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QUARTERLY RESEARCH CONFERENCE CALL
January 24, 201210 am PST
Wurts & Associates
December 2011 Quarterly Research Conference Call
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Introduction by: Jeffrey MacLean, Chief Executive Officer
Presented by:Jeffrey Scott, CFA, Chief Investment OfficerScott Day, CFA, Director Fixed IncomePeter Wilamoski, PhD, Director of Capital Markets Research
Brief Outline:
Introduction and Call Overview Global View US Perspective European Crisis Emerging Markets Portfolio Construction Lesson
Jeffrey J. MacLeanPresident, CEO
Jeffrey Scott, CFA
CIO
Scott Day, CFA
Director of Fixed Income
Peter Wilamoski, Ph.D.
Director ofCapital Markets Research
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C O N F E R E N C E C A L L O V E R V I E W
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Introduction & Call OverviewJeff MacLeanChief Executive Officer
Review of Quarterly Research Findings – Global ViewJeff Scott, CFAChief Investment Officer
Review of Quarterly Research Findings – US PerspectiveScott Day, CFADirector of Fixed Income
Review of Quarterly Research Findings – European CrisisPeter Wilamoski, PhDDirector of Capital Markets Research
Review of Quarterly Research Findings – Emerging MarketsJeff Scott, CFAChief Investment Officer
Quarterly Portfolio Construction LessonJeff Scott, CFAChief Investment Officer
M A C R O D I S C U S S I O N
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C O N F E R E N C E C A L L O V E R V I E W
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Global IMF forecasts 2012 GDP growth to fall to 3.7% from 3.9% in 2011
Growth is constrained by the global deleveraging cycle and fiscal austerity
Personal consumption and manufacturing are trending lower
US GDP growth is near potential but trending lower
Future growth is dependent upon growth in consumption – with growth in wages and credit required
Despite the Fed’s grand monetary experiment – inflation is contained for now by lack of wage and credit growth
Europe The debt crisis is restraining bank lending, consumption and overall GDP growth
Manufacturing surveys forecast GDP growth to contract 1% in 2012
Fiscal austerity resulting in government spending did not impact GDP in 2011 ‐ but will negatively effect GDP in 2012
Emerging Markets The strong economic recovery starting in 2009 resulted in inflation due to expansion in wages, credit and commodity prices
To stem the tide of inflation, central banks tightened monetary policy – effectively slowing growth in 2011
Good news ‐ Several major emerging market central banks are reversing course and starting to ease policy once again
Factors to watch over coming quarters Expansion in jobs, wages and credit to influence growth and inflation
Emerging markets monetary and fiscal policy success is dependent on balancing GDP growth versus inflation
1. Global GDP Growth
GDP Growth Rate %
G L O B A L - O P T I M I S M A B O U N D S : N O T S O F A S T !
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Sources: BEA, Eurostat, IBGE, Bloomberg, Wurts
Has growth peaked?
US ChinaEurope Brazil
Has growth peaked?
Europe & Brazil manufacturing contracting
3. Global Manufacturing Surveys
Sources: ISM, Markit, China Federation of Logistic & Purchasing, NTC Economics, Bloomberg, WurtsSources: BEA, Eurostat, China Economic Information Network, IBGE, Bloomberg, Wurts
YoY % Cha
nge in Con
sumption
US ChinaEurope Brazil
US ChinaEurope Brazil
2. Global Personal Consumption Expenditure
U S – W H Y F A L L I N G U N E M P L O Y M E N T I S A P R O B L E M
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4. U6 Unemployment Rate 5. Labor Force Participation Rate
Unemployment declining due to falling
participation rate
Sources: BLS, Bloomberg, Wurts
6. Nonfarm Payroll Monthly Change
Payrolls gains: less robust and lower quality
Sources: BLS, Bloomberg, Wurts
Sources: BLS, Bloomberg, WurtsSources: BLS, Bloomberg, Wurts
Improvement in the labor market? Not so fast….
U‐6 Une
mploymen
t Rate
Avg Hrly
& Payroll Une
mploymen
t Rate
High unemployment keeping wage growth suppressed
Average Hourly EarningsPayroll Unemployment RateU‐6 Unemployment Rate
7. Wages & Unemployment
8. Personal Consumption – Income & Credit
Personal Consumption ExpenditureUS Household Debt GrowthPersonal Income
Has consumption & growth peaked?
Trending lower
U S – W I L L T H E C O N S U M E R S A V E T H I S “ R E C O V E R Y ” ?
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Sources: BEA, Federal Reserve, Bloomberg, Wurts
10. Household Credit Growth
Household credit continues to contract
Total Household Debt GrowthHome Mortgage Debt Growth
$‐
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
1990
1991
1993
1994
1995
1997
1998
2000
2001
2002
2004
2005
2007
2008
2010
2011
Billion
s USD
9. Household Credit Outstanding
Home Mortgage DebtConsumer Credit
Reduction due to foreclosures & defaults and not pay downs
Sources: Federal Reserve Z.1, Bloomberg, Wurts Sources: Federal Reserve, Bloomberg, Wurts
Total U
nits of H
omes Sold
Averag
e Hom
e Price
U S – H O W I S T H E H O U S E O F C A R D S F A I R I N G ?
9Sources: Federal Reserve, U.S. Census Bureau, Bloomberg, Wurts
Home prices have yet to improve despite economy
recoveryExisting Home Sale Price NSANew Home Sale Price NSA
Home sale volumes have likewise seen
little improvement
New Home Sale Total UnitsHousing Starts Single Family
Excess supply of homes keeping home prices and construction
contained
Sources: Bloomberg, Wurts
Sources: National Association of Realtors, U.S. Census Bureau, Bloomberg, Wurts
11. US Home Prices
12. US Home Sale Total Units 13. Housing Inventory
US Pe
rson
al In
come (Billions)
U S – W H A T A R E T H E C H A N C E S O F S E E I N G M O R E F I S C A L S T I M U L U S I N A N E L E C T I O N Y E A R ?
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Sources: Bloomberg, WurtsSources: BEA, Bloomberg, Wurts
Personal IncomePersonal Income Excluding Transfer Receipts
14. Personal Income & Transfer Receipts
Personal income being supported by government subsidies at a record pace
15. US Budget Deficit % of GDP
U S – M R . B E R N A N K E , W I L L Y O U R G R A N D M O N E T A R YE X P E R I M E N T T U R N U S I N T O Z I M B A B W E ?
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Sources: Federal Reserve, Bloomberg, Wurts
Increase in monetary base only to offset drop in money multiplier
Fed M1 Money MultiplierFed M2 Money SupplyAggregate Monetary Base
Sources: BLS, Bloomberg, Wurts
17. Inflation Trends Driven by Earnings
CPI Headline (YoY)Average Hourly Earnings
Mon
etary Ba
se
Mon
ey Sup
ply/Multip
lier
16. Monetary Expansion to Offset Drop in Multiplier
E U R O P E – I S I T T I M E T O B U T C H E R T H E P I I G S ?
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Source: Bloomberg, Wurts
PortugalItalyIrelandSpain
Greece CDS at 7790
CDS Spread
20. 5 Year CDS - PIIGS
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
Germany France Italy Spain Portugal Greece Ireland
1986 1996 2007
Sources: IMF, Wurts
18. Eurozone Debt to GDP
1990 2000 2011
0%
200%
400%
600%
800%
1000%
1200%
1400%
1600%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
US Europe UK
Sources: S&P, FTSE, Bloomberg, Wurts
19. Banking Sector Leverage (Debt/Equity)
European banking sector leverage remains a
primary concern
US Europe UK
E U R O P E – C A N E U R O P E A N S S P E N D T H E I R W A Y T O P R O S P E R I T Y ?
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Sources: Eurostat, ECB, Bloomberg, Wurts Sources: Eurostat, Bloomberg, Wurts
22. Household Austerity - Contracting Credit
Household credit continues to contract,
constraining consumption & inflation
EuroZone Unemployment RateHousehold ConsumptionH
ouseho
ld Con
sumption
Une
mploymen
t Rate
High unemployment is constraining consumption
21. Unemployment & Consumption
E U R O P E – A U S T E R I T Y W I L L B E A D R A G … C H I N A P L E A S EK E E P G R O W I N G
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Sources: Eurostat, Bloomberg, Wurts
Consumption Exports
GDP YoYExports External to EUHousehold Consumption
23. Austerity in Action – A Drag on Growth
ECB Main Refinancing RateECB M2 Money Supply YoYGov’t Expenditure Contribution to GDP
Sources: Eurostat, ECB, Bloomberg, Wurts
ECB Ra
te/G
ov’t Expe
nditu
re % GDP
Mon
ey Sup
ply Growth YoY
GDP & Con
sumption Growth
Expo
rts E
xterna
l to EU
24. GDP – Consumption to Export Dependent
E M E R G I N G M A R K E T S – F I N A L L Y T H E R E I S S T I L L A P L A C E I N T H E W O R L D W I T H J O B G R O W T H , B U T A T A C O S T
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Sources: Bloomberg, Wurts
26. Unemployment Rate
Brazil Unemployment RateChina Unemployment RateRussia Unemployment Rate
Brazil Manufacturing PMIChina Manufacturing PMIRussia Manufacturing YoY
Sources: IBGE, National Bureau of Statistics of China, Federal Service of State Statistics, Bloomberg, Wurts
25. Manufacturing
Source: IBGE, China Economic Information Network, Federal Service of State Statistics, Bloomberg,, Wurts
27. Inflation
Brazil CPI YoYChina CPI YoYRussia CPI YoY
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Has growth peaked?
29. UBS Commodity Index28. Central Bank Discount Rate
E M E R G I N G M A R K E T S – O U R K N I G H T I N S H I N I N G A R M O R
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Central banks raising rates to lower inflation –
slowing consumption &
growth
Brazil Selic Target RateChina Rediscount RateRussia Refinance Rate
Source: Banco Central do Brasil, The Peoples Bank of China, Central Bank of Russia, Bloomberg, Wurts
‐13.32% in 2011
Sources: UBS, Bloomberg, Wurts
S U M M A R Y O F O U T L O O K
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S U M M A R Y O F O U T L O O K
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Global
The forecast for growth is a modest down shift
Inflation appears under control for the moment
It’s all about jobs and debt ‐ that is, not enough jobs and too much debt
US
Shows some signs of modest strength at the expense of personal savings
The fiscal and monetary policy well looks pretty dry in the near term going forward
Debt deleveraging cycle and housing correction still running its course
Europe
Stay tuned; this debt crisis is far from over
Austerity is good for the long term, but may be too much for the economy in the short term pushing Europe over the edge into recession
Who will bail out Europe, Germany or the IMF?
Emerging Markets
Monetary policy is working – growth slowed in 2011
Will monetary policy work in 2012 – for all of us, we better hope so
Commodity pushed inflation seems to be subsiding
Portfolio Implications
Portfolios should be positioned neutral to lower overall risk relative to the strategic asset allocation
Underweight equities – tilt equity portfolio to EAFE and Emerging Markets
Allocation from US equities to credit
Stay neutral in allocation to treasuries, even at these rich levels
C O R P O R A T E C A P I T A L S T A C K
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Senior Bank Debt
Public Debt(Investment Grade & High Yield)
Mezzanine Debt
Preferred Equity
Equity
Debt
Equity
Q & A Session
Thank you for participating in our December 2011 Quarterly Research Conference Call. We are now open for questions.
To ask a question, please dial in and follow the prompts:
Dial in:
(888) 290-7503
Participant code:
81460974
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