Equity Strategy: Disciplined, Detailed, Data-Driven August 2011 1 Exploiting the Gap Between Fundamental Reality and Market Perception

“Trading Places” Thesis Intact; Many Crosscurrents in Place

Tobias M. Levkovich Managing Director, Chief U.S. Equity Strategist Lorraine Schmitt, Senior Associate (212) 816-1657 [email protected] Andrew Ward, Senior Associate (212) 816-8515 (212) 816-1623

Published June 10, 2011

See Appendix A-1 for Analyst Certification, Important Disclosures and non-US research analyst disclosures. Citi Investment Research & Analysis is a division of Citigroup Global Markets Inc. (the "Firm"), which 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. Equity Strategy: Disciplined, Detailed, Data-Driven 2 For informational purposes only CIRA Regional Equity Strategists Global Equity Strategy Global Emerging Markets South Africa Robert Buckland1 Geoff Dennis Richard Schellbach1 Phone : +44-20-7986-3947 Phone : +1-212-816-8391 Phone : +61-2-8225-4838 Email : [email protected] Email : [email protected] Email : [email protected]

Hasan Tevfik1 Latin America Phone : +44-20-7986-4110 Jason Press Email : [email protected] Phone : +1-212-816-5130 Email : [email protected] United States Tobias Levkovich CEEMEA Phone : +1-212-816-1623 Andrew Howell1 Email : [email protected] ■All of the analysts listed above are employed by Citigroup Phone : +44-20-7986-0891 Global Markets Inc., except for those identified by the following footnotes: Scott Chronert (Small/Mid Cap) Email : [email protected] ■1Citigroup Global Markets Ltd. (Robert Buckland, Hasan Phone : +1-415-951-1771 Tevfik, Jonathan Stubbs, Adrian Cattley, Andrew Howell, Email : [email protected] Russia Kingsmill Bond,and Richard Schellbach) Kingsmill Bond1 2 Citigroup Global Markets Asia (Markus Rosgen) 3 Citigroup Pty Limited (Tony Brennan) Europe Phone: +7-495-643-1489 4 Citigroup Global Markets Japan Inc. (Kenji Abe) Jonathan Stubbs1 Email: [email protected] ■NON-US RESEARCH ANALYST DISCLOSURES: The Phone : +44-20-7986-4218 non-US research analysts listed above (i.e., the research Asia-Pacific analysts listed above other than those identified as Email : [email protected] 2 employed by Citigroup Global Markets Inc.) are not Markus Rosgen registered/qualified as research analysts with FINRA. Such Phone : +852-2501-2752 research analysts may not be associated persons of the Adrian Cattley1 member organization and therefore may not be subject to Email : [email protected] the NYSE Rule 472 and NASD Rule 2711 restrictions on Phone : +44-20-7986-4454 communications with a subject company, public appearances and trading securities held by a research Email : [email protected] analyst account. Unless indicated in Important Disclosures Australia/New Zealand of this document or any of the referenced documents, the 3 analysts listed above have not contributed to this Japan Tony Brennan document or any of the referenced documents. Kenji Abe4 Phone : +61-2-8225-4890 Phone : +81-3-6270-4890 Email : [email protected] Email : [email protected] Equity Strategy: Disciplined, Detailed, Data-Driven 3 US Equity Strategy Publications Weekly
Monday Morning Musings: call note on various topics; varies and can include discussion of broader market concerns, potential equity market catalysts, or review of recent sector and industry group weighting changes.
PULSE Monitor: chart pack which monitors the current conditions in five areas that we consider to be key stock market drivers: Price (or stock market valuation), Unanticipated events, Liquidity, Sentiment, and Earnings. Monthly
Funds Flows Footprints: this monthly note updates and comments on trends in mutual funds flows.
Citi Strategic Baskets (CSB) Update. Bi-monthly ■ SIGN - Sector & Industry Group Navigator: evaluate earnings, sentiment, valuation, fundamentals and trading places (beta and seasonality) to establish S&P 500 recommended sector and industry group weightings.

As Needed ■ Washington Watch: discusses political issues that are salient to the equity market.

To be added to our distribution list for any of the above publications, please contact Yolanda Sanchez at [email protected] Equity Strategy: Disciplined, Detailed, Data-Driven 4

U.S. Equity Market Overview (A Strong Start to 2011, a Tougher Middle and a Better End) Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 5 The Outlook
A moderate return is expected for 2011, in-line with earnings growth. Stocks should be supported by valuation and earnings criteria, but margins are a challenge for 2H11, as well as the exit from QE2 and deficit/debt uncertainties.
Bond funds flows generate deep concern for that asset class as higher yields are probable in the next several years either due to inflation pressures or greater risk premiums given increasing national debt. Moreover, pension funds are overweight bonds.
Bank lending standards and equity market wealth should sustain GDP for 2011. Note that consumer and capex misperceptions abound, though personal income tax policy was addressed via the extension of the Bush tax cuts in late 2010.
A “growth” orientation appears appropriate given margin trends, industrial production, lending standards, and NFIB survey analysis. Small cap names also should lose their relative outperformance potential over time as margins become more of an issue, though commodity prices are not the issue for profits pressure.

Price Targets S&P 500 EPS Estimates

Index 2008A 2009A 2010A 2011E1 2008A 2009A 2010E 2011E 2012E S&P 500 Operating $61.79 $62.05 $85.49 $98.00 $105.00 S&P 903 1,115 1,258 1,400 EPS Estimate 500

DJIA 8,776 10,428 11,578 13,150 Y/Y Change -26.80% 0.40% 37.80% 14.60% 7.10%

Source: CIRA – U.S. Equity Strategy Source: CIRA – U.S. Economics 12011 S&P 500 and DJIA targets established on 9/17/10, revised Financial Sector Asset Write Downs ($ Impact on S&P 500 up on 12/31/10 EPS) 2007 = $9.00 2008 = $23.00 2009E = $7.00 2010E = $0.00 Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 6 Meaningful Trading Rallies/Corrections Are Plausible

S&P 500 Trading Rallies 1974–1982 S&P 500 Trading Rallies 1932–1940

S&P 500 Bear Market Rallies from 1974 to 1982 S&P 500 Bear Market Rallies from 1932-1940 150 33.5 +53.5%+31.4% +19.5% +20.3% +43.1% 140 +18.6% 28.5 130

120 23.5 110 18.5 100 131.72% 37.98% 62.22% 90 13.5 120.73% 80 111.42% 70 8.5

60 3.5 1/2/1929 1/2/1930 1/2/1931 1/2/1932 1/2/1933 1/2/1934 1/2/1935 1/2/1936 1/2/1937 1/2/1938 1/2/1939 1/2/1940 1/2/1941 Jul-74 Jul-75 Jul-76 Jul-77 Jul-78 Jul-79 Jul-80 Jul-81 Jan-74 Jan-75 Jan-76 Jan-77 Jan-78 Jan-79 Jan-80 Jan-81

S&P 500 Trading Rallies 2002–2011 YTD

S&P 500 Trading Rallies from 2002 - 2011 YTD
Within these trading ranges, powerful trading rallies 1650 27.90% do occur; the five trading rallies from 1932–1940 1550

1450 31.34% averaged 93% versus a CAGR of 19.4%. 1350
1250 Within these trading ranges, powerful trading rallies 1150 do occur; the six trading rallies from 1974–1982 1050 70.68% 950 averaged 32% versus trend-line appreciation of 9.4%. 24.22% 850 79.93%
Within these trading ranges, powerful trading rallies 750 650 do occur; the five trading rallies from 2002–2011 YTD averaged 46.8%% versus a CAGR of 6.7%. 1/0/00 5/9/03 10/5/01 7/24/02 2/20/04 9/16/05 12/13/00 12/02/04 18-Jun-2010 04-Apr-2011 28-Jun-2006 17-Apr-2007 31-Jan-2008 13-Nov-2008 01-Sep-2009

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 7

Bear Market Bounce and Post Recession Year Market Blues

S&P 500 Bear Markets Since 1929 S&P 500 EPS and Performance following Recessions

S&P 500 Earnings Y/Y % Chg S&P 500 Y/Y % Chg S&P 500 Bear Markets and Subsequent Performance During Last 1st Full Year 2nd Full Year During Last 1st Full Year 2nd Full Year Peak to 1 Year Year of following following Year of following following Peak Trough Trough % Performance Recession recession recession Recession recession recession Date Level Date Level Change from Trough 1961 -2.45% 23.13% 09/07/1929 31.92 06/01/1932 4.41 -86.18% 120.85% 1962 15.05% -11.81% 09/07/1932 9.31 02/27/1933 5.53 -40.60% 95.44% 1963 9.54% 18.89% 07/18/1933 12.20 10/21/1933 8.56 -29.82% 5.29% 02/05/1934 11.81 03/14/1935 8.06 -31.77% 81.41% 1970 -11.25% 0.10% 03/06/1937 18.68 03/31/1938 8.50 -54.48% 29.18% 1971 11.11% 10.79% 11/09/1938 13.79 04/08/1939 10.19 -26.12% 23.61% 1972 12.63% 15.63% 10/25/1939 13.21 06/10/1940 8.99 -31.94% 9.24% 1975 -10.46% 31.55% 11/09/1940 11.40 04/28/1942 7.47 -34.46% 53.68% 05/29/1946 19.25 05/17/1947 13.72 -28.75% 21.12% 1976 24.50% 19.15% 06/15/1948 17.07 06/13/1949 13.55 -20.59% 42.05% 1977 9.89% 1.06% 08/02/1956 49.75 10/22/1957 38.98 -21.65% 31.02% 1980 -0.27% 25.77% 12/12/1961 72.64 06/26/1962 52.32 -27.97% 32.66% 1981 3.64% -9.73% 02/09/1966 94.06 10/07/1966 73.20 -22.18% 33.21% 1982 -17.71% 14.76% 11/29/1968 108.37 05/26/1970 69.29 -36.06% 43.73% 01/11/1973 120.24 10/03/1974 62.28 -48.20% 38.01% 1982 -17.71% 14.76% 11/28/1980 140.52 08/12/1982 102.42 -27.11% 58.33% 1983 11.00% 17.27% 08/25/1987 336.77 12/04/1987 223.92 -33.51% 22.78% 1984 20.60% 1.40% 03/24/2000 1527.46 10/09/2002 776.76 -49.15% 33.73% 10/09/2007 1565.15 03/09/2009 676.53 -56.78% 68.57% 1991 -15.31% 26.31% 1992 12.33% 4.46% Average -37.23% 44.42% 1993 17.91% 7.06%

2001 -19.43% -13.04% 2002 5.66% -23.37% 2003 15.81% 26.38%

2009 0.42% 23.45% 2010 38.36% 12.78% 2011

Average -9.56% 15.21% 9.81% 16.50% 2.44% 12.17% Median -10.85% 11.72% 12.63% 23.29% 7.63% 14.76%

Earnings bounce often is offset by P/E compression.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 8 Timing the Next Bull Market (Likely to be 2012-2013)

Demographics and the Stock Market Trading Ranges

Population 35-39 Years Old vs. S&P 500 DJIA (With Shaded Portions around 100, 1000, and 10000) 100000

30,000 10000 10000

25,000 1000 S&P 500 n 1000

20,000Populatio

15,000 100 100

10,000 10 5,000 10

0 1 Jan-1921 Jan-1926 Jan-1931 Jan-1936 Jan-1941 Jan-1946 Jan-1951 Jan-1956 Jan-1961 Jan-1966 Jan-1971 Jan-1976 Jan-1981 Jan-1986 Jan-1991 Jan-1996 Jan-2001 Jan-2006 Jan-2011

1901 1911 1921 1931 1941 1951 1961 1971 1981 1991 2001 2011 2021 2031 2041 100, 1000, 10000 DJIA

Population: 35-39 S&P 500 Projected Federal Outlays
US stocks have displayed a visible relationship OMB 2012 Policy Budget Outlays By Spending Category (Indexed, 2009=100) with the portion of the population in its prime 170 savings years. 160 150
Other drivers could include a required mobility- 140 driven technology investment cycle, dividend 130 increases and a focus on fiscal discipline. 120 110
The Dow traded around the 100 and 1,000 100 level for a long period of time. It seems that circa 90 10,000 should follow a similar pattern. 80 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Total Discretionary Ex-Defense Total Discretionary Total Mandatory

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 9 Our Large-Cap Positioning

Recommending Insurance, Diversified Financials, Energy, Tech Hardware & Equipment, Semis & Semi Equipment, and Food, Beverage & Tobacco.

Underweights on Capital Goods, Materials, Household & Personal Products, Real Estate, Pharma & Biotech, Health Care Equipment & Services, Retailing, Transportation, Autos & Components, Consumer Durables & Apparel and Media.

Growth stocks to outperform due to likely margin and production trends in 2011.

Large caps should begin to outpace the SMID space due to margin peaks, lead indicators and risk tolerance shifts, plus valuation extremes, though the shift may take longer to transpire.

Overweight - Energy and US-only CSBs.

Underweight – Tech, Heavy International Sales, Consumer Cyclical and Deep Cyclical CSBs. Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 10

A Dispassionate View on Equities Reflects: I. Sentiment II. Earnings III. Credit Conditions IV. Valuation

Risks to the Outlook: A. Fed Policy B. Deficits/Debt C. Trade Policy D. Exogenous Shocks Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 11 Sentiment

The Panic/Euphoria ModelSM CEO Confidence vs. 12 Mo. Forward S&P 500

The Panic/Euphoria Model (Other PE)SM Conference Board's CEO Confidence Index vs S&P 500 - 12 Month Forward Performance 1.80 80 60.0% 84 S&P 500 12-month forward return (%) return forward 500 12-month S&P 1.50 60 1.20 40.0% 74 40 0.90 Euphori 20.0% 64 0.60 a 20 0.30 - 0.0% 54

Composite - S&P 500 S&P Y/Y (0.30) (20) -20.0% 44 CBoard's CEO CBoard's Confidence (0.60) Panic (40) (0.90) -40.0% 34 (1.20) (60) -60.0% 24 Q1-77 Q1-79 Q1-81 Q1-83 Q1-85 Q1-87 Q1-89 Q1-91 Q1-93 Q1-95 Q1-97 Q1-99 Q1-01 Q1-03 Q1-05 Q1-07 Q1-09 Q1-11 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 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 1/2/2011

12-month forward return The Other PE Panic Euphoria S&P 500 Y/Y Cboard's CEO Confidence Avg +1 SD -1 SD +2 SD -2 SD Cyclical Expectations Model vs S&P 500

Cyclical Expectations Model vs. S&P 500

th 0.80
Rose into ‘neutral’ territory on Friday, July 8 . 1550 0.60
1450 Panic/Euphoria Components: NYSE short interest ratio, 0.40 margin debt, Nasdaq daily volume as % of NYSE volume, a 1350 0.20 500 S&P composite average of Investors Intelligence and the 1250 0.00 1150

American Association of Individual Investors bullishness Mode CEM -0.20 1050 data, retail money funds, the put/call ratio, CRB futures -0.40 950 index, gasoline prices and the ratio of price premiums in -0.60 850

puts versus calls. -0.80 750
CEM Components: credit spreads, steepness of yield 1/04/02 6/21/02 curve, Redbook retail sales, copper and oil prices, and 12/06/02 05/23/03 11/07/03 04/23/04 10/08/04 03/25/05 09/09/05 02/24/06 08/11/06 01/26/07 07/13/07 12/28/07 06/13/08 11/28/08 05/15/09 10/30/09 04/16/10 10/01/10 03/18/11 09/02/11 railroad freight - total carloads. CEM Model S&P 500

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 12 Survey Results (July 15th) S&P 500 Performance Expectations S&P 500 EPS Expectations

July 2011 Survey - Where Will S&P 500 Close at Year-End 2011? How much do you think S&P 500 operating EPS will fall (or grow) in 2011? 70% 40% 2011 Avg: 11.6% 35% 60% Weighted Average: 1369 30% 50% 25% 40% 20% 30% 15% 20% 10%

5% 10%

0% 0% 1500 + 1% to 5% to 1% 1200-1250 1250-1300 1300-1350 1350-1400 1400-1450 1450-1500 6% to 10% to 6% 0% or Below 11% to 15% to 11% 20% to 16% 25% to 21% 30% to 26% Less than 1200 Less than Greater than 30% than Greater Sector Performance Expectations US$ Expectations

2010/11 Surveys - Percent Expecting Sector to Perform Best Less Percent Expecting Sector to Perform Worst Do you expect the US$ to strengthen (or weaken)? 30% 80% 20% 70%

10% 60% 50% 0% 40% -10% 30% -20% 20% -30% 10% -40% 0% July 2009 October January April July 2010 October July 2010 October January April July 2011

Energy Survey - 2009 2010 2010 Survey - 2010 Survey - 2010 2011 2011 Survey - Utilities Telecom Services Staples Materials Consumer Financials Industrials Technology

Consumer Direction Survey - Survey - Survey - Direction Survey - Direction Survey - Survey - Survey - Direction Information Health Care Discretionary in 2H09 Direction Direction Direction in 2H10 Direction in 2011 Direction Direction Direction in 2011 Jul-10 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 in 2010 in 2010 in 2010 in 4Q10 in 2011 in 2011 in 2011 Strengthen Weaken

Source: CIRA – US Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 13 Survey Results (July 15th) 20% Rally vs 20% Pullback Cash as % of AUM

Is there a higher probability of a 20% Rally or a 20% Pullback? What percentage of your funds are in cash? 90% 18% 80% 16% 70% 14% Average: 7.59% 60% 12% 50% 10% 40% 8% 30% 6% 20% 4% 10% 2% 0% 0% 20% Rally 20% Correction Dec-08 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Jan-11 Apr-11 Jul-11 Average of Respondents % of AUM Consensus EPS Expectations 2012 Recession

Is the consensus 2011 EPS estimate of $98.94 (up 15.97 Y/Y bottom-up FirstCall consensus) too high, too low Do you foresee a US recession in 2012? or relatively accurate? 90% 100%

80% 90% 70% 80% 60% 70% 50% 60% 40% 50% 30% 40% 20% 30% 10% 20% 0% 10% Too high Too low Relatively accurate 0% Yes No Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Jul-11

Source: CIRA – US Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 14 Bond Market Issues Debt vs Equity Flows S&P 500 Total Return vs 10-Yr Treasury Total Return

Total Equity vs. Total Bond Fund Flows S&P 500 Total Return Index vs 10-Yr Treasury Total Return Index 50,000

40,000 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 Jan-13 Jan-14 Jan-15 2200 3000 30,000 R2: 0.87 2800

20,000 1700 2600 n n 10,000 2400 1200 2200 - 2000 $ Millions$ (10,000) 700 1800 1600 (20,000) S&P 500 Total Retur

200 1400 Retur Treasury Total 10-yr (30,000) 1200 (40,000) -300 1000 (50,000) 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 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10

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 S&P 500 Composite: Total Return Index (Reinvestment since 1988) ICI: Equity Fund Net Inflows (Mil.$) ICI: All Bond Funds: Net Cash Inflow (Mil.$) 10-Yr Treasury Note Constant Maturity Total Return Index (1-1-62=100, EOP) Bond Mutual Fund Flows Defined Benefit Plan Asset Allocation

6-month Cumulative Flows into Bond Funds as a % of 6-month Avg Fund Assets Defined Benefit Pension Plans - Financial Assets Breakdown 16% 70%

12% 60%

50% 8%

40% 4% 30% 0% 20%

-4% 10%

-8% 0% 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 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 Corporate Equities as a % of Total Financial Assets Mutual Fund Shares as a % of Total Financial Assets 6-mth Cume Flow/Assets Avg +1 -1 +2 -2 +3 Credit Market Instruments as a % of Total Financial Assets

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 15 Sentiment T-Bond/T-Bill S&P 500 vs. 10-Year Treasury

S&P 500 Total Return (Y/Y % Chg) Relative to 10-year Bond Total Return (Y/Y % Chg) 10-Year Yield Over 3-Month T-Bill Yield 100.0% 141 80.0% 121 60.0%

101 40.0%

81 20.0%

61 0.0% Y/Y % Change % Y/Y 41 -20.0% -40.0% 21 -60.0% 1 -80.0% Apr-10 Jan-21 Jan-25 Jan-29 Jan-33 Jan-37 Jan-41 Jan-45 Jan-49 Jan-53 Jan-57 Jan-61 Jan-65 Jan-69 Jan-73 Jan-77 Jan-81 Jan-85 Jan-89 Jan-93 Jan-97 Jan-01 Jan-05 Jan-09 1/31/1920 10/31/192 7/31/1929 4/27/1934 1/27/1939 10/29/194 7/30/1948 4/24/1953 1/31/1958 10/31/196 7/31/1967 4/28/1972 1/31/1977 10/30/198 7/31/1986 4/30/1991 1/31/1996 10/31/200 7/29/2005

S&P 500: Reportable Commercial Long Positions Less Short Positions S&P 500 vs. Gold

S&P 500 Stock Index: Reportable Commercial Long Positions Less Short S&P versus Gold Positions (Contracts) (1886-2011) 80,000 1800 10.00 60,000 1600 "Bull market" from 2003-2007 40,000 1400

20,000 1200

0 1000 +1 Std Dev 1.00 -20,000 800

-40,000 600

-60,000 400

-80,000 200 0.10

-100,000 0 4 4 4 4 4 4 0 .04 04 .04 0 0 .04 0 .04 0 0 1. 6.04 6. 1. 1.04 1. 6.04 6. 1.04 1. 1. 86.04 9 01 0 11.04 1 26 3 36.04 4 46.04 5 61 6 71.04 7 86 9 96.04 0 06.04 1

Ounces Goldof required to buy S&P Index 8 9 9 9 1 18 1896.0419 19 1 19 1921.0419 19 1 19 19 19 1956.0419 19 19 19 1981.0419 19 1 20 20 20 31-Jul-07W 13-Jul-99W 30-Oct-01W 12-Apr-05W 12-Oct-93W 06-Jun-06W 11-Jan-11W 30-Jan-96W 25-Mar-97W 12-Jan-88W 07-Mar-89W 25-Jun-91W 17-Nov-09W 19-May-98W 17-Feb-04W 18-Nov-86W 01-May-90W 18-Aug-92W 23-Sep-08W 05-Sep-00W 24-Dec-02W 06-Dec-94W

0.01 SPX Reportable Commercial Long Positions Less Short Positions S&P 500

Source: Haver Analytics, Bloomberg, and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 16 America May Become Favored

America’s Place in the World Domestic vs Foreign Market Weekly Flows

World GDP - Geographic Breakdown Domestic Fund vs. Foreign Equity Flow s 35% 10,000

30% US 5,000

25% EU 15 -

20%

Dollars (millions) (5,000)

15% (10,000)

A/P ex-Japan As% a of Total World GDP 10% (15,000) Latam 1/30/09 2/28/09 3/30/09 4/30/09 5/30/09 6/30/09 7/30/09 8/30/09 9/30/09 1/30/10 2/28/10 3/30/10 4/30/10 5/30/10 6/30/10 7/30/10 8/30/10 9/30/10 1/30/11 2/28/11 3/30/11 4/30/11 5/30/11 6/30/11 7/30/11 8/30/11 5% 12/30/08 10/30/09 11/30/09 12/30/09 10/30/10 11/30/10 12/30/10 ME/A ICI Domestic Equity Fund Flow s Foreign Equity

0% 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

U.S.: GDP (B il.2000.US$) EU 15: GDP (B il.2000.US$) Asia & Pacific ex Japan: GDP (Bil.2000.US$) M iddle East/A frica (Bil.2000.US$) Latin America & Caribbean: GDP (Bil.2000.US$)

Europe has lost out to Asia while the US had held its
Risk tolerance can be found at the individual level own since the 1970s. but primarily for foreign markets.

Source: Haver Analytics, EPFR and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 17 Equity Risk Premium Equity Risk Premium Equity Risk Premium II

"Observed" Equity Risk Premium New ERP 7.5 6.0

6.5 4.0

5.5 2.0

4.5 0.0

3.5 -2.0 2.5 3.31 -4.0 1.5

-6.0 0.5

-0.5 -8.0

-1.5 -10.0 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-1961 Jan-1963 Jan-1965 Jan-1967 Jan-1969 Jan-1971 Jan-1973 Jan-1975 Jan-1977 Jan-1979 Jan-1981 Jan-1983 Jan-1985 Jan-1987 Jan-1989 Jan-1991 Jan-1993 Jan-1995 Jan-1997 Jan-1999 Jan-2001 Jan-2003 Jan-2005 Jan-2007 Jan-2009 Jan-2011

Equity risk premiums have been climbing.
Rising ERP II does not suggest investor
Equity risk premium is defined as long-term complacency and excitement about equities. expected earnings growth (inflation expectations &
ERP II assumes a long-term 7% return on 10-year rolling average GDP growth) + dividend stocks (in sync with long-term nominal EPS yield less 10-year US Treasury yield. growth) and solves for the risk premium when discounting the dividend yield and the value attributable to long-term earnings growth less the risk free bond yield.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 18 Bond Risk Premium Risk Premium Risk Premium

Spread betw een High Yield and 10-year Treasury 2100 24 Spread between A-Rated Bonds and 10-year Treasury 700 12.00 1900 22 1700 20 10.00 1500 500

18 Yield% in 1300 16 Yield in% 1100 8.00 14 900 300

Spread in BPS 12 700 6.00 Spread in BPS 500 10 100 300 8 4.00 100 6 -100 2.00 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

Spread High Yield Oct-94 Oct-95 Oct-96 Oct-97 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 Spread A-Rated Corporate Bonds

Junk bond spreads have declined to near all-time
A-Rated bond spreads have declined as well. “tights”, but some recent rumbling is noticeable.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 19 Valuation Price to Book Value vs Gov’t Portion of GDP Fed Model

Price/Book Value vs Govt Portion of GDP Trailing PE vs 10-yr Treasury 6 35 R2 = 0.3965 R2=0.74 30 5

25 August 11th, 2011 4

20 3

Trailing PE 15 Price/Book Value 2 10 June-11 1 5

0 0 0.17 0.175 0.18 0.185 0.19 0.195 0.2 0.205 0.21 0.215 0.22 - 2.00 4.00 6.00 8.00 10.00 12.00 14.00 16.00 18.00 Govt Portion of GDP 10-yr Treasury Price to Book vs Govt Portion of GDP +1 St Dev -1 StDev Linear (Price to Book vs Govt Portion of GDP) Trailing PE vs 10-yr Treasury +1 StDev -1 StDev Linear (Trailing PE vs 10-yr Treasury) Monthly Back to April 1976 Monthly Back to November 1971 Deficit/Surplus vs S&P 500 Price/Book P/Es, Interest Rates & Risk Premium Analysis

Federal Surplus/Deficit as % GDP vs S&P 500 Price/Book S&P 500 P/E versus 10-year Treasury & Equity Risk Premium 6 35.0 R2 = 0.37 R2 = 0.62 5 30.0 g 25.0 4 20.0

3 2Q11 15.0 Price/Book S&P 500 S&P Trailin

2 10.0 July 2011

5.0 1 6.0 8.0 10.0 12.0 14.0 16.0 18.0 10-year Treasury + Equity Risk Premium 0 -12.00% -10.00% -8.00% -6.00% -4.00% -2.00% 0.00% 2.00% 4.00% Trailing P/E +1 Std Dev -1 Std Dev Federal Surplus/Deficit as % GDP

Quarterly Back to 4Q76 Monthly Back to January 1961

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 20 Valuation S&P 500 Margins vs Trailing PE S&P 500 Margins vs Forward PE

S&P 500 Margin vs Trailing PE S&P 500 Margin vs Forward PE 10% 35 10% 30

9% 9% Correl: 0.11 30 Correl: 0.23 25

8% 8% 25

iling PE iling 20 7% 7% 20 15 6% S&P 500 Margin S&P 500 6% S&P 500 Margin S&P S&P 500 Tra 15 10 500 ForwardS&P PE 5% 5%

4% 10 4% 5 4Q85 4Q86 4Q87 4Q88 4Q89 4Q90 4Q91 4Q92 4Q93 4Q94 4Q95 4Q96 4Q97 4Q98 4Q99 4Q00 4Q01 4Q02 4Q03 4Q04 4Q05 4Q06 4Q07 4Q08 4Q09 4Q10 4Q85 4Q86 4Q87 4Q88 4Q89 4Q90 4Q91 4Q92 4Q93 4Q94 4Q95 4Q96 4Q97 4Q98 4Q99 4Q00 4Q01 4Q02 4Q03 4Q04 4Q05 4Q06 4Q07 4Q08 4Q09 4Q10 S&P 500 NI Margin S&P 500 Trailing PE S&P 500 NI Margin S&P 500 Forward PE

S&P 500 Margins vs Trailing PE Trailing PE vs Inflation Ranges

Trailing P/E Average vs Buckets of CPI Growth Trailing PE vs S&P 500 Forward Return 25 1+ StDev Above 1- StDev Below 6-mth Fwd 12-mth Fwd 6-mth Fwd 12-mth Fwd 20

Average -3.66% -3.60% 10.21% 18.12% 15 Median -4.14% -10.14% 10.69% 15.28%

10 Total 13 13 13 13 P/E Trailing Up 4 6 11 12 5 %Up 31% 46% 85% 92% Down 9 7 2 1 0 % Down 69% 54% 15% 8% Less Than 0% - 2% 2% - 4% 4% - 6% 6% - 8% 8% - 10% 10%+ 0% Headline CPI Growth - Buckets June 2011 Bucket Average Trailing P/E Median Trailing P/E

Source: Haver Analytics, FactSet, and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 21 Valuation

Stock Valuation Bull’s Eye Earnings Yield Gap (10-Year Treasury) The Valuation Bull’s Eye Earnings Yield Gap Analysis (10-Year Treasury Yield - Earnings Yield) Trailing 4Q EPS

>20x 5.00 16x to 18x

P/E Ranges & Subsequent 12 18x to 20x Month Returns (since 1940) 3.00 <8x: Average 18.6% 8x to 10x Median 18.8% 10x to 12x 1.00 8x to 10x: Average 8.8% 12x to 14x Median 6.7% 14x to 16x 10x to 12x: Average 9.7% -1.00 Median 9.6% 12x to 14x: Average 10.5% Median 10.5% -3.00 14x to 16x: Average 13.7% <8x Median 17.0% -5.00 16x to 18x: Average 5.1% Median 8.5% 18x to 20x: Average 5.7% -7.00 Median 6.3% >20x: Average -0.8% Median -0.6% 1/4/1985 1/4/1986 1/4/1987 1/4/1988 1/4/1989 1/4/1990 1/4/1991 1/4/1992 1/4/1993 1/4/1994 1/4/1995 1/4/1996 1/4/1997 1/4/1998 1/4/1999 1/4/2000 1/4/2001 1/4/2002 1/4/2003 1/4/2004 1/4/2005 1/4/2006 1/4/2007 1/4/2008 1/4/2009 1/4/2010 1/4/2011

Earnings Yield Gap BPS 5 Yr. Avg 5 Yr. Avg - 1 St. Dev. 5 Yr. Avg + 1 St. Dev. 5 Yr. Avg - 2 St. Dev. 5 Yr. Avg + 2 St. Dev. Sweet Spot (<8x) Earnings Yield Gap Earnings Yield Gap (BAA Yield)

5 Yr. S&P 500 Earnings Yield Gap (using 10-year average EPS and Moody's Corporate A Bond Yield) Earnings Yield Gap Analysis (BAA Yield - Earnings Yield)

8.0 Trailing 4Q EPS

7.0 8.00 6.0 6.00 5.0

4.0 4.00

3.0 2.00 2.0 0.00 1.0

0.0 -2.00

-1.0 -4.00 -2.0 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 1/4/1985 1/4/1986 1/4/1987 1/4/1988 1/4/1989 1/4/1990 1/4/1991 1/4/1992 1/4/1993 1/4/1994 1/4/1995 1/4/1996 1/4/1997 1/4/1998 1/4/1999 1/4/2000 1/4/2001 1/4/2002 1/4/2003 1/4/2004 1/4/2005 1/4/2006 1/4/2007 1/4/2008 1/4/2009 1/4/2010 1/4/2011 Earnings Yield Gap BPS 5 Yr. Average 5 Yr. Average - 1 St. Dev. 5 Yr. Average + 1 St. Dev. 5 Yr. Average - 2 St. Dev. 5 Yr. Average + 2 St. Dev. Earnings Yield Gap BPS 5 Yr. Average 5 Yr. Average - 1 St. Dev. 5 Yr. Average + 1 St. Dev. 5 Yr. Average - 2 St. Dev. 5 Yr. Average + 2 St. Dev.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 22 Valuation Criteria 5-yr Forward 10-yr Treasury Yield Spread Current vs 5-yr Forward 10-yr Treasury

5-yr Forward 10-yr Treasury Yield Spread 5-yr Forward Rate of 10-yr Treasury vs 10-yr Treasury 18 3.00 16 2.50

14 2.00 1.50 12 1.00 10 0.50

8 Spread

% Yield 0.00 6 -0.50 4 -1.00 -1.50 2 -2.00 0 11/15/1971 11/15/1973 11/15/1975 11/15/1977 11/15/1979 11/15/1981 11/15/1983 11/15/1985 11/15/1987 11/15/1989 11/15/1991 11/15/1993 11/15/1995 11/15/1997 11/15/1999 11/15/2001 11/15/2003 11/15/2005 11/15/2007 11/15/2009 11/15/1971 11/15/1973 11/15/1975 11/15/1977 11/15/1979 11/15/1981 11/15/1983 11/15/1985 11/15/1987 11/15/1989 11/15/1991 11/15/1993 11/15/1995 11/15/1997 11/15/1999 11/15/2001 11/15/2003 11/15/2005 11/15/2007 11/15/2009

5-yr Forward 10-yr Treasury Yield Spread 5-yr Forward Rate of 10-yr Treasury vs 10-yr Treasury LT Average

Valuations using five-year forward 10-yr Treasury yield expectation is not as favorable.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 23 Valuation

Earnings Yield Gap (10-Year Treasury) Earnings Yield Gap (10-Yr Treasury) – S&P 500 Fwd Performance 10-yr Treasury - S&P 500 Earnings Yield (S&P 500 Forward Performance) Earnings Yield Gap Analysis (10-yr Treasury - S&P 500 Earnings Yield) Trailing 4Q EPS 3-mth 6-mth 12-mth 3-mth 6-mth 12-mth 3-mth 6-mth 12-mth 6.0 -3 StDevs and Below -3 StDev to -2 StDev -2 StDev to -1 StDev Average 26.1% 39.2% 39.4% 5.5% 16.2% 23.2% 0.8% 1.6% 5.2% 4.0 Median 25.6% 39.8% 34.0% 6.5% 15.7% 22.6% 1.0% 1.8% 7.1% 2.0 Total 6 6 6 71 71 62 272 259 242 % Up 100% 100% 100% 73% 94% 100% 55% 54% 70% 0.0 %Down 0% 0% 0% 27% 6% 0% 45% 46% 30% -1 StDev to Average Avg to +1 StDev +1 StDev to +2 StDev -2.0 Average 1.4% 2.1% 5.2% 2.8% 6.1% 11.6% 0.0% -0.6% 1.7% -4.0 Median 2.2% 3.8% 8.7% 2.9% 6.1% 13.4% 0.4% 1.6% 4.5% Total 505 505 505 998 998 998 292 292 292 -6.0 % Up 64% 68% 73% 68% 72% 76% 55% 57% 59% %Down 36% 32% 27% 32% 28% 24% 45% 43% 41% -8.0 +2 StDevs and Above Average -4.4% -6.4% -2.3% 1/02/70 12/31/71 12/28/73 12/8/1989 12/6/1991 12/3/1993 12/1/1995

12/26/1975 12/23/1977 12/21/1979 12/18/1981 12/16/1983 12/13/1985 12/11/1987 11/28/1997 11/26/1999 11/23/2001 11/21/2003 11/18/2005 11/16/2007 11/13/2009 Median -1.1% -4.2% 0.4%

10-yr Treasury vs S&P 500 Earnings Yield Average +1 -1 +2 -2 -3 Total 7 7 7 % Up 43% 0% 57% %Down 57% 100% 43% Earnings Yield Gap (High Yield) Earnings Yield Gap (High Yield) – S&P 500 Fwd Performance High Yield - S&P 500 Earnings Yield (S&P 500 Forward Performance) Earnings Yield Gap Analysis (High Yield - S&P 500 Earnings Yield) Trailing 4Q EPS 18.0 3-mth 6-mth 12-mth 3-mth 6-mth 12-mth 3-mth 6-mth 12-mth

16.0 -2 StDev to -1 StDev -1 StDev to Avg Avg to +1 StDev

14.0 Average 2.7% 4.9% 5.9% 3.3% 6.6% 14.4% 1.8% 3.6% 6.5% Median 2.6% 4.9% 7.4% 3.7% 8.5% 19.2% 2.5% 4.5% 8.6% 12.0 Total 225 212 186 442 442 442 316 316 316 10.0 % Up 72% 80% 82% 77% 78% 86% 67% 78% 76% 8.0 %Down 28% 20% 18% 23% 22% 14% 33% 22% 24% 6.0 +1 StDev to +2 StDev +2 StDev to +3 StDev +3 StDev and Above 4.0 Average -1.0% -2.1% -2.1% 7.5% 16.3% 30.8% -13.4% 4.5% 25.7% 2.0 Median -0.7% -4.6% 4.4% 6.1% 16.1% 30.1% -13.2% 5.5% 25.0%

0.0 Total 203 203 203 30 30 30 6 6 6 % Up 45% 37% 52% 73% 83% 100% 0% 83% 100% -2.0 %Down 55% 63% 48% 27% 17% 0% 100% 17% 0% 10/23/1987 10/23/1988 10/23/1989 10/23/1990 10/23/1991 10/23/1992 10/23/1993 10/23/1994 10/23/1995 10/23/1996 10/23/1997 10/23/1998 10/23/1999 10/23/2000 10/23/2001 10/23/2002 10/23/2003 10/23/2004 10/23/2005 10/23/2006 10/23/2007 10/23/2008 10/23/2009 10/23/2010

High Yield vs S&P 500 Earnings Yield Average +1 -1 +2 -2 +3

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 24 Balance Sheet Help S&P 500 Cash to Market Cap S&P 500 Median Cash to Market Cap

S&P 500 Cash as % Total S&P 500 Market Value Median Cash as % Market Cap (ex-Financials) 45.0% 11.00%

40.0% 10.00%

35.0% 9.00%

30.0% 8.00% 25.0% 7.00% 20.0% 6.00% 15.0% 5.00% 10.0%

4.00% 5.0%

0.0% 3.00%

2.00% 1Q87 1Q88 1Q89 1Q90 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 Based on current S&P 500 constituents Cas h as % Mkt Cap Cash as % Mkt Cap ex-Financials 1.00% 1Q87 1Q88 1Q89 1Q90 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10

Cash and equivalents holdings as a percent of equity market capitalization (ex-financials) is back near 20-year highs.
A cash cushion is in place as markets have historically bottomed when cash/market cap reaches about 9%.
M&A opportunity is growing given cash positions and funding potential in the bond markets with high yield issuance hitting records.

Source: FactSet and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 25 Credit Conditions Improvement Bank Tightening Standards and Jobs Bank Tightening Standards and Capex

Banks Tightening C&I Loans to Large Firms (%) vs. Total Nonfarm Employees (Y/Y) - Banks Tightening C&I Loans to Large Firms (%) vs. Private Nonresidential Fixed Lagged Three Quarters Investment (Y/Y) - Lagged Three Quarters -40 4% -40 16% 13% 3% -20 -20 10% Total Nonfarm (Y/Y) Employees Nonfarm Total 2% 7% 0 0 4% Capex (Y/Y) 1% 20 1% 20 0% -2% 40 -5% 40 -1% -8%

Tightening - Inverted - Tightening 60 -2% -11% Tightening - Inverted - Tightening 60 80 -14% -3% -17% 80 -4% 100 -20%

-5%

100 Q2-90 Q2-91 Q2-92 Q2-93 Q2-94 Q2-95 Q2-96 Q2-97 Q2-98 Q2-99 Q2-00 Q2-01 Q2-02 Q2-03 Q2-04 Q2-05 Q2-06 Q2-07 Q2-08 Q2-09 Q2-10 Q2-11 Recession Q2-90 Q2-91 Q2-92 Q2-93 Q2-94 Q2-95 Q2-96 Q2-97 Q2-98 Q2-99 Q2-00 Q2-01 Q2-02 Q2-03 Q2-04 Q2-05 Q2-06 Q2-07 Q2-08 Q2-09 Q2-10 Q2-11 Banks Tightening C&I Loans to Large Firms (%) (Left) Recession Banks Tightening C&I Loans to Large Firms (%) (Left) Private Nonresidential Fixed Investment Y/Y All Employees: Total Nonfarm Y/Y Bank Tightening Standards vs. GDP Bank Tightening Standards vs. C&I Loans

FRB Survey: Banks Tightening Loans to Large Firms vs. C&I Loans in Bank Credit: All Commercial Banks Banks Tightening C&I Loans to Large Firms (%) vs. Real GDP (Y/Y) - Lagged Three - Six Quarter Lead Quarters -40 7% 25% -40 R2: 0.76 20% Loans C&I for Standards Tightening Bank -20 -20 5% 15% 0 0 10% 3% Real GDP (Y/Y) GDP Real 5% (Inverted) 20 20 0% 1% 40 40 -5% C&I Loans (Y/Y) -10% 60 Tightening - Inverted - Tightening -1% 60 -15% 80 80 -3% -20% -25% 100 100 -5% 3Q91 3Q92 3Q93 3Q94 3Q95 3Q96 3Q97 3Q98 3Q99 3Q00 3Q01 3Q02 3Q03 3Q04 3Q05 3Q06 3Q07 3Q08 3Q09 3Q10

Q2-90 Q2-91 Q2-92 Q2-93 Q2-94 Q2-95 Q2-96 Q2-97 Q2-98 Q2-99 Q2-00 Q2-01 Q2-02 Q2-03 Q2-04 Q2-05 Q2-06 Q2-07 Q2-08 Q2-09 Q2-10 Q2-11 C & I Loans in Bank Credit: All Commercial Banks (SA, Bil.$) Recession Banks Tightening C&I Loans to Large Firms (%) (Left) FRB Sr Officers Survey: Banks Tightening C&I Loans to Large Firms (%) Real GDP Y/Y

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 26 Earnings Credit Conditions vs. Industrial Production Industrial Production vs. EPS

Industrial Production (Y/Y) vs. S&P 500 EPS (Y/Y) Banks Tightening C&I Loans to Large Firms (%) vs. Industrial Production (Y/Y) - 12% 32% Lagged Three Quarters -40 10% 9% 24% 6% 16% -20 S&P 500 EP S&P 500 5% Industrial Production (Y/Y) 3% 8% 0 0% 0% 0% 20 -3% -8% S -6% -16% 40 -5% Industrial Production -9% -24%

Tightening - Inverted Tightening - 60 -12% -32% -10% 80 -15% -40%

100 -15% 1Q70 1Q72 1Q74 1Q76 1Q78 1Q80 1Q82 1Q84 1Q86 1Q88 1Q90 1Q92 1Q94 1Q96 1Q98 1Q00 1Q02 1Q04 1Q06 1Q08 1Q10

Q2-90 Q2-91 Q2-92 Q2-93 Q2-94 Q2-95 Q2-96 Q2-97 Q2-98 Q2-99 Q2-00 Q2-01 Q2-02 Q2-03 Q2-04 Q2-05 Q2-06 Q2-07 Q2-08 Q2-09 Q2-10 Q2-11 Using Trailing 4Q EPS Industrial Production S&P 500 EPS Recession Banks Tightening C&I Loans to Large Firms (%) (Left) Industrial Production Index Y/Y Capex Trends by Sector Aggregate Capex 2007 2008 2009 2010 2011E Consumer Discretionary 88,622 90,629 69,369 61,708 71,682
EPS to be supported by industrial activity but still Consumer Staples 44,680 47,765 42,234 41,395 44,646 Energy 128,821 170,864 133,311 153,643 182,228 Financials NA NA NA NA NA likely to ease sharply in 2011. Health Care 24,369 24,705 21,893 21,980 23,646 Industrials 42,753 42,576 32,560 34,136 45,192 IT 43,389 45,151 34,880 45,096 57,009 Materials 23,782 26,995 19,476 19,083 25,781 Telecom Services 49,035 50,040 44,481 48,968 51,680 Utilities 55,476 67,670 65,286 63,266 69,184 Total 500,928 566,396 463,491 489,275 571,048

Aggregate Capex Y/Y Change 2008 2009 2010 2011E

Consumer Discretionary 2.3% -23.5% -11.0% 16.2% Consumer Staples 6.9% -11.6% -2.0% 7.9% Energy 32.6% -22.0% 15.3% 18.6% Financials Health Care 1.4% -11.4% 0.4% 7.6% Industrials -0.4% -23.5% 4.8% 32.4% IT 4.1% -22.7% 29.3% 26.4% Materials 13.5% -27.9% -2.0% 35.1% Telecom Services 2.0% -11.1% 10.1% 5.5% Utilities 22.0% -3.5% -3.1% 9.4% Total 13.1% -18.2% 5.6% 16.7%

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 27 Earnings

S&P 500 and S&P 500 GICS Sectors – EPS Growth Forecasts (Consensus vs. Citi) Estimated Earnings Per Share Growth for S&P 500 Sectors

S&P 500 Sector EPS Growth (%) Forecasts: Consensus vs. Citi S&P 500 EPS Growth Estimates Sector 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11E 3Q11E 4Q11E 1Q12E Bloomberg Consensus: Consumer Discretionary 24.3% 117.5% 77.5% 28.2% 12.8% 14.7% 5.9% 17.6% 14.1% 12.9% July 2011 * Citi Forecast Consumer Staples 9.8% 13.2% 7.2% 3.9% 7.6% 5.6% 7.7% 8.8% 8.9% 9.3% Energy -24.8% 64.0% 99.7% 37.2% 42.8% 41.3% 40.0% 49.8% 29.4% 17.3% 2007 2008 2009E 2010E 2011E 2012E 2010E 2011E 2012E Financials 103.0% 204.8% 122.7% 62.6% 283.0% 22.5% 16.7% 17.2% 29.9% 16.4% S&P 500 Total (4.1) (26.8) 0.4 33.0 18.9 13.5 37.8 14.6 7.1 Health Care 2.0% 16.8% 17.9% 10.9% 7.6% 6.6% 1.9% 3.4% 7.4% 3.4% Consumer Discretionary (12.0) (52.0) 53.0 27.0 18.3 14.1 49.0 11.0 10.0 Industrials -11.9% 3.7% 29.6% 50.6% 22.2% 34.0% 15.6% 18.6% 17.3% 20.8% Consumer Staples 10.0 11.0 3.0 9.8 8.3 7.8 5.0 5.0 5.0 IT 46.3% 63.7% 54.1% 40.3% 14.4% 24.2% 23.5% 11.5% 12.0% 10.7% Materials 141.8% 132.0% 108.9% 54.9% 44.0% 56.7% 56.6% 32.8% 23.7% 15.6% Energy 4.0 19.0 (59.0) 50.1 39.1 11.2 53.0 28.0 5.0 Telecom Services -19.2% -2.0% 3.0% -3.3% 13.7% 9.4% 11.1% 18.2% 18.7% 18.3% Financials (33.0) -132* 243* 112.8 10.9 22.6 124.0 12.0 11.0 Utilities 8.0% 5.4% 8.3% 13.3% -0.1% 0.8% -1.6% 0.5% 2.3% -2.6% Health Care 12.0 8.0 1.0 10.8 7.8 6.4 11.0 8.0 7.0 Industrials 12.0 (1.0) (34.0) 19.1 19.0 19.0 27.0 20.0 11.0 S&P 500 75.7% 50.7% 48.6% 30.2% 24.3% 20.8% 17.0% 16.7% 16.8% 12.5% IT 17.0 3.0 (8.0) 38.4 27.1 13.9 48.0 16.0 9.0 Ex-Financials 7.8% 37.0% 39.9% 25.6% 15.7% 20.5% 17.1% 16.6% 14.5% 11.7% Materials 6.0 (7.0) (51.0) 69.4 38.9 15.1 88.0 43.0 3.0 Telecom Services 24.0 (9.0) (24.0) (24.6) 35.4 14.8 (2.0) 7.0 10.0 Utilities 13.0 1.0 (2.0) 7.6 (0.4) 0.3 9.0 2.0 4.0 *Absolute value change, Citi estimates embed $47 bln loss in 2008, $60 bln, $75 bln profit in 2009/10. through July 22, 2011

Source: Bloomberg and Citi Global Markets Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 28 Earnings

% of Market Value Attributable to PV of Flat Earnings PV of Flat Earnings Using 5-yr Forward 10-yr Treasury

Percent of Market Value Attributable to PV of Flat Earnings Percent of Market Value Attributable to PV of Flat Earnings - Using 5-yr Forward Rate of 10-yr 135.0% 50.0% Treasury 140.0% 50.0% t 125.0% 40.0% S&P 500 12-mth forward return 500 12-mth S&P 130.0% 40.0%

115.0% 30.0% S&P 500 12-mthforward return 120.0% 30.0% 105.0% 20.0% 110.0% 20.0% 95.0% 10.0% 100.0% 10.0% 85.0% 0.0% 90.0%

earnings 80.0% 0.0% 75.0% -10.0%

earnings earnings 70.0% 65.0% -20.0% -10.0% 60.0% -20.0% 55.0% -30.0% 50.0% % of mkt value attributable to PV of fla 45.0% -40.0% 40.0% -30.0% % of mkt value attributableoftoflatPV 30.0% -40.0% 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

S&P 500 12-month forward return % of mkt value attributable to PV of flat earnings Avg Nov-71 Nov-73 Nov-75 Nov-77 Nov-79 Nov-81 Nov-83 Nov-85 Nov-87 Nov-89 Nov-91 Nov-93 Nov-95 Nov-97 Nov-99 Nov-01 Nov-03 Nov-05 Nov-07 Nov-09

S&P 500 12-month forward return % of mkt value attributable to PV of flat earnings Avg

Current expectations for long-term EPS growth are very depressed; akin to last round of equity dislocation.
However, not as clean when looking at five-year forward capital costs.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 29 Earnings S&P 500 Earnings Revisions Rolling Upward Guidance vs 6-Mth Change in S&P 500

S&P 500: Upw ard Revisions as a % of Total US Companies Issuing Financial Guidance Up as % of Total Companies Issuing Financial Guidance (10-wk Rolling Average) vs 6- mth Change in S&P 500 (4-Week Lead) 40% 50% 80.0% 1550 Correl: 0.59 1450 40% 70.0% 35% 1350 30% 60.0% 30% 20% S&P 500 6-mth Change

1250 S&P 500 25% 50.0% 1150 10% 40.0% 1050 20% 0%

950 -10% 30.0% 15% 850 -20% 20.0% 10% 750 -30% Upward Revisions as % Total % as Revisions Upward 10.0% 650 5% -40% Guidance Up as % of Total Guidance (10-wk Rolling Avg) Rolling (10-wk Guidance Total of % Up as Guidance 0% -50% 1/29/99 1/31/00 1/31/01 1/31/02 1/31/03 1/30/04 1/31/05 1/31/06 1/31/07 1/31/08 1/30/09 1/29/10 1/31/11 6/30/2000 6/30/2001 6/30/2002 6/30/2003 6/30/2004 6/30/2005 6/30/2006 6/30/2007 6/30/2008 6/30/2009 6/30/2010 6/30/2011 Upw ard Rev is ions S&P 500 Composite (EOP 1941-43=10) 12/31/1999 12/31/2000 12/31/2001 12/31/2002 12/31/2003 12/31/2004 12/31/2005 12/31/2006 12/31/2007 12/31/2008 12/31/2009 12/31/2010 Number of US Companies Issuing Financial Outlooks Up as a % of Total US Companies Issuing Financial Outlooks S&P 500 Composite 6-mth Change CESI vs Earnings Revisions CESI vs S&P 500 6-mth Price Change

Citi Economic Surprise Index - US vs S&P 500 Upward Revisions as % Total Citi Economic Surprise Index vs S&P 500 - 6-mth Change 150 60% Correl: 0.496 4/30/98 4/30/99 4/28/00 4/30/01 4/30/02 4/30/03 4/30/04 4/29/05 4/28/06 4/30/07 4/30/08 4/30/09 4/30/10 4/29/11 150 90.00%

S&P 500 Upward Revisions as Total % 100 40% 80.00% 100 70.00% 50 20% 50 60.00%

0 50.00% 0 0% CESI CESI 40.00% -50 -50 -20% 30.00%

-100 S&P 500 6-mthChange 20.00% -100 -40% -150 10.00% -150 -60% 4/2/1998 4/2/1999 4/2/2000 4/2/2001 4/2/2002 4/2/2003 4/2/2004 4/2/2005 4/2/2006 4/2/2007 4/2/2008 4/2/2009 4/2/2010 4/2/2011 10/2/1998 10/2/1999 10/2/2000 10/2/2001 10/2/2002 10/2/2003 10/2/2004 10/2/2005 10/2/2006 10/2/2007 10/2/2008 10/2/2009 10/2/2010

Citi Economic Surprise Index - US S&P 500 Upward Revisions as % Total 4/2/1998 4/2/1999 4/2/2000 4/2/2001 4/2/2002 4/2/2003 4/2/2004 4/2/2005 4/2/2006 4/2/2007 4/2/2008 4/2/2009 4/2/2010 4/2/2011

Citi Economic Surprise Index - US S&P 500 6-mth Change

Source: Haver Analytics, FactSet, Bloomberg and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 30 Earnings Bank Tightening Standards vs. EPS Earnings During Recessions

Banks Tightening C&I Loans to Large Firms (%) vs. S&P 500 Operating Earnings (Y/Y) - No Lag Peak to Trough Earnings Decline Around/During -40 50% Recessionary Periods (using Trailing 4Q earnings) 40% 2Q49-4Q49 -3.33% -20 30% 3Q53-4Q53 -1.57%

20% (Y/Y) Earnings 500 Op. S&P 0 3Q57-3Q58 -17.00% 10% 3Q59-2Q61 -11.66% 20 0% -10% 3Q69-4Q70 -12.90% 40 -20% 3Q74-3Q75 -14.82%

Tightening - Inverted - Tightening -30% 60 1Q80-3Q80 -4.25% -40% 4Q81-1Q83 -19.14% -50% 80 -60% 4Q89-4Q91 -22.41% 100 -70% 3Q00-1Q02 -21.68% 2Q07-3Q09 -44.86% Q1-91 Q1-92 Q1-93 Q1-94 Q1-95 Q1-96 Q1-97 Q1-98 Q1-99 Q1-00 Q1-01 Q1-02 Q1-03 Q1-04 Q1-05 Q1-06 Q1-07 Q1-08 Q1-09 Q1-10 Q1-11 Recession Average -15.79% Banks Tightening C&I Loans to Large Firms (%) (Left) S&P 500: Operating Earnings ($/share)

Earnings fell more than during any recession after World War II.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 31 Earnings Credit vs. Capacity Utilization Capacity Utilization vs. EPS

Spread b/w Junk Bond & 10-year vs. Capacity Utilization: Industry - Lagged 3 S&P 500 Operating EPS (y/y) vs. Capacity Utilization Quarters 45% 90 0 86

200 84 25%

e 85 400 82 Capacity Utilization:Capacity Industr Capacity Ut Capacity hang 600 80 5% 80 800 78

-15% % ilization

1000 76 %EPS Y/Y C 75 1200 74 -35%

Spread (basis points) 1400 72 y S&P 500 Op. S&P 70 1600 70 -55%

1800 68 -75% 65 2000 66 1Q67 1Q69 1Q71 1Q73 1Q75 1Q77 1Q79 1Q81 1Q83 1Q85 1Q87 1Q89 1Q91 1Q93 1Q95 1Q97 1Q99 1Q01 1Q03 1Q05 1Q07 1Q09 1Q11 Q2-90 Q2-91 Q2-92 Q2-93 Q2-94 Q2-95 Q2-96 Q2-97 Q2-98 Q2-99 Q2-00 Q2-01 Q2-02 Q2-03 Q2-04 Q2-05 Q2-06 Q2-07 Q2-08 Q2-09 Q2-10 Q2-11 Spread b/w Junk Bond & 10-year treasury Capacity Utilization: Industry (SA, Percent of Capacity) Capacity Utilization S&P 500 EPS Consumer Durables: Sales vs. Production Consumer Durable Sales vs. Imports

Real Consumer Durable Outlays and Domestic Production - Y/Y% Real Consumer Durable Sales vs Imports - Y/Y 40 30 30 20 20 10 10 0 0

-10 -10

-20 -20 Consumer Durable (Real) Sales -30 -30 Consumer Durable Production Imports of Manufactured Goods (Nominal) Consumer Durable (Real) Sales -40 -40 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009

Source: Haver Analytics, and CIRA – U.S. Equity Strategy, U.S. Economics Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 32 Margins Implied S&P Margins (NFIB Survey) Earnings & Stocks

NFIB Survey: Firms Planning To Raise Prices Less Firms Planning to Raise Worker S&P 500 vs S&P 500 EPS Compensation Vs. Corporate Profit Margins - 2 Year Lag 26.0 1600 R2 = 0.87 25 13% 24.0 1400 22.0

20 12% 20.0 1200

Corporate Profit Margins 18.0 15 11% Price S&P 500 16.0 1000 14.0 10 10% 800 12.0 EPS 5 9% 10.0 600 8.0 Less Worker Comp Less Worker 0 8% 6.0 400 4.0 -5 7% 200 NFIB - Firms Planning to Raise: Prices Prices Raise: to Planning Firms - NFIB 2.0 -10 6% 0.0 0 Q1-90 Q2-91 Q3-92 Q4-93 Q1-95 Q2-96 Q3-97 Q4-98 Q1-00 Q2-01 Q3-02 Q4-03 Q1-05 Q2-06 Q3-07 Q4-08 Q1-10 Q2-11 1Q65 1Q68 1Q71 1Q74 1Q77 1Q80 1Q83 1Q86 1Q89 1Q92 1Q95 1Q98 1Q01 1Q04 1Q07 1Q10

NFIB Difference Profit Margins S&P 500 Operating EPS S&P 500 S&P 500 Margin vs. S&P 500 Performance LPI vs S&P 500 EPS

S&P 500 versus S&P 500 Margins Citigroup's Leading Profits Indicator vs. Quarterly S&P 500 EPS 9.5% 1600 1.50 60%

9.0% 1400 1.00 40% 8.5% 0.50 20% 8.0% 1200 EPS Y/Y

7.5% S&P 500 0.00 0%

1000 LPI 7.0% -0.50 -20% Margin 800 6.5% -1.00 -40% 6.0% 600

5.5% -1.50 -60% 400 5.0%

4.5% 200 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 LPI EPS 1Q90 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 Margi n S&P 500 Components: 1) the differential between core CPI and PPI, 2) the ECRI future inflation Based on current constituents gauge, 3) the Philadelphia Fed survey on prices paid and received, 4) the Conference Board’s leading economic indicators, and 5) the ISM’s production index.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 33 Understanding Margins Profits & Employee Comp as a % of GDP Commodity Prices vs Margins

Corporate Profits and Employee Compensation as % of GDP Corporate Profits as % of GDP vs. CRB Spot Commodity Price Index Y/Y % Change 13.0% 53.0% 13.0% 40.0%

12.0% 54.0% 12.0% 30.0% CRB Spot Commodity Price Index Y/Y %Ch Y/Y Index Price Commodity Spot CRB

11.0% 55.0% 11.0% 20.0% P 10.0% 56.0% 10.0% 10.0%

9.0% 57.0% 9.0% 0.0% Profits as% GD

8.0% 58.0% 8.0% -10.0% g 7.0% 59.0% 7.0% -20.0%

6.0% 60.0% 6.0% -30.0% 1Q75 1Q78 1Q81 1Q84 1Q87 1Q90 1Q93 1Q96 1Q99 1Q02 1Q05 1Q08 1Q11 1Q52 1Q55 1Q58 1Q61 1Q64 1Q67 1Q70 1Q73 1Q76 1Q79 1Q82 1Q85 1Q88 1Q91 1Q94 1Q97 1Q00 1Q03 1Q06 1Q09

Profit % of GDP (Left) Compensation of Employees as % GDP Pr of it % of GDP KR-CRB Spot Commodity Price Index: All Commodities Y/Y % Chg Labor Costs as % of Total US Corporate Costs

Labor % Costs 66.0%
Number of job losses this recession vs 65.0% prior: 64.0% 1990-91 = 1.24 million

63.0% 2000-01 = 1.60 million 2008-09 = 7.53 million 62.0%

61.0%

60.0% 1Q51 1Q54 1Q57 1Q60 1Q63 1Q66 1Q69 1Q72 1Q75 1Q78 1Q81 1Q84 1Q87 1Q90 1Q93 1Q96 1Q99 1Q02 1Q05 1Q08 1Q11

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 34 Credit Conditions Improvement NFIB Expectations on Credit Hard to Get Bank Tightening Standards – Small Firms

NFIB: Percent Reporting that Credit Was Harder to Get Last Time, Net (SA, %) 20 Banks Tightening C&I Loans to Small Firms (%) (Left) -40

15 -20

10 0 20 Percent 5 40

0 60

-5 80 Q2-90 Q2-92 Q2-94 Q2-96 Q2-98 Q2-00 Q2-02 Q2-04 Q2-06 Q2-08 Q2-10 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 Recession FRB Sr Officers Survey: Banks Tightening C&I Loans to Small Firms (%)

Junk Bond Spreads vs. Capex

Spread b/w Junk Bond & 10-year (- Lagged 3 Quarters) vs. Private Nonresidential Fixed Investment (Y/Y) 0 15%

200

10% Private Nonresidential Fixed Investment (Y/Y) 400 5% 600

800 0%

1000 -5%

1200 -10% Spread (basisSpread points) 1400 -15% 1600 -20% 1800

2000 -25% Q2-90 Q2-91 Q2-92 Q2-93 Q2-94 Q2-95 Q2-96 Q2-97 Q2-98 Q2-99 Q2-00 Q2-01 Q2-02 Q2-03 Q2-04 Q2-05 Q2-06 Q2-07 Q2-08 Q2-09 Q2-10 Q2-11 Spread b/w Junk Bond & 10-year treasury Private Nonresidential Fixed Investment (SAAR, Bil.$) Source: Haver Analytics, DataCentral, and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 35 Industrials/Materials/Energy Industrials vs. ISM Energy vs. ISM

Industrials vs. ISM Ener gy v s . ISM 80% 65 60% 65

60 60% 60 40%

55 40% 55 20%

50 ISM 20% 50 0% ISM Energy 45 0% 45

Industrials -20% 40

-20% 40 -40% 35

-40% 35 -60% 30

-60% 30 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

S&P 500 Energy Yr/Yr % Change ISM Mfg Diffusion Index 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

Industrials Y/Y % Change ISM Mfg Diffusion Index Materials vs. ISM

Materials vs. ISM 60% 65
ISM slowing has implications.

60 40%

55 20%

50 ISM 0%

Materials 45

-20% 40

-40% 35

-60% 30 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

S&P 500 Materials Yr/Yr % Change ISM Mfg Diffusion Index

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 36 Tech Capex Credit Standards and Tech Capex Tech Capex and Jobs

Private Investment: Information Processing Equipment/Softw are vs. Employment Banks Tightening C&I Loans to Large Firms (%) vs. Private Nonresidential Fixed 30% 6.0%

Investment: Information Processing Equip/Software (Y/Y) - Lagged Three Quarters 25% 5.0%

-40 20% g

20% 4.0% -20 15% 3.0% 10% 15%

0 2.0% Employmen

5% Capex (Y/Y) 10% 20 1.0% 5% 0% 0.0% 40 0% t -5% -1.0%

Tightening - Inverted - Tightening 60 -5% -10% -2.0%

Equipment/Software Y/Y % Change -10% 80 -15% -3.0% Private Investment: Information Processin Investment:Private Information -15% 100 -20% -4.0% -20% -5.0% Q2-90 Q2-91 Q2-92 Q2-93 Q2-94 Q2-95 Q2-96 Q2-97 Q2-98 Q2-99 Q2-00 Q2-01 Q2-02 Q2-03 Q2-04 Q2-05 Q2-06 Q2-07 Q2-08 Q2-09 Q2-10 Q2-11

Recession 1Q70 1Q72 1Q74 1Q76 1Q78 1Q80 1Q82 1Q84 1Q86 1Q88 1Q90 1Q92 1Q94 1Q96 1Q98 1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 Banks Tightening C&I Loans to Large Firms (%) (Left) Private Investment: Information Processing Equipment/Software (SAAR,Bil.$) Employment Y/Y % Change Capex

Easing bank lending standards have been
Job growth has a tight relationship with tech a positive for technology capex. capex trends.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 37 Implied Recovery Was Getting Priced In

ISM vs S&P 500 ISM New Orders vs S&P 500

ISM Mfg: PMI Composite Index vs. S&P 500 Y/Y % chng ISM New Orders vs. S&P 500 Y/Y % chng 80 60.0% 80 60.0%

75 75 40.0% 40.0% 70 70 S&P 500 Y/Y % Change % Y/Y 500 S&P

65 Change Y/Y % S&P 500 65 20.0% 20.0% 60 60

55 0.0% 55 0.0%

50 50

-20.0% New OrdersISM -20.0% 45 45 ISM Mfg: PMI Composite Inde Composite PMI Mfg: ISM

40 40 -40.0% -40.0% 35 35

30 -60.0% 30 -60.0% 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-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 ISM Mfg: PMI Composite Index (SA, 50+ = Econ Expand) S&P 500 Composite Y/Y % Chg ISM Mfg: New Orders Index (SA, 50+ = Econ Expand) S&P 500 Composite Y/Y % Chg Relative Performance S&P 500 vs 10-yr vs. ECRI Weekly Leading Index S&P 500 vs ECRI Weekly Leading Index

Total Return S&P 500 less 10-year Treasury (6-mth chg) vs. ECRI Weekly Leading Index (6-mth change) Total Return S&P 500 (6-mth chg) vs. ECRI Weekly Leading Index (6-mth change) 40.00% 20.00% 40.00% 20.00% correlation = 0.71

y Correlation = 0.68 r2 = 0.51 R2 = 0.46 30.00% 15.00% 30.00% 15.00% ECRI Weekly ECRI Weekly Leading 6-month Index chang ECRI Weekly Leading Index 6-month chang

20.00% 10.00% ) 20.00% 10.00%

10.00% 5.00% 10.00% 5.00%

0.00% 0.00% 0.00% 0.00%

-10.00% -5.00% -10.00% -5.00% ((6-mth chg) chg) ((6-mth

-20.00% -10.00% -20.00% -10.00%

-30.00% -15.00% chg(6-mth 500 S&P Return Total -30.00% -15.00% e e -40.00% -20.00% -40.00% -20.00%

Total Return S&P 500 (6-mth chg) less S&P 10-year Return Total Treasur -50.00% -25.00% -50.00% -25.00% Jan-1971 Jan-1973 Jan-1975 Jan-1977 Jan-1979 Jan-1981 Jan-1983 Jan-1985 Jan-1987 Jan-1989 Jan-1991 Jan-1993 Jan-1995 Jan-1997 Jan-1999 Jan-2001 Jan-2003 Jan-2005 Jan-2007 Jan-2009 Jan-2011 Jan-1971 Jan-1973 Jan-1975 Jan-1977 Jan-1979 Jan-1981 Jan-1983 Jan-1985 Jan-1987 Jan-1989 Jan-1991 Jan-1993 Jan-1995 Jan-1997 Jan-1999 Jan-2001 Jan-2003 Jan-2005 Jan-2007 Jan-2009 Jan-2011 S&P 500 Composite: Total Return Index 6-month change ECRI Weekly Leading Index 6-month change Total Return S&P 500 (6-mth chg) less 10-year Treasury ((6-mth chg) ECRI Weekly Leading Index 6-month change

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 38 Commodities and Leading Indicators ECRI vs. S&P 500 Energy ECRI vs. CRB Raw Industrials

ECRI Weekly Leading Index Growth Rate vs. S&P 500 Energy (Six-Month Lead) ECRI Weekly Leading Index Growth Rate vs. CRB: Raw Industrials Index (Six-Month Lead)

40 70% 40 30% 60% 30 30 20% 50% 20 20 40% 10% 30% 10 10 Energy 500 S&P 0% 20% CRB 0 10% 0 -10% 0% -10 -10 -10% Lead) (Six-Month ECRI -20% ECRI (Six-Month Lead) -20 -20 -20% -30% -30% -30 -30 -40% -40 -40% -40 -50% Nov-1981 Nov-1983 Nov-1985 Nov-1987 Nov-1989 Nov-1991 Nov-1993 Nov-1995 Nov-1997 Nov-1999 Nov-2001 Nov-2003 Nov-2005 Nov-2007 Nov-2009

Jan-1991 Jan-1993 Jan-1995 Jan-1997 Jan-1999 Jan-2001 Jan-2003 Jan-2005 Jan-2007 Jan-2009 Jan-2011 ECRI Weekly Leading Index Growth Rate (Avg, %) ECRI Weekly Leading Index Growth Rate (Avg, %) S&P 500: Energy (EOP Dec-30-94=100) KR-CRB Spot Commodity Price Index: Raw Industrials (1967=100,EOP)

ECRI data provides a six-month lead for commodities and late-cyclicals.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 39 The Consumer Production versus Employment Duration of Unemployment vs S&P 500

Industrial Production (Y/Y) vs Non-Farm Employment (Y/Y) 6.0% 15.0% S&P 500 Y/Y vs Avg Duration of Unemployment Y/Y 12-mth Lag 60% 60%

4.0% 10.0% 40% 40% n Production Industrial 2.0% 5.0% 20% 20%

0.0% 0.0% 0% 0%

-2.0% -5.0% S&P 500 Y/Y

Non-Farm Employme -20% -20%

-4.0% -10.0% -40% -40% Avg Duration of Unemployment Y/Y in Weeks -6.0% -15.0% -60% -60% 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-48 Jan-52 Jan-56 Jan-60 Jan-64 Jan-68 Jan-72 Jan-76 Jan-80 Jan-84 Jan-88 Jan-92 Jan-96 Jan-00 Jan-04 Jan-08 Non-Farm Employment Industrial Production Average Duration of Unemployment Y/Y S&P 500 Composite Y/Y

Jobs and industrial production move in tandem.
Equity markets have led employment trends for decades.
Hiring intentions still weak.
Energy “shocks” hit 1973–74, 1979–80, 1990–91, as oil prices tripled almost overnight.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 40 Consumer Confidence Consumer Confidence vs S&P 500 Consumer Confidence vs Consumer Spending

Consumer Confidence vs. S&P 500 Consumer Confidence vs. Real Personal Consumption Expenditures 160.0 1650.0 160.0 7.00% s 6.00% Y/YConsumptio Real Chg Personal % 140.0 1450.0 140.0 5.00%

120.0 1250.0 120.0 4.00% Expenditures Expenditures

S&P 500 3.00% 100.0 1050.0 100.0 2.00% 850.0 80.0 80.0 1.00%

0.00%

Consumer Confidence Consumer 60.0 650.0 60.0 -1.00% 40.0 450.0 40.0 -2.00% n Real Personal Expenditure Real Consumption 20.0 250.0 20.0 -3.00% 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 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 Consumer Confidence (SA, 1985=100) S&P 500 Consumer Confidence (SA, 1985=100) Y/Y % Chg Real Personal Consumption Expenditures Consumer Confidence vs Unemployment Consumer Confidence vs Home Prices

Consumer Confidence vs. Unemployment Rate Consumer Confidence vs. Home Prices 160.0 10.5 160.0 240000.0 Correlation =-0.83 Correlation =-0.01 Single Famil Prices Home Existing Median 2 R2 = 0.69 R = 0.00 220000.0 140.0 9.5 140.0 200000.0

120.0 8.5 Rat Unemployment 120.0 180000.0 100.0 7.5 100.0 160000.0 80.0 6.5 80.0 140000.0 e

60.0 5.5 Consumer Confidence 60.0 Consumer Confidence 120000.0

40.0 4.5 40.0 100000.0 y 20.0 3.5 20.0 80000.0 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 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 Consumer Confidence (SA, 1985=100) Consumer Confidence (SA, 1985=100) Unemployment Rate (SA, %) NAR Median Sales Price: Existing 1-Family Homes, United States ($)

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 41 The Real Driver for Consumers Core Retail Sales and Wilshire 5000 Core Retail Sales and Home Prices

Six-Month Annualized Percent Change in Homes Sales Price and Core Retail Sales Six-Month Annualized Percent Change in Wilshire 5000 and Core Retail Sales 60.00 15.00 60.00 15.00

40.00 40.00 10.00 10.00 20.00 20.00 5.00 5.00 0.00 % % 0.00 % % 0.00 -20.00 0.00 -20.00

-5.00 -40.00 -40.00 -5.00 -60.00 -60.00 -10.00

-80.00 -10.00 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 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 Jul-10

Home Sales Price (Left) Retail Control (Right) Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 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 Jul-10

Wilshire (Left) Retail Control (Right)

Discretionary Expenditures as % Total Consumption

"Discretionary" Consumer Spending as % of Total Consumer Spending 22
Stocks prices seem to matter far more than home 21 20 prices for discretionary retail sales trends. 19

The top quintile of American income earners 18 account for roughly 40% of consumer spending and 17 far more of discretionary spending. 16 15 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 "Discretionary" Consumer Spending as % of Total Consumer Spending

"Discretionary" Personal Consumption Expenditure Components: Durable Goods; Nondurable Toys and Sports Supplies; Magazines, Newspapers and Sheet Music; Flowers, Seeds and Potted Plants; Housing Services: Hotels and Motels; Recreation Services; Services: Net Foreign Travel.

Source: Haver Analytics and Citi Economics & Market Analysis Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 42 Another Consumer Driver Hiring Intentions Temporary Help Services vs. Non-Farm Payrolls

Quarterly Employment Change (Thousands) and Manpow er Survey: % Firms Planning Temporary Help Services vs. Total Nonfarm Payrolls (Y/Y Growth) to Increase Jobs 1500 30 30% 4% 3% 1000 25 20% 2% 500 20 10% 1% 0

15 0% Total -500 0% -1% 10 -1000 Temporary Workers -10% -2% 5 -1500 -3% -20% -2000 0 -4%

-2500 -5 -30% -5% 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 1Q80 1Q81 1Q82 1Q83 1Q84 1Q85 1Q86 1Q87 1Q88 1Q89 1Q90 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 Temporary Workers (Left) Nonfarm (Right) Employment (left) Hiring Plans (right)

The jobs outlook has improved based on Manpower survey results.
Temporary Help Services, which typically lead job trends, is improving.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 43 Consumer Myths Unmasked Personal Income + Home Equity Extraction Vs. Spending Jobs vs. Spending

Real Consumer Spending (Y/Y%) vs. Real Real Consumer Spending vs. Total Non-Farm Employment Disposable Income and Home Equity Extraction 10.0% 10.0% (Y/Y%) 14 14 7.5% 7.5% 12 Real Disposable Personal Income 12 Real DPI + Estimated Equity Extraction 5.0% 5.0% 10 10 Real Consumer Outlays

8 8 2.5% 2.5% Y/Y Y/Y

6 6 0.0% 0.0% 4 4 2 2 -2.5% -2.5% 0 0 -5.0% -5.0% -2 Sources: BEA, FRB, Haver Analytics, Citi -2

-4 -4 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 64 69 74 79 84 89 94 99 04 09 Consumer Spending Employment

Nominal Personal Disposable Personal
Looks like consumers dramatically “underspent” Housing Bubble Disposable Income Consumption Income less PCE their real estate riches, but equity market levels Years (Bil.$) Expenditures (Bil.$) (Bil.$) appear to have meaningful impact on the “mass 2002 8,010 7,439 570 affluent” spenders. 2003 8,378 7,804 574 2004 8,889 8,285 604
In fact, the cumulative difference between nominal 2005 9,277 8,819 458 consumer spending and nominal individual income 2006 9,916 9,323 593 from 2002–2007 is nearly $3.4 trillion – that is money 2007 10,403 9,826 577 NOT spent! Total 54,873 51,496 3,377
Consumer spending generally leads job trends and not the other way around.

Source: Haver Analytics, Citi Economics & Market Analysis, and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 44 Consumer Wealth Household Deposits Income Growth by Quintile

Households: Assets: Total Deposits (Bil.$) Income Before Taxes: Percentage Change (2001-2009) 9,000 40%

8,000

7,000 35%

6,000 30% 5,000

Billion $ Billion 4,000 25% 3,000

2,000 20% 1,000

0 15% Q1-70 Q1-72 Q1-74 Q1-76 Q1-78 Q1-80 Q1-82 Q1-84 Q1-86 Q1-88 Q1-90 Q1-92 Q1-94 Q1-96 Q1-98 Q1-00 Q1-02 Q1-04 Q1-06 Q1-08 Q1-10 HHs & Nonprofit Org; Curr & Deps inc Money Market Fund Shares; Asset(NSA, Bil.$) 10%

Household Wealth With & Without Real Estate 1st Quintile 5th Quintile 5th Quintile 4th Quintile 3rd 2nd Quintile 2nd

Household Net Worth 70,000
60,000 Consumers have squirreled away loads of cash since 2006. 50,000
40,000 Roughly 49% of the securities holdings’ wealth

billion $ billion deterioration since 2007 has been recouped with 30,000 the recent equity and credit market rebound. 20,000
10,000 Income growth has occurred across quintiles.

0 1Q70 1Q73 1Q76 1Q79 1Q82 1Q85 1Q88 1Q91 1Q94 1Q97 1Q00 1Q03 1Q06 1Q09 Net Worth Ex-Real Estate Real Estate Net of Mortgages

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 45 Housing Valuation Price of Home vs. Income Price of Home vs. Cost to Rent

Median Existing 1-Family Home Sales Price: Existing/Median Family Income Median Single-Family Home Sales Price to Median Asking Rent Price (Annualized) 5.00 32 31 30 4.50 29 28 4.00 27 26 25 3.50 24 23 22

3.00 21 Rent to Sales 20 19 2.50 18

2.00 Jan-81 Jan-84 Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Q1-88 Q2-89 Q3-90 Q4-91 Q1-93 Q2-94 Q3-95 Q4-96 Q1-98 Q2-99 Q3-00 Q4-01 Q1-03 Q2-04 Q3-05 Q4-06 Q1-08 Q2-09 Q3-10 Q4-11 Median Single-Family Home Sales Price to Median Asking Rent Price (Annualized) NAR Median Sales Price: Existing 1-Family Homes, United States ($) Average (1981-2000)

From a valuation perspective, home prices seem to be more in line with historical rent and income ratios.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Market Overview 46 Consumer Fears

Debt Service Payments PCE: Ex-Medical, Gov’t & Consumer Medical Costs as a % of GDP

Household Debt Service Burden as a % of Disposable Income 14.0 PCE: Ex-Medical Costs, Government and Consumer Medical Costs as a % of GDP 75%

13.5 1969 2009 Change Government 70% Medical 13.0 2.2% 7.3% 3.4X Costs as % 12.5 of GDP 65% Medical 12.0 Costs Ex- 3.3% 7.8% 2.4X 60% Gov't 11.5 Spending as % of GDP 11.0 PCE Ex- 55% Medical 56.0% 55.7% N.C. Costs as % 10.5 of GDP 50% 1Q80 1Q82 1Q84 1Q86 1Q88 1Q90 1Q92 1Q94 1Q96 1Q98 1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 PCE Ex-Medical Costs as a % of GDP Medical Costs Ex Government Spending as a % of GDP Government Medical Costs as a % of GDP

Gov’t Spending on Health Care

Home ownership increase led to a shift from rental Government HC Expenditures as a % of PCE: HC Goods & Services 50% expense to interest-bearing mortgage expense, even if “shelter” cost remained constant. 45%
Consumer spending as a percent of GDP has been 40%

primarily associated with increases in the share of 35% medical costs. 30%
Government spending reported as consumer spending. 25%
GDP could slow if government cuts healthcare 20% 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 spending. Government HC Expenditures as a % of PCE: HC Goods & Services

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven 47

Large-Cap Sector & Industry Group Positioning Equity Strategy: Disciplined, Detailed, Data-Driven 48 Large-Cap Industry Group Recommendations Industry Group Recommendations Recent Changes

Overweight Market Weight Underweight ■ On June 10th, we raised Semis & Semi Equipment to Overweight from Market Energy Food & Staples Retailing Retailing Weight, lifted Food, Beverage & Tobacco to Overweight from Market Weight, lowered Tech Hardware & Equipment Commercial Services & Supplies Real Estate Consumer Services to Market Weight from Insurance Banks Consumer Durables & Apparel Overweight, and reduced Capital Goods to Underweight from Market Weight. Diversified Financials Software & Services Autos & Components ■ On April 8th, we lifted Food, Beverage & Semis & Semi Equipment Telecom Services Materials Tobacco to Market Weight from Underweight, lowered Capital Goods to Market Weight from Food, Beverage & Tobacco Utilities Household & Personal Products Overweight, and reduced Media to Consumer Services Transportation Underweight from Market Weight. th Pharma & Biotechnology ■ On February 4 , we raised Tech Hardware & Equipment to Overweight from Health Care Equip & Services Underweight and lowered both Pharma & Media Biotech and Health Care Equipment & Services to Underweight from Market Weight. Capital Goods ■ On December 3, 2010 we raised Media to Market Weight from Underweight, lifted Semis & Semi Equipment to Market Weight from Underweight, lowered Banks to Market Sector Recommendations (Based on Industry Group Recommendations) Weight from Overweight, reduced Pharma & Biotech to Market Weight from Overweight, and downgraded Retailing to Underweight Overweight Market Weight Underweight from Market Weight. Energy Utilities Consumer Discretionary ■ On September 24, 2010 we lifted Diversified Financials to Overweight from Financials Telecom Services Health Care Market Weight, raised Retailing to Market Information Technology Industrials Weight from Underweight, lowered Consumer Durables & Apparel to Underweight from Consumer Staples Materials Market Weight, and reduced Tech Hardware & Equipment to Underweight from Market Weight.

Source: CIRA US Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 49 Citi Recommended List

YTD Through August 2, 2011 2010 2009 2008 2007 2006 2005 2004 Recent Changes: S&P 500 Performance -0.29% 12.78% 23.45% -38.49% 3.53% 13.62% 3.00% 8.99% *TOL was removed before the open on 7/21/2011, see call note for details S&P 500 Total Return 0.80% 15.06% 26.46% -37.00% 5.49% 15.79% 4.90% 10.88% *NWSa was removed and AES, ADM, TXN were added the close on 6/10/2011, see call note for details Rec List changes are announced via a call note posted on GEO, SB Linx and other internal research systems; we do not maintain an Recommended List Index Equal Weighted Performance -3.98% 14.82% 42.57% -35.93% 8.59% 14.99% 14.01% 24.14% email list announcing changes; FA's with questions, please contact MSSB Equity Sales at 914-225-7000. Recommended List Index Equal Weighted Total Return -3.20% 17.00% 45.55% -34.53% 10.13% 16.50% 15.29% 25.92% Recommended List Portfolio Beta 1.21 Statistical Overview Analyst Ratings, Targets & Estimates Attributes Perf. Mkt 2011 Fiscal Date Price Price Since Cap Perf. Year PriceEPS Estimates P/E 5-Year Div. Added Added 08/02/11 Added (mil) YTD End Rating Target Next Cur. Next Cur. Beta Yield Drivers, Fundamentals & Valuation CONSUMER DISCRETIONARY Starwood Hotels & Resorts (HOT) 7/27/2010 $48.38 $49.86 3.06 % $9,746 -17.97% Dec 1M $70.00 $2.19 $1.72 22.7 28.9 1.89 0.6% Leverage to cyclical recovery in hotel demand, global growth opportunities Macys Inc (M) 9/24/2010 $22.75 $27.63 21.45 % $11,748 9.21% Jan 1H $45.00 $3.32 $2.76 8.3 10.0 1.95 1.4% Attractive valuation, topline growth and margin improvement potential Newell Rubbermaid Inc (NWL) 11/20/2009 $14.45 $14.25 -1.38 % $4,150 -21.62% Dec 1M $20.00 $1.76 $1.60 8.1 8.9 1.34 2.2% Attractive FCF yield, aggressive cost cutting will help offset tough environment CONSUMER STAPLES Reynolds American Inc (RAI) 4/8/2011 $35.71 $34.70 -2.83 % $20,226 6.38% Dec 1M $43.00 $2.85 $2.63 12.2 13.2 0.51 6.1% Unique int'l exposure, improving cigarette mkt share trends Archer-Daniels-Midland Company (ADM) 6/10/2011 $29.54 $28.60 -3.18 % $18,247 -4.92% Jun 1H $40.00 $3.10 $2.97 9.2 9.6 0.84 2.2% Attractively valued, share repurchase a positive development CVS Caremark Corp (CVS) 1/11/2008 $36.77 $36.35 -1.14 % $49,218 4.54% Dec 1M $46.00 $3.26 $2.82 11.2 12.9 0.59 1.4% Poised to benefit from both industry and company-specific opportunities. ENERGY Apache Corp (APA) 12/21/2009 $101.79 $120.02 17.91 % $46,013 0.66% Dec 1M $150.00 $12.10 $11.70 9.9 10.3 1.26 0.5% Growth opportunities, strong balance sheet Marathon Oil Corp (MRO) 10/13/2009 $33.10 $29.12 -12.02 % $20,733 29.54% Dec 1M $38.00 $3.56 $4.65 8.2 6.3 1.31 2.1% Value play, stepping up drilling program FINANCIALS Goldman Sachs Group, Inc. (GS) 4/13/2009 $124.33 $131.23 5.55 % $67,966 -21.96% Dec 1H $180.00 $16.90 $10.70 7.8 12.3 1.62 1.1% Attractively priced, well positioned, relatively clean balance sheet CME Group Inc (CME) 7/27/2010 $283.86 $280.24 -1.28 % $18,738 -12.90% Dec 1M $350.00 $19.70 $17.36 14.2 16.1 0.98 2.0% Improving volumes in interest rate futures, potential in-roads into OTC mkts American Express Co. (AXP) 9/24/2010 $43.13 $48.52 12.50 % $58,321 13.05% Dec 1M $60.00 $4.20 $3.90 11.6 12.5 1.64 1.5% High ROE, should begin to return capital to shareholdes via buybacks MetLife (MET) 1/4/2006 $50.83 $39.60 -22.09 % $41,821 -10.89% Dec 1M $55.00 $5.90 $5.20 6.7 7.6 2.06 1.9% Strong business fundamentals and ROE HEALTH CARE Warner Chilcott Plc (WCRX) 1/13/2011 $23.93 $19.85 -17.05 % $5,038 -12.01% Dec 1H $29.00 $4.14 $3.85 4.8 5.2 0.86 0.0% Underappreciated new product cycle, trades at trough multiple to its peers Covidien Ltd (COV) 10/17/2008 $45.76 $48.98 7.04 % $24,147 7.27% Sept 1M $64.00 $4.26 $3.92 11.5 12.5 0.86 1.6% Favorable business mix, higher EPS outlook INDUSTRIALS Illinois Tool Works Inc. (ITW) 9/24/2010 $47.08 $48.34 2.68 % $24,172 -9.48% Dec 1M $61.00 $4.45 $3.80 10.9 12.7 1.05 2.8% High quality earnings, solid balance sheet CSX Corp. (CSX) 1/13/2011 $23.09 $23.47 1.65 % $25,706 8.98% Dec 1M $28.00 $2.10 $1.74 11.2 13.5 1.24 2.0% Likely to exceed operating ratio internal targets, upside potential to EPS estimates INFORMATION TECHNOLOGY EMC Corp. (EMC) 2/4/2011 $25.69 $25.08 -2.37 % $51,789 9.52% Dec 1M $32.00 $1.79 $1.53 14.0 16.4 0.97 0.0% Solid execution and growth in operating margins despite difficult cost environment Texas Instruments Inc (TXN) 6/10/2011 $32.15 $29.10 -9.49 % $33,620 -10.46% Dec 1M $39.00 $2.42 $2.29 12.0 12.7 0.88 1.8% Likely continuation of share gain, better-than-expected mgmt of expenses Amphenol Corp. (APH) 2/4/2011 $57.52 $46.51 -19.14 % $8,186 -11.88% Dec 1M $63.00 $3.43 $3.09 13.6 15.0 1.21 0.1% Strong end-market growth, org & inorg expansion, product mix improvement UTILITIES The AES Corp. (AES) 6/10/2011 $12.31 $11.73 -4.71 % $9,204 -3.69% Dec 1H $16.00 $1.24 $1.14 9.5 10.3 1.30 0.0% More focused direction from mgmt and attractive valuation

Note: Portfolio performance based on daily index level as calculated by S&P/Citigroup Global indices; index performance incorporates historical constituent changes and is measured using daily close prices. Price added is prior day's close when stock is added b/f market open. Price added is same day close when stock is added after market open. Methodology generally mirrors that used to calculate the S&P equal weighted index. No transaction costs are assumed. Past performance not indicative of future performance. Source: Citigroup Investment Research, S&P Global Indices, and FactSet

Source: FactSet and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 50 Style Investing

Russell 1000 Growth/Value PE Russell 1000 Growth/Value Price to Sales

Relative P/E of Russell 1000 Growth vs. Value Relative Price/Sales of Russell 1000 Growth vs. Value 3.50 4.00

3.00 3.50

2.50 3.00

2.00 2.50

1.50 2.00

1.00 1.50

0.50 1.00 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-86 Dec-88 Dec-90 Dec-92 Dec-94 Dec-96 Dec-98 Dec-00 Dec-02 Dec-04 Dec-06 Dec-08

Trailing PE Forward PE Trailing PE Average Price to Sales Average

NASDAQ Short Interest Ratio

Nasdaq Short Interest Ratio 5.50 5.00
P/E – Now slightly biased towards growth.

4.50

4.00
Price to Sales – Favors growth stocks.

3.50
3.00 Valuation is a necessary, but insufficient 2.50 condition for performance. 2.00

1.50

1.00 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

Short Interest Ratio +1 SD -1 SD +2 SD -2 SD Avg

Source: Bloomberg, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 51 Going for Growth Margins Sector Weightings

Corporate Profits as % of GDP vs. S&P 500/Citigroup Grow th Relative to Value Russell 1000 Sector Weightings 13.0% 1.80 35%

12.0% 1.60 30%

11.0% 25% Growth RelativeGrowth to Value 1.40

P 20% 10.0% 1.20 15% 9.0%

Profitsas % GD 10% 1.00 8.0% 5%

0.80 7.0% 0%

6.0% 0.60 Energy Utilities Services Staples Producer Durables Financial Consumer Technology 1Q75 1Q78 1Q81 1Q84 1Q87 1Q90 1Q93 1Q96 1Q99 1Q02 1Q05 1Q08 1Q11 Health Care and Srvs Processing Materials and Materials

Profit % of GDP Grow th Relative to Value Disc Consumer Russell 1000 Value Index Russell 1000 Growth Index

A compression in margins should support growth
Our sector preferences benefit growth stocks. stocks.

Source: Bloomberg, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 52 Going for Growth Industrial Production vs. Growth/Value NFIB vs. Growth/Value

S&P 500/Citigroup Grow th Relative to Value vs. Industrial Production Y/Y % Change NFIB Survey: Firms Planning To Raise Prices Less Firms Planning to Raise Worker 1.8 15.0% Compensation Vs. Grow th relative to Value - 2 Year Lag 25 1.75 1.65 1.6 10.0% e 20

1.55 Value to relative Growth 15 1.45 1.4 5.0% Industrial Production Industrial 10 1.35 1.25 1.2 0.0% 5 1.15

0 1.05 1 -5.0% Growth relative toValue

Prices Less Worker Comp 0.95

NFIB - Firms Planning to Rais to -NFIB Firms Planning -5 0.85 0.8 -10.0% -10 0.75

0.6 -15.0% Q1-90 Q2-91 Q3-92 Q4-93 Q1-95 Q2-96 Q3-97 Q4-98 Q1-00 Q2-01 Q3-02 Q4-03 Q1-05 Q2-06 Q3-07 Q4-08 Q1-10 Q2-11 NFIB Dif f erenc e S&P 500/Citigroup: Grow th relative to Value 1Q75 1Q78 1Q81 1Q84 1Q87 1Q90 1Q93 1Q96 1Q99 1Q02 1Q05 1Q08 1Q11

Grow th relative to Value Y/Y % Change Industrial Production

NFIB survey data suggests growth stocks should outperform.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 53 Style Investing

Value vs. Growth Small Cap vs. Large Cap Performance

Russell 2000 Relative to S&P 100 Russell 1000 Value Relative to Russell 1000 Grow th 1.50 1.50

1.40 1.40

1.30 1.30 1.20 1.20 1.10 1.10 1.00 1.00 0.90 0.90 0.80 0.80 0.70 0.70 0.60

0.50 0.60

0.50 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 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

S&P 600 vs ECRI Weekly Leading Index

Total Return S&P 600 (6-mth chg) vs. ECRI Weekly Leading Index (6-mth change) 40.00% 20.00% Correlation = 0.77 30.00% 15.00% ECRI Weekly Leading Index 6-month chang 6-month Index Leading Weekly ECRI
Weaker dollar supports larger caps as well.

) 20.00% 10.00%
10.00% 5.00% Large caps tend to perform better during periods

0.00% 0.00% of higher volatility. -10.00% -5.00%
We have a positive view on growth, relative to -20.00% -10.00% value stocks. Total Return 600Total (6-mth S&P chg -30.00% -15.00% e -40.00% -20.00%

-50.00% -25.00% Jul-1994 Jul-1996 Jul-1998 Jul-2000 Jul-2002 Jul-2004 Jul-2006 Jul-2008 Jul-2010

S&P 600 Composite: Total Return Index 6-month change ECRI Weekly Leading Index 6-month change

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 54 Potential for Cap-Size Relative Performance Pretax Corporate Profits Trends vs. Small/Large Cap Small vs Large Lead Indicator Model Relative Performance

Small vs Large Model Lead Indicator Model 40% 175 3.0 0.65 Correlation = 0.82 R2 = 0.67 35% 165 2.5 30% 0.60 155 2.0 25% 20% 145

0.55 50 S&Pto Relative 2000 Russell 1.5 15% 135 1.0 0.50 10% 125 profits

0.5 5% 115 index rel 0% 0.45 105 0.0 -5% 95 Small/Large Model (12-month lead) -0.5 0 0.40 -10% -15% 85 -1.0 0.35 -20% 75 -1.5

-2.0 0.30 Q4-78 Q3-81 Q2-84 Q1-87 Q4-89 Q3-92 Q2-95 Q1-98 Q4-00 Q3-03 Q2-06 Q1-09 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

Model Russell 2000 Relative to S&P 500 Corporate Profits (Yr/yr % change, trailing 4 quarter average) Russell 2000 Small Cap Relative to S&P 500 Large Cap Volatility vs. Relative Performance

VIX vs. S&P 500 Relative to Russell 2000 60 220 2 R =0.13 204 50
189 Highly correlated lead indicator model suggests 40 173 large-cap relative outperformance. 158 30 VIX 142
A recovery in corporate profits also suggests Rel Perf Rel 20 127 large-cap relative outperformance. 111 10 96 0 80 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

CBOE Market Volatility Index (EOP) S&P 500 (Large Cap) Relative to Russell 2000 (Small Cap) - Relative Index

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 55 Style Investing

Market Weighted Relative to Equal Weighted Relative P/E of Top 25 Companies in S&P 500

S&P 500 Mkt Cap Weighted Performance Relative to S&P 500 Equal Weighted Relative P/E of the Largest 25 S&P 500 Companies 1.35 1.25

1.25 Ripof f 1.20

1.15 Expensive 1.15

1.05 Average Average = 1.06 1.10 0.95 1.05 0.85 1.00 0.75 Bargain 0.95 0.65

0.90 0.55 Dirt Cheap

0.85 12/89 12/90 12/91 12/92 12/93 12/94 12/95 12/96 12/97 12/98 12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10

Mkt Weighted Rel. to Equal Weighted Avg +1 Std Dev -1 Std Dev +2 Std Dev -2 Std Dev 1/31/85 1/31/86 1/30/87 1/29/88 1/31/89 1/31/90 1/31/91 1/31/92 1/29/93 1/31/94 1/31/95 1/31/96 1/31/97 1/30/98 1/29/99 1/31/00 1/31/01 1/31/02 1/31/03 1/30/04 1/31/05 1/31/06 1/31/07 1/31/08 1/30/09 1/29/10 1/31/11 Relative to the S&P 500, P/E calculated based on FY1 EPS and based on current S&P 500 constituents Corporate Margins vs Large Relative to Small Cap

Corporate Profits as % of GDP vs. S&P 500 relative to Russell 2000 13.0% 3.4

3.2 12.0%
P/E valuations are adjusting back to more 3.0 S&P 500relative to Russell 2000 neutral levels, but mega-caps still look the most 11.0% 2.8 2.6 attractive. 10.0% 2.4

9.0% 2.2

2.0 Corporate Profits as % GDP % as Profits Corporate 8.0%

1.8 7.0% 1.6

6.0% 1.4 1Q84 1Q85 1Q86 1Q87 1Q88 1Q89 1Q90 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 Profit % of GDP S&P 500 relative to Russell 2000

Source: FactSet, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 56 Underweight Retailing Retailing Revisions Industry Group Investor Sentiment

Re tai ling vs 20 0-D ay Mo vin g Avg S&P 500 Retailing: Upw ard Revisions as a % of Total vs. Performance 600.0 100% 1750 90% 1650 500.0 80% 1550 1450 70% 1350 Performance 60% 400.0 1250 50% 1150 40% 300.0

Revisions 1050 30% 950 20% 850 200.0 10% 750

0% 650 100.0

1/31/00 7/31/00 1/31/01 7/31/01 1/31/02 7/31/02 1/31/03 7/31/03 1/30/04 7/30/04 1/31/05 7/29/05 1/31/06 7/31/06 1/31/07 7/31/07 1/31/08 7/31/08 1/30/09 7/31/09 1/29/10 7/30/10 1/31/11 7/29/11 0.0

Upw ard Revisions Perf ormance 25-Jul-2001 20-Jul-2005 10-Jul-2009 10-Apr-1991 21-Oct-1996 06-Oct-2000 04-Oct-2004 27-Apr-2010 25-Jun-1990 23-Jan-1992 08-Jun-1994 23-Mar-1995 08-Jan-1996 10-Mar-1999 04-Mar-2003 05-Nov-1992 23-Aug-1993 06-Aug-1997 22-May-1998 16-May-2002 09-Feb-2011 05-May-2006 22-Feb-2007 22-Dec-1999 16-Dec-2003 06-Dec-2007 23-Sep-2008

S&P 500: Retailing (Dec-30-94=100) 200 day moving avg Retailing 12-month Lead Indicator Retailing Fundamentals

Retailing Model vs. Retailing Relative to S&P 500 Retailing Economic Model vs 12-month forw ard return 2.0 50.0% 2.0 0.45 Correlation = 0.89 Retailing 12-month forward return Relative to S&P500 to Relative return forward 12-month Retailing R2 = 0.80 40.0% 1.5 1.5 0.40 30.0%

d 1.0 Retailing Relative to S&P 50 1.0 20.0% 0.35 l 0.5 10.0% 0.5

0.30 - 0.0% 0.0 -10.0% Economic Mode (0.5) 0.25 Retailing Model 12-month Model lea Retailing -0.5 0 -20.0% (1.0) -30.0% 0.20 -1.0 (1.5) -40.0%

-1.5 0.15 (2.0) -50.0% 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 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

Mod el Retailing Relative to S&P 500 Retailing 12-month forw ard relative performance Economic Model

Source: FactSet, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 57 Underweight Media Media Revisions Media Seasonality

S&P 500 Media: Upw ard Revisions as a % of Total vs. Performance S&P 500 Media: Average Relative Performance & Frequency of Relative Gains, By Month, Since 1989 90% 1050 2.0% 65% 80% 950 1.5% 60% 70% 850

60% Performance 0.84% 55% 1.0% 750 0.77% 50% 50% 650 0.36% 0.31% 0.5% 0.27%

40% Frequency -0.81% 45% Revisions 550 30% 0.0% 1.00% 0.18% 40% 20% 450 -0.5% Avg Monthly Rel Gain Rel Monthly Avg 350 -0.58% 35% 10% -0.66% -1.0% 0% 250 30% -1.5% -1.43% 25% -1.60% 1/31/97 1/30/98 1/29/99 1/31/00 1/31/01 1/31/02 1/31/03 1/30/04 1/31/05 1/31/06 1/31/07 1/31/08 1/30/09 1/29/10 1/31/11 -2.0% 20%

Upw ar d Rev is ions Performance Jul Jan Feb Apr Jun Oct Sep Nov Dec Aug Mar May

1 Month Average % of "Up" Months

Media 12-month Lead Indicator Media Valuation

Media Indicator vs Media Relative to S&P 500 Media Valuation Model 2.0 0.26 1.50 60.00 Correlation 0.90 R2 = 0.81 1.5 0.24 1.00 40.00 12-month forward relative performance relative forward 12-month

1.0 0.22 Media Relative to S&P500 Relative Media 0.50 20.00

0.5 0.20 0.00 0.00 0.0 Valuation Model Valuation 0.18 -0.50 -20.00 -0.5

Media Model (12-month lead) lead) (12-month Model Media 0.16 -1.0 -1.00 -40.00

0.14 -1.5 -1.50 -60.00

-2.0 0.12 1/31/1994 1/31/1995 1/31/1996 1/31/1997 1/31/1998 1/31/1999 1/31/2000 1/31/2001 1/31/2002 1/31/2003 1/31/2004 1/31/2005 1/31/2006 1/31/2007 1/31/2008 1/31/2009 1/31/2010 1/31/2011

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 Media Relative 12-month forw ard return Media Valuation Model Model Media Relative to S&P 500

Source: FactSet, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 58 Overweight Food, Beverage & Tobacco Food, Beverage & Tobacco Revisions Food, Beverage & Tobacco 12-mth Lead Indicator

S&P 500 Food, Bev. & Tobacco: Upw ard Revisions as a % of Total Performance Food Beverage & Tobacco Indicator vs Food Beverage & Tobacco Relative to S&P 500 90% 850 2.0 0.35 Correlation = 0.81 80% 800 R2 = 0.66 1.5 Food Beverage & Tobacco Relative to S&P 500 750 70% 0.30 1.0 700 Performance 60%

650 0.5 50% 0.25 600

Revisions 40% 0.0 550 30% 0.20 500 -0.5 20% 450 -1.0 10% 400 0.15

Food Beverage & Tobacco Model (12-month lead) lead) (12-month Model Tobacco & Beverage Food -1.5 1/31/97 1/30/98 1/29/99 1/31/00 1/31/01 1/31/02 1/31/03 1/30/04 1/31/05 1/31/06 1/31/07 1/31/08 1/30/09 1/29/10 1/31/11 -2.0 0.10 Upw ard Rev is ions Performance 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

Model Food Beverage & Tobacco Relative to S&P 500

Food, Beverage & Tobacco Economic Model

Food Beverage & Tobacco Economic Model vs 12-month forw ard performance 1.5 50.0%

40.0% return forward 12-month & Beverage Tobacco Food 1.0 30.0%
Rising revisions and lead indicators support

20.0% 0.5 outperformance potential. l 10.0%
Pricing power appears to be returning to the - 0.0%

-10.0% industry. Economic Mode (0.5) -20.0%

-30.0% (1.0) -40.0%

(1.5) -50.0% 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 Food Beverage & Tobacco 12-month forw ard performance Relative to S&P 500 Economic Model Source: FactSet, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 59 Underweight Household & Personal Products Personal Products Valuation Household Products Valuation

Personal Products Valuation Model Household Products Valuation Model 2.00 60.00 2.00 60.00

1.50 1.50 40.00 40.00 12-month relative forward performance 12-month forward relative performance relative forward 12-month 1.00 1.00

20.00 20.00 0.50 0.50

0.00 0.00 0.00 0.00 Valuation Model Valuation Model Valuation -0.50 -0.50 -20.00 -20.00

-1.00 -1.00

-40.00 -40.00 -1.50 -1.50

-2.00 -60.00 -2.00 -60.00 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-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

Household Products Relative 12-month forw ard return Household Products Valuation Model Personal Products Relative 12-month forw ard return Personal Products Valuation Model

Based on Price/EBITDA, Price/Cash Flow, PE, Price/Book, Enterprise Value, Based on Price/Cash Flow, Trailing Weighted EPS, Price/Sales, Price/Book, Enterprise estimated Price/Sales, Dividend Yield Value, Debt/EBITDA Personal Products Revisions Household & Personal Products Fundamentals

Household & Personal Products Economic Model vs. 12-month forw ard performance Personal Products EPS Estimate Revisions Trends 100% 1400 1.5 50.0%

90% 1300 40.0% forward 12-month Products Personal & Household 80% 1200 1.0 30.0% 70% 1100 Performance 20.0% 60% 1000 0.5 l 10.0% 50% 900 return - 0.0% Revisions 40% 800

30% 700 -10.0% Economic Mode 20% 600 (0.5) -20.0% 10% 500 -30.0% 0% 400 (1.0) -40.0%

(1.5) -50.0% 1/31/97 1/30/98 1/29/99 1/31/00 1/31/01 1/31/02 1/31/03 1/30/04 1/31/05 1/31/06 1/31/07 1/31/08 1/30/09 1/29/10 1/31/11

Upward Revisions 3-month avg Personal Products Industry Performance 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

S&P 500: Household & Personal Products 12-month forw ard performance Relative to S&P 500 Economic Model

Source: Bloomberg, FactSet, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 60

Underweight Pharma & Biotech as well as Health Care Equipment & Services Pharma Valuation HC Equipment & Services Revisions

Pharma Valuation Model S&P 500 HC Equipment & Services: Upw ard Revisions as a % of Total vs. Perf. 1.50 40.00 100% 1800

30.00 90% 1.00 1600

12-month relative forward performance 80% 20.00 70% 1400 0.50 10.00 60% Revisions 1200

0.00 0.00 50% 1000 40% Valuation Model Valuation

-10.00 Performance -0.50 30% 800 -20.00 20% 600 -1.00 10% -30.00 0% 400 -1.50 -40.00 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 1/31/97 1/30/98 1/29/99 1/31/00 1/31/01 1/31/02 1/31/03 1/30/04 1/31/05 1/31/06 1/31/07 1/31/08 1/30/09 1/29/10 1/31/11 Pharma Relative 12-month forw ard return Pharma Valuation Model Upw ar d Revis ions Per f or manc e Based on Trailing 12-mth EPS aggregate, Index weighted Book Value, PE, Price/Sales, Enterprise Value, Gross dividends/share aggregate 12 month, Est. Price/Book, Est. Price/EBITDA Pharma & Biotech Fundamentals HC Equipment & Services Lead Indicator

Pharma & Biotech Economic Model vs. 12-month forward relative performance Health Care Equipment & Services vs Health Care Equipm ent & Services Relative to S&P 500 2.0 40.0% 2.0 0.35 Correlation = 0.87 2 R = 0.76 & Equipment Services to Care S&P Relative Health 500 1.5 30.0% Pharma& Biotech 12-month forward return 1.5

0.30 1.0 20.0% 1.0

0.5 10.0% 0.5 0.25

- 0.0% 0.0

0.20 (0.5) -10.0% -0.5 Economic Model Economic

(1.0) -20.0% -1.0 0.15

(1.5) -30.0% -1.5 Health Model lead) Care Services Equipment (12-month &

(2.0) -40.0% -2.0 0.10 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 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 Mod el Health Care Equipment & Services Relative to S&P 500 S&P 500: Pharma & Biotech 12-month forward performance Relative to S&P 500 Economic Model

Source: Bloomberg, FactSet, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 61 Positive on Tech Hardware & Equipment

Credit Conditions vs Tech Capex Tech Hardware & Equipment 12-month Lead Indicator

Banks Tightening C&I Loans to Large Firms (%) vs. Private Nonresidential Fixed Tech Hardw are & Equipment vs Tech Hardw are & Equipment Relative to S&P 500 1.50 0.40 Investment: Information Processing Equip/Software (Y/Y) - Lagged Three Quarters Correlation = 0.74 -40 20% R2 = 0.54

15% ) 1.00 -20 0.35 S&P 50 to Relative & Equipment Hardware Tech 10% 0 0.50

5% Capex (Y/Y) 20 0.30

0% 0.00 40 -5% 0.25

Tightening - Inverted - Tightening 60 -10% -0.50 80 0 -15% (12-monthlead Model Tech Equipment Hardware& 0.20 -1.00 100 -20%

-1.50 0.15 Q2-90 Q2-91 Q2-92 Q2-93 Q2-94 Q2-95 Q2-96 Q2-97 Q2-98 Q2-99 Q2-00 Q2-01 Q2-02 Q2-03 Q2-04 Q2-05 Q2-06 Q2-07 Q2-08 Q2-09 Q2-10 Q2-11 Recession Banks Tightening C&I Loans to Large Firms (%) (Left) 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 Private Investment: Information Processing Equipment/Software (SAAR,Bil.$) Model Tech Hardw are & Equipment Relative to S&P 500

Lead indicators, credit conditions and margin trends’ impact on growth stocks support Tech strength.

Source: FactSet, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 62 Overweight Semis & Semi Equipment

Semis & Semi Equipment Valuation Semis & Semi Equipment Seasonality

Semis & Semi Equipment Industry Group Valuation Model S&P 500 Semis & Semi Equipment Avg Relative Performance & Frequency of Relative Gains, By 3.0 150% Month, Since 1989 2.5 12-month Fwd Performance 2.0 100% 6.0% 75% 5.39% 1.5 5.0% 70% 1.0 50% 4.0% 65% 0.5 0.0 0% 3.0% 60% Composite -0.5 1.89% 2.04% 2.0% 55% Frequency -1.0 -50% 1.27% 1.08% 1.0% 50% -1.5 -3.42% -1.00% -1.55% -2.0 -100% 0.0% 45% 0.75% 2.73% 1.43% Avg monthly rel gain -1.0% -0.81% 40%

1/30/87 1/29/88 1/31/89 1/31/90 1/31/91 1/31/92 1/29/93 1/31/94 1/31/95 1/31/96 1/31/97 1/30/98 1/29/99 1/31/00 1/31/01 1/31/02 1/31/03 1/30/04 1/31/05 1/31/06 1/31/07 1/31/08 1/30/09 1/29/10 1/31/11 -2.0% 35% 12 Mo Fwd Relative Performance Valuation Composite

Based on the four relative valuation metrics (EV to EBITDA, Price to Gross CF, Price to Book, -3.0% 30% Price to Sales ) that have the best correlation w ith 12-month forw ard relative performance -4.0% 25% Jul

Based on Price/EBITDA, Price/Cash Flow, PE, Price/Book, Enterprise Value, Jan Apr Jun Oct Nov Feb Mar Aug Sep Dec estimated Price/Sales, Dividend Yield May Semi Indicator 1 Month Average % of "Up" Months

Relative Price of S&P Semiconductor Index & Y/Y Semi Equipment Bookings 1000 600% Bubble & Burst 500%
Semi Indicator turned positive. 400%

300% Y/Y Bookings
Valuation is already attractive.

200% Relative Price 100%

0%

-100%

100 -200% 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 Relative Price Y/Y Bookings

Note: Shaded areas reflect capacity grow th slow ing (ex bubble period) When bookings go negative, relative performance increases and w hen bookings climb, performance suffers Source: FactSet, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 63 Overweight Energy Energy Fundamentals Energy Fundamentals

Energy Model vs Energy Relative to S&P 500 S&P 500 Energy vs West Texas Intermediate 2.5 0.55 Correlation = 0.92 700.0 140.0 R2 = 0.85 R2 = 0.90 2.0 0.50 600.0 120.0

0.45 Intermediat Texas West 1.5

Energy Relative to S&P 500 S&P to Relative Energy 500.0 100.0 0.40 1.0 400.0 80.0 0.35 0.5

Energy 300.0 60.0 0.30

0.0 0.25 200.0 40.0 e Energy Model (12-month lead) -0.5 0.20 100.0 20.0

-1.0 0.15 0.0 0.0

-1.5 0.10 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

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 S&P 500: Energy (EOP Dec-30-94=100) Mo de l Energy Relative to S&P 500 Spot Oil Price: West Texas Intermediate [Prior'82=Posted Price] ($/Barrel)

Energy Valuation Noncomm Long Less Short Positions Light Sw eet Crude Oil: Reportable Noncomm Long Positions Less Short Positions (Contracts) Energy Valuation Model vs. WTI Crude Oil 2.50 40.00 220,000 150.0

2.00 30.00

1.50 130.0

12-month forward relative performance 12-month forward 170,000 20.00 1.00 110.0 10.00 120,000 0.50

90.0 Price Oil 0.00 0.00 70,000

Valuation Model Valuation -0.50 -10.00 70.0

-1.00 Contracts Futures 20,000 -20.00 50.0 -1.50

-30.00 -2.00 -30,000 30.0

-2.50 -40.00 -80,000 10.0 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

Energy Relative 12-month forw ard return Energy Valuation Model 1/3/1995 1/3/1996 1/3/1997 1/3/1998 1/3/1999 1/3/2000 1/3/2001 1/3/2002 1/3/2003 1/3/2004 1/3/2005 1/3/2006 1/3/2007 1/3/2008 1/3/2009 1/3/2010 1/3/2011 1/3/2012 Based on Price/EBITDA, Price/Cash Flow, P/E, Price/Sales, Estimated FY1 Future Contracts Domestic Spot Market Price: Light Sw eet Crude Oil, WTI, Cushing (EOP, $/Barrel) earnings, Estimated Book Value, Estimated Dividend Yield Source: Bloomberg, FactSet, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 64 Underweight Cap Goods Cap Goods Valuation Cap Goods Lead Indicator

Capital Goods Valuation Model Capital Goods vs Capital Goods Relative to S&P 500 2.00 30.00 1.5 0.30 Correlation = 0.83 2 1.50 R = 0.69 20.00 1.0 0.28 12-month forward relative performance relative forward 12-month 1.00 Capital Goods Relative to S&P500 Relative Goods Capital 10.00 0.5 0.50 0.26

0.00 0.00 0.0 0.24 Valuation Model -0.50 -0.5 -10.00

-1.00 0.22 -1.0 -20.00 Capital Goods Model (12-month lead) lead) (12-month Model Goods Capital -1.50 0.20 -1.5 -2.00 -30.00

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 -2.0 0.18

Capital Goods Relative 12-month forw ard return Capital Goods Valuation Model 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 Based on Price/EBITDA, Price/Book, Price/Sales, Enterprise Value, FY1 estimated Model Capital Goods Relative to S&P 500 earnings, estimated Cash Flow/Share Cap Goods Revisions Cap Goods Rel Metals & Mining Lead Indicator

S&P 500 Capital Goods: Upw ard Revisions as a % of Total vs. Performance Model vs Capital Goods relative to Metals & Mining 100% 900 1.5 3.50 Correlation = 0.87 R2 = 0.75 90% 3.20 800 80% 1.0 2.90 Capital Goods relative to Metals & Minin to Metals relative Capital Goods 70%

700Performance 60% 0.5 2.60

50% 600 2.30 0.0 Revisions 40% 2.00 500 30% -0.5 1.70 20% 400 g 10% 1.40 -1.0

0% 300 Capital Goods relative to Metals Model Mining (12-month & lead 1.10

-1.5 0.80 1/31/97 1/30/98 1/29/99 1/31/00 1/31/01 1/31/02 1/31/03 1/30/04 1/31/05 1/31/06 1/31/07 1/31/08 1/30/09 1/29/10 1/31/11

Upw ard Revisions Current Constituents Performance 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 Model Capital Goods relative to Metals & Mining

Source: Bloomberg, FactSet, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 65 Underweight Materials Materials Revisions Materials Valuation

S&P 500 Materials: Upw ard Revisions as a % of Total vs. Performance Materials Valuation Model 2.00 40.00 90% 425 80% 400 1.50 30.00 375 12-month forward relative performance relative forward 12-month 70% 1.00 20.00 350 60% Performance 325 0.50 10.00 50% 300 40% 275 0.00 0.00 Revisions

250 Model Valuation 30% -0.50 -10.00 225 20% 200 -1.00 -20.00 10% 175 0% 150 -1.50 -30.00

-2.00 -40.00 1/31/97 1/30/98 1/29/99 1/31/00 1/31/01 1/31/02 1/31/03 1/30/04 1/31/05 1/31/06 1/31/07 1/31/08 1/30/09 1/29/10 1/31/11 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

Upw ard Revisions Current Constituents Performance Materials Relative 12-month forw ard return Materials Valuation Model

Based on Index weighted book value, Price/Sales, Enterprise Value, FY1 estimated earnings, estimated Dividend Yield Materials Fundamentals Metals & Mining Valuation

Materials Economic Model vs. 12-month forw ard relative performance Metals & Mining Valuation Model 2.00 60.00 1.5 40.0%

1.50 30.0% 40.00

1.0 performance relative forward 12-month 1.00 20.0% Materials12-month forward return 20.00 0.50 0.5

l 10.0% 0.00 0.00

- 0.0% Valuation Model Valuation -0.50 -20.00

Economic Mode Economic -10.0% (0.5) -1.00

-40.00 -20.0% -1.50

(1.0) -30.0% -2.00 -60.00

(1.5) -40.0% 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 Metals & Mining Relative 12-month forw ard return Metals & Mining Valuation Model

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 Based on Price/EBITDA, Index weighted book value, Price/Sales, Enterprise Value, S&P 500: Materials 12-month forw ard performance Relative to S&P 500 Economic Model FY1 estimated earnings, estimated Dividend Yield Source: Bloomberg, FactSet, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 66 Overweight Diversified Financials Diversified Financials Revisions Diversified Financials vs. S&P 500 S&P 500 Diversified Financials: Upw ard Revisions as a % of Total Diversified Financials and the S&P 500 Performance 100% 1500 1750.0 900.0 90% 1300 800.0 80% 1550.0 700.0

1100 Performance 70% 1350.0 Financials Diversified 60% 600.0 900 1150.0 50% 500.0 700 Revisions 40% 950.0 400.0 30% S&P 500 500 750.0 20% 300.0 300 550.0 10% 200.0 0% 100 350.0 100.0

150.0 0.0 1/31/97 1/30/98 1/29/99 1/31/00 1/31/01 1/31/02 1/31/03 1/30/04 1/31/05 1/31/06 1/31/07 1/31/08 1/30/09 1/29/10 1/31/11

Upw ard Revisions Per f or manc e 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

S&P 500 Diversified Financials

Banks vs Diversified Financials 12-month Lead Diversified Financials Valuation Indicator

Diversified Financials Valuation Model Model vs Banks relative to Diversified Financials 2.00 40.00 2.0 1.30 Correlation = 0.91 30.00 1.50 R2 = 0.82 1.20 1.5 12-month forward relative performance relative forward 12-month 1.00 20.00 1.10 Banks relative to Diversified Financials toDiversified relative Banks 1.0 1.00 0.50 10.00

0.90 0.00 0.00 0.5

0.80 Valuation Model Valuation -0.50 -10.00 0.0 0.70

-1.00 -20.00 -0.5 0.60

-1.50 -30.00 0.50 Banks relative to Diversified Financials Model (12-month lead) -1.0 -2.00 -40.00 0.40

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 -1.5 0.30

Diversified Financials Relative 12-month forw ard return Diversified Financials Valuation Model 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

Based on Index weighted earnings, P/E, Price/Sales, Enterprise Value, Model Banks relative to Diversified Financials Estimated Price/Book Value, estimated Cash Flow Source: Bloomberg, FactSet, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 67 Overweight Insurance Insurance Valuation Insurance 12-month Lead Indicator

Insurance Valuation Model Insurance Lead Indicator Model vs Insurance Relative to S&P 500 2.00 40.00 1.5 0.32 Correlation = 0.77 R2 = 0.59 1.50 30.00 1.0 0.28 12-month forward relative performance forward 12-month 1.00 20.00

0.5 to S&P500 Relative Insurance

0.50 10.00 0.24 0.0 0.00 0.00

-0.5 Valuation Model Valuation -0.50 -10.00 0.20

-1.0 -1.00 -20.00 lead) (12-month Model Insurance 0.16 -1.50 -30.00 -1.5

-2.00 -40.00 -2.0 0.12 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

Insurance Relative 12-month forw ard return Insurance Valuation Model 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 Model Insurance Relative to S&P 500

Based on Price/Cash Flow, Trailing 12-mth EPS Aggregate, Index weighted book value, Price/Sales, Enterprise Value, Estimated Price/Book Value, Debt/EBITDA

Source: Bloomberg, FactSet, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 68 Sell-side Ratings Study Percent Buy Ratings By Industry Group

S&P 500 Industry Groups BuyCurrent Rating As a % YE of 2010 Total Sell Side YE 2009 Ratings YE 2008 YE 2007 Autos & Comp. 63.5% 54.4% 43.8% 20.6% 36.9% Cons.Durables & App. 55.5% 51.7% 43.6% 37.1% 39.7% Cons. Services 55.6% 57.0% 49.5% 45.9% 58.3% Media 63.5% 62.9% 54.7% 49.8% 53.8% Retailin g 48.3% 49.9% 50.7% 34.9% 42.5% Food & Stpls Ret. 45.9% 48.8% 50.8% 46.7% 52.7% Food Bev. & Tob. 46.1% 48.2% 50.8% 50.1% 45.3% HH & Pers. Products 37.9% 41.3% 44.6% 45.8% 45.3% Energy 61.8% 57.3% 48.6% 61.0% 55.0% Banks 40.6% 37.3% 31.9% 25.4% 20.7% Diversified Financials 54.7% 54.9% 48.7% 40.4% 42.4% Insurance 50.6% 50.3% 45.6% 43.6% 47.9% Real Estate 40.3% 37.2% 28.7% 34.4% 43.5% HC Equip. & Services 55.3% 53.3% 52.7% 56.6% 52.3% Pharma & Biotech 56.2% 56.7% 56.4% 62.1% 50.8% Capital Goods 56.4% 52.9% 49.7% 49.0% 53.8% Comm.Svcs & Supp. 47.8% 48.5% 46.0% 44.5% 50.9% Transportation 63.1% 61.3% 43.0% 44.6% 51.2% Semis & Semi Equip. 49.2% 44.2% 48.9% 45.5% 49.9% Software & Services 58.6% 53.3% 54.0% 51.1% 56.2% Tech Hardware & Equip. 59.1% 61.4% 55.7% 50.7% 54.5% Materials 56.3% 51.9% 47.1% 43.3% 53.7% Telecom Services 50.0% 45.5% 48.9% 55.7% 41.2% Utilities 34.3% 36.3% 41.7% 48.4% 46.4%

S&P 500 Total 53.0% 51.3% 48.4% 47.5% 48.4%

Source: Bloomberg and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 69 Beta Comparison S&P 500 Sector Beta S&P 500 Industry Group Beta Sector 5-year 1-year S&P 500 Industry Group Beta 5-year 1-year Consumer Discretionary 1.14 1.03 Autos & Components 2.15 1.49 Consumer Staples 0.58 0.55 Banks 1.37 1.37 Capital Goods 1.32 1.20 Energy 0.89 1.18 Commercial Services & Supplies 0.93 0.93 Financials 1.50 1.25 Consumer Durables & Apparel 1.28 1.06 Health Care 0.68 0.77 Consumer Services 0.86 0.86 Industrials 1.23 1.16 Diversified Financials 1.54 1.29 Information Technology 1.12 1.05 Energy 0.89 1.18 Materials 1.25 1.23 Food & Staples Retailing 0.59 0.64 Telecommunication Services 0.71 0.65 Food, Beverage & Tobacco 0.58 0.55 Utilities 0.58 0.58 Healthcare Equipment & Services 0.85 0.92 Household & Personal Products 0.56 0.46 Insurance 1.50 1.13 Materials 1.25 1.24 As of July 29, 2011 Media 1.21 1.08 Pharmaceuticals & Biotechnology 0.60 0.69 Real Estate 1.55 1.12 Retailing 1.04 0.95 Semiconductors & Semi Equipment 1.16 1.13 Software & Services 1.06 1.01 Technology Hardware & Equipment 1.15 1.08 Telecommunications Services 0.71 0.65 Transportation 1.00 1.08 Utilities 0.58 0.58

As of July 29, 2011

Source: FactSet and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 70 Citi Strategic Baskets (CSBs) Eight CSBs

Deep Cyclicals Basket Bloomberg Ticker: CGSBDCYC Index Constituents include: DOW, DD, CAT, DE, NEM, UTX, PH, JEC, BA, HON, IP, CSX Defensive Basket Bloomberg Ticker: CGSBDEFN Index Constituents include: K, PG, AVP, UNH, KR, WAG, PFE, MRK, CLX, T, VZ, KO Technology Basket Bloomberg Ticker: CGSBTECH Index Constituents include: MSFT, INTC, AAPL, AMAT, CSCO, EMC, DELL, ORCL, AMD, IBM, TXN, ARW Consumer Cyclical Basket Bloomberg Ticker: CGSBC CYC Index Constituents include: TGT, F, CCL, HOT, MCD, NKE, DIS, MAT, CVC, JCP, KBH, HD Energy Basket Bloomberg Ticker: CGSBENRG Index Constituents include: SLB, XOM, CVX, BHI, HAL, APA, HES, VLO, APC, COP Financials Basket Bloomberg Ticker: CGSBFINL Index Constituents include: BAC, JPM, WFC, BEN, MCO, AXP, CB, STT, MMC, TRV, USB, TROW High International Sales Exposure Basket Bloomberg Ticker: CGSBINTS Index Constituents include: HPQ, F, GE, JNJ, KO, AFL, NKE, ITW, CMI, ORCL, HAL, DD, BAX, PPG, HNZ US-only Sales Exposure Basket Bloomberg Ticker: CGSBUSAS Index Constituents T, CVS, TGT, SUN, SCHW, USB, NUE, PCG, EIX, VMC, PAYX, CTAS

Overweight – Energy, Financials and US-only CSBs.
Underweight – Tech, Heavy International Sales, Consumer Cyclical and Deep Cyclical CSBs.
Disclosures: This research is focused on baskets of securities whose component parts share common characteristics. The research does not attempt to distinguish between the prospects or performance of, or provide an analysis of, the individual companies within any basket. Any recommendation included herein is limited to the basket(s) as a whole and does not express an opinion with respect to any individual company included within the basket. In particular, we are not recommending any individual security or an investment in any individual company, and you should not rely on this research in making an investment decision with respect to any individual company or security. You should consider this research as only a single factor in making investment decisions. Source: FactSet, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 71 Overweight CSBs Energy CSB US-only CSB

Model vs US-only Sales Exposure Basket Relative to S&P 500 Model vs Energy Basket Relative to S&P 500 1.75 5.40 2.0 3.40 Correlation = 0.98

Correlation = 0.87 d 2 1.50 R = 0.95 2 R = 0.76 3.10 4.90

1.5 1.25 US-only Sales Exposure Basket Relativeto S&P50 2.80 4.40 1.00

1.0 Energy Basket Relative to S&P 50 2.50 0.75 3.90

2.20 0.50 0.5 3.40

1.90 0.25 2.90 0.0 0.00 1.60

-0.25 2.40

1.30 0 -0.5 -0.50 1.90 1.00 0 Energy Basket Relative to S&P 500 Model (12-mth lead (12-mth Model 500 S&P to Basket Relative Energy -0.75 -1.0 0.70 1.40 -1.00 US-only Sales Exposure Basket Rel. to S&P 500 Model lea (12-mth Model 500 Exposure S&P to Basket Sales Rel. US-only

-1.5 0.40 -1.25 0.90 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 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

Model Energy Basket Relative to S&P 500 Model US-only Sales Exposure Basket Relative to S&P 500

Financials CSB

Model vs Financials Basket Relative to S&P 500 2.0 4.40 Correlation = 0.97 R2 = 0.95 4.00 1.5

3.60 Financials Basket Relative to S&P 50 S&Pto Relative Basket Financials 1.0 3.20

0.5 2.80

2.40 0.0

2.00 -0.5 0

1.60

Financials Basket Relative to 500 S&P Model (12-mth lead -1.0 1.20

-1.5 0.80 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

Model Financials Basket Relative to S&P 500

Source: FactSet, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 72 Underweight CSBs Technology CSB Heavy International Sales CSB

Model vs Tech Basket Relative to S&P 500 Model vs High Int'l Sales Exposure Basket Relative to S&P 500 2.0 40.00 2.00 5.00

Correlation = 0.92 - Correlation = 0.95

2 500 S&P to Relative Basket Exposure Sales Int'l High R2 = 0.84 R = 0.91 35.00 1.5 1.50

30.00 500 S&P to Relative Basket Tech 4.00 1.0 1.00

25.00 0.5 0.50 20.00 3.00 0.0 mth lead) lead) mth 0.00 15.00

-0.5 10.00 -0.50 2.00 -1.0 5.00

Tech Relative 500 Tech Basket S&P to Model (12-month lead) -1.00

-1.5 0.00 SalesHigh Exposure Relative Int'l Basket S&P 500 to Model (12 -1.50 1.00 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

Model Tech Basket Relative to S&P 500 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 Model High Int'l Sales Expos ure Bas ket Relative to S&P 500 Consumer Cyclical CSB Deep Cyclical CSB

Model vs Consumer Cyclical Relative to S&P 500 Model vs Deep Cyclicals Relative to S&P 500 2.0 5.50 2.5 3.00

Correlation = 0.92 Correlation = 0.91 2 R = 0.85 2 2.80

d R = 0.83 1.5 2.0 2.60 4.50 Deep Cyclicals Relative to S&P 500 S&P to Relative Cyclicals Deep

1.0 S&P 50 to Relative Cyclical Consumer 2.40 1.5 2.20 0.5 3.50 1.0 2.00

0.0 1.80

0.5 1.60 2.50 -0.5 1.40 0.0 -1.0 0 1.20 1.50 1.00 -0.5 -1.5 Consumer Cyclical Relative to 500S&P Model (12-month lea 0.80 Deep Cyclicals Relative 500 ModelS&P to (12-month lead)

-1.0 0.60 -2.0 0.50 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 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

Mod el Consumer Cyclical Relative to S&P 500 Model Deep Cyclicals Relative to S&P 500

Source: FactSet, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven 73

Appendix Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 74 Liquidity

Retail vs Institutional Money Market Assets Liquidity Performance Metric

Retail Money Market Assets vs Institutional Money Market Assets Liquidity Performance Metric vs. S&P 500 12-Month Forward Performance 3,200 2.0 50% 2,800 40% 1.5 30% 2,400 1.0 20% Perf. 500S&P Forward 2,000 0.5 10% 1,600 0.0 0% LPM -10% 1,200 -0.5 Money Market Assets -20% 800 -1.0 -30% 400 -1.5 -40% -2.0 -50%

0 4Q92 4Q93 4Q94 4Q95 4Q96 4Q97 4Q98 4Q99 4Q00 4Q01 4Q02 4Q03 4Q04 4Q05 4Q06 4Q07 4Q08 4Q09 4Q10 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 ICI: Retail Assets: Money Market Mutual Funds (Bil.$) S&P 500 Forward Perf. LPM Outperformance Underperformance ICI: Institutional Assets: Money Market Mutual Funds (Bil.$)

Retail Money Market Assets as % of Wilshire 5000

Retail Money Market Fund Assets as % of Wilshire 5000 20%
Proprietary model offering a more positive 18% outlook. 16%
14% The six components of the model include: M2

12% money supply, loan officers’ credit tightening

10% Trend standards, mergers & acquisitions (M&A) activity, high yield credit spreads, net new equity issuance 8% Average and corporate cash holdings as a percent of equity 6% market capitalization. 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

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 75 Liquidity Fed Balance Sheet Credit Outstanding Money Velocity

Federal Reserve Bank Credit Outstanding, Millions of $ Velocity of Bank Reserves 350 3000000

300 2500000 Do you think off-balance sheet lending and securitization will 250 make a rocket-ship recovery? 2000000

200 1500000

150

1000000 100

500000 50

0 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 0 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 Money Supply (M2)

Annualized Sequential Change of a Four-Week Average M2 40%

30%

20%

10%

0% c

-10%

-20%

-30% 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

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 76 Buyouts/Buybacks Private Equity M&A Global M&A Volume – Cash vs. Stock Global Cash vs. Stock by Year Private Equity M&A $1,100.0 30.0% % of # of $200M+ Deals $1,000.0 13% $900.0 25.0% 23% 23% 20% 20% 22% 22% 20% 37% 34% 12% 34%

% Total M&A Volume 41% $800.0 15% 9% 11% 14% 20.0% 15% 14% $700.0 21% 12% 16% $600.0 13% 18% 15.0% $500.0 71% 75%

US $ billions 65% 67% 64% 66% $400.0 54% 55% 62% 10.0% 47% 45% 50% $300.0 $200.0 5.0% $100.0 00 01 02 03 04 05 06 07 08 09 10 11 $0.0 0.0% YTD All-Cash Cash & Stock All-Stock 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Private Equity M&A Volume Private Equity M&A Volume as % Total M&A Volume

Through December 2010 Through June 2011 Junk Bond Issuance

High Yield Issuance Volume 300
Cash picking up as the means to do transactions 250 relative to last year. 200
Only 25% of M&A came from private equity at the 150 peak; nearly 3x as many strategic buyers. 274

100 178 168 154 165 153 134 143 140 50 103 111 83 52 61 50 0 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Source: Securities Data Company, Inc, Dealogic, and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 77 De-equitization Is Supportive, Too Equity Net Issuance The S&P 500 Net Debt to Capital

S&P 500 ex-Financials Net Debt to Capital Nonfarm NonFin Corp Bus:Net New Equity Issues (SAAR, Bil.$) as a % of Equity at Market Value 50.0% Vs. S&P 500 Forward Performance 10.0% 60% 46.0% 8.0% 48% 12-month Forward Performance 6.0% 36% 42.0% 4.0% 24% 2.0% 12% 38.0% 0.0% 0% 34.0% -2.0% -12%

Net Equity Issuance -4.0% -24% 30.0% -6.0% -36% -8.0% -48% 26.0% -10.0% -60%

22.0% 1Q52 1Q55 1Q58 1Q61 1Q64 1Q67 1Q70 1Q73 1Q76 1Q79 1Q82 1Q85 1Q88 1Q91 1Q94 1Q97 1Q00 1Q03 1Q06 1Q09

12-Mo For Perf Net Equity Issues 1Q90 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 Based on current constituents

S&P 500 Cash Flow Yield vs Junk Bond Yield

S&P 500 Cash Flow Yield vs High Yield Bonds 18.0

16.0

14.0
There has been an impressive improvement in

12.0 the S&P 500’s net debt to capital when we exclude

10.0 financials since 1990.

8.0
Powerful public share buy-ins have generally

6.0 been a good indicator for stock price strength. 1/1/1991 1/1/1992 1/1/1993 1/1/1994 1/1/1995 1/1/1996 1/1/1997 1/1/1998 1/1/1999 1/1/2000 1/1/2001 1/1/2002 1/1/2003 1/1/2004 1/1/2005 1/1/2006 1/1/2007 1/1/2008 1/1/2009 1/1/2010

Cash Flow Yield High Yield Bonds

Source: FactSet, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 78 The Deal Determinant Number of M&A Deals vs. S&P 500 (12-Mo. Lag) Dollar Value of M&A Deals vs. S&P 500 (12-Mo. Lag)

S&P 500 S&P 500 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-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-10 350 2000 1,800 1800 300 1800 1,600 1600 M&A $Volume S&P 500 1600 S&P 500(12-Month Lag) 1,400 M&A # of Deals 1400 250 Lag) (12-Month 500 S&P S&P 500 1400 1,200 1200 200 1200 1,000 1000 150 M&A $Volume 1000

M&A # of Deals # of M&A 800 800 100 600 600 800

400 400 50 600 R2 = 0.69 R2 = 0.52 200 200 0 400 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-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

M&A # of Deals M&A $ Volume

Note: U.S. is the Target or Acquirer Region Note: U.S. is the Target or Acquirer Region

Number of announced deals has a powerful
Relationship with the dollar volume of deals correlation with S&P 500 when a 12-month lag is signals caution. applied.

Source: Securities Data Corp., Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 79 Corporate Cash Hoard Uses How Companies Spend Their Cash S&P 500 12-Month Dividend and Buyback Yield

S&P 500 12-Month Dividend and Buyback Yield S&P 500 Uses of Cash 8.00% $700 7.00% $600 6.00% $500 5.00% $400 4.00% $300 $billions 3.00% $200 2.00% $100 1.00% $0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0.00% Dividends Buybacks Capex 4Q98 4Q99 4Q00 4Q01 4Q02 4Q03 4Q04 4Q05 4Q06 4Q07 4Q08 4Q09 4Q10

Note: Capex data is from FactSet and based on current constituents.

Dividends were up ~5% in 2010, while capex grew ~9%.

Source: Standard & Poor’s, FactSet, and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 80 Credit Trends and Housing NFIB Expectations on Credit Conditions to Ease Housing Permits and Completions

NFIB: Percent Expecting Credit Conditions to Ease, Net (SA, %) Single-Family Building Permits and Completions 5 2000

1800 0 1600

1400 -5 1200

Percent Percent 1000 -10 800 SAAR, (Thous.Units) SAAR,

600 -15

400

-20 200 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 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 Permits (6-month lag) Housing Completions: 1-Unit Structures (SAAR, Thous.Units)

Permits point to continued weakness in completions.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 81 The Consumer Personal Income Consumer Delinquencies vs. Employment Growth Consumer Loan Delinquency Rate vs. Employment Grow th Personal Income 5.20 4.0% 14,000 4.90 3.0% 4.60 2.0% s

12,000 Growth Employment 4.30 1.0%

10,000 4.00 0.0% 8,000 3.70 -1.0% 3.40 -2.0%

$Billions 6,000 Consumer Delinquencie 3.10 -3.0%

4,000 2.80 -4.0%

2,000 2.50 -5.0%

0 1Q88 1Q89 1Q90 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 Loan Delinquency Rate: Consumer Loans: All Insured Comml Banks (SA,%) Employment Grow th Q3-50 Q1-54 Q3-57 Q1-61 Q3-64 Q1-68 Q3-71 Q1-75 Q3-78 Q1-82 Q3-85 Q1-89 Q3-92 Q1-96 Q3-99 Q1-03 Q3-06 Q1-10

Has begun to reaccelerate after tapering off in this
Delinquency patterns tend to be inverse to jobs and recession. income trends.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Large–Cap Positioning 82 “Living Large” and “Thriving & Thrifty” Number of US Millionaires 1st Quintile Expenditures Relative to Other Quintiles

Affluent American Households: Net Worth (NIPR) 1st Quintile Spending Relative to Other Quintiles (2009) 16 5.0 4.36x 14 4.0 12

10 3.00x 3.0 8

Millions 2.29x 6 2.0 4 1.66x 2

1st Quintile Spending Relative to Other Quintiles Other to Relative Spending Quintile 1st 1.0 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 5th Quintile 5th Quintile 4th Quintile 3rd 2nd Quintile 2nd $5Mil+ $1Mil+ $500K+ Note: Not including primary residence Living Large rel. Thriving & Thrifty vs. S&P 500

Living Large Relative to Thriving & Thrifty vs S&P 500 (equal weighted) 120.0 1.10 Living Large relative to Thriving & Thrift 110.0 1.00

100.0 0.90

90.0 0.80
Top 20% benefit when equity prices climb.

80.0 0.70

70.0 0.60
Household net worth getting boosted by market 500 Equal Weighted 500 Equal

60.0 0.50 S&P recovery. 50.0 0.40 y

40.0 0.30 12/31/2007 02/05/2008 03/11/2008 04/15/2008 05/19/2008 06/23/2008 07/28/2008 08/29/2008 10/03/2008 11/06/2008 12/11/2008 01/16/2009 02/23/2009 03/27/2009 05/01/2009 06/05/2009 07/10/2009 08/13/2009 09/17/2009 10/21/2009 11/24/2009 12/30/2009 02/04/2010 03/11/2010 04/15/2010 05/19/2010 06/23/2010 07/28/2010 08/31/2010 10/05/2010 11/08/2010 12/13/2010 01/18/2011 02/22/2011 03/28/2011 05/02/2011 06/06/2011 07/11/2011

S&P 500 Equal Weighted Indexed to 100 Living Large Relative to Thriving & Thrifty Index Note: Basket of Thriving & Thrifty stocks includes MCD, WMT, FDO, AZO, RLH, PRA, TAP, CSH, RGS. Basket of Living Large stocks includes AXP, TIF, SKS, EL, COH, RCL, WYNN, OEH, SWRG, ELY, TOL, HZO, JWN, STNR, TPX Source: FactSet, Spectrem Group, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 83 The Consumer: Housing Counts Household Net Equity in Real Estate Household Net Worth

Household Real Estate Holdings Net of Mortgages Household Net Worth 18,000 70,000 16,000 60,000 14,000 50,000 12,000

10,000 40,000

billion $ billion 8,000 billion $ 30,000 6,000 20,000 4,000

2,000 10,000

0 0 1Q52 1Q55 1Q58 1Q61 1Q64 1Q67 1Q70 1Q73 1Q76 1Q79 1Q82 1Q85 1Q88 1Q91 1Q94 1Q97 1Q00 1Q03 1Q06 1Q09 1Q70 1Q73 1Q76 1Q79 1Q82 1Q85 1Q88 1Q91 1Q94 1Q97 1Q00 1Q03 1Q06 1Q09

Existing Home Sales Price Appreciation FHFA Price Index

Median Sales Price: Existing Single-Family Homes (Y/Y Change) FHFA: House Price Index, United States (Y/Y Change) 20% 18%

13% 15%

8% 10%

3% 5% -2% 0% -7% -5% -12%

-17% -10% Jan-69 Jan-72 Jan-75 Jan-78 Jan-81 Jan-84 Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11 Q1-81 Q1-83 Q1-85 Q1-87 Q1-89 Q1-91 Q1-93 Q1-95 Q1-97 Q1-99 Q1-01 Q1-03 Q1-05 Q1-07 Q1-09 Q1-11

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 84 Consumer Concerns Dominate

Housing Market Index vs. Consumer Spending Housing Market Index vs. Retailing

Housing Market Index vs. Consumer Spending % Change Housing Market Index vs. Y/Y % S&P 500 Retailing 80 8.0% 80.0% 85

70 60.0% 75 Consumer Spending % SpendingChangeConsumer % 6.0%

60 65 Index Market Housing 40.0%

50 4.0% 55 20.0% 40 45 2.0% 0.0% 30 35

Housing MarketHousing Index 20 -20.0% 0.0% 25 10 -40.0% 15 Y/Y % Change S&P 500 Retailing 0 -2.0% -60.0% 5 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 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 Home Builders: Housing Market Index {Composite} (SA, All Good = 100) Consumer Spending Y/Y % Chg S&P 500 Retailing Y/Y % Change Home Builders Housing Market Index

Residential and Non-Residential Construction Nominal Residential and Non-Residential Construction
Housing Market Index seems to scare off investors 40 Y/Y% 40 from Retailing names, too. 30 30
20 Housing trends affect spending, but data is similar 20 10 given that non-auto consumer durable goods 0 10 business tends to reflect new home spending.

-10 0
Commercial real estate has slid sharply. -20 Residential (left) -10 -30 Nonresidential (Right) -20 -40 85 88 91 94 97 00 03 06 09 -50 -30

Source: Haver Analytics and CIRA – U.S. Equity Strategy, and CIRA – U.S. Economics Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 85 Real Estate Facts Household Net Equity In Real Estate Household Net Worth (Ex-Real Estate)

HH Net Real Estate Value as % of Total Net Worth Household Net Worth: Ex-Real Estate 60,000 28%

26% 50,000 24%

22% 40,000 20% 30,000

18% billion $

16% 20,000 14% 12% 10,000

10% 0 1Q52 1Q54 1Q56 1Q58 1Q60 1Q62 1Q64 1Q66 1Q68 1Q70 1Q72 1Q74 1Q76 1Q78 1Q80 1Q82 1Q84 1Q86 1Q88 1Q90 1Q92 1Q94 1Q96 1Q98 1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 1Q70 1Q73 1Q76 1Q79 1Q82 1Q85 1Q88 1Q91 1Q94 1Q97 1Q00 1Q03 1Q06 1Q09

Home equity accounts for less than 20% of U.S.
Slipping from near record highs ex-real estate. household net worth, not 75%.
From 2002 – 2007, only $2.6 trillion of the $23.0 trillion increase in net worth was due to real estate.
Household deposits grew by 27.1% over the past five years to $8.04 trillion.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 86 Industrial Activity ISM vs. BAA Yield ECRI Weekly Leading Index

12-month absolute change ISM vs. 12-month absolute change in Baa Yield ECRI Weekly Leading Index Growth Rate 30 -400 30 25 -300 Y/Y Baa Yield12-monthlag points) Change (basis 20 20 15 -200 10 10 e -100 5 0 0 0 -5 ECRI (%) ECRI -10 100 -15 -10 ISM 12-month Chang 12-month ISM -20 200 -25 -20 -30 300 -35

-30 400 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-12 03-Jan-2003W 27-Jun-2003W 11-Jun-2004W 27-Apr-2007W 11-Apr-2008W 19-Oct-2007W 03-Oct-2008W 27-Mar-2009W 18-Sep-2009W 12-Mar-2010W 03-Sep-2010W 25-Feb-2011W ISM 12-month change Baa Y/Y Change bps (RHS-inverted) 19-Dec-2003W 03-Dec-2004W 27-May-2005W 18-Nov-2005W 12-May-2006W 03-Nov-2006W ECRI Weekly Leading Index Growth Rate (Avg, %) S&P 500 Y/Y % and Industrial Production Y/Y%

Industrial Production (Y/Y) vs. S&P 500 (Y/Y) 20% 60%

40% 10%
Higher corporate bond yields and tight credit 20% S&P 500 S&P 500 conditions are indicative of a coming slowdown in 0% 0% domestic industrial activity.

Industrial Production Production Industrial -20% -10%
European industrial activity also tends to -40% weaken with the ISM. -20% -60% 1Q65 1Q68 1Q71 1Q74 1Q77 1Q80 1Q83 1Q86 1Q89 1Q92 1Q95 1Q98 1Q01 1Q04 1Q07 1Q10 Industrial Production S&P 500 Y/Y % Chg

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 87 Industrial Activity ISM Lead vs S&P 500 Sectors

ISM: ISM: ISM: New ISM: New ISM: ISM: ISM: ISM: Backlog ISM: ISM Mfg: PMI Supplier Customer ISM: Prices Export Orders Production Employment Inventories of Orders Imports 3-Month Lag Deliveries Inventories Orders S&P 500 0.106 0.265 0.247 0.082 -0.229 -0.139 -0.280 -0.233 0.392 0.249 0.390 Consumer Discretionary 0.351 0.399 0.391 0.279 0.087 0.079 -0.384 -0.183 0.342 0.149 0.314 Consumer Staples 0.054 0.082 0.072 0.059 -0.048 -0.096 -0.066 -0.074 0.118 0.240 0.067 Energy 0.515 0.440 0.456 0.610 0.325 0.462 -0.197 0.342 0.428 0.509 0.579 Financials 0.341 0.376 0.360 0.275 0.075 0.071 -0.271 -0.114 0.294 0.251 0.319 Health Care 0.052 0.022 0.032 0.100 -0.033 -0.062 0.025 -0.132 0.067 0.081 0.082 Industrials 0.479 0.460 0.465 0.474 0.225 0.264 -0.324 0.095 0.415 0.432 0.437 Information Technology 0.400 0.355 0.388 0.356 0.203 0.170 -0.200 0.033 0.328 0.240 0.261 Materials 0.414 0.500 0.460 0.346 0.220 0.147 -0.436 0.169 0.469 0.508 0.441 Telecom Services 0.323 0.266 0.290 0.337 0.069 0.247 -0.087 -0.134 0.250 0.093 0.309 Utilities 0.273 0.176 0.209 0.406 0.095 0.363 -0.033 0.114 0.186 0.238 0.380 ISM: ISM: ISM: New ISM: New ISM: ISM: ISM: ISM: Backlog ISM: ISM Mfg: PMI Supplier Customer ISM: Prices Export Orders Production Employment Inventories of Orders Imports 6-Month Lag Deliveries Inventories Orders S&P 500 -0.096 0.078 0.064 -0.135 -0.351 -0.284 -0.261 -0.325 0.306 0.197 0.276 Consumer Discretionary 0.168 0.260 0.228 0.077 0.000 -0.148 -0.321 -0.257 0.235 0.023 0.160 Consumer Staples -0.010 0.021 0.016 -0.010 -0.053 -0.157 -0.023 -0.071 0.093 0.240 0.034 Energy 0.464 0.430 0.443 0.542 0.321 0.318 -0.250 0.256 0.391 0.448 0.556 Financials 0.207 0.275 0.258 0.119 0.019 -0.114 -0.232 -0.146 0.233 0.175 0.192 Health Care 0.039 0.004 0.016 0.075 0.005 -0.084 0.060 -0.084 0.093 0.118 0.055 Industrials 0.352 0.394 0.388 0.304 0.170 0.030 -0.319 0.010 0.343 0.323 0.330 Information Technology 0.281 0.287 0.294 0.196 0.126 -0.008 -0.170 -0.078 0.240 0.112 0.172 Materials 0.185 0.323 0.282 0.107 0.076 -0.139 -0.333 0.005 0.287 0.302 0.292 Telecom Services 0.290 0.257 0.258 0.277 0.104 0.180 -0.130 -0.126 0.222 0.085 0.273 Utilities 0.324 0.229 0.267 0.429 0.203 0.345 -0.109 0.192 0.242 0.282 0.409

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 88 Energy/Industrials/Materials Margins S&P 500 Materials Profits Industrials Margins

60 180 S&P Industrials Operating Margin FIBER Index (left) 160 50 9.0% Materials EPS (right) 140 8.5% 40 Prices, 120 1Q 2011, 8.0% Current 100 30 Quote 7.5% 80 7.0% 20 60 6.5% 40 10 6.0% 20 5.5% 0 0 Consensus 5.0% EPS -20 -10 1Q 2011 4.5% -40 4.0% -20 -60 3.5% Last data point for -80 -30 FIBER is Mar 31, 2011 -100 1Q86 1Q87 1Q88 1Q89 1Q90 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 -40 -120 Based on current constituents 19992002200520082011 Materials Margins Energy Margins

S&P Materials Operating Margin S&P Energy Operating Margin 12.0% 10.0%

9.0% 10.0%

8.0% 8.0% 7.0% 6.0% 6.0%

5.0% 4.0%

4.0% 2.0% 3.0%

2.0% 0.0% 1Q86 1Q87 1Q88 1Q89 1Q90 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q86 1Q87 1Q88 1Q89 1Q90 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 Based on current constituents Based on current constituents

Source: Haver Analytics and CIRA – U.S. Equity Strategy, and CIRA – U.S. Economics Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 89 Commodities

Oil vs. S&P 500 Performance Internet Stocks vs. Fertilizer & Ag. Chemical Stocks

S&P 500 Performance vs Oil 100.0% Citi US Equity Strategy Ag Stocks Index (October 2003- October 2009)

80.0% Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07 Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 60.0%

40.0% 700 1100

20.0% 1000 Index Stocks Ag Strategy Equity US Citi 600 0.0% 900

-20.0% 500 800 700 -40.0% 400 600 -60.0% IIX 500 -80.0% 300 400 -100.0% 200 300 -120.0% 200 100 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-11 100 S&P 500 12-month Return Rel WTI Avg +1 SD -1 SD +2 SD -2 SD 0 0 Oct-95 Apr-96 Oct-96 Apr-97 Oct-97 Apr-98 Oct-98 Apr-99 Oct-99 Apr-00 Oct-00 Apr-01 Oct-01

IIX (October 1995- October 2001)

IIX Citi US Equity Strategy Ag Stocks Index Farm Real Estate/ Cash Receipts Note: Ag stocks include MON, POT, AGU, CF, ADM, BG, MOS

Net Farm Real Estate/ Total Farm Cash Receipts 7.0

6.5

6.0

5.5

5.0

4.5

4.0

3.5

3.0 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010F

Source: Haver Analytics, Economic Research Service/USDA, and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 90 Commodities Industrial Commodities During Recessions CPI vs. Energy/Financials

CRB Raw Industrials Index with Recession Shading S&P 500: Energy Relative to Financials vs. CPI (y/y) 7.00% 80% 700 6.00% 60% 600 5.00%

40% Energy to Financials 4.00% 500 3.00% 20% 2.00% 0% 400 CPI 1.00% -20% 0.00% 300 -40% -1.00% 200 -2.00% -60% -3.00% -80% 100

0 Jan-1990 Jan-1991 Jan-1992 Jan-1993 Jan-1994 Jan-1995 Jan-1996 Jan-1997 Jan-1998 Jan-1999 Jan-2000 Jan-2001 Jan-2002 Jan-2003 Jan-2004 Jan-2005 Jan-2006 Jan-2007 Jan-2008 Jan-2009 Jan-2010 Jan-2011

59 79 87 99 CPI-U: All Items (SA, 1982-84=100) S&P 500: Energy Relative to Financials / n/ Jan/47 Jan/51 Jan/55 Jan/ Jan/63 Jan/67 Jan/71 Jan/75 Jan/ Jan/83 Jan Jan/91 Jan/95 Ja Jan/03 Jan/07 Jan/11

Recessions Description: CRB (BLS) Raw Industrials Index Baltic Dry Index

Baltic Exchange Dry Index
Recessions have been accompanied by a 14000 roughly 19% drop in commodity prices, even 12000 during the inflationary 1970s when the dollar 10000 weakened. 8000
Ifo weakness also has been associated with 6000 industrial weakness. 4000 2000
Energy tends to outperform during periods of elevated inflation, but some pricing relief may be 0 on the horizon. Feb-85 Feb-87 Feb-89 Feb-91 Feb-93 Feb-95 Feb-97 Feb-99 Feb-01 Feb-03 Feb-05 Feb-07 Feb-09 Feb-11

Source: Haver Analytics, Bloomberg, and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 91 Capex Fixed Investment vs. Employment Fixed Investment on Equipment & Software

Private Nonresidential Fixed Investment vs. Employment Fixed Investment on Equipment and Software vs. Capacity Utilization 35% 90 30% 6.0% 30% 5.0% 25% 20% 4.0% 85 20% 3.0%

15% Capacity Utilization %

10% Employment e 2.0% 10% 1.0% 80 0% 5% 0.0%

% Change % 0% -1.0% -10% -5% 75 -2.0% Capex Y/Y % Chang % Y/Y Capex -10% -20% -3.0% -15% -4.0% 70 Private Nonresidential Fixed Investment Y/Y Y/Y Investment Fixed Nonresidential Private -20% -30% -5.0% -25%

1Q70 1Q72 1Q74 1Q76 1Q78 1Q80 1Q82 1Q84 1Q86 1Q88 1Q90 1Q92 1Q94 1Q96 1Q98 1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 -30% 65

Employment Y/Y % Chge Capex 1Q67 1Q69 1Q71 1Q73 1Q75 1Q77 1Q79 1Q81 1Q83 1Q85 1Q87 1Q89 1Q91 1Q93 1Q95 1Q97 1Q99 1Q01 1Q03 1Q05 1Q07 1Q09 1Q11

Capex Capacity Utilization

Sluggish jobs trends indicate difficult capex
Capex typically accelerates as capacity environment. utilization nears 80%, while credit conditions often matter more.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 92 Capex IT Capex Driven by Firm Replacement Needs

IT Capex Minus Communication Equipment Capex Multiple of IT Capex to Depreciation 500 1.50 450 4Q84: 1.34 1.40 400 2Q00: 1.28 350 1.30 1Q91: 1.08 300 1.20 250 200 1.10 150 4Q82: 1.17 1.00

billions of dollars Current 2Q87: 1.09 100 (2Q11): 1.07 0.90 50

0 1Q80 1Q82 1Q84 1Q86 1Q88 1Q90 1Q92 1Q94 1Q96 1Q98 1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 Depreciation is based on 4-Year Schedule for IT 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Recovery in place for two years; not just starting
IT capex already appears well on its way. up.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 93 Capex S&P 500 Capex as % Sales ex-Financials Total Capacity

S&P 500 ex-Financials Capex as % of Sales Total U.S. Capacity Growth 8.50% 8%

8.00% 6%

7.50% 4%

7.00% 2%

6.50% Year-over-Year 0%

6.00% -2%

5.50% -4%

5.00% 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 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11

Declining capital expenditures have been a key
Capacity growth has been accelerating driver behind improved free cash flow, but also off the bottom. reflects structural changes.

Source: FactSet, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 94 Recession Study Stock Market Performance Around Recessions

Using S&P 500 Performance Sep 29- Jun 37- Mar-45- Dec-48- Aug 53- Sept 57- May 60- Mar-33 Jun-38 Oct-45 Oct-49 May-54 Apr-58 Feb-61 Length of Recession 1056 326 191 260 206 167 209 Number of Days that Peak Occurred Prior to Recession -5* 68 -6* 124 147 38 188 Peak prior to recession to trough during recession (%) -86.19% -54.48% -6.88% -20.59% -14.79% -20.53% -13.85% Days between peak and trough 811 317 16 281 176 73 311 Days into Recession that trough occurred 816 250 22 158 30 36 124 Depth into Recession that trough occurred 77.27% 76.69% 11.52% 60.77% 14.56% 21.56% 59.33%

Jan 70- Dec 73- Feb 80- Aug 81- Aug 90- Apr 01- Dec-07- Nov-70 Mar-75 Jul-80 Nov-82 Mar-91 Nov-01 Jun-09 Length of Recession 232 334 126 337 167 166 366 Number of Days that Peak Occurred Prior to Recession 160 225 2 170 12 145 58 Peak prior to recession to trough during recession (%) -34.73% -48.20% -14.74% -27.11% -19.92% -36.49% -56.77% Days between peak and trough 260 436 40 430 62 261 355 Days into Recession that trough occurred 101 212 39 261 51 117 298 Depth into Recession that trough occurred 43.53% 63.47% 30.95% 77.45% 30.54% 70.48% 81.42%

Average Median Length of Recession 295.9 220.5 Number of Days that Peak Occurred Prior to Recession 111.4 134.5 Peak prior to recession to trough during recession (%) -32.52% -23.85% Days between peak and trough 273.5 271.0 Days into Recession that trough occurred 179.6 120.5 Depth into Recession that trough occurred 51.40% 60.05%

*Peak Occurred in Recession Note: Peaks within the 12-months prior to recession

Significant downside risk when recessions ensue.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 95 Recession Study Stock Market Performance Following the Trough in the Market During Recessions

Sep 29- Jun 37- Mar-45- Dec-48- Aug 53- Sept 57- May 60- Jan 70- Dec 73- Feb 80- Aug 81- Aug 90- Apr 01- Mar-33 Jun-38 Oct-45 Oct-49 May-54 Apr-58 Feb-61 Nov-70 Mar-75 Jul-80 Nov-82 Mar-91 Nov-01 S&P 500 Performance following trough in markets 12 months from trough 120.85% 29.18% 34.88% 42.05% 37.70% 31.02% 30.67% 43.73% 38.01% 37.09% 58.33% 29.10% -13.68%

Average 12 month performance 39.92%

Average 24 month performance 47.83%

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 96 Recession Study Stock Market Performance Around Recessions

Large Cap Sector Performance During Recessions (Early vs. Late Stage) Jan 80 - Mar 80 - July 81 - July 82 - July 90 - Oct 90 - Mar 01 - Sept 01 - Dec 07 - Mar 09 - Avg Pre - Avg Pre - Total Returns Mar 80 July 80 July 82 Nov 82 Oct 90 Mar 91 Sept 01 Nov 01 Mar 09 June 09 07 - Early 07 - Late Russell 1000 -5.66% 22.58% -15.13% 33.34% -15.01% 27.15% -15.87% 9.94% -44.48% 16.50% -12.92% 23.25% Auto & Transportation -4.85% 18.89% -22.98% 44.57% -26.08% 24.09% -20.51% 16.39% -46.94% 22.97%* -18.60% 25.98% Consumer Discretionary -11.58% 26.36% -1.68% 47.14% -25.19% 43.73% -17.82% 15.90% -40.90% 14.45% -14.07% 33.28% Consumer Staples -9.13% 28.10% 7.54% 27.47% -4.90% 29.30% -3.00% 1.19% -27.87% 12.70% -2.37% 21.52% Financial Services -12.97% 24.02% -17.80% 50.57% -31.28% 54.22% -8.06% 5.81% -64.81% 29.92% -17.53% 33.66% Health Care -7.77% 21.76% -0.49% 28.42% -6.33% 36.48% -5.60% 5.04% -30.07% 9.49% -5.05% 22.92% Integrated Oils 7.54% 7.76% -20.36% 14.35% 2.62% 11.51% -1.73% -2.24% -27.43% 5.69%* -2.98% 7.84% Materials & Processing -8.18% 26.32% -32.63% 37.76% -19.04% 27.95% -7.82% 14.82% -47.87% 17.60% -16.92% 26.71% Other -6.53% 22.53% -14.68% 39.12% -28.50% 35.16% -19.52% 7.17% -65.44% 29.60%* -17.31% 26.00% Energy -2.60% 30.86% -40.79% 15.26% -9.07% -0.16% -39.53% -4.25% -53.18% 30.86% -23.00% 10.43% Producer Durables -6.36% 20.85% -25.72% 37.56% -21.97% 21.94% -23.98% 17.84% -50.52% 19.27% -19.51% 24.55% Technology -8.76% 23.28% -12.09% 47.62% -24.39% 35.60% -36.75% 37.88% -38.00% 20.22% -20.50% 36.09% Utilities -7.52% 16.81% 10.78% 22.29% -2.13% 7.94% -9.41% -7.14% -35.04% 8.29% -2.07% 9.97% * Through May-end 2009 due to discontinuation of index

Financial Services, Tech, Materials, and Consumer Discretionary tend to do well during the second half of recessions.

Source: Russell Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 97 Rate Increase Study S&P 500 Large Cap Sector and Industry Group Performance Prior to First Rate Hike

S&P 500 Large Cap Sector & Industry Group Performance Prior to First Rate Hike 2/4/1994 6/30/1999 6/30/2004 Average 1-month 3-month 6-month 1-month 3-month 6-month 1-month 3-month 6-month 1-month 3-month 6-month S&P 500 Large Cap 0.63% 2.69% 4.74% 5.44% 5.53% 11.43% 1.80% 1.23% 2.81% 2.62% 3.15% 6.33% Consumer Discretionary 3.00% 3.67% 12.09% 5.94% 2.96% 15.51% 0.46% -0.39% 1.06% 3.13% 2.08% 9.55% Autos & Components 7.27% 15.63% 24.44% -1.84% -0.68% 2.10% 4.39% 6.18% -0.06% 3.27% 7.05% 8.83% Consumer Durables & Apparel 1.45% 2.89% 8.61% 3.41% 7.87% 11.81% 2.23% -1.40% 6.10% 2.36% 3.12% 8.84% Consumer Services 6.13% 14.23% 22.17% 6.45% -5.72% 8.31% 2.76% -0.09% 12.10% 5.11% 2.81% 14.19% Media 2.50% 1.78% 17.96% 5.16% 6.14% 22.24% -0.80% -2.97% -8.30% 2.29% 1.65% 10.63% Retailing 0.74% -3.05% 2.34% 9.33% 2.80% 17.51% -0.54% 0.69% 6.00% 3.18% 0.15% 8.62%

Consumer Staples 0.26% 4.40% 10.11% -1.24% -2.35% -8.85% 0.23% -0.06% 5.54% -0.25% 0.66% 2.27% Food & Staples Retailing -0.48% 1.21% -3.41% 5.89% -1.11% -11.50% -2.00% -5.41% 1.77% 1.14% -1.77% -4.38% Food Beverage & Tobacco -0.64% 3.46% 9.37% -0.90% 0.89% -10.66% 1.37% 0.78% 4.33% -0.05% 1.71% 1.01% Household & Personal Products 3.25% 8.60% 18.63% -5.52% -9.54% -2.45% 0.98% 5.89% 13.36% -0.43% 1.65% 9.85%

Energy 3.98% 1.79% 4.70% 0.86% 10.71% 17.39% 5.15% 7.60% 12.00% 3.33% 6.70% 11.37% Energy 3.98% 1.79% 4.70% 0.86% 10.71% 17.39% 5.15% 7.60% 12.00% 3.33% 6.70% 11.37%

Financials 5.11% 8.16% -0.42% 3.97% 3.97% 10.55% 0.29% -3.17% 1.33% 3.12% 2.98% 3.82% Banks 4.29% 10.69% 1.40% 5.25% 4.37% 4.28% 0.03% -0.16% 1.20% 3.19% 4.96% 2.30% Diversified Financials 8.87% 8.86% 2.32% 4.90% 5.52% 21.92% 0.36% -8.17% -2.14% 4.71% 2.07% 7.37% Insurance 3.02% 2.98% -6.07% 0.00% 0.83% 8.14% 0.52% 0.20% 7.39% 1.18% 1.34% 3.15% Real Estate N/A N/A N/A N/A N/A N/A 1.70% -5.31% 0.98% 1.70% -5.31% 0.98%

Healthcare -0.85% 3.96% 12.59% 4.50% -6.89% -2.82% -0.35% 2.55% 1.70% 1.10% -0.13% 3.82% Healthcare Equipment & Services 6.35% 12.34% 18.33% 2.30% 0.04% -7.26% 2.32% 4.31% 9.82% 3.66% 5.56% 6.96% Pharmaceuticals & Biotechnology -2.14% 2.48% 11.54% 4.98% -8.28% -1.83% -1.57% 1.72% -1.68% 0.42% -1.36% 2.67%

Industrials 5.43% 10.93% 12.10% 6.55% 10.94% 16.58% 5.80% 8.03% 6.80% 5.93% 9.97% 11.83% Capital Goods 5.19% 10.47% 12.26% 7.64% 11.83% 18.38% 6.11% 8.50% 7.49% 6.32% 10.27% 12.71% Commercial Services & Supplies 5.53% 14.57% 9.20% 5.74% 11.52% 11.43% 2.98% 3.37% 7.97% 4.75% 9.82% 9.53% Transportation 6.52% 10.18% 14.12% -0.49% 3.24% 11.01% 6.09% 8.85% 2.53% 4.04% 7.42% 9.22%

Information Technology 4.02% 11.73% 16.75% 11.84% 10.51% 24.95% 2.75% 2.09% 0.03% 6.20% 8.11% 13.91% Semis & Semi Equipment 9.24% 9.38% 9.05% 16.23% 8.25% 13.64% -2.66% -2.56% -10.49% 7.61% 5.02% 4.07% Software & Services 0.99% 10.05% 18.72% 9.36% -1.22% 27.24% 6.07% 8.97% 3.39% 5.47% 5.93% 16.45% Technology Hardware & Equipment 4.72% 12.13% 16.28% 13.09% 17.25% 24.06% 2.89% -0.83% 3.15% 6.90% 9.52% 14.50%

Materials 7.02% 14.27% 17.05% 4.96% 19.62% 21.31% 4.90% 1.73% -0.20% 5.63% 11.87% 12.72% Materials 7.02% 14.27% 17.05% 4.96% 19.62% 21.31% 4.90% 1.73% -0.20% 5.63% 11.87% 12.72%

Telecom Services 4.32% -2.78% -2.45% 6.81% 12.04% 15.45% 3.03% -1.13% 2.76% 4.72% 2.71% 5.25% Telecom Services 4.32% -2.78% -2.45% 6.81% 12.04% 15.45% 3.03% -1.13% 2.75% 4.72% 2.71% 5.25%

Utilities -1.38% -0.91% -8.08% -3.82% 9.46% -0.83% 1.24% -2.14% 1.47% -1.32% 2.14% -2.48% Utilities -1.38% -0.91% -8.08% -3.82% 9.46% -0.83% 1.24% -2.14% 1.47% -1.32% 2.14% -2.48%

Shading indicates outperformance relative to S&P 500

Source: FactSet, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 98 Short-Term Trading Indicators VIX vs S&P 500 Forward Performance VIX

Buckets of 5 for VIX - S&P 500 Fwd Performance VIX with 60-Day Moving Average and Standard Deviations 35-40 Random Outcomes 80 3-mth 6-mth 12-mth 3-mth 6-mth 12-mth 70 Average 5.5% 9.4% 18.9% 1.9% 4.0% 8.2% 60 Median 6.3% 8.4% 22.2% 2.6% 4.8% 10.0% 50 40 Up 85 82 93 3675 3874 4106 30 Down 24 27 16 1872 1609 1245 20 Total 109 109 109 5547 5483 5351 10 0 % Up 78.0% 75.2% 85.3% 66.3% 70.7% 76.7% 31-Jul-06 16-Jul-07 25-Jul-11 02-Jan-06 09-Oct-06 26-Feb-07 11-Feb-08 21-Apr-08 30-Jun-08 26-Jan-09 06-Apr-09 15-Jun-09 11-Jan-10 18-Oct-10 18-Dec-06 24-Sep-07 03-Dec-07 08-Sep-08 17-Nov-08 02-Nov-09 27-Dec-10 13-Mar-06 22-May-06 07-May-07 24-Aug-09 07-Mar-11 16-May-11 22-Mar-10 31-May-10 09-Aug-10 VIX 60-Period Rolling Avg. Plus 1 StDev Plus 2 StDev Minus 1 StDev Minus 2 StDev

LIBOR/T–Bill Percent of NYSE Stocks at or Below Moving Avg

Percentage of NYSE Stocks Trading At or Below 200 Day Avg Vs. S&P 500 Spread Between 3-Month LIBOR and 3-Month T-Bill (3-Year Moving Average) 100 1650 5.0 90 1550

4.0 80 1450

3.0 70 1350 60 1250 S&P 500 2.0 50 1150

1.0 40 1050

0.0 30 950

%NYSE of Stocks Below Avg. 20 850 -1.0 10 750

-2.0 0 650 03-Jul-95 1/2/2004 5/2/2004 9/2/2004 1/2/2005 5/2/2005 9/2/2005 1/2/2006 5/2/2006 9/2/2006 1/2/2007 5/2/2007 9/2/2007 1/2/2008 5/2/2008 9/2/2008 1/2/2009 5/2/2009 9/2/2009 1/2/2010 5/2/2010 9/2/2010 1/2/2011 5/2/2011 02-Jun-97 02-Apr-01 31-Jan-05 01-Jan-07 02-Jan-84 02-Oct-89 01-Dec-08 01-Nov-10 02-Dec-85 02-Nov-87 02-Sep-91 02-Aug-93 03-May-99 03-Mar-03

Percentage of NYSE Stocks Trading At or Below 200 Day Avg S&P 500 Spread Average Plus 1 SD Plus 2 SD Minus 1 SD Minus 2 SD
The CEM is one of our better very short-term lead market indicators (one-to-three weeks), comprised of six factors including spread in U.S. interest rates, steepness of yield curve, Redbook retail rates, copper and oil prices, and railroad freight – total carloads. Source: Haver Analytics, Bloomberg, and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 99 Dividends Common Dividends Paid Dividend Payout Ratio

S&P 500 Dividends S&P 500 Dividend Payout Ratio 80 70%

70 65% 60% 60 Average = 45.01% 55% 50 50%

40 45% $ billions 30 40% 35% 20 30% 10 25%

0 1Q60 1Q63 1Q66 1Q69 1Q72 1Q75 1Q78 1Q81 1Q84 1Q87 1Q90 1Q93 1Q96 1Q99 1Q02 1Q05 1Q08 1Q11

Payout Ratio Average Q1-90 Q1-91 Q1-92 Q1-93 Q1-94 Q1-95 Q1-96 Q1-97 Q1-98 Q1-99 Q1-00 Q1-01 Q1-02 Q1-03 Q1-04 Q1-05 Q1-06 Q1-07 Q1-08 Q1-09 Q1-10 Q1-11

Payouts increased in 2Q10, 3Q10, 4Q10 and
Aging investors looking for income in a low interest 1Q11 after falling in 1Q10. rate environment.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 100 Dividends Dividend Screens (Date of observation: June 10, 2011)

Screen 1 Screen 2 Screen 3 T AT&T Inc. Telecommunication Services ACXM Acxiom Corp. Information Technology MU Micron Technology Inc. Information Technology AFL AFLAC Inc. Financials BMY Bristol-Myers Squibb Co. Health Care ADBE Adobe Systems Inc. Information Technology MS Morgan Stanley Financials ALL Allstate Corp. Financials ED Consolidated Edison Inc. Utilities AES AES Corp. Utilities MSI Motorola Solutions Inc. Information Technology AM American Greetings Corp. Cl A Consumer Discretionary DPL DPL Inc. Utilities ADS Alliance Data Systems Corp. Information Technology MGAM Multimedia Games Holding Co. Inc. Consumer Discretionary CLMS Calamos Asset Management Inc. (Cl A) Financials DUK Duke Energy Corp. Utilities AMGN Amgen Inc. Health Care NARA Nara Bancorp Inc. Financials DPS Dr Pepper Snapple Group Inc. Consumer Staples LLY Eli Lilly & Co. Health Care AOL AOL Inc. Information Technology NDAQ NASDAQ OMX Group Inc. (The) Financials FFBC First Financial Bancorp (Ohio) Financials KMB Kimberly-Clark Corp. Consumer Staples BAC Bank of America Corp. Financials NPBC National Penn Bancshares Inc. Financials HMN Horace Mann Educators Corp. Financials LG Laclede Group Inc. Utilities BRK.B Berkshire Hathaway Inc. Cl B Financials NAVG Navigators Group Inc. Financials MTB M&T Bank Corp. Financials MRK Merck & Co Inc Health Care BCSI Blue Coat Systems Inc. Information Technology NSR NeuStar Inc. (Cl A) Information Technology PL Protective Life Corp. Financials WGL WGL Holdings Inc. Utilities CA CA Inc. Information Technology NRG NRG Energy Inc. Utilities STR Questar Corp. Utilities CBM Cambrex Corp. Health Care ORCL Oracle Corp. Information Technology SWY Safeway Inc. Consumer Staples SCHW Charles Schwab Corp. Financials PACW PacWest Bancorp. Financials SIGI Selective Insurance Group Inc. Financials GLW Corning Inc. Information Technology PNFP Pinnacle Financial Partners Inc. Financials CUB Cubic Corp. Industrials PVTB PrivateBancorp Inc. Financials EIG Employers Holdings Inc. Financials QLGC QLogic Corp. Information Technology FHN First Horizon National Corp. Financials NX Quanex Building Products Corp. Industrials FMBI First Midwest Bancorp Financials QSFT Quest Software Inc. Information Technology GY GenCorp Inc. Industrials RGA Reinsurance Group of America Inc. Financials GNW Genworth Financial Inc. (Cl A) Financials LUV Southwest Airlines Co. Industrials ROCK Gibraltar Industries Inc. Industrials SMSC Standard Microsystems Corp. Information Technology GPN Global Payments Inc. Information Technology SUSQ Susquehanna Bancshares Inc. Financials HOMB Home BancShares Inc. Financials SYMC Symantec Corp. Information Technology IPCC Infinity Property & Casualty C Financials SNPS Synopsys Inc. Information Technology INSP InfoSpace Inc. Information Technology TCB TCF Financial Corp. Financials IDTI Integrated Device Technology Information Technology TER Teradyne Inc. Information Technology IILG Interval Leisure Group Inc. Consumer Discretionary TTMI TTM Technologies Inc. Information Technology JDAS JDA Software Group Inc. Information Technology UTHR United Therapeutics Corp. Health Care KIRK Kirkland's Inc. Consumer Discretionary URS URS Corp. Industrials LNC Lincoln National Corp. Financials VVI Viad Corp. Industrials LOJN Lo-Jack Corp. Information Technology WTS Watts Water Technologies Inc. (C Industrials MGLN Magellan Health Services Inc. Health Care WDC Western Digital Corp. Information Technology MCRL Micrel Inc. Information Technology Parameters for Screen 1 Parameters for Screen 2 Parameters for Screen 3 Dividend Yield Greater Than 4% Dividend Yield Less Than 1.5% Dividend Yield Greater Than 2.50% (Market Yield) but less LT Debt to Cap Less Than 50% Cash & Equivalents Greater than 20% of Market Value than 3.50% ST Debt as a % of Total Debt Less Than 50% Free Cash Flow LTM Greater Than 5% of Market Value Free Cash Flow LTM Greater Than 12.5% of Market Value Debt Rating Greater Than or Equal to A- Price to Sales Within a 15% Band of its 3 Year Average Price to FY1 / Price to FY2 Greater Than 1.05 (in effect 5% EPS Growth)

We tend to favor the third screen. Stock selection based on the dividends thesis requires more of a stock specific rather than industry focused approach.
Increased dividends may provide better than the average 7% total return that we envision from stocks over the next few years.
Play on dividends tax relief story requires attention to the tax structure of the dividend payer.

Source: CIRA – U.S. Equity Strategy and FactSet Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 101 Dividends Insider Dividend Screen Takeaways

% of GICS Closely FCF as % LT Debt ST Debt Company Sector Held Market % Total % Total
Symbol Company Name Name Shares Value Capital Debt Closely held companies could ARO Aeropostale Inc. Consumer Discretionary 43.51 11.06% 0.00% N/A increase dividend payouts significantly BRK.B Berkshire Hathaway Inc. Cl B Financials 31.81 6.42% 25.33% 2.97% BCSI Blue Coat Systems Inc. Information Technology 42.62 8.22% 14.14% 0.00% due to the new dividend law limiting CLMS Calamos Asset Management In Financials 73.51 50.59% 28.77% 30.15% CCE Coca-Cola Enterprises Inc. Consumer Staples 36.76 5.40% 44.06% 0.66% top dividend tax rates at 15%. CCRN Cross Country Healthcare Inc. Health Care 34.16 13.21% 14.18% 18.30% CUB Cubic Corp. Industrials 40.92 7.56% 2.20% 27.93% CBST Cubist Pharmaceuticals Inc. Health Care 39.31 7.83% 38.57% 0.00%
After-tax benefits of stock dividends SSP E.W. Scripps Co. (Cl A) Consumer Discretionary 44.90 10.63% 0.00% N/A EBIX Ebix Inc. Information Technology 72.42 6.26% 6.85% 26.18% appear better than after-tax returns ESE ESCO Technologies Inc. Industrials 51.37 5.29% 12.73% 35.89% RE Everest Re Group Ltd. Financials 40.12 17.76% 12.08% 4.66% generated by 5-year Treasuries for EXPE Expedia Inc. Consumer Discretionary 36.62 7.28% 37.83% 0.00% FRX Forest Laboratories Inc. Health Care 38.83 10.24% 0.00% N/A first time in 40 years. GPS Gap Inc. Consumer Discretionary 62.44 9.23% 24.84% 0.00% HSIC Henry Schein Inc. Health Care 32.60 5.44% 13.77% 20.57% IART Integra LifeSciences Holdings CHealth Care 73.30 5.14% 32.98% 19.11% KID Kid Brands Inc. Consumer Discretionary 84.07 9.10% 18.65% 48.95%
Universe: S&P 1500 MANT ManTech International Corp. (C Information Technology 55.03 10.22% 16.58% 0.00% MDP Meredith Corp. Consumer Discretionary 35.28 9.15% 17.78% 22.22% MOH Molina Healthcare Inc. Health Care 65.46 9.37% 18.25% 0.00%
Percentage of closely held shares > 30 % NAVG Navigators Group Inc. Financials 41.84 15.84% 12.29% 0.00% NCIT NCI Inc. Information Technology 59.06 6.91% 13.99% 0.00% NTCT NetScout Systems Inc. Information Technology 49.45 7.08% 13.70% 22.02% ASGN On Assignment Inc. Industrials 36.27 5.98% 24.25% 6.37%
LTM FCF > 5% of market value PZZA Papa John's International Inc. Consumer Discretionary 34.96 7.05% 18.22% 0.00% QSFT Quest Software Inc. Information Technology 32.68 8.81% 3.24% 1.71% SEE Sealed Air Corp. Materials 34.62 8.24% 35.76% 0.99%
ST debt < 50% of total debt SNPS Synopsys Inc. Information Technology 31.96 8.00% 0.00% N/A TTMI TTM Technologies Inc. Information Technology 37.46 5.14% 32.25% 17.69% WRB W.R. Berkley Corp. Financials 38.97 7.69% 30.77% 6.63%
WPO Washington Post Co. (Cl B) Consumer Discretionary 51.34 10.92% 12.76% 0.76% LT debt < 50% total capitalization WTS Watts Water Technologies Inc. Industrials 62.84 6.39% 33.07% 0.17% WBS Webster Financial Corp. Financials 37.45 17.30% 26.71% 46.82% WRLD World Acceptance Corp. Financials 45.91 19.34% 17.82% 40.11% ZEP Zep Inc. Materials 39.85 5.35% 47.98% 9.78%

Date of observation: June 10, 2011 Source: CIRA – U.S. Equity Strategy and FactSet Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 102 The Incredible Shrinking Share Count Names in Citi Investment Research Coverage Universe

06/09/11 Ticker Closing CIRA Target CIRA 2001 to 2002 to 2003 to 2004 to 2005 to 2006 to 2007 to 2008 to 2009 to Symbol Price Price Rating 2002 2003 2004 2005 2006 2007 2008 2009 2010 AUTOZONE INC AZO $291.94 $300.00 2M -8.79% -10.40% -8.71% -3.68% -7.88% -10.61% -9.04% -13.87% -11.05% BMC SOFTWARE INC BMC $52.52 $53.00 2M -3.91% -3.50% -1.60% -3.93% -4.16% -5.47% -4.10% -1.19% -2.08% GRAINGER (W W) INC GWW $143.42 $155.00 2M -1.90% -0.60% -0.47% -0.97% -6.30% -5.48% -5.89% -3.35% -4.01% INTL BUSINESS MACHINES CORP IBM $164.84 $190.00 1M -0.05% -1.62% -2.89% -4.35% -4.29% -8.05% -3.33% -2.52% -5.93% INTUIT INC INTU $50.80 $63.00 1M -3.22% -3.29% -5.57% -6.31% -0.73% -4.57% -3.80% -1.20% -1.77% KROGER CO KR $23.80 $23.00 2M -4.38% -3.27% -0.95% -0.96% -2.48% -4.81% -3.71% -0.31% -2.17% PROGRESSIVE CORP-OHIO PGR $20.38 $25.00 1M -1.00% -0.73% -7.39% -1.55% -5.22% -9.06% -0.54% -0.58% -1.52% ROCKWELL COLLINS INC COL $59.68 $68.00 2H -1.96% -1.00% -0.11% -3.20% -2.44% -2.97% -3.13% -0.51% -1.65% ROSS STORES INC ROST $77.68 $83.00 2M -2.48% -2.50% -2.93% -1.53% -3.31% -3.06% -4.50% -4.26% -3.87% SHERWIN-WILLIAMS CO SHW $82.27 $87.00 2M -3.29% -3.70% -1.83% -4.00% -1.16% -8.05% -4.71% -6.49% -2.21% TORCHMARK CORP TMK $63.53 $70.00 1L -3.76% -4.70% -4.23% -4.05% -3.57% -7.71% -8.10% -2.20% -4.34% WATERS CORP WAT $94.19 $99.00 2M -3.11% -4.85% -0.71% -12.10% -3.76% -0.39% -3.05% -3.85% -2.41%

Parameters Takeaways

Buy back every year.
More profits accrue to fewer shares outstanding.
Shareholder value enhancing versus excessive share dilution elsewhere.

Source: CIRA – U.S. Equity Strategy and FactSet Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 103 Long-Term Returns Subsequent Price Performance When 10-Year CAGR S&P 500 Price Performance: 10-Year CAGR Is Negative

S&P 500 10-Year CAGR vs. S&P 500 Forward 5-Year CAGR 5-Yr Forward 10-Yr 40.00% 30.00% S&P 500 Forward S&P 20.00%

10.00% CAGR 500 CAGR 0.00% Average 6.73% 6.15% -10.00%

-20.00% Median 7.71% 5.98% -30.00% Instances 208 208

1/31/1900 1/31/1906 1/31/1912 1/31/1918 1/31/1924 1/31/1930 1/31/1936 1/31/1942 1/31/1948 1/31/1954 1/31/1960 1/31/1966 1/31/1972 1/31/1978 1/31/1984 1/31/1990 1/31/1996 1/31/2002 1/31/2008 > 0 168 196 S&P 500 Forward 5-Year CAGR S&P 500 10-Year CAGR % UP 80.77% 94.23%

Markets tend to perform well in the subsequent five and ten years after long periods of negative returns.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 104 Long-Term Returns Historical Stock Market Compound Annual Growth Rates

10-Year Treasury S&P 500 Total Return Total Return Price Dividend EPS Valuation Change 20th Century 4.68% 10.44% 5.65% 4.79% 4.80% 0.86% Roaring 20s 5.41% 14.93% 9.04% 5.89% 5.58% 3.46% 1950-1965 2.12% 16.07% 11.26% 4.81% 5.16% 6.10% 1983-1994 bull market 9.67% 14.34% 10.36% 3.97% 7.65% 2.72% 1995-1999 tech bulge 6.98% 28.56% 26.18% 2.37% 9.50% 16.69% 2000-2009 5.74% -0.95% -2.72% 1.77% -0.04% -2.69%

Note: Using Reported EPS

Total Return Breakdown
Dividends are core to market returns excluding Historical Stock Market Compound Annual Growth Rates 10-Year Treasury S&P 500 Price Perf./ 1995–99 aberrational period, in our view. Decade Total Return Total Return Price Dividend EPS EPS Growth
1900-1910 2.73% 10.35% 5.52% 4.83% 5.64% 0.98 Throughout the 1900s, stocks generally appreciated 1910-1920 2.62% 4.22% -1.31% 5.53% 1.96% (0.67) in line with earnings. 1920-1930 5.41% 14.93% 9.04% 5.89% 5.58% 1.62 1930-1940 3.88% -0.64% -5.26% 4.62% -4.09% 1.29
In the latter 1990s, valuation expansion was the 1940-1950 2.41% 8.74% 2.98% 5.76% 8.15% 0.37 1950-1960 0.69% 19.25% 13.58% 5.66% 3.87% 3.51 greatest driver for stock price appreciation (like the 1960-1970 3.71% 7.78% 4.39% 3.39% 5.48% 0.80 1970-1980 6.82% 5.88% 1.60% 4.27% 9.90% 0.16 1950s). 1980-1990 11.75% 17.55% 12.59% 4.96% 4.42% 2.85
1990-2000 7.24% 18.21% 15.31% 2.90% 7.72% 1.98 When the assumed earnings growth potential 1995-2000 6.98% 28.56% 26.18% 2.37% 9.50% 2.76 proved to be excessive, stock prices fell sharply due 2000-2009 5.74% -0.95% -2.72% 1.77% -0.04% 76.96 to multiple contraction.

Source: CIRA – U.S. Equity Strategy and Haver Analytics Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 105 Variability Seems to Be the Norm S&P 500 Index Since 1911 S&P 500 Index Since 1961

S&P 500 Index Annual Returns S&P 500 Index Annual Returns 50% 40% 30%

30% 20%

10% 10% 0%

-10% -10% -20%

-30% 5.90% of Growth Trend -30%

Trend Appreciation of 5.05% of Appreciation Trend -40%

-50% -50% 1911 1916 1921 1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009

Annual Appreciation Trend Gains Annual Appreciation Trend Gains

In 36 years, the market rose more than 15%.
In 18 years, the market rose more than 15%.
In 32 years, the market declined.
In 13 years, the market declined.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 106 Credit Implications Fed Funds and High Yield Credit Spreads Fed Funds and ISM Trends

High Yield Spreads versus Fed Funds Rate ISM lagged 6 months vs. 12-month change Fed Funds Effective Rate (bps) 2000 12.00 74.0 800.0 1800 70.0

10.00 600.0 Fed 12-monthin Funds change 1600 66.0

1400 8.00 62.0 400.0 Fed Funds Fed 58.0 1200 200.0 6.00 54.0 1000 50.0 0.0 800 4.00 46.0 -200.0

High Yield Credit Spreads Credit Yield High 600 42.0 2.00 lag 6-month ISM 400 38.0 -400.0 34.0 200 0.00 -600.0 30.0 26.0 -800.0 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

High Yield Spreads Fed Funds 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

12-month change Fed Funds ISM Mfg: PMI Composite Index (SA, 50+ = Econ Expand)

Fed actions take time to work, compared with “instant gratification” desires.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 107 Sentiment Consumer Confidence vs. S&P 500 NYSE Turnover

Consumer Confidence vs. S&P 500 12-Month Forward Performance Number of Years to Turnover all NYSE Shares 60% 10.00

140 9.00 40% 120 8.00

20% S&P 500Perf. 7.00 100 0% 6.00 80 5.00

-20% # Years

Consumer Confidence 60 4.00

40 -40% 3.00

2.00 20 -60% 1.00

Jun-77 Jun-79 Jun-81 Jun-83 Jun-85 Jun-87 Jun-89 Jun-91 Jun-93 Jun-95 Jun-97 Jun-99 Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 0.00 12-Month Consumer Confidence (SA, 1985=100) 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 State Street Investor Confidence Index

State Street Investor Confidence 150
Shorter-term investment horizons, though, given 140 much more rapid portfolio turnover. 130
In the 16 instances that Consumer Confidence 120 has been below 55, the S&P 500 has been up 12 110 months later 87.5% of the time. 100

90

80 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

State Street Index Average +1 Std Dev -1 Std Dev +2 Std Dev -2 Std Dev

Source: Haver Analytics, Bloomberg, and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 108 Sentiment Swiss Franc/US$ & Markets IPO Pricings

Sw iss Franc/U.S. Dollar vs. S&P 500 12-month Forw ard Return 2.1 50.0 $120 2.0 40.0 1.9 $100 1.8 30.0 return forward 12-month S&P 500 1.7 20.0 $80 1.6 1.5 10.0 1.4 $60

Sf/US$ 0.0 1.3 YTD (10.0) 1.2 $40

1.1 (20.0) ($) Billions in Volume 1.0 (30.0) 0.9 $20 0.8 (40.0) $0 1/2/09 8/10/90 7/12/91 6/12/92 5/14/93 4/15/94 3/17/95 2/16/96 1/17/97 9/22/00 8/24/01 7/26/02 6/27/03 12/4/09 01/03/86 12/05/86 11/06/87 10/07/88 09/08/89 12/19/97 11/20/98 10/22/99 05/28/04 04/29/05 03/31/06 03/02/07 02/01/08 11/05/10

12-month forw ard return Sf/US$ 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Risk aversion as represented by Swiss Franc buying often indicates stock price opportunity, with roughly 12.0% average historical upside potential when the SF/US$ is below 1.5.
Clearly not at “froth” levels of 1999/2000.

Source: FactSet, Renaissance Capital’s IPOhome.com, and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 109 Earnings S&P 500 Financial Profits Materials EPS vs FIBER

S&P Financials, Operating Profits (Billions of $) 60 180 80 FIBER Index (left) 160 50 60 Materials EPS (right) 140 40 Prices, 120 1Q 2011, 40 Current 100 30 Quote 80 20 20 60 40 0 10 20 0 0 -20 Consensus EPS -20 -10 1Q 2011 -40 -40 -20 -60 -60 Last data point for -80 -30 FIBER is Mar 31, 2011 -100 -80 -40 -120 1994 1996 1998 2000 2002 2004 2006 2008 2010 1999 2002 2005 2008 2011

Source: CIRA – U.S. Economics Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 110 Earnings Change in US Inventories Revenue Growth of DJIA vs. GDP Growth

Change in U.S. Inventories Quarterly Revenue Grow th of the DJIA vs. Nominal GDP Grow th 150 Year-over-Year 30.0% 10.0%

100 25.0% 8.0% 20.0%

50 Change % Y/Y GDP 15.0% 6.0% 10.0% 0 4.0% 5.0% 2.0% -50 0.0%

-5.0% 0.0% -100 Revenue% Y/Y Change SAAR,Billion $ Chained2000 -10.0% -2.0% -150 -15.0%

-20.0% -4.0% -200 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q80 1Q81 1Q82 1Q83 1Q84 1Q85 1Q86 1Q87 1Q88 1Q89 1Q90 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 Rev enue Avg Revenue Grow th GDP

Inventory swings are critical to production and EPS.
As GDP recovers, so does the top line.

Source: FactSet, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 111 Earnings S&P 500 Margin vs. S&P 500 Performance S&P 500 ROE vs. S&P 500 Performance

S&P 500 versus S&P 500 ROE S&P 500 versus S&P 500 Margins 20.0% 1600.0 9.5% 1600 19.0% 9.0% 1400.0 1400 18.0% 8.5% 17.0% 1200.0 8.0% 1200 16.0% S&P 500 1000.0 7.5% 15.0% 1000 S&P 500

ROE 14.0% 7.0% 800.0 Margin 800 13.0% 6.5% 12.0% 600.0 6.0% 600 11.0% 400.0 5.5% 10.0% 400 5.0% 9.0% 200.0

4.5% 200 1Q90 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 Based on current constituents ROE S&P 500 Mar gin S&P 500 Based on current constituents

There is a visible relationship between margins
But ROEs also matter. and stock price performance.
Given low net debt to capital levels, ROEs can be sustained with mild margin compression, if companies re-leverage balance sheets.

Source: FactSet and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 112 Earnings 12-Mo. Forward S&P 500 EPS Implied Long-Term US Earnings Growth

12-Month Forward S&P 500 EPS Estimates Percent Change from Prior Month, Annual Rate Implied Long-Term U.S. Earnings Grow th 40.00 14.0

12.0 0.00

10.0 -40.00

8.0 %

-80.00 6.0

Implied Growth = bond yield + ERP - div yield 2.98% + 3.00% -1.98% = 4.00% -120.00 4.0

-160.00 2.0 01/04/65 01/04/67 01/04/69 01/04/71 01/04/73 01/04/75 01/04/77 01/04/79 01/04/81 01/04/83 01/04/85 01/04/87 01/04/89 01/04/91 01/04/93 01/04/95 01/04/97 01/04/99 01/04/01 01/04/03 01/04/05 01/04/07 01/04/09 01/04/11 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 US Implied Earnings Grow th 3-Year Average + 1 St. Dev. - 1 St. Dev.

In July, forward 12-month earnings estimate
Bounced back. revisions fell to -12.10% on an annualized basis following a reading of -0.73% in June.

Source: FactSet, Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 113 How Bad? Performance Is Similar But Not the Same Price to Book

Nominal S&P 500 Price Index - Pre and Post Bubble Comparison S&P 500 Price to Book 260 550 6.0 240 500 5.0 220 450

200 400 4.0 180 350 1930's

160 300 3.0

1970's & Current & 1970's 140 250 2.0 120 200

100 150 1.0 80 100 -32-24-16-80 8 1624324048566472808896 0.0 months from trough, trough = 0

Nominal, 2000 -Current (trough Sept 02) Nominal, 1972-1982 (trough Sept 74) Apr-76 Apr-78 Apr-80 Apr-82 Apr-84 Apr-86 Apr-88 Apr-90 Apr-92 Apr-94 Apr-96 Apr-98 Apr-00 Apr-02 Apr-04 Apr-06 Apr-08 Apr-10 Nominal, 1929-1940 (trough Jun 32) S&P 500 Price to Book Avg +1 SD -1 SD +2 SD -2 SD S&P 500 price level indexed to 100 at monthly post-bubble troughs S&P 500 Annual Returns Price to Sales

S&P 500 Annual Returns (1801 through 2010) S&P 500 Price to Sales 3.0 70

60 2.5

50 2.0

40 1.5

Frequency 30 1.0 20

10 0.5

0 0.0 Apr-76 Apr-78 Apr-80 Apr-82 Apr-84 Apr-86 Apr-88 Apr-90 Apr-92 Apr-94 Apr-96 Apr-98 Apr-00 Apr-02 Apr-04 Apr-06 Apr-08 Apr-10 0% to 10% -10% to 0% to -10% 10% to10% 20% to20% 30% to30% 40% to40% 50% to50% 60% -50% to -40% to -50% -30% to -40% -20% to -30% -10% to -20% S&P 500 Price to Sales Avg +1 SD -1 SD +2 SD -2 SD

Source: Haver Analytics, Thomson Baseline, and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 114 Valuation Long-Term P/E Treasury Yields

S&P 500 P/E (using trailing operating EPS) 10-Year Treasury Price-to-Yield since 1960 35 45 Tech Bubble 40 30 35

25 30 Average = 16.14 25 20 20 15 15

Energy Buyout Boom 10 crisis or Buyout Binge 10 5

Iranian Revolution

5 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 Inverted Yield Average 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 P/E Avg P/E P/E based on 2011E EPS P/E based on 2012E EPS Bond Yields vs P/E Multiples S&P 500 Seasonality

High Yield Spreads versus Fed Funds Rate Average S&P 500 Equity Performance by Month Since 1950 2000 12.00 5.00% 1800 10.00 1600 4.00%

1400 8.00 3.00% Fed Funds 1200 6.00 1000 2.00%

800 4.00

High Yield Credit Spreads Credit Yield High 1.00% 600 2.00 400 0.00%

200 0.00 -1.00% Jul Jan Apr Jun Oct 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 Feb Mar Aug Sep May Nov Dec High Yield Spreads Fed Funds 1 Month 3 Month

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 115 Valuation 3 Month T-Bill Stock Dividend Yield vs. T-Bill Yield

Comparison of S&P 500 Dividend Yield and 3-month T-Bill Yield 18

3-month Price-to-Yield since 1960 16 120.0 14

105.0 12

90.0 10 Average =62.22

yield (%) 8 75.0 6 60.0 4 45.0 2

30.0 0

15.0 Jul-74 Jul-03 Jan-60 Jun-62 Apr-67 Feb-72 Oct-81 Jan-89 Jun-91 Apr-96 Feb-01 Oct-10 Nov-64 Sep-69 Nov-93 Sep-98 Dec-76 Dec-05 May-79 Mar-84 Aug-86 May-08 0.0 3 Month T-bill S&P 500 Dividend Yield

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 P/Es (Using Normalized Earnings)

S&P 500 P/E (using rolling 10-year average trailing operating EPS)
50.0 Moving back away from average levels. 45.0 40.0 35.0 Average = 21.21 30.0 25.0 20.0 15.0 10.0 5.0 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

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 116 Valuation

S&P 500 GICS Sectors – Valuation Metrics

(7/29/11) Market % of Trailing FY1 FY2 Price to Price to Div. Value Mkt Val P/E Rel. P/E Rel. P/E Rel. Sales Rel. Book Rel. Yield S&P 500 $12,334,853.0 15.60 13.07 11.37 1.28 2.35 2.06%

Consumer Discretionary $1,361,788.0 11.04% 17.96 1.15 15.56 1.19 13.46 1.18 1.10 0.86 3.24 1.38 1.52% Autos & Components $85,699.2 0.69% 8.92 0.57 8.20 0.63 7.38 0.65 0.44 0.34 5.58 2.38 0.64% Consumer Durables & Apparel $136,003.0 1.10% 21.29 1.37 16.53 1.26 14.38 1.26 1.39 1.09 3.18 1.36 1.73% Consumer Services $256,350.5 2.08% 20.32 1.30 17.79 1.36 15.80 1.39 2.28 1.79 6.73 2.87 2.03% Media $396,322.2 3.21% 17.15 1.10 14.28 1.09 12.10 1.06 1.51 1.19 2.14 0.91 1.54% Retailing $487,413.4 3.95% 20.22 1.30 18.26 1.40 15.66 1.38 0.86 0.67 3.49 1.49 1.33%

Consumer Staples $1,383,613.0 11.22% 15.59 1.00 14.45 1.11 13.18 1.16 0.93 0.73 3.37 1.44 3.05% Food & Staples Retailing $355,646.0 2.88% 14.46 0.93 13.19 1.01 11.86 1.04 0.40 0.31 2.40 1.02 2.18% Food Beverage & Tobacco $747,727.3 6.06% 16.37 1.05 14.84 1.14 13.60 1.20 1.68 1.32 4.10 1.75 3.30% Household & Personal Products $280,239.4 2.27% 15.16 0.97 15.24 1.17 13.99 1.23 1.97 1.55 3.49 1.49 3.28%

Energy $1,530,823.0 12.41% 15.67 1.01 11.32 0.87 10.14 0.89 1.08 0.84 3.64 1.55 1.75% Energy $1,530,823.0 12.41% 15.67 1.01 11.32 0.87 10.14 0.89 1.08 0.84 3.64 1.55 1.75%

Financials $1,892,368.0 15.34% 17.44 1.12 13.08 1.00 9.77 0.86 1.39 1.09 1.04 0.44 1.67% Banks $321,067.1 2.60% 16.01 1.03 11.23 0.86 8.84 0.78 1.72 1.35 1.01 0.43 1.89% Diversified Financials $836,294.8 6.78% 12.55 0.80 12.48 0.95 8.50 0.75 1.43 1.12 0.92 0.39 1.36% Insurance $526,267.9 4.27% 29.08 1.86 11.59 0.89 9.81 0.86 0.95 0.74 1.04 0.44 1.41% Real Estate $208,738.1 1.69% 56.32 3.61 56.41 4.31 39.87 3.51 5.50 4.31 2.42 1.03 2.99%

Healthcare $1,355,477.0 10.99% 12.40 0.80 11.64 0.89 10.99 0.97 1.20 0.94 3.94 1.68 2.29% Healthcare Equipment & Services $489,642.4 3.97% 14.54 0.93 13.22 1.01 11.86 1.04 0.62 0.49 2.88 1.23 1.09% Pharmaceuticals & Biotechnology $865,834.9 7.02% 11.45 0.73 10.90 0.83 10.55 0.93 2.53 1.98 4.98 2.12 2.97%

Industrials $1,269,678.0 10.29% 16.77 1.08 13.84 1.06 11.74 1.03 1.20 0.94 2.64 1.13 2.32% Capital Goods $970,874.5 7.87% 16.34 1.05 13.41 1.03 11.37 1.00 1.16 0.91 2.49 1.06 2.34% Commercial Services & Supplies $67,196.6 0.54% 16.19 1.04 14.97 1.14 13.24 1.16 1.14 0.90 2.57 1.09 3.12% Transportation $231,607.0 1.88% 19.05 1.22 15.60 1.19 13.12 1.15 1.41 1.10 3.60 1.54 2.00%

Information Technology $2,374,216.0 19.25% 14.67 0.94 12.61 0.96 11.26 0.99 2.36 1.85 3.33 1.42 1.07% Semis & Semi Equipment $289,676.3 2.35% 11.12 0.71 10.76 0.82 9.89 0.87 2.30 1.81 2.59 1.10 2.45% Software & Services $1,234,658.0 10.01% 15.30 0.98 13.61 1.04 12.07 1.06 3.10 2.43 4.06 1.73 1.09% Technology Harware & Equipment $849,881.6 6.89% 15.42 0.99 12.04 0.92 10.72 0.94 1.76 1.38 2.87 1.22 0.59%

Materials $427,789.3 3.47% 18.07 1.16 12.96 0.99 11.31 0.99 1.23 0.97 2.56 1.09 2.10% Materials $427,789.3 3.47% 18.07 1.16 12.96 0.99 11.31 0.99 1.23 0.97 2.56 1.09 2.10%

Telecom Services $337,634.8 2.74% 17.68 1.13 16.23 1.24 14.33 1.26 1.17 0.92 1.41 0.60 5.39% Telecom Services $337,634.8 2.74% 17.68 1.13 16.23 1.24 14.33 1.26 1.17 0.92 1.41 0.60 5.39%

Utilities $401,465.8 3.25% 13.14 0.84 13.39 1.02 13.35 1.17 1.20 0.94 1.65 0.70 4.34% Utilities $401,465.8 3.25% 13.14 0.84 13.39 1.02 13.35 1.17 1.20 0.94 1.65 0.70 4.34%

Source: FactSet and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 117 Valuation

S&P 500 GICS Sectors – Performance Statistics (7/29/11) Price Performance Stats Relative Price Performance Stats 1 Month 3 Months 6 Months 12 Months 3 Years YTD 1 Month 3 Months 6 Months 12 Months 3 Years YTD S&P 500 -1.16% -5.23% 1.25% 17.32% 2.30% 2.75% Consumer Discretionary -0.57% -2.24% 6.85% 27.38% 38.73% 5.98% 0.59% 2.99% 5.60% 10.07% 36.43% 3.23% Consumer Staples -0.77% -2.19% 6.12% 14.35% 11.89% 4.53% 0.38% 3.04% 4.87% -2.97% 9.59% 1.78% Energy 2.16% -5.85% 6.17% 39.31% 2.40% 11.10% 3.31% -0.62% 4.92% 21.99% 0.09% 8.35% Financials -3.35% -9.66% -8.87% 0.61% -30.69% -7.26% -2.19% -4.43% -10.11% -16.71% -32.99% -10.01% Healthcare -3.63% -3.16% 7.93% 19.56% 6.37% 8.20% -2.47% 2.07% 6.68% 2.25% 4.07% 5.45% Industrials -5.47% -10.56% -3.78% 14.06% -3.43% -0.62% -4.31% -5.32% -5.03% -3.26% -5.74% -3.38% Information Technology 3.03% -2.90% -0.35% 17.50% 18.49% 3.16% 4.19% 2.33% -1.60% 0.18% 16.19% 0.41% Materials -2.09% -6.64% 0.88% 23.35% -3.67% -0.84% -0.94% -1.41% -0.36% 6.03% -5.97% -3.60% Telecom Services -5.90% -6.53% 1.42% 13.76% -1.29% -2.61% -4.74% -1.30% 0.18% -3.56% -3.59% -5.37% Utilities -0.74% 0.02% 4.52% 8.52% -12.39% 5.53% 0.42% 5.25% 3.27% -8.80% -14.69% 2.77%

Source: FactSet and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 118 Mutual Funds Assets

Mutual Fund Assets – Breakdown by Category (excluding Institutional Money Market Assets)

Retail Money Market Assets Equity Assets Hybrid Assets Bond Assets 1995 19.73% 48.71% 8.21% 23.35% 1996 18.03% 53.91% 7.90% 20.16% Equity Peak – August 2000: 1997 15.95% 58.38% 7.82% 17.85%
1998 16.28% 59.74% 7.32% 16.66% Equity funds = 68.04% 1999 15.10% 65.57% 6.15% 13.18%
2000 16.70% 64.47% 5.63% 13.20% Retail money market funds = 14.61% 2001 18.82% 59.17% 6.00% 16.01%
2002 19.76% 51.95% 6.38% 21.92% Bond funds = 12.01% 2003 14.80% 58.55% 6.94% 19.72%
Hybrid funds = 5.34% 2004 12.13% 62.19% 7.37% 18.31% 2005 10.89% 64.13% 7.36% 17.62% 2006 10.71% 65.49% 7.24% 16.56% 2007 11.48% 64.76% 7.08% 16.67% 2008 19.12% 51.94% 6.99% 21.95% Equity Trough – February 2009: 2009 12.06% 55.87% 7.20% 24.86%
Jun-11 8.77% 57.21% 7.70% 26.33% Equity funds = 47.83%
Retail money market funds = 20.69% Equity Funds Weighting
Bond funds = 24.67% Equity Mutual Fund Assets as a % of Total Assets (ex Institutional Money Market Assets)
Hybrid funds = 6.81% 72.0% 69.0% 66.0% June 2011: 63.0%
60.0% Equity funds = 57.21% 57.0%
Retail money market funds = 8.77% 54.0%
Bond funds = 26.33% 51.0% 48.0%
Hybrid funds = 7.70% 45.0% 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

Source: ICI and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 119 Fund Flow Footprints

$Billions 10-Year 10-Year Traditional Mutual Funds (ICI) Jun-11 May-11 Jun-10 June Avg. 2011 YTD 2010 YTD YTD Avg. Equity -$22.96 -$4.95 -$5.03 -$0.79 $13.76 $1.68 $47.25 Domestic -$20.82 -$7.07 -$7.50 -$3.12 -$9.37 -$26.59 $15.24 Growth -$17.50 -$5.70 -$4.91 -$3.19 -$7.20 -$11.40 $6.15 Aggressive Growth -$5.38 -$2.31 -$3.30 -$2.07 -$3.27 -$6.21 -$3.56 Value -$3.32 -$1.37 -$2.59 $0.07 -$2.17 -$15.19 $9.09 International -$2.14 $2.12 $2.47 $2.34 $22.99 $28.27 $32.16 Emerging Markets $0.78 $2.00 $1.90 $0.60 $11.12 $9.91 $5.62 Bonds $12.93 $19.59 $18.88 $8.63 $63.33 $153.04 $66.91

Source: Source: ICI, EPFR and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 120 Equity Culture Alive but Shifting Household Equity Holdings Breakdown Equity Ownership Breakdown

Households's Equity Holdings - Direct vs. Indirect Holdings Sector Holdings as a Percent of Total Corporate Equities 12,000

10,000 other

8,000 100% life insurance 90% private pension funds mutual funds 6,000 billion $ 80% 4,000 70%

2,000 60% Rest 50% 0 personal sector of world - 40% foreigners

30%

20% 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 10% Directly Held Corporate Equities as a Percent of Total Equities Holdings Indirectly Held Corporate Equities as a Percent of Total Equities Holdings 0% 1 Q701 Q7 1 Q741 Q 1 2 Q781Q80 76 1 Q821Q84 1 Q8 1 Q881 Q9 1 6 Q921 Mutual Funds Equity Holdings Q 1 0 Q961 94 Q9 1 Q001 Q 1 8 Q041Q06 02 1 Q081Q10 Mutual Funds: Equities as a Percent of Total Financial Assets 80% 75%
Diversification continues for individual investors. 70% 65%
More indirect ownership of stocks appears 60% evident. 55% 50%
Shift to defined benefit contribution plans is also 45% 40% having an impact. 35% 30% 1Q80 1Q82 1Q84 1Q86 1Q88 1Q90 1Q92 1Q94 1Q96 1Q98 1Q00 1Q02 1Q04 1Q06 1Q08 1Q10

Source: Flow of Funds and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 121 Retirement Accounts Private Pension Cash Flows into Equities Private Pension Equity Holdings

Private Pension Funds: Corporate Equity Flows (SAAR, Bil.$) Private Pension Funds (DC + DB): Equities as a Percent of Financial Assets 70%

65% 400 60% 300 55% 200 50% 100$Billions 0 45% -100 40% -200 35% -300 30% -400 4Q85 4Q87 4Q89 4Q91 4Q93 4Q95 4Q97 4Q99 4Q01 4Q03 4Q05 4Q07 4Q09

Equities as a Percent of Plans' Total Financial Assets 1Q80 1Q82 1Q84 1Q86 1Q88 1Q90 1Q92 1Q94 1Q96 1Q98 1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 Equities as a Percent of Plans' Financial Assets Ex Mutual Funds

Private Pension Stock Holdings – DB vs. DC Private Pension Corporate Equities

Household Equity Holdings at Retirement Plans Private Pension Funds (DC + DB): Corporate Equities as a Percent of Financial 70% As s ets

3,000 60%

2,500 50%

billion $ 2,000

40% 1,500

1,000 30%

500 20% 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Defined Benefit Plan: Corporate Equities as a % of Total Financial Assets

Equities Held At Defined Benefit Plans as a Percent of Total Equities Holdings Defined Contribution Plan: Corporate Equities as a % of Total Financial Assets Equities Held At Defined Contribution Plans as a Percent of Total Equities Holdings

Source: Flow of Funds and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 122 Pension Plans S&P 500 Pension Plan Asset Allocations

S&P 500 GICS Sector Equity Fixed Income Real Estate Other
Pension Allocation 2010 2009 2008 2007 2010 2009 2008 2007 2010 2009 2008 2007 2010 2009 2008 2007 Equity allocation decreased substantially Consumer Discretionary 45.3% 45.4% 33.8% 60.3% 43.0% 41.4% 53.6% 31.8% 0.4% 1.1% 5.7% 1.9% 11.3% 12.1% 6.9% 8.3% Consumer Staples 52.6% 51.9% 49.1% 64.2% 32.7% 35.5% 41.2% 30.3% 1.2% 1.5% 1.3% 1.1% 13.5% 11.1% 8.5% 4.5% in 2008, due to the market’s plunge, but Energy 58.0% 56.3% 59.1% 60.4% 35.7% 35.6% 35.0% 33.1% 2.5% 2.2% 2.3% 1.3% 3.9% 5.9% 3.7% 8.5% Financials 48.3% 42.8% 38.3% 60.8% 40.2% 40.2% 47.5% 33.1% 1.7% 1.9% 2.5% 1.1% 9.8% 15.1% 11.7% 6.5% bounced back slightly in 2009 and 2010. Health Care 56.5% 58.7% 55.3% 65.2% 27.2% 30.1% 34.2% 30.5% 1.3% 0.9% 0.2% 1.1% 15.1% 10.4% 10.2% 4.4% Industrials 49.4% 52.6% 46.6% 61.5% 38.8% 37.2% 38.1% 31.7% 3.3% 3.6% 5.0% 2.8% 8.4% 6.6% 10.4% 4.8% Information Technology 47.2% 44.8% 40.9% 57.4% 47.8% 49.3% 51.6% 39.2% 3.5% 3.1% 4.2% 1.7% 1.5% 2.9% 3.2% 1.7%
Materials 46.8% 47.9% 44.4% 59.9% 44.1% 40.3% 36.2% 30.8% 2.8% 3.5% 2.9% 2.3% 6.3% 8.4% 16.5% 8.4% Most substantial under-funding in the Telecom Services 57.8% 58.0% 47.2% 60.0% 30.4% 30.5% 28.7% 27.1% 7.9% 6.6% 9.7% 4.4% 4.0% 5.0% 14.3% 8.5% Utilities 51.0% 51.3% 51.8% 62.3% 35.9% 36.5% 38.6% 31.1% 2.5% 2.8% 4.7% 2.8% 10.6% 9.3% 4.9% 4.0% Energy, Materials, Consumer Staples, S&P 500 51.0% 50.5% 43.7% 61.3% 35.9% 38.0% 42.8% 32.3% 2.5% 2.9% 4.6% 1.8% 10.6% 8.6% 8.9% 5.9% Consumer Discretionary, Utilities and Health Care sectors, respectively.

S&P 500: Pension Funding Status (2006–2010)

S&P 500 Funding Status (Assets/Obligations) 140% 120%
Funded status of S&P 500 100% 80% companies diminished substantively 60% in 2008, but recovered slightly in 2009 40% and 2010. 20% 0% Utilities Energy S&P 500 Materials Info. Tech Financials Industrials Health Care Cons. Discr. Cons. Staples 2006 2007 2008 2009 Svcs. Telecom 2010

Source: Standard & Poor’s Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 123 The Dollar The Dollar and the Stock Market The Dollar and Precious Metals

Trade Weighted Dollar vs. S&P 500 Precious Metals vs. US Trade Weighted Dollar 130 1,800 240 130

1,600 220 125 120 1,400 200 120 Trade WeightedTrade Dollar 1,200 180 115

110 500 S&P 160 110 1,000 140 105 800 100 120 100 600 Trade Weighted Dollar Trade Weighted

Gold/Silver Index 100 95 400 90 80 90 200 60 85

80 - 40 80 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 May-84 May-86 May-88 May-90 May-92 May-94 May-96 May-98 May-00 May-02 May-04 May-06 May-08 May-10 Real Broad Trade-Weighted Exchange Value of the US$ (Mar-73=100) S&P 500 Gold/Silver Index Broad Dollar Index

Exports vs. Residential Construction

Y/Y Contributions (%) to US GDP Growth: Net Exports, Residential Investment 2.0

1.5

1.0

0.5

0.0

-0.5

-1.0 Residential Investment Net Exports -1.5 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Source: Haver Analytics, CIRA – U.S. Equity Strategy, and CIRA – U.S. Economics Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 124 International Slowdown US Profits Earned Abroad Yr/Yr % Change Emerging Markets and Commodities Performance

Profits Earned Abroad vs Domestic Profits Y/Y % Change 100 MSCI Emerging Markets vs. CRB Spot Commodity Price Index 1400 600 80 550 1200 60 500 1000 450

40 CRB 800 400 MSCI 20 350 600 0 300 400 250 -20 200 200 -40 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 -60 MSCI Emerging Markets Index 1Q80 1Q82 1Q84 1Q86 1Q88 1Q90 1Q92 1Q94 1Q96 1Q98 1Q00 1Q02 1Q04 1Q06 1Q08 1Q10 KR-CRB Spot Commodity Price Index: All Commodities (1967=100,EOP) Profits Earned Abroad Y/Y % Change Dom es tic Profits Y/Y % Chg

International profit strength, which has been a tailwind for US multinational firms, has been falling.
Emerging markets performance has led commodity price trends by about six months, but this trend has become more coincident recently.

Source: Haver Analytics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 125 Europe Exposure European Banks Tightening Standards Geographic Revenue Breakdown S&P 500 (FY10/11) Geographic Revenue Breakouts For Latest Fiscal Year (2010 or 2011) Net Percentage of European Banks Tightening Lending Standards to % of Total Revenues Households vs. Y/Y% Change in Real Personal Consumption For Euro- North America Area (2-Quarter Lag) (includes Europe, 2.50 0 Canada & Middle East, Global/Rest of Total Foreign Carribean) Africa Asia-Pacific Lat Am World/Other (Non NA) S&P 500 69.58% 8.51% 4.56% 1.60% 15.75% 30.42% 2.00 5 Consumer Discretionary 77.28% 9.45% 2.08% 0.93% 10.27% 22.73% 10 Automobiles & Components 52.34% 27.59% 0.20% 0.00% 19.86% 47.66% 1.50 Consumer Durables & Apparel 61.46% 16.16% 6.53% 6.08% 9.76% 38.54% 15 Consumer Services 57.43% 16.69% 8.46% 0.06% 17.36% 42.57% 1.00 Media 80.29% 8.98% 3.64% 1.90% 5.19% 19.71% 20 Retailing 90.80% 1.00% 0.10% 0.02% 8.08% 9.20% 0.50 Consumer Staples 74.64% 8.02% 2.68% 2.44% 12.22% 25.36% 25 Food & Staples Retailing 86.66% 0.00% 0.00% 0.00% 13.34% 13.34% 0.00 Food Beverage & Tobacco 59.60% 22.05% 6.11% 4.51% 7.73% 40.40% 30 Household & Personal Products 41.76% 17.45% 9.81% 12.21% 18.75% 58.24% -0.50 Energy 58.16% 10.87% 3.92% 0.77% 26.27% 41.84% 35 Financials 66.73% 3.78% 5.29% 1.60% 22.60% 33.27% 100.00% 0.00% 0.00% 0.00% 0.00% 0.00% -1.00 40 Banks Diversified Financials 69.07% 8.32% 5.65% 4.08% 12.88% 30.93% -1.50 45 Insurance 52.93% 1.39% 6.83% 0.18% 38.68% 47.07% 2002 2003 2004 2005 2006 2007 2008 2009 2010 Real Estate 88.32% 2.71% 2.97% 0.36% 5.64% 11.68% Health Care 80.42% 6.45% 1.55% 0.28% 11.31% 19.58% Consumption (Left) Lending Standards (Right, Inverted) Health Care Equipment & Services 93.48% 2.47% 0.97% 0.22% 2.85% 6.52% Pharmaceuticals, Biotechnology 50.41% 15.57% 2.89% 0.41% 30.72% 49.59% Industrials 63.81% 13.56% 8.40% 2.77% 11.46% 36.19% Capital Goods 59.34% 16.40% 9.85% 3.38% 11.03% 40.66% Commercial & Professional Serv 80.71% 6.26% 3.68% 0.99% 8.36% 19.29% Transportation 81.62% 0.90% 2.34% 0.15% 14.99% 18.38% Information Technology 46.44% 10.25% 12.86% 0.98% 29.47% 53.56% Semiconductors & Semiconductor 15.25% 13.17% 66.45% 0.50% 4.63% 84.75% Software & Services 60.05% 8.92% 1.41% 0.03% 29.58% 39.95%
Retail sales declining in Euro-zone. Technology Hardware & Equipmen 43.74% 10.54% 11.28% 1.54% 32.91% 56.26% Materials 52.10% 19.77% 10.54% 5.04% 12.55% 47.90%
Telecommunication Services 99.87% 0.00% 0.03% 0.09% 0.00% 0.13% Corporate and consumer sentiment is falling. Utilities 95.08% 0.63% 0.18% 4.05% 0.05% 4.92%

Source: Bloomberg, Company Reports, CIRA – U.S. Equity Strategy, CIRA – U.S. Economics, ECB, Eurostat Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 126 The EMX Factor

CIRA Covered Companies Exposure +20% to Emerging Markets Performance of High EM Exposure vs S&P 500

Emerging Market Sales as % of Total Sales CIRA CIRA S&P 500 vs High EM Exposed Stock Performance (12/31/2010 - 8/8/2011 Ticker Company Name EM Price Rating Target Price SMOD SMART MODULAR TECHNOLOGIES 54% $8.76 2S 9.25 120 CMI CUMMINS INC 50% $83.67 1M 137 115 CE CELANESE CORP 40% $37.94 1H 69 110 MOS MOSAIC CO 40% $57.51 1H 89 V VISA INC 37% $79.24 2M 88 105 HUN HUNTSMAN CORP 36% $11.21 2H 14.5 100 NLC NALCO HOLDING CO 36% $30.55 2H 39 YUM YUM BRANDS INC 35% $47.82 2M 59 95 Performance Since 12/31/2010: EMR EMERSON ELECTRIC CO 34% $42.53 2M 49 90 MMM 3M CO 33% $78.59 2M 98 EMX Basket: -7.7% S&P 500: -11.0% DOW DOW CHEMICAL 32% $27.07 1H 47 85 DD DU PONT (E I) DE NEMOURS 30% $44.06 1M 67 80 POT POTASH CORP SASK INC 30% $49.31 1M 72 PG PROCTER & GAMBLE CO 30% $59.29 1L 67 GLW CORNING INC 30% $13.39 2H 18 4/8/2011 5/6/2011 6/3/2011 7/1/2011 1/14/2011 1/28/2011 2/11/2011 2/25/2011 3/11/2011 3/25/2011 4/22/2011 5/20/2011 6/17/2011 7/15/2011 7/29/2011

OI OWENS-ILLINOIS INC 30% $18.01 1M 30 12/31/2010 REX REXAM PLC 30% $15.65 1M 4.1 S&P 500 Indexed to 100 12/31/2010 EMX Composite Indexed to 100 12/31/2010 CAT CATERPILLAR INC 28% $82.60 2M 124 Equal Weighted Basket: SMOD, CMI, CE, MOS, V, HUN, NLC, YUM, LZ, EMR, MMM, DOW, DD, POT, PG, GLW, OI, REX, ETN EATON CORP 28% $37.97 1M 67 CAT, ETN, PH, EMN, PX, MON, BA, MA, SPW, ALB, CYT, CCK, AMT, ECL, IR, BMS, SEE, DE PH PARKER-HANNIFIN CORP 28% $62.17 1M 95 EMN EASTMAN CHEMICAL CO 28% $78.07 2H 112 PX PRAXAIR INC 28% $91.36 1M 120 MON MONSANTO CO 28% $63.44 1M 82 S&P 500 vs High EM Exposed Stock Performance (7/22/2011 - 8/8/2011) BA BOEING CO 28% (21% ex China) $58.71 1H 85 105 MA MASTERCARD INC 26% $291.96 2M 340 SPW SPX CORP 26% $53.22 2M 63 100 ALB ALBEMARLE CORP 25% $51.46 1M 81 CYT CYTEC INDUSTRIES INC 25% $44.12 2H 64 95 CCK CROWN HOLDINGS INC 25% $33.58 1M 42 AMT AMERICAN TOWER CORP 21% $46.35 1H 63 ECL ECOLAB INC 20% $44.96 2L 52 90 IR INGERSOLL-RAND PLC 20% $29.51 3M 40 Performance Since 7/22/2011: EMX Basket: -17.7% 85 BMS BEMIS CO INC 20% $29.21 1M 38 S&P 500: -16.8% SEE SEALED AIR CORP 20% $17.96 2H 28 DE DEERE & CO 20% $67.05 1M 105 80 8/1/2011 8/2/2011 8/3/2011 8/4/2011 8/5/2011 8/6/2011 8/7/2011 8/8/2011 7/22/2011 7/23/2011 7/24/2011 7/25/2011 7/26/2011 7/27/2011 7/28/2011 7/29/2011 7/30/2011 7/31/2011 S&P 500 Indexed to 100 7/22/2011 EMX Composite Indexed to 100 7/22/2011

Equal Weighted Basket: SMOD, CMI, CE, MOS, V, HUN, NLC, YUM, LZ, EMR, MMM, DOW, DD, POT, PG, GLW, OI, REX, Priced Close 8/8/11 CAT, ETN, PH, EMN, PX, MON, BA, MA, SPW, ALB, CYT, CCK, AMT, ECL, IR, BMS, SEE, DE

Source: Bloomberg, DataCentral, FactSet, Company Reports, and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 127 The Dollar International Sales by Sector Foreign Profits (4/14/11) International Total Foreign Profits as % of Total Corporate Profits 40 Sales Sales % International 40 S&P 500 $2,727,190.0 $9,122,521.8 29.90% S&P Sectors 35 35 Consumer Discretionary $294,235.2 $1,208,521.0 24.35% 30 Consumer Staples $380,258.2 $1,425,920.0 26.67% 30 Energy $574,615.2 $1,181,653.0 48.63% 25 Financials $235,402.9 $1,373,189.0 17.14% 25 Healthcare $208,767.8 $1,100,392.0 18.97% 20 Industrials $370,448.7 $1,003,748.9 36.91% 20 Information Technology $501,183.4 $893,128.9 56.12% 15 Materials $144,770.3 $317,518.9 45.59% 15 Telecom Services $370.9 $284,013.9 0.13% Utilities $17,137.9 $334,436.2 5.12% 10 10 S&P Industry Groups Autos & Components $100,165.5 $186,956.7 53.58% 5 5 Banks $0.0 $193,643.1 0.00% Capital Goods $329,369.8 $792,561.1 41.56% 0 0 Commercial Services & Supplies $12,176.9 $57,405.5 21.21%

Consumer Durables & Apparel $41,776.9 $102,896.1 40.60% 1Q48 1Q52 1Q56 1Q60 1Q64 1Q68 1Q72 1Q76 1Q80 1Q84 1Q88 1Q92 1Q96 1Q00 1Q04 1Q08 Diversified Financials $135,883.9 $591,055.6 22.99% International Sales By Market–Cap Energy $574,615.2 $1,181,653.0 48.63% Food & Staples Retailing $137,796.6 $870,816.3 15.82% International Sales as a Percent Total Sales for S&P Small, Mid, and Large Cap Indices Food, Beverage & Tobacco $166,821.2 $416,663.4 40.04% 35% Healthcare Equipment & Services $49,851.6 $768,384.2 6.49% 29.9% Hotels, Restaurants & Leisure $40,552.4 $105,207.3 38.55% 30% Household & Personal Products $75,640.4 $138,440.6 54.64% 26.9% Insurance $94,886.0 $552,457.5 17.18% 25% Materials $144,770.3 $317,518.9 45.59% 20% Media $52,658.7 $253,621.5 20.76% 17.0% Pharmaceuticals & Biotech $158,916.2 $332,008.0 47.87% Real Estate $4,633.0 $36,032.8 12.86% 15% Retail $59,081.8 $559,839.6 10.55% 10% Semiconductors & Equipment $97,214.7 $114,688.4 84.76% Software & Services $158,637.4 $341,678.4 46.43% 5% Tech Hardware & Equipment $245,331.3 $436,762.1 56.17% Telecom Services $370.9 $284,013.9 0.13% 0% Transportation $28,902.0 $153,782.3 18.79% Small (S&P 600) Mid (S&P 400) Large (S&P 500) Utilities $17,137.9 $334,436.2 5.12% *Based on data for the latest reported fiscal year Note: US dollars in millions Source: Haver Analytics, FactSet, and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 128 Foreign Investment in the US Foreign Ownership of US Financial Assets Foreign Purchases of US Financial Assets

Rest of World: Net Acquisition of US Credit Market Instruments vs. US Corporate Equities (Bil. $, SAAR) Rest of World - Holdings of US Financial Assets in 1Q11

$1,200

$1,000

$800 Foreign Direct Inv estment in Other Financial Assets

the US 16% Other Credit Market Billions $600 17% Instruments $400 3% $200

US Corporate Equities $- 18% $(200)

Treasury Securities 1Q90 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10 1Q11 25% US Corporate Equities US Treasuries US Corporate Bonds Corporate Bonds 14% Agency Securities 7%

Foreign ownership of U.S. equities in comparison to fixed income positions has rebounded significantly over the past four quarters.

Source: FRB Flow of Funds and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 129 Debt Deficit as a % of GDP Federal Government Debt as a % of GDP

Federal Debt as a % of GDP Federal Budget Balance ($Billions) And As a Percent of GDP 70% 5.0 500 65%

0.0 0 60% 55% -5.0 -500 50%

-10.0 -1000 45% 40% -15.0 -1500 35%

-20.0 -2000 30% 25% 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

As a % of GDP (left) Federal Budget Balance (right) 20% 1Q52 1Q55 1Q58 1Q61 1Q64 1Q67 1Q70 1Q73 1Q76 1Q79 1Q82 1Q85 1Q88 1Q91 1Q94 1Q97 1Q00 1Q03 1Q06 1Q09

Source: Haver Analytics, Office of Management and Budget, CIRA – U.S. Economics and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 130 Debt Gross Government Debt as % of GDP S&P Sectors Net Debt to Cap Gross Gov't Debt % of GDP 2005 2006 2007 2008 2009 20010E 20011E 2012E Relative Canada 71.61 70.26 66.52 71.28 83.40 84.16 85.92 87.98 France 75.69 70.87 72.27 77.77 89.25 94.10 97.31 99.98 Net Debt to Cap Net Debt to Cap Germany 71.22 69.32 65.31 69.35 76.43 87.00 87.28 86.87 Italy 119.98 117.35 112.78 115.22 127.84 126.78 128.96 128.43 S&P 500 27.23% --- Japan 175.27 172.15 167.05 174.10 194.05 199.65 212.71 218.65 UK 46.39 46.05 47.20 56.96 72.39 82.37 88.51 93.3 Consumer Discretionary 32.25% 1.18 US 61.43 60.83 61.98 71.02 84.28 93.58 101.11 106.99 Consumer Staples 33.97% 1.25 Energy 14.50% 0.53 Financials 31.14% 1.14 Healthcare 5.14% 0.19 Industrials 41.44% 1.52 Information Technology -23.99% -0.88 Materials 27.89% 1.02 Telecommunications Services 42.37% 1.56 Utilities 51.48% 1.89

Source: Haver Analytics, OECD (historical and projected), FactSet and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 131 Is Inflation Back? CPI TIPS Breakeven

Median CPI 10-Year Treasury Less 10-Year Inflation Indexed Treasury 4.0 4.0

3.6 3.5 3.0 3.2 2.5 2.8 2.0 2.4 TIPS 1.5 2.0 Percent % Percent 1.0 1.6 0.5 1.2 0.0 0.8

0.4 1/31/1997 1/31/1998 1/31/1999 1/31/2000 1/31/2001 1/31/2002 1/31/2003 1/31/2004 1/31/2005 1/31/2006 1/31/2007 1/31/2008 1/31/2009 1/31/2010 1/31/2011

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 TIPS Break-Even Inflation Expectations

University of Michigan 5-10 Yr Median Inflation Expectations Protectionism remains the primary threat to 5.0

“stagflation.” 4.6
Energy Inputs ~ 7% of corporate costs. 4.2 3.8
Labor compensation ~ 70% of corporate costs. 3.4

Inflation expectations been rebounding since 4Q 2010, 3.0

based on the TIPS breakeven spread, after having pulled 2.6 back in early 2010. 2.2 Apr-1990 Apr-1991 Apr-1992 Apr-1993 Apr-1994 Apr-1995 Apr-1996 Apr-1997 Apr-1998 Apr-1999 Apr-2000 Apr-2001 Apr-2002 Apr-2003 Apr-2004 Apr-2005 Apr-2006 Apr-2007 Apr-2008 Apr-2009 Apr-2010 Apr-2011

5-10 Yr Expectations: Annual Chg in Prices: Median Increase (%)

Source: Haver Analytics, Bloomberg, and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 132 Energy Input Costs

Intermediate Energy Inputs as a Share of Production Costs Energy Inputs As Percentage of Total Inputs By Industry Consumer Discretionary 3.9 Industrials 13.2 Accommodation 8.2 Air transportation 36.4 Amusements, gambling, and recreation industries 6.1 Waste management and remediation services 1.8 Retail trade 3.1 Warehousing and storage 9.5 Food services and drinking places 4.6 Truck transportation 25.9 Arts, entertainment, and recreation 3.7 Rail transportation 18.4 Textile mills and textile product mills 5.2 Water transportation 32.6 Construction 4.8 Administrative and support services 11.6 Furniture and related products 2.2 Management of companies and enterprises 1.8 Apparel and leather and allied products 2.3 Printing and related support activities 4.1 Motion picture and sound recording industries 1.2 Other transportation equipment 1.3 Motor vehicles, bodies and trailers, and parts 1.3 Machinery 1.6

Consumer Staples 5.4 Information Technology 0.8 Agriculture, forestry, fishing, and hunting 10.4 Food and beverage and tobacco products 3.9 Materials 7.4 Wholesale trade 1.8 Mining, except oil and gas 12.2 Support activities for mining 4.5 Energy 3.3 Nonmetallic mineral products 12.4 Support activities for mining 4.5 Paper products 11.2 Oil and gas extraction 4.1 Chemical products 6.0 Mining, except oil and gas 1.3 Primary metals 8.5 Plastics and rubber products 4.1 Financials 1.4 Fabricated metal products 3.1 Real estate and rental and leasing 2.3 Wood products 4.9 Finance and insurance 0.4 Telecom Services 1.7 Health Care 2.1 Social assistance 2.4 Utilities 33.9 Hospitals and nursing and residential care facilities 2.7 Ambulatory health care services 1.3 Note: Based on 2009 annual data from GDP-By-Industry Accounts Source: CIRA – U.S. Economics Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 133 Sector & Industry Group Recommendations

Citi Strategy Sector & Industry Group Weightings

Actual Weight (% CIRA Rec'd Sector Industry Group of S&P 500) Rating Weight Citigroup Strategist's Rationale Consumer Discretionary 10.9% - 9.1% Autos & Components 0.69% - 0.56% This group typically underperforms in 2H of year, sell-side analysts bullishness is at its highest level in five years, unattractive valuation. Consumer Durables & Apparel 1.1% - 0.9% May-Dec is a bad time to own, proprietary 12-month lead indicator suggesting risk, sell-side bullishness at 5-yr high. Consumer Services 2.1% 0 2.1% Typically underperforms Jun-Aug, proprietary 12-month lead indicator suggest near-term upside potential, valuation unattractive. Media 3.2% - 2.5% Revisions just pulling back from peak levels, most liked group in S&P 500, unappealing valuation, Jun-Sept is not a good time to own. Retailing 3.9% - 3.1% EPS estimate revisions look stretched, lead indicator arguing for underperformance, seasonally not a good time to own. Consumer Staples 11.4% + 12.1% Food & Staples Retailing 2.9% 0 2.9% Upward EPS revisions have been falling from peak levels, attractive valuation, lead indicator arguing for 12-month forward underperformance . Food Beverage & Tobacco 6.1% + 7.4% EPS revisions in an upward trend, May-Nov is a good time to own; unattractive valuation; 12-month lead indicator suggesting outperformance potential. Household & Personal Products 2.3% - 1.9% 2H year typically good time to own, unattractive valuation, economic model suggesting relative underperformance potential. Energy 12.4% + 14.7% Energy 12.4% + 14.7% Valuation negative; 12-month lead model is arguing near-term strength, Feb-Sept a good time to own group. Financials 15.3% + 17.1% Banks 2.6% 0 2.6% Upward EPS revisions retreating from peak, attractive valuation, sell-side analysts bearish on group, 12-month lead model arguing for relative underperformance. Diversified Financials 6.8% + 8.1% Neutral valuation; tight correlation with broader market, thus expectation for near 10% gain in 2011 should be positive for these names. Insurance 4.3% + 5.1% Valuation is appealing, 12-month lead indicator is arguing for relative outperformance. Real Estate 1.7% - 1.3% Valuation unattractive, gap b/w earnings contribution and market cap representation continues to widen, fundamentally challenged group. Healthcare 10.9% - 8.7% Healthcare Equipment & Services 3.9% - 3.1% Revisions retreating from peaks, valuation neutral, seasonally a good time to own these names, trading sharply above its 200-day moving avg. Pharmaceuticals & Biotechnology 7.0% - 5.6% May-Nov is best time to own, Pharma valuation is unattractive, earnings revisions look stretched. Industrials 10.2% - 8.3% Capital Goods 7.8% - 6.2% Neutral valuation, earnings revisions are rolling over; May-Oct is not a good time to own, 12-mth lead indicator arguing for relative underperformance. Commercial Services & Supplies 0.5% 0 0.5% Positive valuation, tends to underperform from June through October. Transportation 1.9% - 1.5% Earnings revisions seem stretched, valuation favorable, trading above its 200-day moving avg, lead indicator suggestion caution. Information Technology 19.4% + 21.2% Semiconductors & Semi Equipment 2.4% + 2.8% Y/Y bookings still positive but comps likely to be more difficult in coming months, tends to outperform in July & August and attractive valuation. Software & Services 10.1% 0 10.1% Modestly unattractive valuation, earnings revisions appear risky, lead indicator arguing for near-term relative outperformance. Technology Hardware & Equipment 6.9% + 8.3% Lead indicator suggesting outperformance, attractive valuation; capex environment stabilizing. Materials 3.5% - 2.8% Materials 3.5% - 2.8% 12-mth lead indicator suggestion caution; valuation unattractive; earnings revisions pulling back from peak-like levels, summer is not a good time to own. Telecom Services 2.8% 0 2.8% Telecom Services 2.8% 0 2.8% Appealing valuation; earnings revisions showing no clear trend, economic model suggesting a buying opportunity, declining pricing power. Utilities 3.3% 0 3.3% Utilities 3.3% 0 3.3% Attractively valued, January through July can be seasonally tough time to own, economic model is suggesting outperformance. Legend: + = Overweight 0 = Market Weight S&P weightings as of 8/02/2011 - = Underweight

Source: FactSet and CIRA – U.S. Equity Strategy Equity Strategy: Disciplined, Detailed, Data-Driven Appendix 134 Economic Forecast

Citigroup Forecast Last Update: July 20, 2011 Percent Change from Preceding Quarter at Annual Rate or Percent Change from Year-ago Quarter History ForecastHist Forecast 2010.1 2010.2 2010.3 2010.4 2011.1 2011.2 2011.3 2011.4 2012.1 2012.2 2012.3 2012.4 2010 2011 2012
2010 real GDP Real GDP (Q/Q) 3.7 1.7 2.6 3.1 1.9 1.5 2.8 3.4 2.2 2.9 3.0 3.3 —Y/Y % Change 2.4 3.0 3.2 2.8 0.4 1.3 1.9 2.5 2.5 2.8 2.9 2.8 2.9 1.7 2.7 growth: 2.9%. —4Q/4Q % Change 2.8 2.4 2.8 Personal Consumption Expenditures (Q/Q) 1.9 2.2 2.4 4.0 2.2 0.7 2.8 3.5 1.3 2.4 2.7 3.0 —Y/Y % Change 0.8 1.7 1.8 2.6 2.7 2.3 2.4 2.3 2.1 2.5 2.5 2.4 1.7 2.4 2.3
Durable Goods 8.8 6.8 7.6 21.1 9.3 (5.3) 5.8 9.8 2.7 3.8 4.4 5.0 7.7 7.6 4.4 2011 estimate for Nondurable Goods 4.2 1.9 2.5 4.1 1.4 1.5 3.4 3.2 0.9 2.6 3.2 3.4 2.7 2.5 2.4 Services 0.1 1.6 1.6 1.5 1.3 1.5 2.1 2.5 1.2 2.1 2.3 2.5 0.5 1.6 2.0 real GDP growth: Nonresidential Fixed Investment (Q/Q) 7.8 17.2 10.0 7.7 2.0 4.0 6.4 7.2 6.8 8.2 8.7 9.0 —Y/Y % Change (0.8) 5.2 8.2 10.6 9.1 5.9 5.0 4.9 6.1 7.2 7.7 8.2 5.7 6.2 7.3 1.7%. Structures (Q/Q) (17.8) (0.5) (3.6) 7.7 (14.8) (1.5) 0.9 1.6 1.6 2.0 2.2 2.2 —Y/Y % Change (20.1) (15.6) (13.5) (4.0) (3.1) (3.4) (2.3) (3.7) 0.7 1.5 1.8 2.0 (13.7) (3.1) 1.5 Equipment & Software (Q/Q) 20.5 24.8 15.4 7.7 8.7 6.0 8.3 9.2 8.5 10.4 10.9 11.2
2012 estimate for —Y/Y % Change 9.6 15.7 18.7 16.9 14.0 9.4 7.7 8.1 8.0 9.1 9.7 10.2 15.3 9.7 9.3 Residential Fixed Investment (Q/Q) (12.3) 25.6 (27.3) 3.3 (2.0) (3.1) 4.7 6.1 9.6 15.5 17.1 13.6 real GDP growth: —Y/Y % Change (6.2) 4.9 (5.6) (4.6) (1.9) (8.1) 0.7 1.3 4.2 8.9 12.0 13.9 (3.0) (2.1) 9.8 Change in Private Inventories ($bln) 44.1 68.8 121.4 16.2 55.7 59.9 65.8 65.3 63.3 57.2 50.5 49.5 62.6 61.7 55.1 —contribution to GDP 2.6 0.8 1.6 (3.4) 1.2 0.1 0.2 0.0 (0.1) (0.2) (0.2) (0.0) 1.4 0.4 (0.1) 2.7%. Net Exports ($bln) (423) (374) (309) —contribution to GDP (0.3) (3.5) (1.7) 3.3 0.2 0.6 0.1 0.3 0.8 0.5 0.4 0.3 (0.5) 0.3 0.5 Exports (Q/Q) 11.4 9.1 6.7 8.6 7.6 7.3 6.0 6.9 6.9 7.2 7.4 7.7 11.7 7.5 7.0 Imports (Q/Q) 11.2 33.5 16.8 (12.6) 5.1 2.2 4.6 3.7 0.7 2.5 3.6 4.3 12.6 3.7 2.8 Gov't Consumption & Investment (Q/Q) (1.6) 3.9 3.9 (1.7) (5.8) (0.4) (0.8) (1.2) (1.9) (1.8) (2.2) (1.7) 1.0 (1.3) (1.5) Federal 1.9 9.1 8.8 (0.3) (8.0) 3.8 0.3 (1.1) (3.3) (3.2) (4.5) (3.3) 4.8 0.1 (2.1) State & Local (3.8) 0.6 0.7 (2.6) (4.1) (3.2) (1.5) (1.2) (0.9) (0.8) (0.7) (0.7) (1.4) (2.3) (1.1) Addenda: Final Sales (Q/Q) 1.1 0.9 0.9 6.7 0.6 1.4 2.6 3.3 2.3 3.1 3.2 3.3 —Y/Y % Change 0.9 1.1 1.2 2.4 2.3 2.4 2.8 2.0 2.4 2.8 3.0 3.0 1.4 2.3 2.8
2010 Operating EPS Nominal GDP (Q/Q) 4.8 3.7 4.6 3.5 4.0 3.9 5.1 4.6 3.7 4.1 4.0 4.4 —Y/Y % Change 2.8 3.9 4.5 4.2 4.0 4.0 4.1 4.4 4.3 4.4 4.1 4.0 3.8 4.1 4.2 Inflation Measures estimate for the S&P GDP Chain-type Price Index (Q/Q) 1.0 1.9 2.1 0.4 2.0 2.3 2.3 1.2 1.4 1.1 1.0 1.0 1.0 1.8 1.4 Consumer Price Index (Y/Y %) 2.4 1.8 1.2 1.2 2.2 3.3 3.3 2.9 2.0 1.3 1.5 1.7 1.6 2.9 1.6 500: $85.49. Core Consumer Price Index (Y/Y %) 1.3 1.0 0.9 0.6 1.1 1.5 1.6 1.7 1.7 1.5 1.5 1.5 1.0 1.5 1.5 Producer Price Index (Y/Y %) 5.1 4.3 3.7 3.8 5.0 6.4 5.7 4.3 1.5 0.2 0.7 0.6 4.2 5.4 0.8 Interest Rates
2011 Operating EPS Federal Funds (%, End of Period) 0.13 0.19 0.19 0.19 0.16 0.25 0.25 0.25 0.25 0.25 0.50 1.00 Federal Funds (%, Annual Avg ) 0.17 0.25 0.50 estimate for the S&P 10-year Treasury Bond (%, Period Avg ) 3.72 3.49 2.79 2.86 3.46 3.21 3.10 3.25 3.35 3.45 3.60 3.85 3.21 3.25 3.55 Others Industrial Production (Y/Y % Change) 1.6 6.5 6.9 6.2 5.3 4.0 3.5 3.6 3.5 4.0 3.9 4.1 5.3 4.1 3.9 500: $98.00. Unemployment Rate (%) 9.7 9.7 9.6 9.6 8.9 9.1 9.0 8.8 8.8 8.6 8.5 8.5 9.6 9.0 8.6 Assumed WTI Price ($/bbl) 78.6 77.9 76.2 85.0 94.0 102.6 101.8 103.0 103.9 104.5 104.7 104.9 79.4 100.4 104.5
Federal Budget Balance ($bln, FY, Unified) (1,300) (1,300) (1,200) 2012 Operating EPS % of GDP (8.9) (8.6) (7.3) Corporate Earnings estimate for the S&P S&P 500 Oper EPS Pre-writeoffs ($/share) 19.71 21.48 21.75 22.55 23.45 24.75 24.65 25.15 25.45 26.45 26.40 85.49 98.00 105.00 S&P 500 Oper EPS Pre-writeoffs (Y/Y %) 53.6 34.0 32.7 34.2 19.0 15.2 13.3 11.5 8.5 6.9 7.1 37.8 14.6 7.1 500: $105.00. S&P 500 GAAP EPS ($/share) 17.48 19.68 19.52 20.67 77.35 90.25 96.00 S&P 500 GAAP EPS (Y/Y %) 132.4 45.7 32.2 36.2 51.8 16.7 6.4 S&P 500 Dividends ($/share) 5.46 5.58 5.66 6.03 22.73 25.35 28.00 S&P 500 Dividends (Y/Y%) -8.4 2.6 5.8 6.5 1.4 10.9 10.5 Sources: Bureau of Economic Analysis, Bureau of Labor Statistics, Office of Management and Budget, Federal Reserve Board, First Call, and Citi Investment Research and Analysis. Equity Strategy: Disciplined, Detailed, Data-Driven 135

Appendix A-1

Analyst Certification

The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analyst's name appears in bold alongside content which is attributable to that analyst. Each of these analyst(s) certify, with respect to the section(s) of the report for which they are responsible, that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner, including with respect to Citigroup Global Markets Inc and its affiliates. No part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendation(s) or view(s) expressed by that research analyst in this report.

IMPORTANT DISCLOSURES A director of Citi serves on the board of Ecolab Inc.

A director of Citi serves on the board of IBM Corporation.

A director of Citi serves on the board of Procter & Gamble Company.

A director of Citi serves on the board of Reynolds American Inc.

Citigroup Global Markets Inc. or its affiliates beneficially owns 1% or more of any class of common equity securities of American Express Co., EMC Corporation, Eaton Corp, Goldman Sachs Group, Inc., Macys Inc, Mosaic Co, News Corp, Procter & Gamble Co, Potash Corp of Saskatchewan Inc, YUM! Brands Inc.. This position reflects information available as of the prior business day. Within the past 12 months, Citigroup Global Markets Inc. or its affiliates has acted as manager or co-manager of an offering of securities of American Tower Corp, Apache Corp, Amphenol Corp, American Express Co., AutoZone Inc., Caterpillar Inc., Crown Holdings Inc, Celanese Corp, Covidien Ltd, CSX Corp., E I du Pont de Nemours and Co, Deere & Company, Eastman Chemical Co, Corning Incorporated, Goldman Sachs Group, Inc., Huntsman Corp, International Business Machines Corp, MetLife Inc, Monsanto Co, Mosaic Co, Marathon Oil Corp, Newell Rubbermaid Inc, Owens Illinois Inc, Procter & Gamble Co, Parker Hannifin Corp, Potash Corp of Saskatchewan Inc, Praxair Inc, SPX Corporation, YUM! Brands Inc.. Citigroup Global Markets Inc. or its affiliates has received compensation for investment banking services provided within the past 12 months from American Tower Corp, Apache Corp, American Express Co.,

AutoZone Inc., Boeing Co., Caterpillar Inc., Crown Holdings Inc, Celanese Corp, Covidien Ltd, CSX Corp., E I du Pont de Nemours and Co, Deere & Company, Dow Chemical Co, Eastman Chemical Co, Emerson Electric Co., Corning Incorporated, Goldman Sachs Group, Inc., Starwood Hotels & Resorts, Huntsman Corp, International Business Machines Corp, Ingersoll-Rand plc, Kroger Co, MasterCard Inc., MetLife Inc, 3M Company, Monsanto Co, Mosaic Co, Marathon Oil Corp, Nalco Holding Co, Newell Rubbermaid Inc, News Corp, Owens Illinois Inc, Procter & Gamble Co, Progressive Corp, Parker Hannifin Corp, Praxair Inc, Sherwin-Williams Co, SPX Corporation, Torchmark Corp, Toll Brothers, Warner Chilcott Plc, YUM! Brands Inc.. Citigroup Global Markets Inc. or its affiliates expects to receive or intends to seek, within the next three months, compensation for investment banking services from American Express Co., Caterpillar Inc.,

Rockwell Collins, Inc., Dow Chemical Co, Goldman Sachs Group, Inc., Huntsman Corp, 3M Company, Potash Corp of Saskatchewan Inc, Reynolds American Inc, Sealed Air Corp. Citigroup Global Markets Inc. or an affiliate received compensation for products and services other than investment banking services from Albemarle Corp, E I du Pont de Nemours and Co, Dow Chemical Co, Ecolab Inc, Eastman Chemical Co, Huntsman Corp, Monsanto Co, Praxair Inc, Sherwin-Williams Co, American Tower Corp, Apache Corp, Amphenol Corp, American Express Co., AutoZone Inc., Boeing Co., BMC Software, Inc., Bemis Co Inc, Caterpillar Inc., Crown Holdings Inc, Celanese Corp, CME Group Inc, Cummins Inc., Rockwell Collins, Inc., Covidien Ltd, CSX Corp., CVS Caremark Corp, Cytec Industries Inc., Deere & Company, EMC Corporation, Emerson Electric Co., Eaton Corp, Corning Incorporated, Goldman Sachs Group, Inc., W.W. Grainger, Inc., Starwood Hotels & Resorts, International Business Machines Corp, Intuit Inc., Ingersoll-Rand plc, Illinois Tool Works Inc., Kroger Co, Macys Inc, MasterCard Inc., MetLife Inc, 3M Company, Mosaic Co, Marathon Oil Corp, Nalco Holding Co, Newell Rubbermaid Inc, News Corp, Owens Illinois Inc, Procter & Gamble Co, Progressive Corp, Parker Hannifin Corp, Potash Corp of Saskatchewan Inc, Reynolds American Inc, Ross Stores Inc., Sealed Air Corp, SPX Corporation, Torchmark Corp, Toll Brothers, Visa Inc., Warner Chilcott Plc, YUM! Brands Inc. in the past 12 months. Equity Strategy: Disciplined, Detailed, Data-Driven 136

Citigroup Global Markets Inc. currently has, or had within the past 12 months,g as theinvestment followin banking client(s): CME Group Inc, Amphenol Corp, American Tower Corp, E I du Pont de Nemours and Co, Dow Chemical Co, Ecolab Inc, Eastman Chemical Co, Huntsman Corp, Monsanto Co, Praxair Inc, Sherwin-Williams Co, Toll Brothers, MetLife Inc, Apache Corp, American Express Co., AutoZone Inc., Boeing Co., Caterpillar Inc., Crown Holdings Inc, Celanese Corp, Rockwell Collins, Inc., Covidien Ltd, CSX Corp., Deere & Company, Emerson Electric Co., Corning Incorporated, Goldman Sachs Group, Inc., Starwood Hotels & Resorts, International Business Machines Corp, Ingersoll-Rand plc, Kroger Co, MasterCard Inc., 3M Company, Mosaic Co, Marathon Oil Corp, Nalco Holding Co, Newell Rubbermaid Inc, News Corp, Owens Illinois Inc, Procter & Gamble Co, Progressive Corp, Parker Hannifin Corp, Potash Corp of Saskatchewan Inc, Reynolds American Inc, Sealed Air Corp, SPX Corporation, Torchmark Corp, Warner Chilcott Plc, YUM! Brands Inc.. Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following as clients, and the services provided were non-investment-banking, securities-related: CME Group Inc, E I du Pont de

Nemours and Co, Dow Chemical Co, Ecolab Inc, Eastman Chemical Co, Huntsman Corp, Monsanto Co, Praxair Inc, Sherwin-Williams Co, American Express Co., American Tower Corp, Apache Corp, Amphenol Corp, AutoZone Inc., Boeing Co., BMC Software, Inc., Bemis Co Inc, Caterpillar Inc., Crown Holdings Inc, Celanese Corp, Cummins Inc., Rockwell Collins, Inc., Covidien Ltd, CSX Corp., CVS Caremark Corp, Cytec Industries Inc., Deere & Company, EMC Corporation, Emerson Electric Co., Eaton Corp, Corning Incorporated, Goldman Sachs Group, Inc., W.W. Grainger, Inc., Starwood Hotels & Resorts, International Business Machines Corp, Intuit Inc., Ingersoll-Rand plc, Illinois Tool Works Inc., Kroger Co, Macys Inc, MasterCard Inc., MetLife Inc, 3M Company, Mosaic Co, Marathon Oil Corp, Nalco Holding Co, Newell Rubbermaid Inc, News Corp, Owens Illinois Inc, Procter & Gamble Co, Progressive Corp, Parker Hannifin Corp, Potash Corp of Saskatchewan Inc, Reynolds American Inc, Ross Stores Inc., Sealed Air Corp, SPX Corporation, Torchmark Corp, Toll Brothers, Visa Inc., Warner Chilcott Plc, YUM! Brands Inc.. Citigroup Global Markets Inc. currently has, or had within the past 12 months, the following as clients, and the services provided were non-investment-banking, non-securities-related: Albemarle Corp, E I du

Pont de Nemours and Co, Dow Chemical Co, Ecolab Inc, Eastman Chemical Co, Huntsman Corp, Monsanto Co, Praxair Inc, Sherwin-Williams Co, American Tower Corp, Apache Corp, Amphenol Corp, American Express Co., AutoZone Inc., Boeing Co., BMC Software, Inc., Bemis Co Inc, Caterpillar Inc., Crown Holdings Inc, Celanese Corp, CME Group Inc, Cummins Inc., Rockwell Collins, Inc., Covidien Ltd, CSX Corp., CVS Caremark Corp, Cytec Industries Inc., Deere & Company, EMC Corporation, Emerson Electric Co., Eaton Corp, Corning Incorporated, Goldman Sachs Group, Inc., W.W. Grainger, Inc., Starwood Hotels & Resorts, International Business Machines Corp, Intuit Inc., Ingersoll-Rand plc, Illinois Tool Works Inc., Kroger Co, Macys Inc, MasterCard Inc., MetLife Inc, 3M Company, Mosaic Co, Marathon Oil Corp, Nalco Holding Co, Newell Rubbermaid Inc, News Corp, Owens Illinois Inc, Procter & Gamble Co, Progressive Corp, Parker Hannifin Corp, Potash Corp of Saskatchewan Inc, Reynolds American Inc, Ross Stores Inc., Sealed Air Corp, SPX Corporation, Toll Brothers, Visa Inc., Warner Chilcott Plc, YUM! Brands Inc.. Citigroup Global Markets Inc. or an affiliate received compensation in the past 12 months from CME Group Inc, Amphenol Corp, Albemarle Corp, E I du Pont de Nemours and Co, Dow Chemical Co, Ecolab Inc,

Eastman Chemical Co, Huntsman Corp, Monsanto Co, Praxair Inc, Sherwin-Williams Co. Analysts' compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc. and its affiliates ("the Firm"). Like all Firm employees, analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues. The Firm is a market maker in the publicly traded equity securities of BMC Software, Inc., CME Group Inc, CVS Caremark Corp, Intuit Inc., Macys Inc, News Corp, Ross Stores Inc., SMART Modular Technologies Inc, Warner Chilcott Plc. For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research & Analysis product ("the Product"), please contact Citi Investment Research & Analysis, 388 Greenwich Street, 28th Floor, New York, NY, 10013, Attention: Legal/Compliance. In addition, the same important disclosures, with the exception of the Valuation and Risk assessments and historical disclosures, are contained on the Firm's disclosure website at www.citigroupgeo.com. Valuation and Risk assessments can be found in the text of the most recent research note/report regarding the subject company. Historical disclosures (for up to the past three years) will be provided upon request.

Citi Investment Research & Analysis Ratings Distribution

Data current as of 31 Mar 2011 Buy Hold Sell Buy Hold Sell Citi Investment Research & Analysis Global Fundamental Coverage 52% 37% 11% 9% 82% 9% % of companies in each rating category that are investment banking clients 43% 41% 41% 51% 41% 45% Guide to Citi Investment Research & Analysis (CIRA) Fundamental Research Investment Ratings: CIRA's stock recommendations include a risk rating and an investment rating. Risk ratings, which take into account both price volatility and fundamental criteria, are: Low (L), Medium (M), High (H), and Speculative (S). Investment ratings are a function of CIRA's expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating.

12 Month Rating Relative Rating Equity Strategy: Disciplined, Detailed, Data-Driven 137

Analysts may place covered stocks “Under Review” in response to exceptional circumstancesg. lack of information (e. critical to the analyst's thesis)g the affectin company and/or trading in the company's securities (e.g. trading suspension). Stocks placed “Under Review” will be monitored daily by management. As soon as practically possible, the analyst will publish a note re-establishing a rating and investment thesis.

To satisfy regulatory requirements, we correspond Under Review to Hold in our ratings distribution table for our 12-month fundamental rating system. However, we reiterate that we do not consider Under Review to be a recommendation. Relative three-month ratings: CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the analyst's coverage universe over a 3 month period. The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company. Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in his coverage universe, explaining the basis for this short-term view. This three-month view may be different from and does not affect a stock's fundamental equity rating, which reflects a longer-term total absolute return expectation. For purposes of NASD/NYSE ratings-distribution- disclosure rules, most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation. Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR). For purposes of NASD/NYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system. However, we reiterate that we do not consider NRR to be a recommendation. For securities in developed markets (US, UK, Europe, Japan, and Australia/New Zealand), investment ratings are:Buy (1) (expected total return of 10% or more for Low-Risk stocks, 15% or more for Medium-

Risk stocks, 20% or more for High-Risk stocks, and 35% or more for Speculative stocks); Hold (2) (0%-10% for Low-Risk stocks, 0%-15% for Medium-Risk stocks, 0%-20% for High-Risk stocks, and 0%-35% for Speculative stocks); and Sell (3) (negative total return). Investment ratings are determined by the ranges described above at the time of initiation of coverage, a change in investment and/or risk rating, or a change in target price (subject to limited management

discretion). At other times, the expected total returns may fall outside of these ranges because of market price movements and/or other short-term volatility or trading patterns. Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management. Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stock's expected performance and risk.

NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (i.e., all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc.) are not registered/qualified as research analysts with FINRA. Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. The legal entities employing the authors of this report are listed below: Citigroup Global Markets Inc Tobias M Levkovich; Deborah L Weinswig; Keith Horowitz, CFA; Donald Fandetti, CFA; Robert S Morris; Josh Levin, CFA; John T. Boris; Michael Bilerman; Faisel Khan, CFA; Richard Gardner; Vivien Azer; Matthew J Dodds; Jim Suva, CPA; Christian Wetherbee; Deane M. Dray, CFA; Jason B Bazinet; Wendy Nicholson; Colin W Devine, CFA; P.J. Juvekar; Jason Gursky; Kate McShane, CFA; Jeff Black; Keith F. Walsh; Walter H Pritchard, CFA; Amit Bhalla; Timothy Thein, CFA; Michael Rollins, CFA; Gregory R Badishkanian; Andrew T Ward; Lorraine M Schmitt

OTHER DISCLOSURES

Citi group Global Markets Inc. and/or its affiliatesgnificant has a si financial interest in relation to American Tower Corp, Apache Corp, American Express Co.,g AutoZone Co., Caterpillar Inc., Boein Inc., Celanese Corp, CME Group Inc, Cummins Inc., Covidien Ltd, CSX Corp., CVS Caremark Corp, Cytec Industries Inc., Deere & Company, Dow Chemical Co, Ecolab Inc, Eastman Chemical Co, Emerson Electric Co., Eaton Corp, Corning Incorporated, Goldman Sachs Group, Inc., Starwood Hotels & Resorts, Huntsman Corp, International Business Machines Corp, Intuit Inc., Ingersoll-Rand plc, Illinois Tool Works Inc., Kroger Co, MasterCard Inc., MetLife Inc, 3M Company, Monsanto Co, Marathon Oil Corp, Newell Rubbermaid Inc, News Corp, Owens Illinois Inc, Procter & Gamble Co, Parker Hannifin Corp, Potash Corp of Saskatchewan Inc, Praxair Inc, Reynolds American Inc, Sherwin-Williams Co, SPX Corporation, Toll Brothers, Visa Inc., YUM! Brands Inc.. (For an explanation of the determination of significant financial interest, please refer to the policy for managing conflicts of interest which can be found at www.citigroupgeo.com.) Citigroup Global Markets Inc. or its affiliates beneficially owns 2% or more of any class of common equity securities of EMC Corporation, Goldman Sachs Group, Inc..

Citigroup Global Markets Inc. or its affiliates beneficially owns 5% or more of any class of common equity securities of News Corp.

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