Bannister - Stifel Nicolaus Mid-2011 Macro Outlook

Macro & Portfolio Strategy
July 11, 2011
Stifel Nicolaus Mid-2011 Macro Outlook Slide Deck

Barry B. Bannister, CFA (443) 224-1317 bbbannister@stifel.com
Context - Interlocking structural challenges: U.S. needs traction, the EU a unified bond market, and China rebalancing. Favored Sectors: Technology, Communications, Health Tech., Finance (i.e., growth stocks and depressed rate sensitive) and Source of Funds: Non-Energy Minerals, Energy Minerals, and Mineral feeder industries (ex., Machinery, Oil Service). In our view: TRACTION: The U.S. structural challenge is to transfer private housing liabilities to the public sector while levitating asset values until nominal GDP growth offsets missing housing investment. Outlook: U.S. succeeds in 2H11 GDP traction, U.S. dollar stabilizes, commodities roll over April-December 2011, 2H11 corporate investment improves, and the S&P 500 rises, bounded at the low end by 1,200 and high end at 1,400 fair value (~5% over-shoot either side of 200dma). UNITY: The EU structural challenge is a transfer of fiscal sovereignty to a single bond market while preserving solvency, despite a stubbornly hawkish and increasingly vulnerable ECB. Outlook: EUR/USD down to ~1.35 as peripheral debt situation is far from over. European central bank balance sheets may be the next in focus. Portuguese public and Spanish private debt require restructuring, possibly along the lines of the Greek debt swaps and maturity extensions. REBALANCE: The Chinese structural challenge is to achieve the first soft landing in Emerging Market history following years of rapid credit growth, while rebalancing growth to bottom-up consumption despite such a directive coming from top-down authority. Outlook: Despite Chinese inflation peaking we see Chinese GDP weakening sharply in 2H11 with a traditional lag to monetary tightness, thereby significantly weakening construction-dependent commodities. Top-down authority can order fixed investment, but not consumption. Sections Since 4/4/11 we have said the Hard Asset vs. Paper Asset trade, a defining trade for leadership since 2002, is over (page 5-13) Favored Sectors: Technology, Communications, Health Tech., Finance (i.e., growth stocks and depressed rate sensitive) (page 14) Source of Funds: Non-Energy Minerals, Energy Minerals, Mineral feeder industries (ex., Machinery, Oil Service) (page 15-16) We see S&P 500 bouncing off the 200 day average in 2011, especially weak in summer, then 1,400 by the end of year (page 17-26) We see WTI Oil ~$75/bbl.in a year (more supply, less demand), but not without Asia slowing and Libya returning (page 27-34) 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 this report. Investors should consider this report as only a single factor in making their investment decision.
All relevant disclosures and certifications appear on pages 58 - 59 of this report.
July 11, 2011
Since commodities have become a financial asset, they should be subject to/pressured by a monetary relationship (page 35-38) The frightening scenario is the commodity market signaling a 20% S&P 500 bear market between April-August 2011? (page 39-45) Fed & Treasury are brilliantly converting a Depression into debt a work-out; we see the 10-year near 4% within a year (page 46-53) U.S. fiscal deficits are desirable, inflation should average about 3% to 2015, and debt deflation is a far greater risk (page 54-57)
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July 11, 2011
Stifel Nicolaus Mid-2011 Macro Outlook Slide Deck Interlocking Structural Challenges: Traction, Unity and Rebalancing
As of July 2011 S&P 500 1,353 (7/7/11) 10-Yr. 3.14% / 10/2yr. 267bps WTI Oil $99/bbl. / CRB-CCI 642 DXY 75.21 / EUR/USD 1.44
In our view:
(1) Context - Interlocking structural challenges: U.S. needs traction, the EU a single bond market, and China rebalancing. 4
Page
(2) Since 4/4/11 we have said the Hard Asset vs. Paper Asset trade, a defining trade for leadership since 2002, is over 5-13 (3) Favored Sectors: Technology, Communications, Health Tech., Finance (i.e., growth stocks, depressed rate sensitive)..... 14 (4) Source of Funds: Non-Energy Minerals, Energy Minerals, Mineral feeder industries (ex., Machinery, Oil Service). 15-16 (5) We see S&P 500 bouncing off the 200 day average in 2011, especially weak in summer, then 1,400 by the end of year17-26 (6) We see WTI Oil ~$75/bbl. in a year (more supply, less demand), but not without Asia slowing and Libya returning...... 27-34 (7) Since commodities have become a financial asset, they should be subject to/pressured by a monetary relationship.. 35-38 (8) The frightening scenario is the commodity market signaling a 20% S&P 500 bear market between Apr-Aug 2011?.......... 39-45 (9) Fed & Treasury are brilliantly converting a Depression into debt a work-out; we see the 10-year near 4% in a year.. 46-53 (10) U.S. fiscal deficits are desirable, inflation should average about 3% to 2015, and debt deflation is a far greater risk 54-57 Barry B. Bannister, CFA Managing Director, Equity Research - Macro & Sector Strategy Stifel Nicolaus & Co. bbbannister@stifel.com 443-224-1317
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 this report. Investors should consider this report as only a single factor in making their investment decision. All relevant disclosures and certifications can be found on page 58-59 of this report and on the research page at stifel.com.
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July 11, 2011
Structural Challenges: Traction (U.S.), Unity (EU), Rebalance (PRC)

In Our View: TRACTION: The U.S. structural challenge is to transfer private housing liabilities to the public sector while levitating asset values until nominal GDP growth offsets missing housing investment. Outlook: U.S. succeeds in 2H11 traction, U.S. $ stabilizes, commodities roll over April December 2011, 2H11 corporate investment improves, and S&P 500 rises, bounded at the low end by 1,200 and high end at 1,400 fair value (~5% over-shoot either side of 200dma). ----------------------------------------------------------------------------------------------------------------------------------UNITY: The EU structural challenge is a transfer of fiscal sovereignty to a single bond market while preserving solvency, despite a stubbornly hawkish and increasingly vulnerable ECB. Outlook: EUR/USD down to ~1.35 as peripheral debt situation is far from over. European central bank balance sheets next in focus. Portuguese public and Spanish private debt require restructuring, possibly along the lines of the Greek debt swaps and maturity extensions. ----------------------------------------------------------------------------------------------------------------------------------REBALANCE: The Chinese structural challenge is to achieve the first soft landing in Emerging Market history following years of rapid credit growth, while rebalancing growth to bottom-up consumption despite such a directive coming from top-down authority. Outlook: Despite Chinese inflation peaking we see Chinese GDP weakening sharply in 2H11 with a traditional lag to monetary tightness, thereby significantly weakening constructiondependent commodities. Top-down authority can order fixed investment, but not consumption.
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July 11, 2011
Since 4/4/11 we have said the Hard Asset vs. Paper Asset trade, a defining trade for leadership since 2002, is over
Successful U.S. economic traction removes U.S. $ debasement fears Deep EU debt woes reduce the downward pressure on the U.S. dollar Chinese efforts to restrain lending remove commodity demand
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July 11, 2011
On September 10, 2001 (the day before 9/11), we rolled out coverage of mining equipment maker Joy Global Inc. (JOYG) as it was emerging from bankruptcy. We were aligning our coverage to take advantage of what we saw as a shift to commodity strength. A key part of that report was the Paper to Hard Asset Switch, outlined in the report and excerpted to the right, as well as a long-term chart from the report of the U.S. stock market index divided by the U.S. commodity price index, which we felt was changing direction in favor of commodities.
Source: Stifel Nicolaus & Co., From a former report by Barry Bannister & Paul Forward dated September 10, 2001 published by Legg Mason Wood Walker, Inc., the prior owner of parts of the Stifel Nicolaus Capital Markets business.
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July 11, 2011
To the right we update the chart on the preceding page showing the Paper vs. Hard Asset trade from 1870 to present. Easy money has been a multiplier for the Paper to Hard Asset trade since 1999, favoring the latter until recently. The decline since 1999 of stocks relative to commodities is as powerful as any past cycle, while lasting a similar ~12 year period. Commodity sentiment has migrated from deep cyclical to growth, fueling extractive investment. Still, centuries of data support the view that commodity production is a price-taking, high fixed-cost, depleting, capital-intensive, deeply cyclical industry, with periodic pricing power that lures new capital (human & physical), only to be dashed against the rocks in relative deflation.
U.S. Stock Market relative to the Commodity Market, 1870 to June 13, 2011
Note: Excludes dividends for simplicity of cycle presentation
100.0
Key: When the line is rising, the S&P stock market index beats the commodity price index and when the line is falling the opposite occurs.
Relative price strength, stocks vs. commodities, log scale
10.0
Post-W.W. 2/Korea commodity inflation bubble bursts, disinflation ensues, 1950s bull market begins. Post-Civil War Reconstruction ends in 1877, gold standard begins 1879, deflationary boom, stocks rally. Post-WW 1 commodity bubble bursts, bull market begins.
OPEC overplays hand and oil prices collapse 1981, Volcker stops inflation 1981-82, Reagan cuts taxes, long Soviet collapse, disinflation & bull market 1980s-90s.
Credit growth expands money supply relative to commodities, post9/11 U.S. $ weakens, Mid-East wars, Asian commodity use.
1.0
Populism in U.S. politics. Panic of 1907, a banking crisis & stock market crash. WW1 1914 to 1918
'29 Crash, WW2 Gold 1939-45 siezed U.S.$ devalued in 1933.
Guns-andButter 1960s; Nixon closed OPEC '73 gold window embargo; 1971, all 1973-74 inflationary. Bear Market, Iran fell '79, Volcker tightens.
0.1
1870 1875 1880 1885 1890 1895 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015E
U.S. stock market composite relative to the U.S. commodity market, 1870 to present
Source: Standard & Poors (Cowles Composite joined to S&P 500), U.S. PPI All Commodities joined to CRB futures (rebased). Note: While this is the time for cyclical (over) investment in commodity capacity that destroys pricing for commodity producers for a generation, the underlying equities respond to commodity prices, which we think have peaked.
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July 11, 2011
This paper relative to hard assets price cycle began precisely July 16, 1999 (left chart), after which the S&P 500 relative to the CRB CCI Futures fell. The S&P 500/CRB CCI bottomed at the same level (right chart) on Mar-7, 2009 when the numerator hit its low (S&P 500 ~$666), and again Mar-7, 2011 when the denominator peaked (Commodities close to their high). If the facts change well change our minds(1), but we now think the S&P 500 will outperform the CRB CCI futures.
The Ratio of U.S. Stock Prices (S&P 500) to Commodity Prices (CRB Futures) Daily prices 10/1/1998 to latest
8.00 7.50 7.00 6.50 2.50 6.00 5.50 5.00 2.25 4.50 4.00 3.50 3.00 2.50 2.00 1.50
Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Oct-98 Oct-99 Oct-00 Oct-01 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Apr-11
The Ratio of U.S. Stock Prices (S&P 500) to Commodity Prices (CRB Futures) Daily prices 7/1/2008 to latest
2.75
Peak July 16, 1999
2.00
Low Mar-9,'09 1.94115
Low Mar-7,'11 1.9182
Close as of July 07, 2011 2.08054
1.75
Jul-08 Aug-08 Sep-08 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
Source: Factset prices. (1) If we are wrong and commodities have one more leg up versus the S&P 500 (causing the left chart to lurch down one more leg), it is because the first two downward moves since 1999 represented shock and acceptance in the context of a shock, acceptance & capitulation secular bear market for equities vs. commodities, and the third leg capitulation lies ahead. An example of a catalyst would be an Israel/Iran conflict that could cause oil to rise and the S&P 500 to fall.
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July 11, 2011
The rotation from paper to hard assets decided winners & laggards for the past decade (table, left side). But two centuries of rolling 10-year total return data for U.S. equities (right chart) shows that >13% 10-year compound returns are as good as it gets and <4% as bad as it gets. To sit with the top performers is to ride the wild bull of momentum, a precarious strategy.
Factset Industry Categories All Domestic Equity, Various Indicies, Total Return (Price + Dividend) Indices, 10-Yr. June 2001 to June 2011 Annual
Total Return
S&P Stock Market Composite 10-Year Compound Annual Total Return (Incl. Reinvested Dividends), Data from 1825 to Jul-6, 2011
22.5% 20.0% 17.5% 15.0% 12.5% 10.0% 7.5% 5.0% 2.5% 0.0% -2.5%
1835
1845
1855
1865
1875
1885
1895
1905
1915
1925
1935
1945
1955
1965
1975
1985
1995
Source: Factset sector returns. The S&P 500 and long-dated U.S. stock market total return is from 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 & Poors largecap equity. Note that the stock market return index includes dividends. Chart formats/annotations are Stifel Nicolaus & Co.
2005
Non-Energy Minerals 17.1% Energy Minerals 12.7% Consumer Non-Durables 11.4% Process Industrials11.2% Health Services 9.8% Industrial Services 8.4% Transportation. 7.8% Consumer Services 7.6% Distribution Services 7.5% Retail Trade 6.6% Utilities 5.9% Producer Manufacturing 4.6% Consumer Durables 4.1% Technology Services 3.9% Communications 3.4% Health Technology 2.7% Electronic Technology 2.6% Finance 1.4% Commercial Services 0.4%
As good as it gets.
As bad as it gets.
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July 11, 2011
Having left behind disdain, doubt, and trepidation as stages of psychology, S&P 500 investors seem to us just cautious. In sharp contrast, the EM / commodity trade appears to us to be in the precarious Greed & Conviction or perhaps Indifference stage. We know what the right side of that curve feels like think Big Tech stocks 2000-02 or Big Finance stock 2008-09.
The Cycle of Investor Psychology

Greed & Conviction Enthusiasm Confidence Caution
S&P 500
Indifference
EM / Commodity (Same trade)
Dismissal Denial Dread Panic Disdain
Doubt & Trepidation Disdain
Source: Stifel Nicolaus adaptation.
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July 11, 2011
As the U.S. established hegemony in the 20th Century, commodities stair-stepped higher during periodic commodity inflations (left chart) because the U.S. utilized its open-ended fiat currency as a tool to institute secular, capitalist democracy in the world (WW 1&2, Cold War, the westernization of EM). We believe commodities may be about to level in price for upwards of 10+ years (left chart, red arrow) as stocks continue to consolidate back to the exponential trend (right chart, blue arrow).
Commodity Price Index, Log Scale Data1805toJuly7,2011
100.00
U.S. S&P Stock Market Total Return Index 1825 = $1 (Includes Reinvested Dividends), Data from 1825 to July 7, 2011 With exponentail trend shown in red $1,000,000.00
U.S.$ debasement, EM growth
We see a stronger U.S.$ and weaker EM construction demand causing commodities to enter another leveling period (that lasts 15+ years)
Cold War (1980 peak)
2000 high
while the S&P 500 trades in a range that takes it back to the exponential trend.
$10,000.00
10.00
World War 2, Korean Conflict
1932 low
War of 1812 & Napoleonic Wars (1814 peak)
World War 1 (1920 peak) U.S.Civil War (1864 peak)
$100.00
1897 (low)
$1.00
1.00
2015E
2025E
1805
1815
1825
1835
1845
1855
1865
1875
1885
1895
1905
1915
1925
1935
1945
1955
1965
1975
1985
1995
2005
$0.01
1825
1835
1845
1855
1865
1875
1885
1895
1905
1915
1925
1935
1945
1955
1965
1975
1985
1995
PPI All Commodities (Up to 1956) and CRB Commodity Futures (1957-now) Linked Commodity Prices Y/Y % Change, 10-Yr. Moving Average
Source: Commodity prices are described in the next exhibit. The last data point is April 29, 2011. The S&P 500 and long-dated U.S. stock market total return is from A New Historical Database for the NYSE 1815 to 1925: Performance and Predictability, Yale School of Management, used with permission. Post-1925 data for stocks are Ibbotson/Morningstar and Standard & Poors large-cap equity. Note that the stock market return index includes dividends. Chart formats/annotations are Stifel Nicolaus & Co.
2005
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July 11, 2011
Translating the prior page into 10-year growth rates, commodity prices have reached the highest 10-year rolling return in two centuries (left), rising with the adoption of fiat money. In contrast, the S&P 500 return (price + dividend) hit its lowest 10-year compound total return in two centuries (right) in 2008. Those are antithetical, mania and capitulation, value and momentum.
10-year smoothed commodity price growth may be peaking within widening amplitude Data1795toJuly7,2011,10yr.M.A.
Cold War (1980 peak) U.S.$ debasement, EM growth
15% 14% 13% 12%
22.5% 20.0% 17.5% 15.0% 12.5% 10.0% 7.5% 5.0% 2.5% 0.0% -2.5%
S&P Stock Market Composite 10-Year Compound Annual Total Return (Incl. Reinvested Dividends), Data from 1825 to Jul-7, 2011
10% 9% 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% -6% 8%

War of 1812 & Napoleonic Wars (1814 peak) U.S.Civil War (1864 peak)
Mania
Mania
Mania
World War 2, Korean Conflict
Mania
11%
World War 1 (1920 peak)
Mania
on Capitulati
on Capitulati
Capitulation
on Capitulati
on Capitulati
2015E
2025E
1805
1815
1825
1835
1845
1855
1865
1875
1885
1895
1905
1915
1925
1935
1945
1955
1965
1975
1985
1995
2005
1835
1845
1855
1865
1875
1885
1895
1905
1915
1925
1935
1945
1955
1965
1975
1985
1995
PPI All Commodities (Up to 1956) and CRB Commodity Futures (1957-now) Linked Commodity Prices Y/Y % Change, 10-Yr. Moving Average
Source: Commodities 1795 to 1890 are the Warren & Pearson U.S. commodity index constructed with farm products, foods, hides & leather, textiles, fuel & lighting, metals & metal products, building materials, chemicals & drugs, household furnishing goods, spirits and other commodities. 1891 to 1913 is the Wholesale Commodities Price Index from the BLS and other agencies. 1914 to 1956 is the PPI for All Commodities, and 1957 to present is the CRB Continuous Commodity Index, currently an equal-weighted, front-month index of 17 commodities including most high-use energy and agricultural commodities. The last data point is the 10-year moving average from 2002 to present of the y/y change, with the 2011 y/y value being July 7, 2011 divided by the same day in 2010. The S&P 500 and long-dated U.S. stock market total return is from A New Historical Database for the NYSE 1815 to 1925: Performance and Predictability written by the Yale School of Management, used with permission. This paper can be downloaded without charge from the Social Science Research Network Electronic Paper Collection. Post-1925 data for stocks are Ibbotson/Morningstar and Standard & Poors for large-cap equity. Note that the stock market return includes dividends. Chart formats and annotations are Stifel Nicolaus & Co.
2005
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July 11, 2011
Commodities pay no interest, and thrive on zero rates. Fed Funds rate (FFR) cycles off lower lows since 1982 (left chart) have magnified y/y FFR volatility (right chart), worsening each crisis for the past three decades. The sector most dependent on cheap money is the one that collapses shortly after the y/y change in the FFR peaks. We think that is the EM/Commodities/Commodity FX this cycle.
Markets adjust to level, so momentum matters. Each decade has featured a ~400bps Fed Funds rate hike... but each 400bps rate cycle was a larger percentage change in rates from a lower base, causing ever larger financial crises
220% 200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% -80% -100% 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
A = Mar-89 peak, Drexel Burn. fails Feb-90 B = Dec-94 peak, Mexico Dec-94, EM 1997+ C = May-05 peak, housing peaks the next year
15% 14% 13% 12% 11% 10%
9% 8% 7% 6% 5% 4% 3% 2% 1% 0%
B A
Fed Funds Rate
Fed Funds Rate y/y% chg.
What happens when the FFR target is raised from ~15bps to ~150bps, a 10-fold increase? We doubt the effect is immediate, since crises require the FFR to actually peak on a y/y basis, but a financial crisis would seem possible middecade.
Source: U.S. Fed and government data, Stifel Nicolaus format. Page 13
July 11, 2011
Favored Sectors: Technology, Communications, Health Technology, Finance (i.e., growth stocks and depressed rate sensitive)
155 145 135 125 115 105 95 85 75 65 Health Technology Relative Strength vs S&P, Excluding Dividends, 155 YTD 145 135 125 115 Electonic Technology Relative Strength vs S&P, Excluding Dividends, YTD
Electronic Technology Includes:

Semiconductors Electronic Components, Equipment, & Instruments Telecom Equipment Aerospace & Defense Computer Processing Hardware, Peripherals, & communications Electronic Production Equipment
Health Technology Includes: Pharmaceuticals Major, Generic, & Other Biotechnology Medical Specialties
105 95 85 75 65
155 145 135 125 115 105 95 85 75
Communications Relative Strength vs S&P, Excluding Dividends, YTD
155 145 135 125 115
Finance Relative Strength vs S&P, Excluding Dividends, YTD
Communications Includes: Major, Specialty, & Wireless Telecom
105 95 85 75 65 Jan-11
Finance Includes: Banks, All Investment Services, All Insurance, All Real Estate Development, as well as RED Trusts
65 Jan-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Feb-11
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Source: Factset.
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July 11, 2011
Source of Funds: Non-Energy and Energy Minerals, Feeder industries (ex., Machinery, Oil Service)
135 130 125 120 115 110 105 100 95 90 85
Energy Minerals Relative Strength vs S&P, Excluding Dividends, YTD
135 130 125 120 115 110 105 100
Non-Energy Minerals Relative Strength vs S&P, Excluding Dividends, YTD
Non-Energy Minerals Includes: Steel Aluminum Precious Metals Other Metals/Minerals Forest Products Construction Materials
Energy Minerals Includes: Oil & Gas Production Integrated Oil Oil Refining/Marketing Coal
Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11
95 90 85 80 Jan-11
80 Jan-11
Feb-11 Mar-11
Apr-11
May-11
Jun-11
Jul-11
Source: Factset.
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July 11, 2011
When commodities are strong, the stocks of companies that increase commodity output and add to commodity capacity are winners. But even though heavy capital spending to monetize commodities occurs, the related equities respond only to the level and direction of commodity prices, not EPS for which P/E multiples may compress. So, we think flat commodities plus the stocks no longer rising on beats would be a sell signal.
Caterpillar relative to the S&P 500 (GREEN LINE) vs. CRB Futures Commodity Index (BLUE LINE)
9.0% 8.5% 8.0% 7.5%
Deere relative to the S&P 500 (GREEN LINE) vs. Value of U.S. Major Crops (BLUE LINE)
700 650
R2 Jan-84 to Jun-11 = 0.87

*CCI is the CRB Continuous Commodity Index
$180 $170 $160
R2 Jan-93 to Jun-2011 = 0.937
7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0%
CRB Futures commodity price index (CCI)
600 550 500 450 400 350 300 250 200 150
$150
CAT stock price divided by S&P 500
7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0%
Corn + Soy + Wheat Crop Value ($ Bil.)
$140 $130 $120 $110 $100 $90 $80 $70 $60 $50 $40 $30 $20 $10 $0
`
3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5%
Jan-84
Jan-86
Jan-88
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Corn+Wheat+Soybean Market Value of U.S. Production (LEFT AXIS)

CAT stock price relative to the S&P 500 Index CRB Futures Commodity Price Index
Deere Relative to the S&P 500 (RIGHT AXIS)
Source: Stifel Nicolaus & Co.
Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
DE stock divided by the S&P 500
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July 11, 2011
We see the S&P 500 bouncing off 200 dma in 2011, especially weak through summer, then 1,400 by the end of year
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July 11, 2011
The S&P 500 in 2010-11 appears to us a mid-bull similar to 2004-06. Bear market memories faded in 2004-06, investors were cautious, and late bull 2006-07 conviction and momentum were too distant to contemplate. In mid-bull periods the 200 dma is tested repeatedly. We target the S&P 500 near or below the 200dma by mid-2011 (<=1,250) on Europe debt crisis and choppy U.S. growth, ending the year at 1,400 (weaker oil boosts consumer, tax-driven capex, auto build).
Phases of a Stock market Cycle in a Secular Bear market - The S&P 500 (1,334 on 7/6/11)
Bear Market
Defensive
Early Bull
Oversold Stocks
Mid Bull
Attractive Relative Value
Late Bull
Momentum
Bear Market
Defensive
Early Bull
Oversold Stocks
Mid Bull
Attractive Relative Value
1600 1500 1400 1300 1200 1100 1000 900 800 700 600
200dma TESTS IN A MIDDLEBULL MARKET
200dma TESTS IN A MID-BULL MARKET?
Source: Factset, Chart courtesy of Stifel Financial EquityCompass Strategies. Index final data point priced intra-day.
1/3/00 5/11/00 9/19/00 1/29/01 6/7/01 10/19/01 3/1/02 7/10/02 11/14/02 3/27/03 8/05/03 12/11/03 4/22/04 8/31/04 1/07/05 5/18/05 9/26/05 2/03/06 6/14/06 10/20/06 3/05/07 7/12/07 11/16/07 3/31/08 8/06/08 12/12/08 4/24/09 9/01/09 1/11/10 5/20/10 9/28/10 2/4/11 6/13/11
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July 11, 2011
Secular bear markets flatten in nominal terms for large cap equity ~14 years, with four such markets since 1900, shown below. Their purpose is to de-capitalize equity % of GDP by eroding buy-and-hold, market timers & momentum investors (i.e., everyone). Nominal lows in secular bears are seen near the mid-point, since investor awareness of long-term problems usually follows a normal distribution. A workable strategy is to buy fear / sell confidence, and if/when a break-out from the trading range occurs then go back in and buy for the long bull market ahead.
100,000
Dow Jones Industrial Average, 1896 to 2011

Secular bear market = ~14 range-bound, flat years
2000- .
10,000
2000 start
S&P 500 666 (Dow 6,443) in Mar 09.
1966-82
16 years flat
1,000
13 years down
1929-42
1907-21
14 years flat
1966 start
1974
low
1982 end
100
1921 end
1929 start 1942 end 1932
1906 start
1914
low
low
10
1896
1899
1902
1905
1908
1911
1914
1917
1920
1923
1926
1929
1932
1935
1938
1941
1944
1947
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
Source: Dow Jones, U.S. Census, Stifel Nicolaus format.
2010
Page 19
July 11, 2011
Reflationary efforts of the Fed have caused oil and the S&P 500 to closely correlate, but >$90/bbl. the correlation dissipated as oil became a drag on GDP and thus a counterbalance to loose monetary policy.
S&P 500 (LS) vs WTI, $ per bbl. (RS) Some breakdown >$90/bbl.
Until such time that Emerging countries slow, we believe the job of oil is to rise to a price point that slows U.S. oil demand growth to ~0%y/y. ~$90-100/bbl.
~$90-100/bbl. WTI oil (left) and $3.00-$3.25/gal. retail gasoline (right) appears to be the U.S. consumer's "pinch point"
$1,550 $1,450 $1,350 $1,250 $1,150 $1,050 $950 $850 $750 $650
$120 $115 $110 $105 $100 $95 $90 $85 $80 $75 $70 $65 $60 $55 $50 $45 $40 $35
$150 $140 $130 $120 $110 $100 $90 $80 $70 $60 $50 $40 $30 $20 $10
$4.50
$4.00
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
Jan-11 Jan-09 Jan-07 Jan-05 Jan-03 Jan-01 Jan-99 Jan-97 Jan-95 Jan-93 Jan-91 Jan-89 Jan-87 Jan-85 Jan-83 Jan-81 Jan-79 Jan-77 Jan-75 Jan-73 Jan-71 Jan-69 Jan-67
9-Mar-09 21-Apr-09 3-Jun-09 16-Jul-09 27-Aug-09 9-Oct-09 20-Nov-09 6-Jan-10 19-Feb-10 2-Apr-10 14-May-10 28-Jun-10 10-Aug-10 22-Sep-10 3-Nov-10 16-Dec-10 27-Jan-11 10-Mar-11 21-Apr-11 3-Jun-11 15-Jul-11
Inflation adjusted WTI $ per bbl Inflation Inflation-adjusted U.S All Grades Retail Gasoline Prices ($ per gallon)
S&P 500
WTI, $ per bbl
Source: Factset prices, U.S. BEA, U.S. BLS, Stifel Nicolaus format.
Page 20
July 11, 2011
We do not believe QE3 is necessary, but we have been warily monitoring the poor trend of the ISM for Manufacturing in terms of New Orders minus Inventories (chart below) which moves in tandem with the real S&P 500. In a decade in which the ability of debt leverage to generate rapid growth has failed, the ability to grow orders more rapidly than inventory is at a premium. The S&P 500 appears vulnerable to a correction, in our view, even if this is a soft patch like 2002-03.
The ISM Manufacturing New Orders minus Inventories Diffusion Index (Green, Right Axis) Impacts the S&P 500 Total Return (Blue, Left Axis)
60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% Left axis Right axis
S&P 500 Real Annual Total Return Manuf . New Orders Index Minus Inventory Index
35 30 25 20 15
Gap
10 5 0 -5 -10 -15 -20
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Source: ISM, Factset.
Jan-12
Page 21
Jan-11
Jul-98
Jul-99
Jul-00
Jul-01
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
July 11, 2011
Employment is the weakest factor of production (land, labor & capital). Capital lagged off the 1975 lows, and Land (commodities) were weakest off the 1982 lows, so everyone gets a turn. We expect the U.S. unemployment rate to pause in 2011 then decline slowly to only 5.9% by 2015, close to the post-1948 average of 5.7%. History shows (below) that the real S&P 500 does not peak until just before unemployment bottoms. We see the S&P 500 peaking in 2014, but the pace moderating.
In 7 of 9 post-W.W. II instances, the real S&P 500 price do not tend to peak until just before the unemployment rate has bottomed, which we see occurring in 2015
1,000 900 800 700 600 500 400 300 200 100 0 Jan-48 Jan-50 Jan-52
12.0% 11.0% 10.0% 8.8% 9.0% 8.0% 7.0% 5.9% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%
8.0% 7.3% 6.6%
Jan-54
Jan-56
Jan-58
Jan-60
Jan-62
Jan-64
Jan-66
Jan-68
Jan-70
Jan-72
Jan-74
Jan-76
Jan-78
Jan-80
Jan-82
Jan-84
Jan-86
Jan-88
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12E
Real S&P 500 Index (Left)
Civilian Labor Unemployment Rate % (Right)
Source: U.S. BLS, Stifel Nicolaus estimates based on our eventual EUC expiration, female participation rate and payrolls assumptions described in our report dated Nov17, 2010 titled Positive S&P 500 reflexivity from a falling unemployment rate in 2011.
Jan-14E
Page 22
July 11, 2011
Foreign investment flows to the U.S. were dominated by corporate asset (primarily equity) purchases (Point A) as the federal deficit fell and absorbed less foreign cash (Point B) and U.S. relative economic growth was favorable during dislocations overseas (ex., Asia Crisis). Today, the opposite exists, but if the U.S. Federal deficit gradually and cyclically closes and U.S. relative GDP growth is favorable, we believe foreign buying of U.S. equities could resurge (Point C) concurrent with reduced foreign purchases of U.S. Treasuries & Agencies (Point D).
Foreign Inflows to Government & Agency Securities vs. U.S. Corporate Stocks & Bonds, % of Total Inflows/Outflows to U.S. Markets
140% 115%
$ Millions
$1,500,000
Purchases from Abroad: U.S. Government & Agency Issues vs. U.S. Corporate Stocks & Bonds
$1,250,000
90% 65%
$1,000,000
$750,000
40%
B
15% -10% -35% 3Q1990 1Q1992 3Q1993 1Q1995 3Q1996 1Q1998 3Q1999 1Q2001 3Q2002 1Q2004 3Q2005 1Q2007 3Q2008 1Q2010 3Q2011
$500,000
Growth stock/Tech Bubble
$250,000
$0 3Q1990 1Q1992 3Q1993 1Q1995 3Q1996 1Q1998 3Q1999 1Q2001 3Q2002 1Q2004 3Q2005 1Q2007 3Q2008 1Q2010 3Q2011
($250,000)
4-qtr. sum
4-qtr. sum
Source: U.S. Federal Reserve.
Page 23
July 11, 2011
One way to value the S&P 500 is cyclical average EPS. 5-year centered average(1) S&P 500 EPS 2008-12E are $82. Using a 5-year average S&P 500 P/E vs. CPI (inverted axis) since 1945 (left chart), 2-3% y/y inflation supports an S&P 500 P/E 16x-17s, or ~1,353 (16.5 x $82), e.g. S&P 500 resistance. Looking forward, if ROE(2) pressure causes S&P 500 5-year average EPS to plateau ~$100, then a 16x P/E could cap the S&P 500 by 2014 near the 2000/2007 high (right), or ~1,600.
U.S. Consumer Price Inflation (Inverted, Right Axis) vs. S&P 500 P/E Ratio (Left Axis) 5-yr. moving averages +3% y/y CPI Mar-11 supports a P/E 16x
S&P 500 daily price 1/3/00 to present

-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% 11.0% 2015E
26X 25X 24X 23X 22X 21X 20X 19X 18X 17X 16X 15X 14X 13X 12X 11X 10X 9X 8X 7X 6X 1945
1,600 1,550 1,500 1,450 1,400 1,350 1,300 1,250 1,200 1,150 1,100 1,050 1,000 950 900 850 800 750 700 650 600
Jan-00 Sep-00 Jun-01 Mar-02 Nov-02 Aug-03 Apr-04 Jan-05 Sep-05 Jun-06 Mar-07
1565.15
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
676.53
Nov-07
Aug-08
Apr-09
Jan-10
Sep-10
P/E of the S&P 500, 5-Yr. Moving Average (Left Axis) U.S. Consumer Inflation, Y/Y % Change, 5-Year Moving Average (Right Axis)
Source: S&P EPS, Factset prices.
Page 24
July 11, 2011
Another way to value the S&P 500 is economic profits. Inventory Valuation (IVA) and Capital Consumption (CCAdj)(1) economic profit adjustments applied to the S&P 500 P/E support a current discount for the S&P 500 P/E of about 15%, or a P/E of ~13x applied to consensus forward EPS of just over $100, resulting in mid-1,300s resistance for the S&P 500, in our view.
U.S. Corporate Profits After IVA & CCAdj. RELATIVE to Reported U.S. Corporate Profits versus S&P 500 Operating P/E on Latest 12-month EPS, data 3Q1947 to 1Q2011 30.0x Adjustments are positive
Adjusted/Unadjusted Profits, right axis S&P 500 P/E, left axis
1.80x 1.60x 1.40x
25.0x
20.0x
1.20x 1.00x 0.80x 0.60x
15.0x
10.0x
P/E 13x = 15% discount
5.0x
Adjustments are negative

1950Q1 1952Q1 1954Q1 1956Q1 1958Q1 1960Q1 1962Q1 1964Q1 1966Q1 1968Q1 1970Q1 1972Q1 1974Q1 1976Q1 1978Q1 1980Q1 1982Q1 1984Q1 1986Q1 1988Q1 1990Q1 1992Q1 1994Q1 1996Q1 1998Q1 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1
0.40x 0.20x
0.0x
S&P 500 Operating P/E on LTM EPS (Left Axis)
Adjusted Relative to Un-adjusted U.S. Corporate Profits (Right Axis)
Source: S&P EPS, Factset prices, U.S. National Income and Product Accounts, U.S. Bureau of Economic Analysis. (1) IVA and CCAdj. remove inventory profits and correct for depreciation due to tax policies and replacement cost changes. The 1950 to present R2 between S&P 500 EPS (operating EPS post-1989, reported EPS earlier) and NIPA IVA & CCAdj. corporate profits is 0.93, so we believe NIPA may be used to analyze the S&P 500.
Page 25
July 11, 2011
The path to a 10%/year S&P 500 return to 2018? Another way to measure prospective return is through risk-adjusted methods. Major bottoms for the S&P 500, 1920, 1938 and 1974, had about the same return per unit of standard deviation the next 10 years, or ~0.60. On that basis, the return from 2008 (bottom) to 2018 may be 11.7%, and from mid2011 the implied return to 2018 is 10%/year (price + dividend).
22.5% 20.0% 17.5% 15.0% 12.5% 10.0% 7.5% 5.0% 2.5% 0.0% -2.5% -5.0% 1900 1904 1908 1912 1916 1920 1924 1928 1932 1936 1940 1944 1948 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
S&P Stock Market Composite 10-Year Compound Annual Total Return (Including Reinvested Dividends), Data 1900 to Apr-28, 2011
The Large Cap U.S. Equity Total Return the 10 years before and after the 1920 bottom
60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 -50%
60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50%
The Large Cap U.S. Equity Total Return the 10 years leading up to the 2008 bottom
1910-20 Average 1910-20 Stand. Dev. Ret. / unit of St Dev. 1920 (low) to 1930 Avg. 1920-30 Stand. Deviation Ret. / unit of St Dev.
1.3% 13.0% 0.10 12.8% 22.2% 0.58
8.1% 35.1% 0.23 10.4% 17.1% 0.61
3.8% 16.2% 0.23 11.8% 19.1% 0.62
Note: The implied return 2008-18 is calculated by multiplying the units of return per unit of standard deviation by the average standard dev. of return for the 3 periods to the left (1920, 1938 & 1974).
Source: The S&P 500 and long-dated U.S. stock market total return is from 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 & Poors large-cap equity. Note that the stock market return index includes dividends. Chart formats/annotations are Stifel Nicolaus & Co.
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E 2017E 2018E
1910 1911 1912 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930
1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984
60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50%
60% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50%
3.2% 21.1% 0.15 11.7% 19.4% 0.60
Page 26
July 11, 2011
We see WTI Oil ~$75/bbl. in a year (more supply, less demand), but not without Asia slowing and Libya returning
Page 27
July 11, 2011
G7 country(1) oil demand is now below trend (left chart), having experienced in 2007-09 an oil shock similar to 1979-81 from which recovery in oil demand is likely to be as slow this cycle as it was in the 1980s, in our view. G7 oil demand is now 38% of the world total, growing at an average 0.4%/year. In contrast, non-G7 country oil demand has grown at ~3%/yr., is 62% of world demand, is above trend and may pull-back (right chart), especially if GDP slows and subsidy distortions are rolled back in the Emerging world due to budget woes, as we expect.
bbl. 000s/day
G7 (U.S., U.K., Ger, Fr, It, Jap, Can) Oil Demand, 1970-2010 (000s bbl.)
38% of world oil demand growing at an average 0.4% y/y growth rate
bbl. 000s/day
Non-G7 Country Oil Demand, 1970-2010 (000s bbl.)

62% of world oil demand growing at an average 3.0% growth rate
55,000
55,000
Above trend
50,000
50,000
45,000
45,000
40,000
Below trend
40,000
35,000
35,000
30,000
30,000
25,000
25,000
20,000
20,000
15,000 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
15,000 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Source: EIA, BP Statistical Review, United Nations, IEA, Stifel Nicolaus. (1) G7 is U.S., U.K., Germany, Japan, France, Italy and Canada.
Page 28
July 11, 2011
(G7 = 38% of world oil demand x 0.4% trend growth) + (non-G7 62% x 3.0% trend growth) = ~2% world oil demand growth, or 1.75 mb/d of incremental oil demand per year. In 2010, world oil demand grew 3.1%, well within the historical range of normal (left chart) and we see ~2% in 2011. If Emerging country GDP slows or subsidies are reduced, that takes pressure off the world oil markets, but in the longer term accommodating Asia and raising Middle East exports (via better Middle East efficiency of use) are key challenges (right chart).
World Oil Demand, y/y% 1979-2010
4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 -0.5% -1.0% -1.5% -2.0% -2.5% -3.0% -3.5% -4.0%
(35,000) 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1978 1976 1974 1972 1970 (25,000)
China Europe & Eurasia
bbl. 000s/day
35,000
Net Oil Exports (Positive) / Imports (Negative), 000 bbl./day 1970 to 2010 (Production is ex-biofuels, Consumption includes)
Projected growth rate 2.0%

S. & Cent. Amer.
25,000
Africa
15,000
Middle East
5,000
(5,000)
Asia ex-China
(15,000)
North America
Source: EIA, BP Statistical Review, United Nations, IEA.
Page 29
July 11, 2011
8%
Gross Capital Form ation as % W orld Nom inal GDP
8% 7% 6% 5% 4% 3% 2%
Euro Area China US
China has been the major global driver of incremental commodity demand since ~2002. Top-down China has used fixed investment (construction, capex, etc.) to generate GDP (top chart, right), creating an investment vs. consumption imbalance. Command economies excel at fixed investment projects, but commanding personal consumption is far more difficult. The risk to China we see is that Fixed Investment falls over about 2 years by ~150bps as a percentage of world GDP (to just below the trend line in the top chart), and this occurs more quickly than Chinese Personal Consumption spending can rise 150 bps as an offset and as a percentage of world GDP (bottom chart).
7% 6% 5% 4% 3% 2% 1% 0% 1991 1993 1995 1997 1999 2001 2003

Thiswasvery goodfor commodities.
1% 0% 2009 2011 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
United States Euro Area Linear (China) China
2005 2005
26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 1991 1993
Personal Consum ption Expenditure as % W orld Nom inal GDP
1995
1997
1999
2001
2003
2007
2007
2009
Source: World Bank, IMF.
2011
Page 30
July 11, 2011
A stronger U.S. $ typically undermines oil prices. Reserve currency is a home court advantage in deleveraging, and a gift to high saving countries during leveraging. After winning W.W. II and the Cold War, the U.S. post-1946 established reserve currency status, and logically chose to borrow and mildly inflate while fulfilling its duty to provide open-ended reserves to the modernizing world. But linear devaluation roils creditors, so every 10 years external events or Fed actions have engineered a cyclical dollar rally, one of which may now begin, in our view, if the EU peripheral debt issues worsen and Asian growth falters.
Nominal Trade-Weighted U.S.$ Major Currency Index, 1936 to Jun-2011 (Left) versus U.S. GDP as a share of global GDP expressed in PPP U.S. $, 1950 to 2011E (Right)
120 110 Nominal trade-weighted U.S. $ 100 90 80 70 60 50 40 30
We expect a USD bounce between 2011-2014, and weak commodity prices.
30% 29% 28% 27% 26% 25% 24% 23% 22% 21% 20% 19% 18% 17%
Bretton Woods Agreement began U.S. dollar ascent that we're still unwinding; U.S. share world GDP peaks.
Emerging markets reserves increase, dollar rallies.
1936
1941
1946
1951
1956
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
Source: U.S. GDP with a base year 1990 links the OECD Geary-Khamis 1950 to 1979 series to the IMF World Economic Outlook 1980 to present series. U.S. dollar data is from the U.S. Federal Reserve 1971 to present, for 1970 and prior we use R.L. Bidwell - Currency Conversion Tables - 100 Years of Change, Rex Collins, London, 1970, and B.R. Mitchell - British Historical Statistics - Cambridge Press, pp. 700-703. For trade weightings pre-1971 we use Historical Statistics of the United States, Colonial Times to 1970, a U.S. Census publication.
2011E
U.S. GDP share of global GDP, World Bank & IMF linked series, constant dollars
Fed tightens 1968-69, dollar rallies, Martin -> Burns Fed transition 1970, then Bretton Woods abandoned.
Fed's Volcker hikes rates sharply.
31%
Page 31
July 11, 2011
The four previous secular bear markets for oil since the 20th Century were ~17 years long (chart, 1899-1915, 1926-1945, 1957-1972 & 1980-1998), with an average nominal price decline of -35%, impacted by new oil supply. If ~$100/bbl. in 2011 is the peak, a 35% 17-year (to 2028E) decline would take oil prices to $65/bbl for the reasons we list in the chart to the left under 2011-2028E.
Inflation-adjusted Crude Oil Prices, $ per bbl. - Double Peak, Then 17-Year Slide
$100
End of the gold standard
Oil Decline
2011-2028E WTI Oil falls to $65/bbl. on increased U.S. output, strong ramp in Iraqi oil production (out-of-quota), a breakdown in OPEC cohesion as regimes seek to maximize cash flow to support welfare states and forestall rebellion, weaker EM demand as China works through credit problems, U.S. dollar strengthens moderately as a result of euro solvency and EU integration challenges.
Period Nominal Oil $/bbl. (Chart, left is real price) Period Percentage Price Change
Year 1899 16 Years Year 1915
$1.29 /bbl. Est. -50% Decline $0.64 /bbl. Est.
$10
1899-1915 California alone reached 22% of global oil production. Large oil discoveries in Spindletop, TX, Glenn Pool, OK and Louisiana. In addition, Anglo-Persian struck oil in Persia. 1926-1945 Venezuela's output hits #2 globally. Dormant since 1920, PostBolshevik Revolution Russian production ramps to repair the economy. The Black Giant is discovered in East Texas. Romanian oil production ramps.
1957-1972 Middle East production rises to 30% of world total. African output rises (mainly Libya). Between 1955-1960, Russian production doubles under the "Soviet Economic Offensive."
1980-1998 By 1981, nonOPEC surpasses OPEC due to Mexico, Alaska & North Sea. From 19801985, Saudi output falls 2/3 as they defend oil prices amid rising OPEC member noncompliance and Russian production. But, in Nov1985, Saudi & OPEC flood the market to maintain Saudi share.
Year 1926 19 Years Year 1945 Year 1957 15 Years Year 1972 Year 1980 18 Years Year 1998 Year 2011 17 Years Year 2028E
$1.88 /bbl. Est. -44% Decline $1.05 /bbl. Est. $3.04 /bbl. Est. 17% Increase $3.56 /bbl. Est. $37.38 /bbl. Est. -62% Decline $14.39 /bbl. Est. $100.00 /bbl. Est. -35% Decline $65.23 /bbl. Est.
$1 1892 1897 1902 1907 1912 1917 1922
1927
1932
1937
1942
1947
1952
1957
1962
1967
1972
1977
1982
1987
1992
1997
2002
2007
2012
2017
2022
Source: BP data, BLS, EIA, Stifel Nicolaus projections. Note: Although inflation led to a higher second peak in the 1970s, accumulated debt since 1980, which is deflationary, would prevent that reoccurrence, in our view.
2027
Page 32
July 11, 2011
Corn prices have jumped ~85% every generation. We believe such price hikes are necessary to attract a new generation of capital into farming. But with bio-fuel as a catalyst for this rally exhausted at e-10 (10% ethanol), we feel grain prices have peaked, although exports should help prices remain firm, in our view.
$6.50 $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015E 2020E
C o rn B u s h e ls (M il.)
5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0
U.S. Corn Prices Received by Farmers, $/bu. 1900 to YTD Average of 2010/2011 Crop Year (Sep. to Aug.)
Prices (blue line) rise in steps (red line)
Ethanol usage of corn should peak now that the blend wall of e-10 has been reached
35% 30% 25% 20% 15% 10% 5% 0% C o rn in e th a n o l, % U .S . C ro p 40%
+90% $2.36 old avg to $4.50 new avg.?
2007 to 2030? Average = ~$4.50 +/- $2/bu.
+83%
1974 to 2006 Average = $2.36

+82%
Corn used to make ethanol
Source: Bloomberg, USDA.
2011/12E 2010/11E 2009/10 2008/09 2007/08 2006/07 2005/06 2004/05 2003/04 2002/03 2001/02 2000/01 1999/00 1998/99 1997/98 1996/97
Corn used to make ethanol, % of U.S. crop
1900 to 1945 Average = $0.71
1946 to 1973 Average = $1.29

These are USDA national season average U.S. prices, and are often below spot market quotations.
Page 33

10000
July 11, 2011

World Annual Production of Iron Ore Absolute and Per Capita, 1904-2010E
0.50 0.45
Iron ore produced, mil. metric tonnes
0.40
The results are similar for other commodities. We see demand growing more slowly and supply recovering. Iron ore naturally feeds infrastructure globally, but largely in China (48% of world demand). The first eight years of iron ore demand growth after W.W. II (bottom, left shows detail) were similar to the first eight years after 2002 (bottom, right detail). But from 1954-75, and in our view from 2011-2032E, the return of the cycle for commodities, with punishing 1-3 year periods if investors buy high and sell low, may shock some investors.
1000
Post-WW2 were 8 strong years for infrastructure, followed by cyclical growth.
Tons per capita production
0.35 0.30 0.25 0.20 0.15 0.10 0.05
100
1904 1907 1910 1913 1916 1919 1922 1925 1928 1931 1934 1937 1940 1943 1946 1949 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
0.00
World iron ore production, left axis
World per capita iron ore production, right axis
1000
World Annual Production of Iron Ore Absolute and Per Capita, 1945-1975
0.25 0.23 0.21
10000
World Annual Production of Iron Ore Absolute and Per Capita, 2002-2032E
0.60
5 19
13 %
5 4-7
GR CA
4%
0.55
0.50
0.19 0.17 0.15 0.13 0.11 0.09 0.07
0.45
CA GR
CA GR
-5 4
10
0.40
0.35
46
02 - 10
19
0.30
20
0.25
0.20
2010E
2012E
2014E
2016E
2018E
2020E
2022E
2024E
2026E
2028E
2030E
1945
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
World iron ore production, left axis World per capita iron ore production, right axis
World iron ore production, left axis World per capita iron ore production, right axis
Source: Stifel Iron Ore Mining Research, USGS, U.S. Census. Stifel Nicolaus estimates for 2010 production.
2032E
2002
2004
2006
2008
100
0.05
1000
0.15
Page 34
July 11, 2011
Since commodities have become a financial asset, they should be subject to/pressured by a monetary relationship
Page 35
July 11, 2011
Why have commodities risen since ~2000? Since banks create money by making loans (fractional reserve banking system), we believe that beyond demand factors commodities were lifted by credit 1995-2007. Asian excess savings were funneled into U.S. dollars, enabling credit growth that tripled money supply (left chart) after 1995. Since dollars are the unit of account, money and commodities both tripled (right chart) and QE + Chinese building added fuel to the fire. As a result, a fair value for the average commodity may be ~10% below current levels, minus a probable over-shoot.
Growth of Components of U.S. M3 Money Supply ($ bil.)
$15,000 $14,000 $13,000 $12,000 $11,000 $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000
Savings Deposits Repos Institutional Money Funds
2008
Sum = M3
750 700 650 600
Commodity Prices (CRB Futures Continuous Commodity Index) Daily prices 10/14/1998 to present
Eurodollars
3x
550
Deng currency reforms in China, Mexican Peso & Asian debt crises.
Large-Time Deposits
M2 = Below
Retail Money Funds
500 450 400
Credit growth
3x
1995
Small Denom. Time Deposits
350 300 250 200 150

Aug-98 Feb-99 Aug-99 Feb-00 Aug-00 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03 Feb-04 Aug-04 Feb-05 Aug-05 Feb-06 Aug-06 Feb-07 Aug-07 Feb-08 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11
$3,000 $2,000 $1,000 $0

Jan-81 Jan-82 Jan-83 Jan-84 Jan-85 Jan-86 Jan-87 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
M1 = Below
Demand & Other Check Deposits
QE 1 & 2
Currency & Travelers Checks
Source: U.S. Federal Reserve for M3 (SA) 1959 to 2005. For M3 2006 forward we use: M2 + Large time deposits + Institutional Money Mkt. Balances + Fed Funds & Reverse repos with non-banks + Interbank loans + Eurodollars (regress historical levels versus levels of M3 excluding Eurodollars), CRB Continuous Commodity Futures, Stifel Nicolaus format.
Page 36
July 11, 2011
Gold is money, everything else is credit attributed to J.P. Morgan. The price of gold in U.S. dollars (vertical axes below) oscillates around money supply (horizontal axes). A fair value for gold would be ~$900/oz. on that basis, but fear of debasement always causes gold to oscillate sharply above or below that trend. As a result, a small increase in M2 could drive a parabolic spike in gold, but this is the risky phase. As a result, we are a trend follower in this case.
The relationship held before abandonment of the gold exchange standard in 1971 (below)
$45/oz.
and after abandoning the gold standard in 1971 (below).

Gold Price (U.S.$/oz., Annual Avg.) vs. M2 Money, 1919-2011
2011 $1,500/oz. $1,400/oz.
Gold Price (U.S.$/oz., Annual Avg.) vs. M2 Money, 1919-1970
$1,600/oz.
Gap
$40/oz.
$1,300/oz. $1,200/oz.
1934 $35/oz. 1970
$1,100/oz. $1,000/oz. $900/oz.
Gap
$30/oz.
$800/oz. $700/oz. $600/oz. 1980
Gap
$20/oz.
1930
Area of detail
$400/oz. $300/oz. $200/oz. $100/oz. $0/oz. $0B (M2)
Gap
2001
1970 $1,000B (M2) $2,000B (M2) $3,000B (M2) $4,000B (M2) $5,000B (M2) $6,000B (M2) $7,000B (M2) $8,000B (M2) $9,000B (M2) $10,000B (M2)
$15/oz. $0B (M2) $100B (M2) $200B (M2) $300B (M2) $400B (M2) $500B (M2) $600B (M2) $700B (M2) $800B (M2)
Source: Stifel Nicolaus analysis, U.S. Federal Reserve, Bloomberg.
Gap
$25/oz.
$500/oz.
Gap
Perhaps the value of gold in USD should relate to the quantity of USD? In that event, fair value is $900/oz., and over the next 10 years we converge to a rising trend for M2, or $900-$1,000
Page 37
July 11, 2011
In addition to gold (preceding page), oil prices oscillate around money supply. A fair value for oil would be ~$72/bbl., but that requires a stronger U.S. dollar. Since that is our view, among other negatives impacting oil described herein, we see oil falling to $75/bbl. in a year.
$5/bbl. $110/bbl.
$4/bbl.
Oil Price (U.S.$/bbl., Annual Avg.) vs. M2 Money, 1919-1970
$100/bbl.
Oil Price (U.S.$/Bbl., Annual Avg.) vs. M2 Money, 1919-2011
2009
2011
$90/bbl. $4/bbl. $80/bbl.

1920 1960 1968 1949
$3/bbl.
$70/bbl.
$3/bbl.
$60/bbl.
$2/bbl.
$50/bbl.
$40/bbl. $2/bbl. $30/bbl. $1/bbl.

1945
1980 2000
2001
$1/bbl.
1931
Area of detail
$100B (M2) $200B (M2) $300B (M2) $400B (M2) $500B (M2) $600B (M2) $700B (M2)
$20/bbl.
1998
$10/bbl.
$0/bbl.
$0/bbl.
$1,000B (M2)
$2,000B (M2)
$3,000B (M2)
$4,000B (M2)
$5,000B (M2)
$6,000B (M2)
$7,000B (M2)
$8,000B (M2)
$9,000B (M2)
$0B (M2)
Source: Stifel Nicolaus analysis, U.S. Federal Reserve, EIA, Moodys Economy.com data.
$0B (M2)
Page 38
July 11, 2011
The frightening scenario is the commodity market signaling a 20% S&P 500 bear market April-August 2011?
Page 39
July 11, 2011
Past manias followed a somewhat regular 3-step disbelief, belief, mania price pattern, but failure to re-attain the previous high after the price cycle broke signaled a bust (see the annotation Fail, i.e., the Value Trap in each chart below).
Dow Jones Industrial Average, 1/3/1921-12/31/1936
$400
Nikkei 225, 1/2/1985 - 12/30/1996

$40,000
$5,000
Nasdaq Composite, 1/2/1990 to 12/31/2004
$350
3
Fail
3
Fail
$4,500 $4,000 $3,500
$35,000 $300
Fail
$250
$30,000
2
$200
$3,000 $2,500
2 1
$25,000
$150
$20,000
$100 $15,000
$2,000 $1,500 $1,000
2 1
$50
$0
1/3/1921 1/3/1922 1/3/1923 1/3/1924 1/3/1925 1/3/1926 1/3/1927 1/3/1928 1/3/1929 1/3/1930 1/3/1931 1/3/1932 1/3/1933 1/3/1934 1/3/1935 1/3/1936
$10,000
1/2/1985 1/2/1986 1/2/1987 1/2/1988 1/2/1989 1/2/1990 1/2/1991 1/2/1992 1/2/1993 1/2/1994 1/2/1995 1/2/1996
$500
12/1/94
12/1/95
12/1/96
12/1/97
12/1/98
12/1/99
12/1/00
12/1/01
12/1/02
12/1/03
$160
WTI Oil, 1/2/1998 - 12/31/2010 $900
Gold Price $/oz. 1980 Bubble

2/1/78 - 1/31/82 $5,000
Home Builders Index, 12/30/1994 to Present
$140
3
$120
$800
Fail
$4,500
3
Fail
$700 $600
Fail
$4,000 $3,500
$100
$80
2 1
$3,000 $2,500 $2,000 $1,500 $1,000
$500
$60
2
$400 $300
$40
$20
$200
$0
$500
12/30 12/30 12/30 12/30 12/30 12/30 12/30 12/30 12/30 12/30 12/30 12/30 12/30 12/30 12/30 12/30 12/30
1/2/1997
1/2/1998
1/2/1999
1/2/2000
1/2/2001
1/2/2002
1/2/2003
1/2/2004
1/2/2005
1/2/2006
1/2/2007
1/2/2008
1/2/2009
1/2/2010
$100
01/26/78 05/26/78 09/26/78 01/26/79 05/26/79 09/26/79 01/26/80 05/26/80 09/26/80 01/26/81 05/26/81 09/26/81
$0
Source: Historical daily price series, Compustat, Factset.

Page 40
12/1/04
July 11, 2011
Within a three-stage disbelief, belief and greed mania bubble pattern (left chart), each stage is punctuated by corrections, which are a bear trap (bearish disbelievers sell), a bull trap (bullish believers sell, as happened to this analyst in late 2009), and a value trap (latecomers buy the third dip, a mistake). July 1999 was the bottom for the CRB CCI divided by the S&P 500, denoted by a red arrow in the right chart. This feels like the value-trap stage (right chart) to us. Initial support for the CRB would be ~431 in July 2011, down ~37% from peak in April 2011. For how we time that level and percent, turn to the next page. SECULAR BULL MARKET STAGES
DIMINISHING RETURNS BOTTOM TO TOP
GREED
Commodity Prices (CRB Futures Continuous Commodity Index) Daily prices 10/14/1998 to present
700
E VALU TRAP
600 550
500 450 400
GREED
431 = Initial support based on past busts
E LU VA A P TR
650
3
BUL L TRAP
INEVITA T BLE BUS
2 1
F IE EL SB DI
300 250 200 150 100

Feb-99 Aug-99 Feb-00 Aug-00 Feb-01 Aug-01 Feb-02 Aug-02 Feb-03 Aug-03
IEF EL SB DI
Jul-16, 1999 S&P 500 peaks vs. CRB
Feb-04 Aug-04
B
R EA P B RA T
Feb-05 Aug-05
EL IE F
Feb-06 Aug-06
F IE EL B
350
LL BU AP TR
Feb-07 Aug-07
Feb-08 Aug-08
Feb-09 Aug-09
Feb-10 Aug-10
Source: Stifel Nicolaus, CRB Futures from Factset.
Aug-98
Feb-11
AR BE AP TR
Page 41
July 11, 2011
The decline from the commodity top (A right chart below) to the normal first level of support (B below), typical of a post-bubble breakdown, the burst bubbles shown two pages back fell an average 37% from the peak. If commodities were a bubble and if April 20, 2011 was the peak for the CRB CCI Commodity Index at 686.34, then a decline of 37% for the CRB CCI to 431 (about the level when QE2 was announced 3Q10, by the way) would be normal in the context of the move from A to B in past cycles, and history suggests this could occur in July 2011.
Calendar Days of Decline from Top to 1st Bottom 71 days 94 days 74 days 57 days 75 days 91 days 77 days 14 days Percent Decline to 1st Bottom -48%
A (top)
Top DJIA 1929 - 1930 Nikkei 1989 - 1990 NASDAQ 1990-2000 Gold 1979 - 1980 Crude 1999 - 2008 Homebuilders 1999 - Present 9/3/1929 12/29/1989 3/10/2000 1/21/1980 7/3/2008 7/28/2005
1st Bottom 11/13/1929 4/2/1990 5/23/2000 3/18/1980 9/16/2008 10/27/2005
Fail
Ma nia
-28% -37% -43% -37% -29% -37% 7% 431 398 +1
B (1st Support)
t Bus
Averages Standard Deviation CRB 686.34 on 4/20/2011 Peak?
7/3/11E to 74 days 7/17/11E + 1 91 days + 1
Page 42
July 11, 2011
The correlation between the S&P 500 and CRB CCI has been strong (left), but may lessen. As a result, a decline in the CRB CCI from 642 currently to 431 (-33%) may not lead to a proportional drop for the S&P 500, but an S&P 500 ~1,150 (-15%) would be our expectation in that case (right chart).
LTM correlation S&P 500 and CRB CCI, January 1980 - Current 1.00 0.80 0.60 0.40
Based on a regression (not shown), we estimate a sudden decline in the CRB CCI (left axis, black) could bring the S&P 500 (red line, right axis) down to 1,150 700 650
S&P 500 right CRB CCI left
1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000 900 800 700 600
0.20 0.00 -0.20 -0.40 -0.60 -0.80 -1.00

Apr-94 Apr-95 Apr-96 Apr-97 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11
600 550 500 450 400 350 300
65.0 55.0 45.0 35.0 25.0 15.0 5.0

Apr-94 Apr-95 Apr-96 Apr-97 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02
VIX
250 200 150 Apr-96 Apr-97 Apr-98 Apr-99 Apr-00 Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11
Monthly CRB CCI
Monthly Average S&P500

Page 43
Apr-03
Apr-04
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-11
July 11, 2011
Within 1-2 years of real oil prices spiking >75% y/y (chart below), the real S&P 500 has fallen >20% in every instance since 1970. Oil crossed +75% y/y in Jan-2010, but has the S&P 500 been levitated (for now) by QE? Or was Jan-10 y/y just an easy oil price comparison we should dismiss?
Inflation-adjusted S&P 500, y/y% 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50%
Source: Moodys Economy.com prices, inflation indices.
Oil S&P 500 Crosses Crosses +75% y/y (20)% y/y Jan-74 Nov-73 Oct-79 Mar-82 Jul-87 Aug-88 Nov-99 Mar-01 Jun-08 Sep-08 Jan-10 2011?
175% 150% 125% 100% 75% 50% 25% 0% -25% -50% -75% -100% Jan-70 Jan-72 Jan-74 Jan-76 Jan-78 Jan-80 Jan-82
Interval -2 mos. 29 mos. 13 mos. 16 mos. 3 mos.
Inflation- adjusted Crude Oil $ per bbl., y/y% Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12
Page 44
July 11, 2011
Consumer spending on essential items (defined in the left chart, shown in the right chart) are historically >46% of personal income when recessions begin. That is not currently the case, so we see the current environment as a sluggish recovery. But as a risk we caution that it would not take a large tax or oil hike to pierce 46% of personal income and perhaps cause a double-dip.
Essential Items % of Personal Income
Essential items are: Food & beverages for off-premises (i.e., home) consumption, gasoline & transport services and other energy, personal health care expenditures, personal current taxes, and mortgage payments.
Temporary tax cuts, lower mortgage payments, and cheap non-oil energy are keeping essentials under control (for now)
15% 14% 13% 12% 11% 10% 9% 8% 7% 6% 5% 4%
1980Q1 1982Q1 1984Q1 1986Q1 1988Q1 1990Q1 1992Q1 1994Q1 1996Q1 1998Q1 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1
100
48%
1 0 0 8 0 6 0 4 0 2 0
~46.2% of Income = trigger for recession (shaded areas), so only a 0.8% increase is needed to start a recession?
90 80 70 60
Healthcare
47%
Mortgage
Indiv. Taxes
46%
50of as
1Q11
45.4%
Food at Home Gasoline & Trans.
45%
40 30
44%
20 10
Foodstuffs bought for off-premises (i.e., home) consumption % of Personal Income Gasoline, transportation services and other energy goods % of Personal Income Health care expenditures % of Personal Income Personal current taxes % of Personal Income Mortgage payments % of Personal Income
43% 1980Q1 1982Q1 1984Q1 1986Q1 1988Q1 1990Q1 1992Q1 1994Q1 1996Q1 1998Q1 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1
Source: Recessions in gray shaded areas of left chart. U.S. BEA, U.S. Federal Reserve, NBER recessions, Stifel Nicolaus format.
Page 45
July 11, 2011
Fed & Treasury are brilliantly converting a Depression into a debt work-out; we see the 10-year near 4% within a year
Faced with the same debt deflation issues as 1929-33 the Fed & Treasury in 2008-11 responded with every tool not available in 1929-32, such as: (a) a fiat reserve currency, (b) unused federal debt capacity, (c) relatively open global labor markets (d) knowledge the democratic U.S. could survive unemployment and (e) knowledge that the Communist Chinese regime could not. U.S. policymakers have chosen to let the air debt out of the tire slowly, borrowing GDP from the future to avoid uncontrolled liquidation today.
Page 46
July 11, 2011
We believe a Depression began in 2000, moderated by U.S. reserve currency status and an enlightened Fed & Treasury(1). Equity today (right chart) is following the path of the Great Depression (left). The comparable market in terms of speculation to the 1920s-30s Dow (left) is the NASDAQ (right) today. Just as 1932-37 was temporarily supported by federal debt, 2002-07 benefited from housing debt. In both cases, 1938 and 2008, removal of support was detrimental, leading to unilateral actions by struggling states in pursuit of growth.
Dow Industrials Jan-3 1927 to Jan-3 1941 (2 1/2 years before peak, 12 years after) vs. 200-day moving average
$400 $350 $300 $250 $200 $150 $100 $50 $0 Jan-27 Jan-28 Jan-29 Jan-30 Jan-31 Jan-32 Jan-33 Jan-34 Jan-35 Jan-36 Jan-37 Jan-38 Jan-39 Jan-40 Jan-41
$5,500 $5,000 $4,500 $4,000 $3,500
NASDAQ Composite Jul-1 1997 to present (2 1/2 years before peak, 12 years after) vs. 200-day moving average
ulati Spec
Jul-97
Jul-98
Jul-99
Jul-00
Jul-01
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Dow Jones Industrial Average
Dow Industrials 200-day moving average
Nasdaq composite Index
NASDAQ Composite 200-day moving average
Source: Dow Jones prices, Bloomberg. (1) Enlightened unless one concurs with the liquidation strictures of an inflexible gold standard. The gold standard puts all nations on equal footing with respect to balance of payments irrespective of the advantages gained by (and need for, see Colossus by Niall Ferguson) superpower/reserve currency status.
Jul-10
e ativ cul Spe o et c ass llap se

lc ca s Fi
it ed al Cr mov re
ol set c ve as
it ed al Cr mov re
po es tr di re
e ns
$3,000 $2,500 $2,000 $1,500
e laps
Ho ng usi
spo t re edi cr
nse
Sep-1939 Germany invaded Poland
$1,000 $500
Aug-2010 Jackson Hole/QE2
Page 47
July 11, 2011
Changes in the savings rate (left chart) abruptly impact GDP via changes in consumption. So, stabilizing the personal savings rate at ~5 % reduces the consumption drag from deleveraging, but that requires those very same asset values that drive net worth to not decline in price (right chart). In that sense, we believe U.S. GDP is highly asset value sensitive, hence Fed policy.
Personal Saving Rate
14% 13%
Personal Savings as a % of Disposable Income
Household Net Worth vs. Personal Savings Rate

14% 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 400%
1Q2011
12%
Personal Savings as a % of Disposable Income
11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%
1970Q1 1973Q1 1976Q1 1979Q1 1982Q1 1985Q1 1988Q1 1991Q1 1994Q1 1997Q1 2000Q1 2003Q1 2006Q1 2009Q1
The collapse of net worth/income from ~650% to 500% drove the savings rate initially from ~1% to 7%. Future losses from housing may be offset by rising stocks via profit share of GDP and low discount rates, causing savings to stabilize ~5.5%, in our view.
450%
500%
550%
600%
650%
Household Net Worth as a % of Disposable Income
Source: Federal Reserve, BEA.
Page 48
July 11, 2011
The Fed unwound emergency lending and bought Treasuries/Agencies, creating reserves (left chart). Banks use reserves to extend loans, thereby creating money supply. As a result, we expect the market for loans not the Fed to set interbank rates in the future. As Fed assets expanded, risk assets (right charts) climbed, but GDP traction is to keep assets aloft, in our view.
$ Billion $2,900 $2,400 $2,150 $1,900 $1,650 $1,400 $1,150 $900 $650 $400 $150 -$100 -$350 -$600 -$850 -$1,100 -$1,350 -$1,600 -$1,850 -$2,100 -$2,350 -$2,600 -$2,850 -$3,100
5-Mar-08 5-Jan-08 5-Nov-07 5-May-09 5-Mar-09 5-Jan-09 5-Nov-08 5-Mar-10 5-Jan-10 5-Mar-11 5-Jan-11 5-Jul-08 5-May-08 5-Jul-10 5-May-10 5-May-11 5-Sep-07 5-Sep-08 5-Nov-09 5-Sep-09 5-Nov-10 5-Sep-10 5-Jul-09
Liabilities Treasury SFP Reserve Balances at Fed Other Securities Held Outright Assets Repurchase Agreements Liquidity Facilities
U.S. Federal Reserve Bank Weekly Assets & Liabilities Sep-5, 2007 to June 26, 2011
$3,100 $2,900
Fed assets, $ Bil.
Fed Asset Expansion Has Moved with Risk Assets, such as the S&P 500
1,450 1,350 1,250
$2,650
$2,700 $2,500 $2,300 $2,100 $1,900
QE2
Other
1,050 950 850 750 650

Jun-11 May-11 Apr-11 Mar-11 Feb-11 Jan-11 Dec-10 Nov-10 Oct-10 Sep-10 Aug-10 Jul-10 Jun-10 May-10 Apr-10 Mar-10 Feb-10 Jan-10 Dec-09 Nov-09 Oct-09 Sep-09 Aug-09 Jul-09 Jun-09 May-09 Apr-09 Mar-09
QE1
Term Auction Credit
$1,700
Fed Total Assets ($ Bil., Left)
S&P 500 (Right)
$3,100 $2,900
Fed assets, $ Bil.
Fed Asset Expansion Has Moved with Risk Assets, such as the CRB Continuous Commodity Index
750 700 650
Other
$2,500 $2,300 $2,100 $1,900 $1,700

Jun-11 May-11 Apr-11 Mar-11 Feb-11 Jan-11 Dec-10 Nov-10 Oct-10 Sep-10 Aug-10 Jul-10 Jun-10 May-10 Apr-10 Mar-10 Feb-10 Jan-10 Dec-09 Nov-09 Oct-09 Sep-09 Aug-09 Jul-09 Jun-09 May-09 Apr-09 Mar-09
Excess reserves. See Footnote (1) below.
550 500 450 400 350 300
Currency in Circulation
Fed Total Assets ($ Bil., Left)
CRB CCI (Right)
Source: Federal Reserve, NBER, FactSet. Charts formats and annotations are Stifel Nicolaus & Co.
(Footnote 1) Since the Fed must out-bid market rates via term auction facilities to keep newly created excess reserves at the Fed, the Fed has probably lost control of short term rates and must manage its balance sheet to tighten/loosen. We view this as positive, however, since market-based rates in a recovery are preferable to Fed intervention.
Page 49
CRBFuturesCCI
$2,700
600
S&P500
1,150
July 11, 2011
Bank lending has ratcheted down from annual growth of 11% pre-1980 to 8% 1980-97, growing perhaps ~2-3% in the future (left chart). Note 2-3% is the mid-point of our expected range for U.S. nominal GDP growth this decade, resulting in commercial bank credit relative to GDP (right chart) that shrinks. A combination of private credit in lieu of bank loans and reduced mortgage growth may restrain total bank credit, relegating banks to cyclical trades in the absence of much top line.
Total Loans & Leases at Commercial Banks y/y% Growth has ratcheted down since 1949, from ~11% growth pre-1980 to ~8% 1980-97 to perhaps 2-3% in the future period, the mid-point of expected nominal GDP (as part of a general de-leveraging)
Notice the way loan growth steps down. 2-3% growth would be the mid-point of the nominal GDP we expect for the foreseeable future.
68% 66% 64% 62% 60% 58% 56% 54% 52% 50% 48% 46% 44% 42% 40% 38% 36% 34% 32%
Jan-47 Jan-50 Jan-53 Jan-56 Jan-59 Jan-62 Jan-65 Jan-68 Jan-71 Jan-74 Jan-77 Jan-80 Jan-83 Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07 Jan-10
U.S. Commercial Bank Credit relative to U.S. Nominal GDP, Jan-1947 to present
24% 23% 22% 21% 20% 19% 18% 17% 16% 15% 14% 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% -6% -7% -8% -9%
Source: FDIC, St. Louis Fed data, Stifel Nicolaus format.
Jan-49 Jan-51 Jan-53 Jan-55 Jan-57 Jan-59 Jan-61 Jan-63 Jan-65 Jan-67 Jan-69 Jan-71 Jan-73 Jan-75 Jan-77 Jan-79 Jan-81 Jan-83 Jan-85 Jan-87 Jan-89 Jan-91 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11
Page 50
July 11, 2011
How did the U.S. get in this consumer debt predicament? Asia recycling its savings back to the U.S. created cheap debt, but why did U.S. consumers borrow? We think because wages & salaries (exbenefits) as a percentage of U.S. GDP (blue line) began to fall in 1971, when Bretton Woods ended(1). By adding the change in household debt to wages & salaries (gold line) we show in the chart below that consumers borrowed the income gap, at least until credit access stopped in 2007.
Source: U.S. Federal Reserve, Bureau of Economic Analysis, Bureau of Labor Statistics.
After the Gold Exchange Standard ended in 1971 U.S. consumers supplemented weak wages with consumer debt, but that ended in 2008 and a (temporary?) welfare state began 59% 57% 55% 53% 51% 49% 47% 45% 43% 41% 39% 1952Q2 1955Q2 1958Q2 1961Q2 1964Q2 1967Q2 1970Q2 1973Q2 1976Q2 1979Q2 1982Q2 1985Q2 1988Q2 1991Q2 1994Q2 1997Q2 2000Q2 2003Q2 2006Q2 2009Q2
4Q71 Gold Exchange system ends Housing bust
Wage & Salary Disbursements Percent of GDP Wage &Salary Disbursements PLUS Quarterly $ Change annualized in Household Debt as a Percent of GDP
(1) The official end of the gold exchange standard in 1971 coincided with a rapid rise in U.S. dollar quantity worldwide, as the U.S. fulfilled its duty to provide a reserve currency to the high savings rate developing nations. Globalization was capital friendly and periodically commodity friendly, but it was real wage growth unfriendly. Perhaps this occurred as a trade-off to escape a motivating factor (global poverty) behind 20th Century foreign wars, for which the Vietnam-weary U.S. had no appetite. The U.S. opening its currency to overseas accumulation lifted foreign labor. Later recycling of foreign savings kept U.S. interest rates low, enabling consumers to borrow the income gap, but now that the debt cycle has gone fiscal we would expect private sector leveraging to be constrained for many years.
Page 51
July 11, 2011
We see mortgage debt as a percentage of GDP falling for the next 10 years (left chart) and Federal debt (right) facilitating private sector de-leveraging while back-filling a deficiency of Consumption and Investment (i.e., GDP equals Consumption + Investment + Government + Net Exports, so running deficits (G) forestalls a decline in GDP). Total debt/GDP has not declined by much (text box, right chart), so we remain more worried about renewed debt deflation than price inflation.
80% 75% 70% 65% 60% 55% 50% 45% 40% 35% 30% 25% 20% 15% 10%
1953Q1 1955Q1 1957Q1 1959Q1 1961Q1 1963Q1 1965Q1 1967Q1 1969Q1 1971Q1 1973Q1 1975Q1 1977Q1 1979Q1 1981Q1 1983Q1 1985Q1 1987Q1 1989Q1 1991Q1 1993Q1 1995Q1 1997Q1 1999Q1 2001Q1 2003Q1 2005Q1 2007Q1 2009Q1 2011Q1 2013Q1 2015Q1 2017Q1 2019Q1 2021Q1
4Q 1997 = 44.7%
Nominal Home Mortgage Debt as a % of Nominal GDP

Growing mortgage debt at half nominal GDP, or about 2.5% versus 5% nominal GDP, for almost 10 years would lower mortgage debt to its pre-bubble 1997 level.
1Q 2009 = 74.7%
Debt as a Percentage of U.S. GDP, by Category

130%
Change in debt since 2Q08 as a % of GDP (bps): Financial debt 2Q08 to 1Q11 Change: -2,120 bps Private household 2Q08 to 1Q11 Change: -749 bps Private business 2Q08 to 1Q11 Change: -276 bps Public debt 2Q08 to 1Q11 Change: +2,770 bps
1Q 2011 = 66.4%
120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
1952Q1
= Debt/GDP down 375 BPS since 2Q08
1955Q1
1958Q1
1961Q1
1964Q1
1967Q1
1970Q1
1973Q1
1976Q1
1979Q1
1982Q1
1985Q1
1988Q1
1991Q1
1994Q1
1997Q1
2000Q1
2003Q1
2006Q1
2009Q1
2012Q1
-10% -20% -30%
Financial Private Nonfinancial Household
Public Nonfinancial Private Nonfinancial Business
Source: FactSet prices, Federal Reserve, Stifel Nicolaus format. Note that Financial Debt is primarily securitization, and is thus a double-counted liability. If a homeowner owes a mortgage and that mortgage is re-issued as a debt security by the holder of the mortgage then it is Financial Debt and is thus twice counted.
2015Q1
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July 11, 2011
The Treasury maturity structure is already priced for higher rates and/or debt levels (left chart). More important is whether interest rates are below nominal GDP growth, which is inflationary (Period A, right), or above GDP growth and deflationary (Period B). Currently, rates and y/y nominal GDP are balanced, something we expect for several years. A 3% 10-year yield equates to 3% 10-year nominal GDP growth (~2-3% real, ~0-1% inflation), whereas a 5% 10-year yield equates to 5% 10-year nominal GDP growth (~3% real, ~2% inflation), in our view.
Avg. Maturity of Total Marketable Federal Debt Outstanding (Months, Left) Versus Total Interest Rate burden of Federal Debt as a Percent of GDP (Right)
Interest Rate on 10-Year U.S. Treasuries (%) vs. U.S. Nominal GDP Y/Y %
5.5%
16.00% 15.00%
75 mos.
70 mos.
5.0%
14.00% 13.00%
65 mos.
4.5%
12.00% 11.00%
d rio Pe
60 mos.
4.0%
10.00% 9.00%
Pe rio d
U.S. rates to stay in-line with nominal GDP.
55 mos.
3.5%
8.00% 7.00%
50 mos.
3.0%
6.00% 5.00% 4.00% 3.00% 2.00%
45 mos.
2.5%
40 mos.
2.0%
1.00% 0.00% 1970Q1 1972Q1 1974Q1 1976Q1 1978Q1 1980Q1 1982Q1 1984Q1 1986Q1 1988Q1 1990Q1 1992Q1 1994Q1 1996Q1 1998Q1 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1
35 mos.
Avg. Maturity of Total Marketable Federal Debt Outstanding (Left Axis) Federal Gov't Interest Payments % of GDP
1.5%
-1.00% -2.00%
30 mos. 1970Q1 1972Q1 1974Q1 1976Q1 1978Q1 1980Q1 1982Q1 1984Q1 1986Q1 1988Q1 1990Q1 1992Q1 1994Q1 1996Q1 1998Q1 2000Q1 2002Q1 2004Q1 2006Q1 2008Q1 2010Q1
1.0%
-3.00% -4.00%
Source: U.S. Treasury, Federal Reserve. Charts formats and annotations are Stifel Nicolaus & Co.
Page 53
July 11, 2011
U.S. fiscal deficits are desirable, inflation should average about 3% to 2015, and debt deflation is a far greater risk
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July 11, 2011
In markets, what matters is direction. Tax revenue (blue line) is mean-reverting and bottoming, spending (green line) has been counter-cyclical and is peaking, so the residual deficit % GDP (red bars) is peaking. In 2012 watch for (a) supply-side tax cuts, (b) targeted tax hikes on risk averse (ex., dividends) capital, and (c) the expiry of recession programs (ex., aid to states). 300bps of spending cuts (25.5% of GDP to 22.5%) and 300bps of tax revenue (15.5% to 18.5%) would reduce the deficit from 9.5% of GDP to 3.5%, close to the post-1971 (post-Bretton Woods) average deficit.
Quarterly Data 3/31/1946 - 3/31/2011
Taxes and Government Spending
Note: In the book This Time Is Different, Eight Centuries of Financial Folly by Carmen M. Reinhart & Kenneth S. Rogoff, the authors found that Advanced Economy real central government revenue growth recovers sharply the third year [e.g., 2011 in this case] following major banking crises per Figure (10.8) of the book, which is timely since real public debt rises an average 86% in the three years after a financial crisis per Figure (10.10) of the book. U.S. Federal debt is up 83% 1Q08-1Q11, but because the U.S. has a reserve currency it can go higher.
25 24 23 22 21 20 19 18 17 16 15 14 13 5 4 3 2 1 0 -1 -2 -3 -4 -5 -6 -7 -8 -9
(E300)
Government Spending as a % of GDP (60.0-Year Average = 19.6% of GDP) 3/31/2011 = 25.0% ( )
25 24 23 22 21 20 19 18 17 16
Taxes as a % of GDP (60.0-Year Average = 18.0% of GDP) 3/31/2011 = 16.5% ( )
Data Subject To Revisions By The Federal Reserve Board
15 14 13 5 4 3 2 1 0 -1 -2 -3 -4 -5 -6 -7 -8 -9
3/31/2011 = -8.6%
Surplus as a % of GDP
Deficit as a % of GDP
(60.0-Year Average = -1.5% of GDP)

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Copyright 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
See NDR Disclaimer at
www.ndr.com/copyright.html
. For data vendor disclaimers refer to
www.ndr.com/vendorinfo/ .
Page 55
July 11, 2011
We believe demographics (experienced relative to less experienced workers, blue line, left chart) supports strong ~2% U.S. labor productivity to 2020 (left chart), and when combined with 1.0%-1.5% growth in the size of the labor force that equates to ~3.0%-3.5% U.S. normalized real GDP growth (right chart), in our view. Though 2% productivity constrains job growth, it supports profit margins(1).
1.20x 1.15x 1.10x U.S. Ratio of 35 - 49 to 20 - 34 Year Olds 1.05x 1.00x 0.95x 0.90x 0.85x 0.80x 0.75x 0.70x 0.65x 0.60x 0.55x Jun-53 Jun-56 Jun-59 Jun-62 Jun-65 Jun-68 Jun-71 Jun-74 Jun-77 Jun-80 Jun-83 Jun-86 Jun-89 Jun-92 Jun-95 Jun-98 Jun-01 Jun-04 Jun-07 Jun-10 Jun-13 Jun-16 Jun-19
U.S. productivity appears to track the ratio of the middle aged workforce to the young workforce
4.75% 4.50% 4.25% 4.00% 3.75% Productivity Growth, Y/Y%, 3-yr. moving avg. 3.50% 3.25% 3.00% 2.75% 2.50% 2.25% 2.00% 1.75% 1.50% 1.25% 1.00% 0.75% 0.50% 0.25% 0.00% -0.25% -0.50%
U.S. real GDP y/y percent change (line) versus the change in the size of the labor force and labor productvity
8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012E 2014E
U.S. Non-Farm output per hour YY% Size of the U.S. non-farm labor force Y/Y% U.S. Real GDP Y/Y%
Stifel Nicolaus estimate 2011 to 2015 About 3.0-3.5% potential annual real GDP growth
U.S. Ratio of Experienced People Age 35-49 To Less Experienced People Age 20-34 (Left axis) Nonfarm Business Output Per Hour y/y % Change 3-Year Moving Avg. (Right axis)
Source: U.S. Fed and government data, Stifel Nicolaus format and estimates. (1) Profits margins are supported by high productivity because of the limiting effect on unit labor costs.
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July 11, 2011
The case for only ~3% compound inflation 2010 to 2015: Since MV=PQ, then MV/Q = P, if M2 Velocity (or GDP/Money) rises to its 1.85 long-term trend implied 2015 value (top, left chart, and this may even be a stretch), and Money M2 grows 4%/yr. 2010-15 (bottom, left chart) while real GDP Quantity real GDP grows 3%/yr. as discussed on the preceding page (to which we add inflation to derive PxQ), then solving for Price inflation is 3.3%/year compound inflation 2010-15.
Nominal GDP divided by M2 Money Supply (M2 velocity) 1926 to Current
2.25x 2.15x 2.05x 1.95x 1.85x 1.75x 1.65x 1.55x 1.45x 1.35x 1.25x 1.15x 1.05x 0.95x 0.85x 16%
Given MV = PQ
then MV/Q = P
Money Supply (M) x Velocity (V) (which is nominal GDP/M) Equals Price (P) of all goods and services x Quantity (Q) of goods & services (which is real GDP)
Nominal GDP relative to M2
We estimate M (M2, though other broad aggregates like MZM may be used) rises by 4%/year the next five years.
M2 money supply 3-year annualized growth rate 1926 to Current
8000
We estimate V rises from 1.70x to 1.85x by 2015. We estimate real GDP rises by 3%/year 2010-15, to which we add the price component to produce nominal GDP PxQ. Solving for price inflation (P), the five year growth rate would be a compound rate of 3.3%/year, (i.e., Q real GDP plus P price inflation = 6.3% nominal GDP) U.S. $ in trillion (T) 12/31/2010 to $8.78T ----> 1.70x ----> $14.9T ----> $14.9T ----> 12/31/2015 $10.27T 1.85x $19.0T $19.0T
12%
M2 Money Supply - Log Scale M2 money, 3-yr. CAGR
8%
4%
400
0%
-4%
-8%
1926 1930 1934 1938 1942 1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014E
20
M2 Money x Velocity = MV ------------------> Since M V = PQ Then PQ equals -->
4% growth x V target = MV = 6.3% nominal GDP less: 3% real GDP = 3.3% inflation
Source: U.S. Federal Reserve, For pre-1959 data we add M1 + time deposits + bank vault cash + monetary gold stock (when applicable) + savings bank deposits + S&L deposits.
Page 57
Macro & Portfolio Strategy Important Disclosures and Certifications
July 11, 2011
I, Barry B. Bannister, certify that the views expressed in this research report accurately reflect my personal views about the subject securities or issuers; and I, Barry B. Bannister, certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report. For our 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) Stifel Nicolaus' 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. For Canadian securities we expect the stock to outperform the S&P/TSX Composite Index by more than 10% over the next 12 months. For other non-U.S. securities we expect the stock to outperform the MSCI World Index by more than 10% over the next 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 other non-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 12 months. For Canadian securities we expect the stock to perform within 10% (plus or minus) of the S&P/TSX Composite Index. For other non-U.S. securities we expect the stock to perform within 10% (plus or minus) of the MSCI World Index. A Hold rating is also used for yield-sensitive securities where we are comfortable with the safety of the dividend, but believe that upside 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 and believe the stock could decline in value. For Canadian securities we expect the stock to underperform the S&P/TSX Composite 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 and believe the stock could decline in value. Of the securities we rate, 50% are rated Buy, 48% 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 34%, 20% 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 companies mentioned in this publication that are within Stifel Nicolaus' coverage universe. For a discussion of risks to target price please see 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 is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of Stifel, Nicolaus & Company, Inc. or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed 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 banking assignments and compensation from issuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving as a placement agent in private transactions. Moreover, Stifel Nicolaus and its affiliates and their respective shareholders, directors, officers and/or employees, may from time to time have long or short positions in such securities or in options or other derivative instruments based thereon. These materials have been approved by Stifel Nicolaus Limited and/or Thomas Weisel Partners International Ltd., authorized and regulated by the Financial Services Authority (UK), in connection with its distribution to professional clients and eligible counterparties in the European Economic Area. (Stifel Nicolaus Limited home office: London +44 20 7557 6030.) No investments or services mentioned are available in the European Economic Area to retail clients or to anyone in Canada other than a Designated Institution. This investment research report is classified as objective for the
Page 58
July 11, 2011
purposes of the FSA rules. Please contact a Stifel Nicolaus entity in your jurisdiction if you require additional information.
The use of information or data in this research report provided by or derived from Standard & Poors Financial Services, LLC is 2011, Standard & Poors Financial Services, LLC (S&P). Reproduction of Compustat data and/or information in any form is prohibited except with the prior written permission of S&P Because of the possibility of . human or mechanical error by S&Ps sources, S&P or others, S&P does not guarantee the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. S&P GIVES NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall S&P be liable for any indirect, special or consequential damages in connection with subscribers or others use of Compustat data and/or information. For recipients internal use only.
Additional Information Is Available Upon Request 2011 Stifel, Nicolaus & Company, Inc. One South Street Baltimore, MD 21202. All rights reserved.
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Stifel Nicolaus Mid-2011 Macro Outlook Slide Deck

All relevant disclosures and certifications appear on pages 58 - 59 of this report.

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July 11, 2011

Macro & Portfolio Strategy

July 11, 2011

Macro & Portfolio Strategy

July 11, 2011

Structural Challenges: Traction (U.S.), Unity (EU), Rebalance (PRC)

Macro & Portfolio Strategy

July 11, 2011

Macro & Portfolio Strategy

July 11, 2011

Macro & Portfolio Strategy

July 11, 2011

Relative price strength, stocks vs. commodities, log scale

'29 Crash, WW2 Gold 1939-45 siezed U.S.$ devalued in 1933.

Macro & Portfolio Strategy

July 11, 2011

Peak July 16, 1999

Low Mar-9,'09 1.94115

Low Mar-7,'11 1.9182

Close as of July 07, 2011 2.08054

Macro & Portfolio Strategy

July 11, 2011

Macro & Portfolio Strategy

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The Cycle of Investor Psychology

Dismissal Denial Dread Panic Disdain

Doubt & Trepidation Disdain

Source: Stifel Nicolaus adaptation.

Macro & Portfolio Strategy

July 11, 2011

War of 1812 & Napoleonic Wars (1814 peak)

World War 1 (1920 peak) U.S.Civil War (1864 peak)

Macro & Portfolio Strategy

July 11, 2011

15% 14% 13% 12%

10% 9% 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% -5% -6% 8%

World War 2, Korean Conflict

World War 1 (1920 peak)

Macro & Portfolio Strategy

July 11, 2011

15% 14% 13% 12% 11% 10%

Fed Funds Rate

Fed Funds Rate y/y% chg.

Macro & Portfolio Strategy

July 11, 2011

Electronic Technology Includes:

155 145 135 125 115 105 95 85 75

Communications Relative Strength vs S&P, Excluding Dividends, YTD

155 145 135 125 115

Finance Relative Strength vs S&P, Excluding Dividends, YTD

Communications Includes: Major, Specialty, & Wireless Telecom

Macro & Portfolio Strategy

July 11, 2011

135 130 125 120 115 110 105 100 95 90 85

Energy Minerals Relative Strength vs S&P, Excluding Dividends, YTD

135 130 125 120 115 110 105 100

Non-Energy Minerals Relative Strength vs S&P, Excluding Dividends, YTD

Macro & Portfolio Strategy