Markets Gone Wild :Surviving Sub Prime, Black Swans and Market Turmoil

John Cassady, CFA

Senior Portfolio Manager

Fifth Third Asset Management, Inc. (FTAM)

2

Homes Now Equal to 2000 Stock Levels

Source: Bianco Research

The "New" American DreamEquity in Household Real Estate Versus Direct Stock Ownership

0

1

2

3

4

5

6

7

8

9

10

11

12

1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

Tri

llio

ns

of D

olla

rs

0

1

2

3

4

5

6

7

8

9

10

11

12

Tri

llio

ns

of D

olla

rs

Equity in Household Real Estate(Fine Line)

Direct Stock Ownership (Heavy Line)

3Source: Bianco Research

Sub Prime Contagion

ABX Indices: 06-02 Series - Price

2/27/0790.17%

2/27/0763.16%

2/20/07

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

105%

8/1/

06

8/15

/06

8/29

/06

9/13

/06

9/27

/06

10/1

2/06

10/2

6/06

11/9

/06

11/2

4/06

12/8

/06

12/2

2/06

1/9/

07

1/24

/07

2/7/

07

2/22

/07

3/8/

07

3/22

/07

4/5/

07

4/19

/07

5/3/

07

5/17

/07

6/1/

07

6/15

/07

6/29

/07

7/16

/07

7/30

/07

8/13

/07

Per

cent

of

Par

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%

105%

Per

cent

of

Par

ABX-HE- BBB- Index

ABX-HE- A Index

ABX-HE- AAA Index

BBB

Current Loss Outlook

(62.5%)

BBB

Historical Worst Case

1999 = (5.25%)

Crisis I

2/27/07

4

Jumbo 30-Year Fixed Mortgage Rates vs.Conforming 30-Year Fixed Mortgage Rates

5.00%

5.50%

6.00%

6.50%

7.00%

7.50%

8.00%

8.50%

9.00%7/

17/1

997

1/1/

1998

6/18

/199

8

12/1

0/19

98

5/27

/199

9

11/1

1/19

99

4/27

/200

0

10/2

6/20

00

4/12

/200

1

10/4

/200

1

3/21

/200

2

9/5/

2002

2/20

/200

3

8/7/

2003

2/12

/200

4

7/29

/200

4

1/13

/200

5

6/30

/200

5

12/1

5/20

05

6/1/

2006

11/1

6/20

06

5/3/

2007

10/1

8/20

07

Rat

es

5.00%

5.50%

6.00%

6.50%

7.00%

7.50%

8.00%

8.50%

9.00%

Rat

es

Jumbo Mortgage Rates(More Than $417,000)

Conforming Mortgage Rates(Less than $417,000)

Source: BanqQuote

Source: Bianco Research Updated 8/31/07

Contagion – Part 1

5

Honey, I NUKED the Hedge Fund

$

$ $

$ $

$ $

Hedgie raises $1,000,000.

There are 10,000 Hedge Funds today.

1) 2)

Wall Street Bankers lend Hedgie

$5,000,000 more, @ 6% interest.

3) Hedgie invests $6,000,000 @ 8% interest.

$6,000,000 x 8%

$480,000(300,000)$180,000

$1,000,000

ReturnGross ReturnInterest Expense (Wall Street loves Hedgie)

18% return, Collect big fees

4) Uh oh, here comes the black swan…

$6,000,000 x (.20)

($1,200,000)$1,000,000

Bond prices decline 20% 100 80.

Busted, margin call’s incinerate principal.

$ $ $ $ $ $X X X X X X

6

30 Day AA-Rated Commercial Paper Rates

8/2/2007, 5.32

5.00

5.10

5.20

5.30

5.40

5.50

5.60

5.70

5.80

5.90

6.00

6.10

6.20

4/2

7/2

00

7

5/7

/20

07

5/1

4/2

00

7

5/2

1/2

00

7

5/2

9/2

00

7

6/5

/20

07

6/1

3/2

00

7

6/2

0/2

00

7

6/2

7/2

00

7

7/5

/20

07

7/1

2/2

00

7

7/1

9/2

00

7

7/2

6/2

00

7

8/2

/20

07

8/9

/20

07

8/1

6/2

00

7

8/2

3/2

00

7

8/3

0/2

00

7

5.00

5.10

5.20

5.30

5.40

5.50

5.60

5.70

5.80

5.90

6.00

6.10

6.20

Financial Non-Financial

Asset Backed

Source: Bianco Research

Outstanding Levels of Asset-Backed Commercial Paper

9/5/2007, 966.70

8/8/2007, 1,182.85

900

950

1,000

1,050

1,100

1,150

1,200

5/3/

2006

6/28

/200

6

8/23

/200

6

10/1

8/20

06

12/1

3/20

06

2/7/

2007

4/4/

2007

5/30

/200

7

7/25

/200

7

9/19

/200

7

Bill

ion

s o

f D

olla

rs900

950

1,000

1,050

1,100

1,150

1,200

Bill

ion

s o

f D

olla

rs

Money Market Meltdown - Liquidity Seizure

7

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Jul-0

0Oct-

00Ja

n-01

Apr-0

1Ju

l-01

Oct-01

Jan-

02Apr

-02

Jul-0

2Oct-

02Ja

n-03

Apr-0

3Ju

l-03

Oct-03

Jan-

04Apr

-04

Jul-0

4Oct-

04Ja

n-05

Apr-0

5Ju

l-05

Oct-05

Jan-

06Apr

-06

Jul-0

6Oct-

06Ja

n-07

Apr-0

7Ju

l-07

% Change

90

100

110

120

130

140

150

Jan-

00

Apr-0

0

Jul-0

0

Oct-00

Jan-

01

Apr-0

1

Jul-0

1

Oct-01

Jan-

02

Apr-0

2

Jul-0

2

Oct-02

Jan-

03

Apr-0

3

Jul-0

3

Oct-03

Jan-

04

Apr-0

4

Jul-0

4

Oct-04

Jan-

05

Apr-0

5

Jul-0

5

Oct-05

Jan-

06

Apr-0

6

Jul-0

6

Oct-06

Jan-

07

Apr-0

7

Jul-0

7

(MM) Units

4

5

6

7

8

(MM) Units

Home Sales Price

Existing Home SalesMonthly Supply

Housing Affordability

Real Estate Story – Looking for a Bottom…

Source: FTAM Updated 7/31/07 Year-Over-Year

8.4Months

4.9Months

2

4

6

8

1/31

/00

4/30

/00

7/31

/00

10/3

1/00

1/31

/01

4/30

/01

7/31

/01

10/3

1/01

1/31

/02

4/30

/02

7/31

/02

10/3

1/02

1/31

/03

4/30

/03

7/31

/03

10/3

1/03

1/31

/04

4/30

/04

7/31

/04

10/3

1/04

1/31

/05

4/30

/05

7/31

/05

10/3

1/05

1/31

/06

4/30

/06

7/31

/06

10/3

1/06

1/31

/07

4/30

/07

7/31

/07

Month Supply

-0.6%

8

Will Housing Prices Collapse?

Since 1985, the 4 worst quarters for average U.S. home prices are:

Q4 1990 -0.47%

Q2 1992

Q4 1994

Q2 2007

-0.23%

-0.25%

-0.60%

But there have been long and more severe local bear markets:

Area Period % Change

New York 4Q 1989 – 2Q 1995 -6.5%

Houston 3Q 1988 – 3Q 1996 -21.4%

Flint, MI

Grand Rapids, MI

Kalamazoo, MI

Detroit, MI

7/06 – 7/07

7/06 – 7/07

7/06 – 7/07

7/06 – 7/07

-8.4%

-3.5%

-5.6%

-30.4%Source: ISI Group

9

Consumer Spending – How Much of a Decline?

'83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06-4-4

-2-2

00

22

44

66

88

1010

(% 1Q Ann) Real Private Consumption (saar) - United StatesRecession Periods - United States

?

10

What will the Fed do? Rate cuts normally Good for stocks.

Source = FactSet/Ned Davis Research

'83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '070

2

4

6

8

10

12

14

Policy Rates Fed Funds Target Rate, Percent - United StatesRecession Periods - United States

1) S&P 500 up

31.6% in 1985. 2) S&P 500

up 31.3% in 1989. 3) S&P

500 up 37.4% in

1995.

4) S&P 500 down 11.8% in

2001.

11

Above Average Global Growth

Source: World Bank/IMF

World GDP Growth

2.7%

4.8%

2.4%

3.0%

4.0%

5.2%4.9%

5.5%5.2% 5.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

12

4.8%

7.3%

1.0%

6.4%

-0.5%

6.4%

-0.5%

1.2%

-1.4%

1.6%

2.7%

2.2%2.4%

0.2%

1.2%

3.5%

7.5%

2.7%3.0%

3.5%3.6%

2.5%

3.1%2.8%

4.5%

1.2%

4.8%

2.4%

1.1%

2.1%

0.6%

4.0%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

3Q 1

999

4Q 1

999

1Q 2

000

2Q 2

000

3Q 2

000

4Q 2

000

1Q 2

001

2Q 2

001

3Q 2

001

4Q 2

001

1Q 2

002

2Q 2

002

3Q 2

002

4Q 2

002

1Q 2

003

2Q 2

003

3Q 2

003

4Q 2

003

1Q 2

004

2Q 2

004

3Q 2

004

4Q 2

004

1Q 2

005

2Q 2

005

3Q 2

005

4Q 2

005

1Q 2

006

2Q 2

006

3Q 2

006

4Q 2

006

1Q 2

007

2Q 2

007

0%

1%

2%

3%

4%

5%

6%

7%

Unemployment Rate

Average Growth Rate for GDP

3.1%

Unemployment Rate & Real GDP

Source: FTAM (Q2, Advance)

13

0.50%

0.75%

1.00%

1.25%

1.50%

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

3.25%

3.50%1

99

4

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

An

nu

al r

ate

of c

ha

ng

e

0.50%

0.75%

1.00%

1.25%

1.50%

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

3.25%

3.50%

An

nu

al r

ate

of c

ha

ng

e

Core CPI

Core PCE

Core CPI vs. Core PCE

Fed Focus – Core Inflation Measures

Source: Bianco Research

14

Percent Change in Real GDP by State 2005-2006

Source: U.S. Bureau of Economic Analysis

15

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1999 2000 2001 2002 2003 2004 2005 2006 2007

U.S. Michigan

Motor Vehicle & Parts Manufacturing Employment

1999 – 2007 April

April

Source: BLS

1,128,400

189,000

316,300

846,900

U.S.: -281,500 or –25%

Michigan: -127,300 or –40%

16

23.0%

9.5%

6.5%

35.5%

15.3%

23.9%

13.1%12.2%

16.3%

7.6%

6.2%

4.5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

FORD

HONDA

Source: Autodata, Updated 7/31//07

Detroit Drops; Asia GainsU.S. Market Share of Major Automakers:

TOYOTA

NISSAN

CHRYSLER

GM

17

-5

0

5

10

15

20

25

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

(%)

-200

0

200

400

600

800

1000

Source: ISI Group

U.S. Mtg. Equity Withdrawal

House Price Index

(000)

millions

MEW Declines – Bad News for Detroit

18

-15-27

7.6

-11-29

13.5

-12

-32

17.4

-11

-33

13.4

-8

-26

-3.7

-90

-80

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

40

2002 2003 2004 2005 2006

Ford Funding Shortfall

Pension OPEB Shareholder Equity

-25

-51

7

-8

-57

25.2

-9

-61

27.8

-5

-65

14.7

5

-51

-5.4

-90

-80

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

40

2002 2003 2004 2005 2006

GM Funding Shortfall

Pension OPEB Shareholder Equity

Post-Employment Healthcare Costs

Source: Bank of America, Bloomberg, 10-Ks

$ billion $ billion

Book Value/Share

-9.62

Book Value/Share

-2.58

19

2007 – A Turning Point for the Big 3

Master Contract Negotiations – September 2007

• Wage Rates – Need to come down

• Productivity Enhancement – More flexible work rules

• Healthcare Costs

• Legacy and existing workers

• Need to erase a $1,500 per vehicle cost disadvantage

• Can a VEBA cure the healthcare crisis for the Big 3?

Chrysler – What can Cerberus do that Daimler couldn’t?

A seminal moment for the UAW and the domestic auto industry…

20

4.91%

2.13%

4.55%

13.54%

15.79%

10.39%

18.44%

26.34%

5.20%

8.06%

1.42%

9.11%

Standard & Poors 500Index

NASDAQ CompositeIndex

Russell 2000 Index

MSCI EAFE

12/31/2005 12/31/2006 8/31/07 YTD

Common Stock Total Returns

Source: FTAM

21

43.00%

15.20% 15.50%

30.80%

83.00%

5.80%

19.60%

34.90%30.40%

13.70%

-5.94%

1.20%

15.60%

34.87%31.38%

5.08%5.68%

19.89%

8.63%

-0.99%

18.09% 18.89%

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

iSharesBrazil EWZ

MS E.Europe

Fund RNE

India FundIFN

iSharesCanadaEWC

iSharesAustralia

EWA

iSharesChina FXI

iSharesJapaneEWJ

iSharesSouth

Africa EZA

iSharesGermany

EWG

iShares UK EWU

US SpidersSPY

2006 2007 YTD

Source: Bloomberg Updated 8/31/07

Global ETF Returns US$

22

What stock traders are watching: Earnings

YoY Growth in S&P 500 Operating Earnings

7.4%

11.7%9.5%

21.3%

25.3%

16.8%

19.7%

13.9%11.7%

16.0%14.9%

16.3%

22.0%

11.4%

4.4%5.8%

11.5%

4.2%

14.4%

27.5%28.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

*NOTE: Current top-down estimate.

Source: FirstCall

23

'79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '0755

1010

1515

2020

2525

3030

Standard & Poors 500 Index, 12 Month Forw ard P/E Ratio, Ratio - United States

Stock market valuation is still about average…

Source = FactSet

High inflation...

Internet euphoria…

24

Vice vs. Virtue

90%

100%

110%

120%

130%

140%

150%

160%

170%

180%

190%12

/31/

2003

3/15

/200

4

5/25

/200

4

8/6/

2004

10/1

8/20

04

12/2

9/20

04

3/11

/200

5

5/23

/200

5

8/3/

2005

10/1

3/20

05

12/2

7/20

05

3/10

/200

6

5/22

/200

6

8/16

/200

6

10/2

6/20

06

1/12

/200

7

3/27

/200

7

6/7/

2007

8/17

/200

7

10/2

9/20

07

90%

100%

110%

120%

130%

140%

150%

160%

170%

180%

190%

Vice: The Mutuals.com Vice Fund

Virtue:The Domini Social Equity Fund

Source: Bianco Research

More Profitable being Naughty not Nice

25

Fixed Income Total Returns

2.74%

1.58%

2.43%

1.77%

3.07%

11.85%

4.08%

4.33%

4.25%

4.85%

0.58%

3.64%

3.07%

3.94%

3.79%

LB High Yield

LB IntermediateGovt/Corp

LB Aggregate

LB 1-3 Year Govt/Corp

90-Day T-Bills

12/31/2005 12/31/2006 8/31/07 YTD

Source: FTAM

26

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07

-60-60

-40-40

-20-20

00

2020

4040

6060

8080

100100

Stock Valuation Model

10-year Treasury Yield vs. SPX Earnings Yield

Bonds Attractive

Stocks Attractive

Fundamentally - Stocks Still Attractive Versus Bonds…

Source = FactSet

27

6.16

7.11

4.82

4.774.83

5.28

4.794.804.80

6.09

5.515.525.545.54 5.57

4.104.20

4.13 4.144.24

4.53

3.50

4.00

4.50

5.00

5.50

6.00

6.50

7.00

7.50

3 Month 6 Month 2 Year 3 Year 5 Year 10 Year 30 Year

(%)

YT

M

Treasury Yields vs. After Tax Muni YieldsLong Munis are Cheap

AAA Muni

35% Tax Bracket

U.S. Treasury

AAA Muni

25% Tax Bracket

Source: Bloomberg, Municipal Market Data Updated August 31, 2007

28

Investment Management Tactical Outcomes

Value add: +4.16% +0.14% +1.76% +1.17% +0.61%

Source = FactSet

'03 '04 '05 '06 '07700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

1,600

Small & Midcap stock bias

Large cap bias

Remove largecap bias Started

incrementalgrowth

bias

Lengthenedbond maturity

Largecap&

internationalbias

Raised 3% cash

Reinvested cash

Lengthenedbond maturity

Shortened bondmaturity and

added tointernational.

Incrementaladd to Intl.

stocks.

Lower stockov erweight f rom

6% to 3%.

Last: 1451.70 (10-SEP-07)

Standard & Poors 500 Composite Index, Price Return, USD, Close - United States

29

Items of Consideration for Investors

1. The national economy will weather the sub-prime storm, but it will be a drag on growth for the next year. There is no reason to expect a quick turn around, so growth will be sub –3.0% into 2008.

2. The struggles of Ford and GM will overshadow the Midwest economy for at least the next 2 years. Economic fundamentals are much stronger today than they were in the past which will mitigate the economic impact on the Midwest economy, though we will still lag the national economy.

3. Remember the importance of diversification and re-balancing in your portfolios for long-term performance.

4. Volatility is to be expected in financial markets, what matters is earnings growth still supports stock valuations, keeping P/E multiples reasonable.

• At current levels S&P 500 is selling for 15.7x the 2007 estimates and 14.8x the 2008 earnings estimates. 25 year average is 20.4x, 50 year average is 17.5x, and 81 year average is 15.9x.

• This is not an expensive market.

5. International stocks represent near and long-term opportunity.

6. Current 2007 domestic biases include . . .

1. Stocks over bonds.

2. Large Cap stocks over Small Cap.

3. Higher quality over Lower quality (stocks & bonds).