EFTA01157997.pdf

From: "Pil, Anton C" < To: Undisclosed recipients:; Subject: Thoughts on Recent Market Pullbacks Date: Wed, 23 Feb 2011 20:44:26 +0000 Attachments: GIO_Trade_Alert_2011-01-27_(Middle_East_Conflict).pdf Inline-Images: image001.png; image002.png The last three days of trading in global markets have exhibited a sharp jump in volatility and declines in broad risk markets driven by the increase in global political uncertainty and its impact on oil prices. As we take a step back to digest the market action, we find it difficult to predict with certainty how the political events in the Middle East will unravel. However, we continue to believe that the improvements in the global macro recovery story, for now, remain intact. While we are closely watching oil prices and would be concerned to see sustained high prices for multiple months, we believe equity market valuations remain attractive and ultimately view sell offs as buying opportunities in specific sectors with strong fundamental stories. Equities: Although equity valuations may vary by different analyst approaches, most metrics continue to show cheap valuations relative to history. More importantly, equity valuations continue to show strength compared to alternative asset classes. The two charts below from our Asset Management partners exhibit these points. US equities currently trade at just over 12x normalized earnings vs the last 15 year historical average of almost 17x. The asset class also looks attractive relative to fixed income: equity risk premiums vs corporate bond yields are above peak levels of prior cycles. We continue to focus on buying internet mobility related stocks, shipping container leasers, high dividend paying blue chips, and airlines (even though we strongly recommend pairing the trade with long oil exposure). Price to Earnings Ratio - JPM Normalized Earnings 30 Peak PIE: 26 25 Normalized P/E as of 20 January 31. 2011: 12.3 Is Average Nomialized P/E: 16.7 10 Trough P/E. 8.4 5 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 EFTA01157997  Equity Risk Premiums vs. Corporate Bonds ERP (BAA Corporates) Average -2% 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source:. Morgan Asset Management, Bloomberg. As of January 31, 2011. Oil: Oil is certainly important to watch as high prices sustained over long periods of time may force the Fed's hand prematurely or even worse may derail the current recovery. However, we believe that the 10-15% increase in global oil prices since Friday has been a result of heightened uncertainty. With Libya accounting for 2-3% of world oil supply, disruptions isolated to the country should be manageable and offset by other oil producers. Clearly, disruptions amongst the larger producers in the area would force us to reconsider. In the meantime, we are taking partial profits on our long crude commodity positions and replacing them with non-Middle East dependent oil producers. Protection: Despite our preference for adding to risky assets on these pullbacks, we also acknowledge that newsflow and events will continue to create volatility in global markets and as such, hedging strategies still make sense. The most obvious hedge is to have long exposure to oil either through the commodity outright or buying oil stocks. As we mentioned in our previous note from late January (see attached), we also see value in buying credit default protection on other countries in the Middle East. We are also considering adding credit protection on large Southeast Asian countries that may be particularly sensitive to higher sustained oil and food prices. Also, for Euroskeptics, we still like short Euro / long Swiss positions. On a side note, we are watching Wisconsin closely to make sure that public sector labor disruptions in the US don't spill over into the private sector. IMPORTANT INFORMATION This presentation and the material contained herein is not a product of the Morgan Research Department and Is not a research report, although it may refer to a research report or research analyst. This presentation should be reviewed in conjunction with U.S. research published by Morgan Securities, Inc. to the extent that such research exists. The opinions and ideas expressed herein do not take Into account individual client circumstances, objectives and needs. Transactions in any securities that may be referenced herein may not be suitable for all Investors. This presentation has been prepared for information purposes only. Nothing in this material is intended to be a solicitation for any product or service offered by NI Morgan's Private Bank or any of Its affiliates. Information contained herein has been obtained from sources believed to be reliable but we do not guarantee its accuracy or completeness and accept no responsibility for any direct or consequential losses arising from its use. The views and strategies described herein may not be suitable for all investors. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument and is being provided merely to illustrate a particular investment strategy. Past performance Is no guarantee of future results. 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