8

Q4-0

8

Q1-0

9

Q2-0

9

Q3-0

9

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Commercial Residential

Consumer finance

(%)

Over the past two years, debt delinquency rose dramatically among real estate and consumer loans. Consumer loan delinquencies peaked in the first quarter of 2009 while those for real estate loans continues to rise.

Changes in Consumer Price Index in Percentage Terms 2007 v.

20062008 v. 2007

6 months ended in Aug.2009

6 months ended in Sep. 2009

6 months ended in Oct. 2009

All items 4.1% 0.1% 2.3% 2.9% 3.5%Food at Home 5.6% 6.6% -3.7% -3.6% -2.4%Food Away Home 4.0% 5.0% 1.5% 1.6% 1.2%Rent of Primary Res 4.0% 3.4% 1.0% 1.5% 0.0%Owners Equiv of Rent of Prim Res 2.8% 2.1% 1.2% 0.5% 0.2%Household Energy 5.3% 5.9% -12.8% -9.4% -3.0%Water/Sewer/Trash 5.4% 6.5% 7.3% 7.2% 7.5%Houshold Ops 2.2% 6.0% -.8% -0.6% -0.8%Car Repair 3.3% 5.9% 1.5% 2.0% 2.3%Pub. Transp 7.2% 1.8% -.2% 6.1% 9.7%Medical 5.2% 2.6% 3.1% 3.6% 3.2%Education 5.6% 5.6% 5.9% 4.9% 4.7%Energy 17.4% -21.3% 12.9% 21.6% 31.3%Source: Bureau of Labor Statistics

While inflation has declined precipitously in the recession led by the collapse in energy and commodity prices. After bottoming in July, prices are moving up, driven by the reversal in energy prices. In addition, basic services, healthcare and education prices remain stubbornly high.

Source: Energy Information Administration

Crude Oil Spot Prices in U.S. DollarsDecember, 2004– December, 2009

Dec

-04

Mar-

05

Jun-0

5

Sep

-05

Dec

-05

Mar-

06

Jun-0

6

Sep

-06

Dec

-06

Mar-

07

Jun-0

7

Sep

-07

Dec

-07

Mar-

08

Jun-0

8

Sep

-08

Dec

-08

Mar-

09

Jun-0

9

Sep

-09

Dec

-09

0

20

40

60

80

100

120

140

160

Dec. 1$78.39

Dollars per barrel

The collapse in oil prices since last summer hit its bottom in January of this year. The price of oil is currently over $70 per barrel and has escalated on the decline in the U.S. dollar and a return of speculation. While volatile and subject to near term correction oil prices will escalate further once U.S. and overseas economies re-cover. We expect worldwide oil prices to resume their upward trend longer term.

Nominal Broad Dollar Index* July, 2000 – November, 2009

Jul-00

Sep

-00

Dec

-00

Mar-

01

Jun-0

1A

ug-0

1N

ov-

01

Feb

-02

May-

02

Aug-0

2O

ct-0

2Ja

n-0

3A

pr-

03

Jul-03

Sep

-03

Dec

-03

Mar-

04

Jun-0

4A

ug-0

4N

ov-

04

Feb

-05

May-

05

Jul-05

Oct

-05

Jan-0

6A

pr-

06

Jun-0

6S

ep-0

6D

ec-0

6M

ar-

07

Jun-0

7A

ug-0

7N

ov-

07

Feb

-08

May-

08

Jul-08

Oct

-08

Jan-0

9A

pr-

09

Jun-0

9S

ep-0

9

80

90

100

110

120

130

140

Nov. 30 100.7

Mar. 27110. 75

The long term decline in the U.S. Dollar was reversed last August as the world-wide recession intensified. The Dollar became a safe haven for foreign money and also reflected lower inflation. The rising U.S. national debt and budget deficits and a perceived stabilization in the worldwide recession is resulting in money shifting out of the Dollar into other currencies and gold. We believe these will be long term trends.

* Broad Dollar Index: a weighted average of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners.

Source: Federal Reserve Board

THE GOVERNMENT’S RESPONSE

Jan-0

7Ja

n-0

7F

eb-0

7M

ar-

07

Apr-

07

May-

07

Jun-0

7Ju

l-07

Jul-07

Aug-0

7S

ep-0

7O

ct-0

7N

ov-

07

Dec

-07

Dec

-07

Jan-0

8F

eb-0

8M

ar-

08

Apr-

08

May-

08

Jun-0

8Ju

n-0

8Ju

l-08

Aug-0

8S

ep-0

8O

ct-0

8N

ov-

08

Dec

-08

Dec

-08

Jan-0

9F

eb-0

9M

ar-

09

Apr-

09

May-

09

Jun-0

9Ju

n-0

9Ju

l-09

Aug-0

9S

ep-0

9O

ct-0

9N

ov-

096,500

6,700

6,900

7,100

7,300

7,500

7,700

7,900

8,100

8,300

8,500

2007: ∆5.5%

$Billions

Dec. ’08 – Q1 ’09: ∆13.2%

2008: ∆9.9 %

The Fed has added massive amounts of liquidity to the banking system dramatically increasing the money supply. While it has been beneficial to the credit and banking sys-tems it represents a source of higher inflation longer term. Recently the Fed has reversed this stimulus as the credit sys-tem has stabilized.

Q1 ’09 – Q2 ’09: ∆3.5%

Q2’09 – Q3’09: ∆-0.1%

* All percentage changes are annualized.

Q3’09 – Present: ∆2.4%

Money Supply (M2): January, 2007 – November, 2009

Source: Federal Reserve Bank

U.S. Federal Budget Deficit, 1995-2011*

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

-1,800

-1,300

-800

-300

200

700

-1417 -1381 -921-1554 -1485-1029

TOTAL

ON-BUDGET (deficit ex-cluding Social Security Trust funds and net cash-flow of Postal Services)

$B

illi

on

s

The federal budget deficit reached a record $1.7 trillion in fiscal 2009. According to the August CBO Budget Projection, the cumulative federal deficit (on budget) between FY2010 and FY2014 would reach approxi-mately $4 trillion. The public debt accounts for approximately 54 per-cent of this year’s GDP, but the figure is expected to rise to nearly 70 percent during the next ten years.

*2010-2011 data are projections

Source: Congressional Budget Office

Source: Federal Reserve Bank

Federal Reserve Balance Sheet: Reserve Bank Credit

June, 2008 – December, 2009

Jun-0

8

Jul-08

Aug-0

8

Sep

-08

Oct

-08

Nov-

08

Dec

-08

Jan-0

9

Feb

-09

Mar-

09

Apr-

09

May-

09

Jun-0

9

Jul-09

Aug-0

9

Sep

-09

Oct

-09

Nov-

09

800000

1000000

1200000

1400000

1600000

1800000

2000000

2200000

2400000

The Federal Reserve has also increased its purchase of bank and other credit issuer assets and U.S. Trea-sury debt to provide added liquidity and remove impaired assets from the credit system. This has also kept interest rates low by absorbing the “ballooning” supply of U.S Treasury debt to finance the increased Federal budget deficits. The huge increase in the Federal Reserve balance sheet is worrisome if not de-leveraged in the foreseeable future. The Fed has announced it will be ceasing such purchases by the end of March, 2010.

Source: (Left) Federal Reserve Bank, (Right) British Banker’s Association

Federal Fund Rates, January, 2008 - December, 2009

Jan-0

8

Mar

-08

May

-08

Jul-08

Sep

-08

Nov

-08

Jan-0

9

Mar

-09

May

-09

Jul-09

Sep

-09

Nov

-09

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Oct. 7 2008:

2.97

Dec. 3 0.13

(%)

3-month LIBOR rates lent in $US January, 2008 - December, 2009

The Fed and European Central Bank have cut interest rates to the banking systems here and abroad thus driving down the cost of bank funds to facilitate bank lending.

Jan

-08

Mar-

08

May-

08

Jul-

08

Sep

-08

Nov-

08

Jan

-09

Mar-

09

May-

09

Jul-

09

Sep

-09

Nov-

09

0

1

2

3

4

5

6 Oct. 10 2008: 4.82

Dec. 40.255

(%)

What’s on the other side? 2009 - Recession Bottoms in Q2 and GDP Grows in Second Half

Housing bottoms and improves in the second half Unemployment slowly gets “less worse” in the second half of this yearLower wholesale and retail prices help consumer incomes and spending but are offset by rising energy prices, excess capacity in business and consumer efforts to reduce debt and raise savingsIncreased exports as overseas economies recoverObama Administration Increased economic “bailout” and stimulus programs have temporarily stimulated the economy towards recovery in the second half but at the expense of large increases in federal budget deficits and national debt

What’s on the other side? (cont.)2009 – Business

Cost of goods have declined as interest rates, labor costs and commodity prices decline but business is facing weak consumer and business demand Corporate profits overall stabilize in Q2 and improve in second halfFederal stimulus spurs increases in sales and production in second halfWeak consumer spending but pent-up demand building

2010 – Economy Makes Gradual Cyclical Recovery?

Increased employment = increased consumer spendingIncreased Corporate Sales = increased corporate profits = increased capital spendingIncreased interest rates and rising prices from higher demand and continuing federal budget deficitsAll based on private sector demand filling void from expiration of Federal stimulus programs in 2009-2010

Where are the opportunities?Healthcare EducationWorker RetrainingAgricultureEnergy ConservationEnvironmental Solutions Electric PowerTransportation – Increase Mass TransitExports

Water Conservation – New Supplies and RecyclingU.S. Government Procurement and Outsourcing – Base Realignment Program (BRAC)Real Estate – Recycle and Rehab Existing Commercial and Residential Property

Source: Recovery.gov

Overview of Where the $787 Billion is Going: Break-down of the Stimulus Dollars by Sectors

Tax Relief

State and Local Fiscal Relief

Infrastructure and Science

Protecting the Vulnerable

Health Care

Education and Training

Energy

Other

$0 $50 $100 $150 $200 $250 $300

$288

$144

$111

$81

$59

$53

$43

$8

$ Billions

ConclusionsThe deep and protracted recession that began in the fourth quarter of 2007 ended in the third quarter of 2009 thanks to federal stimulus and subsidy programs. The artificial stimulus led to positive GDP growth in the third quarter. The continuation of government stimulus is expected to lead to positive GDP growth in the fourth quarter of 2009 and the first half of 2010. The rest of the world, led by accelerated growth in China, is outpacing the U.S. in economic recovery and is poised to grow faster than the U.S. in 2010.Despite government stimulus the U.S. economy still faces near term economic pressures which include:

high cost and reduced availability of creditLow level of corporate profitsContinuing unemploymentcontinued weak levels of corporate capital and consumer spending

Conclusions continued

Severe reductions in State and Local Government spending and eroded municipal financial strength Continued credit pressures in residential housing and consumer lending extending to commercial real estate markets and corporate lendingDespite a second half economic improvement, GDP for 2009 is expected to show little if any growth

Conclusions continuedHowever, a bottoming of the housing cycle and an improvement in unemployment late this year, aided importantly by increased federal stimulus spending in the second half of this year, should set the stage for cyclical capital markets and economic improvements in 2009 and 2010. Indeed, capital markets in the U.S. and abroad have already staged a large recovery off market cycle lows in the first quarterAfter an expected cyclical recovery in 2010-2012, we believe longer term socio-economic issues facing this country will result in slower future economic growth for the United States featuring reduced rate of consumer spending growth, high levels of national debt and entitlement spendingIn addition, the availability and cost of credit, particularly to consumers, will be more restricted and expensive in the future, further curtailing private sector spending

Thank You

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