Lookout Report...2013/04/26 · It's Time For Investors To Resume Viewing Stocks As Stocks, And Not...

It's Time For Investors To Resume Viewing Stocks As Stocks,And Not As A Surrogate For Bonds

As of Friday morning, 271 S&P 500 corporations had reported their first-quarter earnings, and

with roughly half of the results in, things are looking up. On April 5th, the Friday before Alcoa

Inc. unofficially kicked off the first quarter earnings season, the S&P Capital IQ consensus

called for first-quarter earnings growth of just 0.7%. Now, at the mid-point of earnings season,

the growth rate stands at a much healthier 3.6%, well on the way to the 4%-5% range that

Global Markets Intelligence (GMI) optimistically envisioned at the start of the period. As we

have occasionally noted in the past, with regards to the quarterly earnings cycle, you can't know

where you are going until you have a handle on where you've been. With this sentiment in

mind, it is our opinion that expectations for sequential record quarterly S&P 500 earnings over

the balance of 2013 are starting to look realistic. S&P 500 corporations are on track to earn

$26.31 per share in the first quarter, second only to the $26.36 record set during fourth quarter

2012. Earnings are currently expected to reach an impressive $29.50 in the fourth quarter,

according to the S&P Capital IQ consensus, representing a key psychological foundation for the

2013 bull-run in equities.

Expectations for continued strong earnings growth presents investors with a conundrum of

sorts. If earnings growth is on the verge of accelerating over the balance of the year, it stands to

reason that growth oriented sectors of the stock market should come back into vogue with

investors. The best performing categories of the S&P 500 Index year-to-date have been the

healthcare (18.6%), utilities (17.0%), and consumer staples (16.5%) sectors. Two of these

sectors, utilities and staples, are, even now, among the highest dividend yielding sectors in the

S&P 500 (see table 1).

Since the start of this year, as an increasing number of market observers conclude that U.S.

economic prospects are improving, many investors have turned to traditionally non-cyclical

sectors, not for defensive purposes, but for dividend yield and the prospect of continued capital

appreciation. As a consequence of the Fed's longstanding zero interest rate environment, many

investors appear to have turned to stocks when they were actually pursuing income generating

strategies typically oriented to the bond market.

Lookout Reportfrom Global Markets Intelligence

April 26, 2013

Michael G Thompson

Managing Director

Global Markets Intelligence

(1) 212-438-3480

[email protected]

Robert A Keiser

Vice President


(1) 212-438-3540

[email protected]

The Lookout Report is a compendium

of current data and perspectives from

across S&P Capital IQ and S&P

Indices covering corporate earnings,

market and credit risks, capital

markets activity, index investing, and

proprietary data and analytics.

Published bi-weekly by the Global

Markets Intelligence research group,

the Lookout Report offers a detailed

cross-market and cross-asset view of

investment conditions, risks, and

opportunities.

1122526 | 301128617

Table 1

Top Performing S&P 500 Sectors

YTD return (%) Current dividend yield (%)

Health care 18.60 2.00

Utilities 17.00 4.00

Consumer staples 16.50 2.70

Consumer discretionary 13.90 1.60

Financials 13.00 1.70

Telecommunication services 12.20 4.40

Industrials 8.30 2.30

Energy 7.20 2.20

Materials 3.40 2.40

Information technology 2.00 1.70

Source: S&P Capital IQ and S&P Dow Jones Indices (dividend yield)

This sets the stage for a potential fork-in-the-road as far as financial market strategy is concerned. If the economy is on the

verge of improving to the point where S&P 500 corporations deliver a series of record setting quarterly earnings results, it

seems logical to conclude that investors will show a resumed preference for cyclical growth stocks over higher yielding, but

traditionally defensive, sectors of the stock market. Conversely, should the long awaited, Fed policy promoted,

acceleration of economic growth and corporate profits fail to materialize, then many investors may regret having extended

on the credit risk curve in search of more attractive yields. For our part GMI Research continues to believe that the U.S.

economy has been building momentum at a measured pace since QE3 was introduced six months ago, which should

improve considerably in the months to come as housing activity picks up this spring. Either way, now may be a good time

for investors to closely evaluate their individual tolerance for risk, relative to personal investment objectives, within the

context of the overall capital structure exposure imbedded in their investment portfolios. GMI Research continues to

believe that a well-diversified portfolio, inclusive of multiple asset classes that are structured predominantly according to

appetite for risk, represents the best strategy at this point in the business and investment cycle.

Inside This Issue:

Macroeconomic Overview

As of Friday morning, 271 S&P 500 corporations had reported their first-quarter earnings, and with roughly half of the

results in, things are looking up. On April 5th, the Friday before Alcoa Inc. unofficially kicked off the first quarter

earnings season, the S&P Capital IQ consensus called for first-quarter earnings growth of just 0.7%.

Economic And Market Outlook: North American And European Earnings

This week marked the second peak week for earnings season, and what a surprising one it was. S&P 500 earnings growth,

which was projected to come in at 0.7% at the beginning of the season, is now expected to grow 3.6% due to positive

earnings surprises from companies in every sector.

International Update: Relative Valuation And Economic Risk Render Irish Equity Market Too Costly For Investment

Ireland may still be among the most financially distressed nations in the European Monetary Union, but it stands the best

chance of recovering from the steep downturn in growth that continues to besiege its Spanish, Greek, Portuguese, Maltese,

and Italian Euro-area partners.

It's Time For Investors To Resume Viewing Stocks As Stocks, And Not As A Surrogate For Bonds Lookout Report from Global Markets Intelligence

2 April 26, 2013

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S&P Index Commentary: Who's On First?

On April 23, Apple Inc. raised its dividend 15%, wresting the title of No. 1 dividend payer in the world from Exxon

Mobil Corp. The next day, Exxon Mobil raised its dividend to $0.63 per quarter, from $0.57, yielding 2.8%. If the oil

and gas giant had raised its dividend $0.01 more, it would have reclaimed the top spot.

Leveraged Commentary And Data: LIBOR Floors Fall Anew In Hot Loan Market, But Remain Ubiquitous

Thanks to a combination of red-hot technicals and low interest rates, the average LIBOR floor on institutional loans eased

to 1.09% in April, from 1.10% in March and 1.25% at year-end. The current level is the lowest since this feature came

into widespread use in the wake of the credit crunch.

R2P Corporate Bond Monitor

U.S. economic growth turned out to be robust in the first quarter of 2013. Consumer spending remained buoyant

according to monthly retail sales data, despite broad based U.S. tax hikes, while housing market conditions continued to

improve.

Municipal Bond Commentary: Determining A Municipal Bond Default Rate: A New Use For The Benchmark Index

For years pundits, analysts, portfolio managers, and others have estimated the municipal bond default rate, using their

estimates to compare the municipal bond asset class to other available fixed income choices. Actual monetary default data,

when combined with a finite universe of bonds outstanding, may help fine tune those estimates.

Market Derived Signal Commentary: Credit Market 's View Of Machinery Isn't Affected By Caterpillar

On Monday, Caterpillar Inc. cut its 2013 earnings and revenue outlook citing an expected 50% drop in heavy equipment

sales to mining customers, and a 15% decline in sales of machines the company procured in a 2011 acquisition. The

company now forecasts revenues of $57 billion to $61 billion, from a previous estimate of $60 billion to $68 billion, and

earnings per share of $7, versus a range of $7-$9.

Capital Market Commentary: IPOs, M&A, And Debt

Following our previous examination of activist investor ownership, we decided to expand our coverage to include IPOs

priced over the past three years, in order to find the best performers among those issues with the highest concentration of

activist ownership.

S&P Fixed-Income Commentary: Secured, Or Unsecured, That Is The Question

The current low interest rate environment has many investors searching for alternatives to improve their return on

investment. In order to achieve greater returns, one must consider the risks as well.

S&P DJI Commodity Indices Commentary: Precious Metals Lack Luster While Natural Gas Remains Warm

The S&P GSCI remains negative year-to-date, through April 24, declining 5.7%. The Index's month to date decline was

6.2%. All S&P GSCI sectors continued their decline amid concerns over depressing global economic data and decreasing

Chinese demand.


3 April 26, 2013

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Economic And Market Outlook: North American And European Earnings

North America

This week marked the second peak week for earnings season, and what a surprising one it was. S&P 500 earnings growth,

which was projected to come in at 0.7% at the beginning of the season, is now expected to grow 3.6% due to positive

earnings surprises from companies in every sector. With more than half of S&P 500 companies having reported at this

point, the earnings surprise ratio stands at 5.7%, just about in-line with the historical 6.0% average. On the other hand,

revenues are coming in worse than expected, with a negative surprise ratio of 2.8% so far.

Chart 1

Revenue expectations have been steadily falling as the majority of companies have been missing estimates. Of the 271

companies that have reported, only 43% have beat analysts' revenue expectations, compared with 61% historically. This

is also in stark contrast to the 70% of companies that have managed to beat on the bottom-line. Such a disparity causes an

expansion in profit margins, which creates the illusion of improved pricing power. In fact, improving margins have more

to do with companies continuing to implement strict cost management programs, and employing certain accounting

measures, such as removing non-recurring special items, which inflates their non-GAAP earnings per share (EPS) figure.

Due to poor revenue results, top-line growth is currently estimated to reach 1.4%, about a third of what was anticipated

at the beginning of the season. Only the energy and industrials sectors are expecting negative revenue growth this quarter.


4 April 26, 2013

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Chart 2

The telecommunications (16.6%) and consumer discretionary sectors (9.2%) are still expected to lead overall earnings

growth. It's important to note there are only eight companies within telecom, so any unexpected swing in one company's

growth rate can affect the entire sector. Strong results were seen from Verizon Communications and AT&T Inc., which

posted year-over-year growth of 6.7% and 15.3%, respectively. An improvement in 2012 laggard Sprint Nextel Corp.

gave a boost to the sector when it beat estimates by $0.09, although the company still posted negative EPS growth of

$0.21. Household durables (53%) and textiles, apparel and luxury goods (52%) are expected to drive growth in the

consumer discretionary sector. Homebuilders, such as Lennar Corp., PulteGroup Inc., and DR Horton Inc., have reported

robust results thus far, all beating analysts' estimates and reporting triple-digit year-over-year growth. Meanwhile strong

retail sales are supporting improved textiles, apparel and luxury goods profits.

Only the information technology sector is expecting negative earnings growth (0.35%) for the quarter. The industries

responsible for the year-over-year decline are semiconductors (-19.6%), and computers and peripherals (-15.1%). Of the

17 companies within semiconductors and semiconductor equipment, 11 have reported earnings, and, of those, six have

posted results that are lower year-over-year, with Teradyne Inc. (-70.0%) and KLA-Tencor Corp. (-20.5%) being the

worst offenders. Dismal earnings are linked to the demise of the personal computer, which continues to take its toll on

suppliers of commoditized chips. For that same reason, two of the four computers and peripherals companies that have

reported so far announced year-over-year declines, with Apple Inc. and Western Digital Corp. experiencing negative

growth of 18% and 17%, respectively.


5 April 26, 2013

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Chart 3

Prolonged European debt concerns and sustained decelerating growth out of China continue to impact first-quarter

results. Peak earnings season continues next week, with 135 companies reporting.

Europe

Similar to the S&P 500, peak earnings season for the S&P Euro 350 was in full swing this week, with 45 companies

reporting. At this point only 179, or 51%, of S&P 350 companies are expected to report results, which is typical for

European companies as they are not required to issue quarterly filings. However, all companies will report for fiscal year

2013.

Calendar-year 2013 earnings estimates for the S&P Europe 350 Index have been falling for several months now. On the

second day of the year, the index's earnings were projected to grow 10.4%. Since then, estimates have dropped 7.4

percentage points, bringing the current estimate to a mere 3.0%. While this is very low, it is an improvement from the

March 27 trough, when growth was expected to come in at just 2.85%. This bump had little to do with expectations for

2013 improving, and instead relates to a reduced 2012 figure, caused by poor reports from S&P 350 companies that are

still releasing last year's results. Lagging European corporations will likely continue reporting 2012 results well into the

summer. Four of 10 sectors (energy, consumer discretionary, telecommunication services, and utilities) are expected to

come in negative for 2013.


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Chart 4

The two sectors dragging on 2013 expectations are consumer discretionary and utilities, with estimates of negative 12.8%

and negative 12.2%, respectively. This is in contrast to the S&P 500 where the consumer discretionary sector is expected

to be a growth leader in 2013, with a current estimate of 12.2%. Of the 52 companies in the sector, only 15 are scheduled

to report for the quarter, with seven likely coming in positive and eight negative. Both Fiat S.p.A. and Mediaset SpA are

expecting negative earnings per share growth of €0.07 and €0.01 for the quarter, in contrast to positive results of €0.10

and €0.01 in the year-ago period. Other weak spots are the Greek Organisation of Football Prognostics S.A, Nokian Tyres

Oyj, and Continental AG; all with negative year-over-year growth estimates of 80%, 22%, and 21%, respectively. Three

of these laggards are in the auto components and automobiles industries, pointing to weakness in that space.

On the other hand, analysts expect six of the 22 utilities companies to report for first quarter 2013. The biggest laggards

within the sector are RWE Ag and E.ON SE, with negative growth expectations of 43.3% and 39.4%, respectively.


7 April 26, 2013

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Chart 5

Peak earnings season continues for the Euro S&P 350 next week, with 40 companies scheduled to report.

Contact Information: Christine Short, Associate Director—Global Market Intelligence, [email protected]

International Update: Relative Valuation And Economic Risk Render Irish Equity Market TooCostly For Investment

Ireland may still be among the most financially distressed nations in the European Monetary Union (EMU), but it stands

the best chance of recovering from the steep downturn in growth that continues to besiege its Spanish, Greek, Portuguese,

Maltese, and Italian Euro-area partners. Nevertheless, further improvement in investor sentiment is predicated on Dublin's

commitment to fiscal retrenchment in conformity with the terms of the bail-out, which was arranged for Ireland by the

"troika"--the European Central Bank (ECB), International Monetary Fund (IMF), and European Commission (EC).

Although the collapse of the domestic housing market and banking sector continues to weigh on private and public

consumption, as well as business fixed investment, rising external demand should lend strength to the Irish economy as

competitive gains--arising from a precipitous drop in labor costs because of double-digit joblessness--bolster foreign

appetites for the country's exports this year and next. Projected expansion of Ireland's current account surplus, driven by

vigorous foreign demand for its goods and services, will remain the sole source of vitality for the economy in 2013.


8 April 26, 2013

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Chart 6

Most importantly, Ireland's credibility in the bond markets could continue to enjoy a marked resurgence if the ruling

coalition can withstand growing public pressure to moderate or abandon the austere fiscal consolidation imposed by the

troika in exchange for the rescue program. To the center-right regime's credit, its repayment of more than half the bail-out

package has substantiated its determination to remain in the eurozone by restoring government finances to a sound

footing. Symptomatic of the improving sentiment toward Ireland, fixed income issuance has been well-received by foreign

investors, who have not only rewarded the nation with gradually compressing cash market yield spreads, but also

cautiously declining costs of default insurance in the form of narrowing CDS differentials--tantamount to a 911 and 750

basis point contraction, respectively, since July 2011.

Reflecting the more upbeat mood in the credit markets, Irish shares now trade at a hefty premium to every core and

peripheral rival on the Continent, in addition to key competitors in Eastern Europe. At 17.7x positive forward 2013

earnings, Ireland's price-earnings multiple is well above its 15x historical average, and outstrips its 3x all-time low,

hovering within reach of its 23.8x record high--rendering the ISEQ comprehensively over-priced in comparison with its

rivals and past performance.

Relative valuations unambiguously adjudge Irish equities too costly for immediate investment. Yet, aside from a high

price-earnings ratio, other factors also argue against establishing positions or broadening exposures in the Irish stock

market. Much more remains to be done on the fiscal front, especially reducing the budget gap from 31% of nominal GDP

in 2010, to less than 3% by 2015. The retail banking industry will remain in crisis until the Central Bank of Ireland


9 April 26, 2013

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forcefully directs it to tackle the mortgage arrears problem head-on via bad debt write-offs. Worse still, one of the two

parties in the governing alliance, the Labour party, is starting to fragment amid increasingly vociferous dissension over the

austerity program. All in all, investors, irrespective of risk tolerance, would be ill-advised to contemplate new or increased

holdings of Irish shares pending developments on the domestic, economic, and political fronts.

Contact Information: John Krey, Director—Global Markets Intelligence, [email protected]

S&P Index Commentary: Who's On First?

On April 23, Apple Inc. raised its dividend 15%, wresting the title of No. 1 dividend payer in the world from Exxon

Mobil Corp. The next day, Exxon Mobil raised its dividend to $0.63 per quarter, from $0.57, yielding 2.8%. If the oil

and gas giant had raised its dividend $0.01 more, it would have reclaimed the top spot. Yielding 3%, Apple Inc.'s dividend

is worth more than the market value of 204 S&P 500 issues; however, Apple remains second to Exxon Mobil in market

value ($381 billion versus $401 billion as of Feb. 24, 2013).

Exxon Mobil reported first-quarter earnings on April 25, and confirmed what we expected; the company, known as the

poster child for share count reduction (SCR), reduced its share count again. Over the past 50 quarters (since September

2000), Exxon Mobil reduced actual shares outstanding (as well as diluted shares used for EPS calculations) 49 times. Over

the past 20 years, the company (a constituent of the S&P 500 Dividend Aristocrats Index) reduced its shares outstanding

in 69 of 80 quarters, increasing its cash dividends each year.

Apple now says it will be active in buying back its shares, but it remains to be seen whether the company will engage in

SCR. The actual share count (or reduced amount due to SCR) may determine which company pays the most in cash

dividends.

Table 2

Exxon Mobil Corp.

Date

Buybacks (Mil.

$)

Diluted shares

(Mil.)

Outstanding shares

(Mil.)

Sales (Mil.

$)

Net (Mil.

$)

Operating EPS

($)

Reported EPS

($)

Mar-13 5,600 4,485 4,446 9,500 2.12 2.12

Dec-12 5,254 4,541 4,502 101,883 9,950 2.20 2.20

Sep-12 5,098 4,597 4,559 103,417 9,570 2.09 2.09

Jun-12 5,012 4,657 4,616 104,718 15,910 2.29 3.41

Mar-12 5,704 4,716 4,676 110,696 9,450 2.00 2.00

Dec-11 5,422 4,775 4,734 107,419 9,400 1.97 1.97

Sep-11 5,468 4,843 4,793 111,991 10,330 2.13 2.13

Jun-11 5,512 4,912 4,862 112,781 10,680 2.19 2.18

Mar-11 5,653 4,971 4,926 101,335 10,650 2.14 2.14

Dec-10 5,758 5,031 4,979 93,428 9,250 1.86 1.85

Sep-10 3,272 5,089 5,043 85,181 7,350 1.44 1.44

Jun-10 1,568 4,729 5,092 82,747 7,560 1.61 1.60

Mar-10 2,495 4,736 4,698 80,222 6,300 1.37 1.33

Dec-09 2,372 4,759 4,727 80,106 6,050 1.27 1.27

Sep-09 4,233 4,803 4,747 73,285 4,730 0.98 0.98

Jun-09 5,246 4,871 4,806 65,951 3,950 0.84 0.81

Mar-09 7,852 4,959 4,880 56,222 4,550 0.92 0.92

Dec-08 8,845 5,078 4,976 73,284 7,820 1.55 1.54

Sep-08 8,663 5,178 5,087 122,758 14,830 2.60 2.85


10 April 26, 2013

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Table 2

Exxon Mobil Corp. (cont.)

Jun-08 8,761 5,261 5,194 124,238 11,680 2.29 2.22

Mar-08 9,465 5,362 5,283 104,791 10,890 2.05 2.03

Dec-07 7,938 5,454 5,382 103,301 11,660 2.15 2.13

Sep-07 8,463 5,536 5,464 91,160 9,410 1.72 1.70

Jun-07 7,633 5,620 5,546 87,249 10,260 1.85 1.83

Mar-07 7,788 5,714 5,633 76,890 9,280 1.64 1.62

Dec-06 9,179 5,816 5,729 80,116 10,250 1.71 1.76

Sep-06 7,985 5,922 5,832 88,504 10,490 1.79 1.77

Jun-06 6,630 6,030 5,945 87,813 10,360 1.74 1.72

Source: S&P Dow Jones Indices

Table 3

S&P Dow Jones Indices

S&P 500 Earnings Per Share

--Contributions to index EPS--

Quarter

Index operating EPS

($) Apple operating EPS

Percent of operating EPS

(%)

Market value

(%) Operating efficiency

3/28/2013 25.81 1.07 4.15 2.97 1.4

12/31/2012 23.15 1.47 6.34 3.93 1.61

9/30/2012 24.00 0.92 3.85 4.86 0.79

6/30/2012 25.43 0.97 3.81 4.44 0.86

3/31/2012 24.24 1.27 5.23 4.39 1.19

12/31/2011 23.89 1.44 6.03 3.31 1.82

9/30/2011 25.29 0.73 2.87 3.43 0.84

6/30/2011 24.86 0.80 3.22 2.58 1.25

3/30/2011 22.56 0.66 2.91 2.66 1.09

12/31/2010 21.93 0.66 3.01 2.59 1.16


Table 4

S&P Dow Jones Indices

S&P 500 Earnings Per Share

--Contributions to index EPS--

Quarter

Index operating EPS

($)

Exxon operating

EPS

Percent of operating EPS

(%)

Market value

(%) Operating efficiency

3/28/2013 25.81 1.07 4.13 2.89 1.43

12/31/2012 23.15 1.12 4.85 3.10 1.56

9/30/2012 24.00 1.05 4.38 3.28 1.34

6/30/2012 25.43 1.18 4.64 3.25 1.43

3/31/2012 24.24 1.04 4.30 3.21 1.34

12/31/2011 23.89 1.04 4.37 3.57 1.22

9/30/2011 25.29 1.14 4.50 3.43 1.31

6/30/2011 24.86 1.19 4.77 3.33 1.43

3/30/2011 22.56 1.17 5.17 3.43 1.51


11 April 26, 2013

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Table 4

S&P Dow Jones Indices (cont.)

12/31/2010 21.93 1.03 4.71 3.23 1.46


Contact Information: Howard Silverblatt, Senior Index Analyst—S&P Dow Jones Indices, [email protected]

Leveraged Commentary And Data: LIBOR Floors Fall Anew In Hot Loan Market, But RemainUbiquitous

Thanks to a combination of red-hot technicals and low interest rates, the average LIBOR floor on institutional loans eased

to 1.09% in April, from 1.10% in March and 1.25% at year-end. The current level is the lowest since this feature came

into widespread use in the wake of the credit crunch.

Chart 7

Of course, dovish monetary policy around the globe has forced LIBOR lower. The three-month rate, for instance, stood at

a microscopic 0.28% on April 18, according to Bloomberg, down from 0.31% at year-end. Meanwhile, the premium

issuers are paying on floors relative to the open-market rate has tightened to 81 basis points (bps) so far in April, from 82

bps in March and 94 bps at year-end.


12 April 26, 2013

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Chart 8

Understandably, 'BB' loans have seen the sharpest decrease. The average LIBOR floor for these institutional loan

aristocrats has fallen to 0.75% in April, from 0.86% in the first quarter and 1.00% during the final three months of 2012.

The average 'BB' premium to three-month LIBOR, meanwhile, narrowed to 47 bps, from 56 bps between January and

March and 67 bps in the fourth quarter.


13 April 26, 2013

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Chart 9

For single-'B' issuers, by comparison, floors have declined nominally, but have remained fairly steady relative to LIBOR.

The average floor so far in April is 1.11%, versus 1.14% during the first three months of 2013 and 1.26% during the

fourth quarter. As a premium to three-month LIBOR, however, April's gap stands at 83 bps, unchanged from the opening

three months of the year. In fact, that reading is within the recent range of 78-94 bps.


14 April 26, 2013

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Chart 10

Although LIBOR floors are contracting, especially for blue-chip issuers, the feature remains nearly universal. Indeed, 91%

of April's new institutional issues--60 of 66--were fortified with a floor, versus 95% in March. Drilling down, the six April

loans offered without a floor are either repricings or refinancings of seasoned loans that originally didn't have a floor: two

First Data repricings, CSC Holdings, Regal Entertainment, HCA, and Nuveen Investments.


15 April 26, 2013

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Chart 11

As a result, the share of loans in the S&P/LSTA Index with a floor reached a high of 75% in mid-April, up from 74% in

March and 67% at the end of 2012.


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Chart 12

Naturally, LIBOR floors are not the only part of the primary pricing package to come under pressure in the teeth of

2013's liquidity surge. The average all-in new-issue clearing yield--an estimate based on the floor, spread, and OID--is

down across the board.


17 April 26, 2013

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Chart 13

Contact Information: Steve Miller, Managing Director—Leveraged Commentary And

Data, [email protected]

R2P Corporate Bond Monitor

U.S. economic growth turned out to be robust in the first quarter of 2013. Consumer spending remained buoyant

according to monthly retail sales data, despite broad based U.S. tax hikes, while housing market conditions continued to

improve.

U.S. GDP grew at a healthy 2.5% pace in the first quarter, up sharply from the 0.4% recorded in fourth quarter 2012.

First quarter growth was slightly disappointing, however, relative to consensus economist forecasts that set market

expectations for a 3% growth rate.

In Europe, German investors' economic sentiment dropped sharply in April, based on the Zew indicator released on April

16, erasing much of this year's gains. The Zew indicator fell sharply, from 48.5 in March, to 36.3 this month. Zew

president, Professor Clemens Fuest, pointed out that surveyed financial market experts remain confident, but are less

optimistic than they had been the previous month. The unresolved euro crisis, along with a dip in exports, was behind the

confidence slide.

Amid pessimistic economic figures, risk-reward profiles--as measured by average Risk-to-Price (R2P) scores--decreased

overall in the month to April 19 (see tables 5 and 6). Decreases in credit and market risk were not enough to erase the


18 April 26, 2013

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drop in yield in North America and Europe.

In North America, scores decreased by 9% due to a 15 basis point (bps) tightening in the average option-adjusted spread

(OAS), more than offsetting the decrease in the average probability of default (PD) (0.02%) and historical 20-day bond

price volatility (.01%).

In Europe, scores decreased by 5% as OAS tightened 17 bps. PD decreased by 0.09% on average, and bond price volatility

decreased by 0.004%.

Table 5

North American Risk-Reward Profiles By Sector--One Month Average R2P Score And Components Change

Scores (%) OAS (bps) PD (%) BP Vol (%)

Consumer discretionary (8) (18) 0.068 (0.023)

Consumer staples 6 (16) (0.051) (0.037)

Energy (13) (18) (0.022) (0.023)

Financials (3) (9) (0.001) (0.049)

Healthcare (6) (16) (0.017) (0.009)

Industrials (16) (14) 0.031 (0.035)

Information technology (5) (22) (0.094) (0.035)

Materials (19) (17) (0.008) 0.035

Telecommunication services (13) (9) (0.037) 0.057

One month change to April 19, 2013. Source: S&P Capital IQ

Table 6

European Risk-Reward Profiles By Sector--One Month Average R2P Score And Components Change

Scores (%) OAS (bps) PD (%) BP Vol (%)

Consumer discretionary 2 (7) (0.010) (0.004)

Consumer staples (16) (17) (0.163) (0.034)

Energy (17) (24) (0.029) (0.012)

Financials (2) (15) (0.342) (0.009)

Healthcare 11 (13) (0.129) (0.014)

Industrials (5) (15) (0.061) 0.006

Information technology 4 (22) (0.025) (0.002)

Materials (10) (17) (0.021) 0.019

Telecommunication services (9) (23) (0.040) 0.015

One month change to April 19, 2013. Source: S&P Capital IQ

Contact Information: Fabrice Jaudi, Vice President—Global Markets Intelligence, [email protected]

Municipal Bond Commentary: Determining A Municipal Bond Default Rate: A New Use For TheBenchmark Index

For years pundits, analysts, portfolio managers, and others have estimated the municipal bond default rate, using their

estimates to compare the municipal bond asset class to other available fixed income choices. Actual monetary default data,

when combined with a finite universe of bonds outstanding, may help fine tune those estimates. We can now do this using

data from the S&P Municipal Bond Index.

Based on the index data, the 2012 municipal bond monetary default rate was 0.144%, and the 2012 high yield municipal


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bond default rate was 1%. According to S&P Global Fixed Income Research, the 2012 U.S. speculative grade corporate

bond default rate was 2.6%. Combining this data reveals a definitive trend: historically, municipal bonds have had a lower

propensity to default.

The enormous swath of the municipal bond market tracked by the S&P Municipal Bond Index makes this analysis

possible.

The S&P Municipal Bond Index has been a live benchmark since Dec. 31, 2000. Tracking over 70,000 bonds from nearly

21,000 different issuers, the index represents a market value of over $1.47 trillion. Some unique features of the index are

that it tracks bonds throughout their 'lifetime', from issuance to maturity (as of the index rebalancing date, the bond must

have a minimum term to maturity and/or complete call date greater than or equal to one calendar month), and includes

bonds that range in quality from 'AAA' to 'D'. By keeping bonds in the benchmark even when a default occurs, the index

has become a 'living' timeline, allowing us to track the municipal bond default rate.

Table 7

New Monetary Defaults

--S&P Municipal Bond Index--

--S&P Municipal Bond High Yield

Index--U.S. speculative grade

corporate bonds

Deals entering default

(#)*

Deals in index

(#) Default (%)

Deals in index

(#) Default (%) Default (%)

2011 46 20,307 0.227 3,032 1.52 1.98

2012 30 20,802 0.144 3,005 1 2.6

*Deals in index defaulting on principal and/or interest for the first time. Source: S&P Capital IQ, S&P Dow Jones Indices, and S&P Global Fixed

Income Research

Contact Information: James Rieger, Vice President—S&P Dow Jones Indices, [email protected]

Market Derived Signal Commentary: Credit Market 's View Of Machinery Isn't Affected ByCaterpillar

On Monday, Caterpillar Inc. cut its 2013 earnings and revenue outlook citing an expected 50% drop in heavy equipment

sales to mining customers, and a 15% decline in sales of machines the company procured in a 2011 acquisition. The

company now forecasts revenues of $57 billion to $61 billion, from a previous estimate of $60 billion to $68 billion, and

earnings per share of $7, versus a range of $7-$9.

Because of Caterpillar's dominance in the machinery industry, the GMI research team wouldn't have been surprised to see

that the company's results affected its S&P 500 peers. Specifically, we wanted to learn how the credit market reacted to

the news.

Although Caterpillar's five-year credit default swap (CDS) spread widened 5 basis points (bps) to 74 bps (still a very

low-risk level) over the week ended Feb. 23, 2013, its peers' insurance premiums either tightened or remained about flat.

This includes the spread for Caterpillar's largest competitor, Deere & Co., which tightened 2 bps to 35 bps.


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Chart 14

Table 8

Credit

CDS (bps) Change (bps) Change (%) Benchmark (bps) CDS ICR OL/CW

Deere & Co. 34.9 (1.7) (4.5) 69.8 aa- A STABLE

Caterpillar Inc. 74.2 5.1 7.4 69.8 bbb+ A STABLE

Cummins Inc. 59.4 0.0 0.0 69.8 a- A STABLE

Meritor Inc. 711.5 (12.3) (1.7) 635.1 ccc+ B STABLE

Stanley Black & Decker Inc. 66.0 (1.8) (2.6) 69.8 bbb+ A STABLE

Navistar International Corp. 586.8 2.5 0.4 635.1 b- B NEGATIVE

Ingersoll-Rand Co. Ltd. 85.6 (0.2) (0.2) 112.5 bbb BBB+ CWNEG

Dover Corp. 59.4 (1.0) (1.6) 69.8 a- A STABLE

Illinois Tool Works Inc. 48.4 (1.9) (3.8) 61.5 a A+ STABLE

ICR--Issuer credit rating. OL/CW--Outlook/CreditWatch. Source: S&P Capital IQ

Analysts polled by S&P Capital IQ expect machinery earnings per share (EPS) of $45.41 for 2013, flat with 2012, but

there is significant disparity between expectations for industrial machinery EPS and construction and farm machinery and

heavy trucks (construction) EPS. The consensus estimate for the construction group is $54.82, representing a 7% decline

from 2012. For industrial machinery, analysts estimate EPS of $38.29, implying 11.5% growth from last year.

Caterpillar's mining sector problems stem from its decision to buy the mining-equipment manufacturer Bucyrus


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International Inc. in 2011 for $8.8 billion. Amid questions about the wisdom of the acquisition, Caterpillar remains

convinced that the mining market will rebound, according to the Wall Street Journal report on April 22.

Expectations for Deere are decidedly more bullish. The consensus FY13 (ending Oct. 31, 2013) EPS estimate of $8.59

reflects an expected 12.6% increase. For the fiscal first quarter, Deere reported a 27% gain in EPS on a 10% increase in

sales, driven by healthy demand for farm equipment.

We take a positive view of this CDS trend, and will revisit the numbers after first-quarter earnings reporting season draws

to a close.

Lisa Sanders, Director—Global Markets Intelligence, [email protected]

Capital Market Commentary: IPOs, M&A, And Debt

IPOs

Following our previous examination of activist investor ownership, we decided to expand our coverage to include IPOs

priced over the past three years, in order to find the best performers among those issues with the highest concentration of

activist ownership. One interesting aspect we found is that, of the top ten activist owned IPOs completed since April 2010,

half went public after fourth quarter 2011 (see table 9). As for their performance, this group has appreciated about 26%

on average, despite four of the issues gaining 5% or less. To that end, it would appear that activist ownership data could

hold considerable weight for those seeking guidance on leading market performers.

Table 9

Leading Activist Investor Ownership Among IPOs Priced In The Past Three Years

Effective date Target/issuer Value (Mil. $) Activist investor owned (%) Price change (%)*

9/29/2010 Rhino Resource Partners L.P. 66.5 52.7 1.9

8/4/2010 Gordmans Stores Inc. 58.9 51.5 (25.0)

9/6/2012 Sears Hometown and Outlet Stores Inc. 346.5 44.1 31.1

6/23/2010 Hudson Pacific Properties Inc. 217.6 25.0 4.8

12/14/2011 Bonanza Creek Energy Inc. 170.0 22.6 23.9

11/16/2011 Delphi Automotive PLC 529.7 19.5 10.4

9/19/2012 National Bank Holdings Corp. 137.6 18.7 (4.4)

3/29/2012 Enphase Energy Inc. 53.8 17.7 59.2

11/12/2010 Atlantic Coast Financial Corp. 17.1 17.1 125.9

2/10/2011 AcelRx Pharmaceuticals Inc. 40.0 16.9 38.3

*YTD as of Jan. 1, 2013. Source: S&P Capital IQ

M&A

While the price of oil has been edging lower recently, the pace of foreign acquisitions involving Middle Eastern-North

African (MENA) buyers has been on the rise. To date, S&P Capital IQ data shows over $10 billion in announced M&A

activity, from 52 deals, where a MENA company is either the sole buyer, or part of a group of investors, buying a

non-MENA business or asset. The largest such transaction announced to date involves a group of Australian investors,

along with UAE-based Tawreed Investments Ltd.--a subsidiary of the Abu Dhabi Investment Authority--agreeing to

acquire Port Kembla Pty. Ltd. and Port Botany from Sydney Ports Corp. for $5.07 billion on April 12, 2013. In contrast,

at this time last year, MENA foreign M&A activity totaled only about $3 billion from 50 deals, with 29 of those involving

European targets.


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Table 10

Leading Foreign Acquisitions By MENA Acquirers 2013YTD

Announced Target Value (Mil. $) Buyers

4/12/2013 Port Kembla Pty. Ltd. and PortBotany

5,319.76 Industry Funds Management Pty Ltd.; Cbus Industry Superannuation Fund;Hesta; Qsuper Ltd.; AustralianSuper Pty Ltd; Host-Plus Pty Ltd.; TawreedInvestments Ltd.

3/2/2013 42 Marriott Branded Hotels inU.K.

987.86 Abu Dhabi Investment Authority

4/15/2013 Suncor Energy Inc. 979.75 Qatar Petroleum International; Direct Energy Resources Partnership

1/2/2013 Current TV LLC 500.00 Al Jazeera Sports

2/27/2013 Queens Moat HousesGermany Holding Gmbh

403.39 Fattal Hotel Management Co.

4/8/2013 Property at 20 GrosvenorSquare

381.65 Finchatton Ltd.; Abu Dhabi Investment Council

2/11/2013 Medgaz S.A. 313.90 Compañía Española de Petróleos, S.A.U.; Sonatrach SPA

4/7/2013 IDS Center Office Building inMinneapolis

277.00 Harel Insurance Investments and Finances Services Ltd., AssetManagement Arm

1/22/2013 FishNet Consulting Inc. 200.00 Investcorp Bank B.S.C.

1/3/2013 Portfolio of 22 CommercialCenters in Texas

170.00 The Phoenix Holdings Ltd.

2/18/2013 Hydrasun Ltd. 150.00 Investcorp Gulf Investments

1/29/2013 Warid Telecom (Pvt) Ltd. 150.00 Warid Telecom Pakistan LLC

3/28/2013 Continental Farmers GroupPLC

125.68 Almarai Co.; Saudi Agricultural & Livestock Investment Co.; Saudi Grainsand Fodder Holding Co. LLC

Source: S&P Capital IQ

Debt

Whether it was developments relating to the Boston Marathon bombing, or a reaction to the prior week's sluggish

financial markets, CUSIP requests (with the exception of municipal debt identifiers) for leading debt-related securities all

retreated in the week ending April 19 according to CUSIP Global Services. Compared to the preceding week's data, CUSIP

requests were down 45%. To that end, municipal CUSIPs, which are the largest segment shown below, show a nearly

15% year-over-year decline. Alternatively, the smallest segment in the table, long-term municipal note identifiers, enjoyed

the strongest gains with a 49% jump compared to a year ago. Overall, with a 2.6% drop in identifier demand, the outlook

for debt underwriting looks mixed at best.

Table 11

Selected Debt CUSIP Requests

Week ending April, 19 Week ending April, 12 2013YTD 2012YTD Change (%)

Domestic corp debt 91 509 3419 3169 7.9

Municipals 373 361 4364 5129 (14.9)

ST muni note 15 22 309 375 (17.6)

LT muni note 8 19 149 100 49.0

Int'l debt 32 51 718 495 45.1

PPN domestic debt 47 73 725 676 7.2

Total 566 1035 9684 9944 (2.6)

Source: CUSIP Global Services

Contact Information: Rich Peterson, Director—Global Markets Intelligence, [email protected]


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S&P Fixed-Income Commentary: Secured, Or Unsecured, That Is The Question

The current low interest rate environment has many investors searching for alternatives to improve their return on

investment. Extending investment time horizons to longer maturities, or moving down the credit scale, are two of the more

familiar ways to increase returns. In the not too distant past, only accredited investors who met certain wealth thresholds

were able to access high yield products. Recently though, products such as ETFs have become more widely used by retail

investors, mainstreaming over-the-counter traded investments, and providing them with an easy and efficient way to get

involved in markets they couldn't access in the past.

Two possible options for better yields are high yield bonds or senior loans. The S&P U.S. Issued High Yield Corporate

Bond Index is returning 3.84% year-to-date with a weighted average yield of 5.81%.

Similar to high yield bonds--whose credit ratings are below the investment grade cutoff of 'BBB' assigned by the rating

agencies--are senior loans. William Shakespeare's famous quote from Hamlet, "To be, or not to be, that is the question:"

can be rephrased by investors comparing high yield to senior loans as "secured, or unsecured, that is the question," when

pondering the risks of each product. Senior loans rank higher in the capital structure and are secured to the assets of the

business, unlike the unsecured nature of high yield bonds. The loan's coupon is typically the higher of a floor rate or a

certain spread over three-month LIBOR. Because their coupons are tied to a short-term rate, senior loans have less interest

rate risk and are considered a floating rate instrument. In a rising rate environment, senior loans are at an advantage to

high yield whose bullet structure and fixed coupon would be negatively affected. Not surprisingly, senior loans tend to

have slightly smaller, but less volatile returns than high yield bonds. The table below compares the returns of different

investments this year.

Table 12

Total Returns (%)

Jan-13 Feb-13 Mar-13 Month to date Year to date

S&P/LSTA U.S. Leveraged Loan 100 Index 1.22 0.08 0.80 0.49 2.61

S&P U.S. Issued High Yield Corporate Bond Index 1.13 0.41 1.06 1.18 3.84

As of April 24, 2013. Source: S&P Dow Jones Indices

In order to achieve greater returns, one must consider the risks as well. When investing in lower rated credit instruments,

the risk of default should always be a concern. Though now, after the 2008 financial crisis, the majority of companies

have put their balance sheets back in relatively good financial shape. Presently, default rates are near historical lows, with

senior loan defaults at 1.4% and high yield defaults at 2.3%.

Weighing the risks, both senior loans and high yield bonds are attractive investments. Not only because of their higher

yields, but also because they are relatively short investments which, when compared to other long term investments, won't

be as affected by changes in long term rates. The duration of the S&P U.S. Issued High Yield Corporate Bond Index is 5

years, while the average life of senior loan is 4.48 years as measured by the S&P/LSTA U.S. Leveraged Loan 100 Index.

An additional benefit of these two investment choices is that their returns are negatively correlated to other markets. The

returns of a fixed income multi-product portfolio are, in essence, hedged to the changes in the market; as one product is

underperforming the other is providing return (see correlation table below).


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Table 13

Correlation Table

S&P/LSTA U.S. Leveraged Loan 100

Index

S&P U.S. Issued High Yield Corporate Bond

Index

S&P 500 (TR) 0.02 0.27

S&P U.S. Preferred Stock Index (TR) 0.19 0.43

S&P/BGCantor US Treasury Bond Index (0.10) (0.11)

S&P US Treasury TIPS Index (0.12) (0.12)

S&P National AMT-Free Municipal Bond Index (0.03) (0.02)

S&P U.S. Issued Investment Grade Corporate BondIndex

(0.06) 0.00

S&P/LSTA U.S. Leveraged Loan 100 Index 1.00 0.56

S&P U.S. Issued High Yield Corporate Bond Index 0.56 1.00

Dec. 31, 2012 to April 24, 2013. Source: S&P Dow Jones Indices

Contact Information: Kevin Horan, Director—S&P Dow Jones Indices, [email protected]

S&P DJI Commodity Indices Commentary: Precious Metals Lack Luster While Natural GasRemains Warm

The S&P GSCI remains negative year-to-date (YTD), through April 24, declining 5.7%. The Index's month to date

(MTD) decline was 6.2%. All S&P GSCI sectors continued their decline amid concerns over depressing global economic

data and decreasing Chinese demand. China's slowing economic growth has had a large impact on commodities. The

country is a significant purchaser of soft commodities, such as corn and soybeans, and accounts for about a third of global

base metal consumption. Based on EIA findings, China is the world's largest energy consumer, and is second only to the

U.S in oil consumption.

Energy

Weak economic data, including a slowdown in factory activity and rise in jobless claims, drove the S&P GSCI Energy

down 6.9% MTD. The S&P GSCI Unleaded Gasoline lost 11.6% MTD after the U.S. Energy Information Administration

reported gasoline demand was at a 16-year low. Despite declines across the energy sector, the S&P GSCI Natural Gas

remains in positive territory, up 3.48% MTD and 20% YTD. The natural gas rally has been supported by unseasonably

cold weather and high electric power demand, especially as stricter environmental rules make burning coal more

expensive.

Agriculture

The cold weather also increased demand for warm drinks like hot cocoa, as first-quarter North American cocoa grindings

performed better-than-expected, up nearly 6%. The S&P GSCI Cocoa rose 6.4% MTD and 3.2% YTD. Cotton fell 4.3%

for the week, and 8.3% MTD, as a result of wet weather in the U.S that improved conditions for cotton crops.

Livestock

The S&P GSCI Livestock increased 0.59% as beef and pork prices rose, supported by increased consumer purchases for

the approaching spring season. The S&P GSCI Feeder Cattle, the S&P GSCI Lean Hogs, and the S&P GSCI Live Cattle

rose 2.1%, 0.7%, and 0.2%, respectively, for the week.


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Industrial metals

The S&P GSCI Industrial Metals fell 4.2% for the month and 11% for the year. The Purchasing Managers Index for

China fell to 50.5 for April, which was below analyst estimates. A reading over 50 indicates economic expansion, while a

reading below indicates oversupply and under demand. The S&P GSCI Copper is down 6.8% for the month and 11.77%

for the year.

Precious metals

On April 15, 2013, the S&P GSCI Gold had its biggest one day loss (-9.3%) since its inception on Jan. 6, 1978. The

decline was due to worries about central bank gold sales, especially in Cyprus, and whisperings that the Fed might wind

down its bond purchase program. However, buying improved in India ahead of the Akshaya Tritiya, a gold buying

festival, next month. The wedding season, when gold is frequently given as a gift to brides, has also recently begun, and

will continue until June. On April 15, 2013, the S&P GSCI Silver had its sixth biggest single day drop (11.3%) since its

Jan. 5, 1973, inception, and nine days later hit its lowest level since Oct. 4, 2010.

Table 14

Index Performance Sorted By YTD

(All Data Is Total Return* Through April, 24, 2013)

One week (%) MTD (%) YTD (%) 12 months (%) Three years (%) Five years (%)

S&P DFI 0.34 1.64 0.70 (10.05) (15.00) (19.51)

S&P Systematic Global Macro 2.13 0.57 0.04 (14.38) 5.58 27.43

S&P GSCI Dynamic Roll Alpha LightEnergy *ER

0.00 0.26 (1.82) (0.25) 1.22 21.14

S&P GSCI 3 Month Forward 2.25 (5.45) (4.49) (9.27) 2.39 (36.25)

S&P GSCI Covered Call Select (0.71) (4.99) (4.96) (7.62) 2.29 (17.61)

S&P GSCI Multiple Contract 2.28 (6.11) (5.40) (9.10) 0.36 (46.19)

S&P GSCI Enhanced Commodity 2.22 (6.03) (5.48) (9.19) 3.17 (36.97)

S&P GSCI 2.28 (6.22) (5.71) (9.08) 0.02 (48.95)

S&P GSCI Dynamic Roll 2.12 (5.13) (6.12) (7.27) 2.52 (24.28)

S&P WCI 2.49 (6.59) (6.85) (8.49) 20.71 (30.83)

S&P GSCI Light Energy 0.71 (5.45) (7.57) (7.59) 3.12 (37.85)

*S&P GSCI Dynamic Roll Alpha Light Energy is excess return since the market neutrality negates collateral return. Charts and graphs are provided

for illustrative purposes only. Indices are unmanaged statistical composites and their returns do not include payment of any sales charges or fees

an investor would pay to purchase the securities the index represents. Such costs would lower performance. It is not possible to invest directly in

an index. Past performance is not an indication of future results. Source: S&P Dow Jones Indices

Contact Information: Marya Alsati-Morad, Associate Director—S&P Dow Jones Indices, [email protected]

Jodie Gunzberg, Vice President--Commodities, [email protected]


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