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1 THE BESPOKE REPORT Bespoke Investment Group LLC

Transcript of THE BESPOKE REPORT - Bespoke Investment Group Bespoke Report.pdf · Model Stock and ETF Portfolios...

Page 1: THE BESPOKE REPORT - Bespoke Investment Group Bespoke Report.pdf · Model Stock and ETF Portfolios 102 Page . 3 The Bespoke Report—2012 B e s p o k e I n v e s t m e n t G r o u

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THE BESPOKE REPORT

Bespoke Investment Group LLC

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The Bespoke Report—2012

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Written by Co-Founders Paul Hickey and Justin Walters

Bespoke Investment Group LLC 105 Calvert Street

Harrison, NY 10528 914-315-1248

The Bespoke Report Everything Investors Must Know About the

Markets in 2012

© Copyright 2012, Bespoke Investment Group, LLC. Bespoke Investment Group, LLC be-lieves all information contained in this report to be accurate, but we do not guarantee its accuracy. None of the information in this report or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities.

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Table of ContentsI. Introduction 4

II. Our View 8

III. Prognostications 10

IV. Valuation 15

V. Sentiment 24

VI. Washington 28

VII. Seasonality 33

VIII. Technicals 44

IX. Economic Indicators 52

X. Economic Expansions 64

XI. Housing 70

XII. Yield Curve 76

XIII. Dollar & Stocks 80

XIV. Commodities 86

XV. International 92

XVI. The Year in Headlines 100

XVII. Model Stock and ETF Portfolios 102

Page

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About Bespoke Bespoke Investment Group prides itself on its original content and intuitive thinking. Our unique ability to analyze financial markets in ways unlike tradi-tional Wall Street firms is what helps us stay one step ahead of the investment community. Bespoke provides financial research to individual and institutional investors as well as money management services. Our work has been used ex-tensively by some of the most prestigious Wall Street firms and major media outlets including CNBC, Bloomberg, the Wall Street Journal and Barron’s.

Bespoke Investment Group—Turning Information Into Wealth

To learn more about Bespoke, please visit www.bespokepremium.com.

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After starting off 2011 with gains in three out of the first four months of the year, market bulls had settled in to expect a repeat of the solid gains seen in 2009 and 2010. Once May rolled around, however, the bears took charge, sending the S&P 500 lower for five consecutive months through September. The common market saying “Sell in May and Go Away” could never have been more right in 2011.

It took a huge bounce in October and a surge in the last two weeks of the year to get the index back to even by the time the year ended.

S&P 500 in 2011

-0.12

0.28

-0.17

0.07

-0.01

-0.2-0.10.00.10.20.30.4

1050

1100

1150

1200

1250

1300

1350

1400January February March Apri l May June July August Sept. October Nov. Dec.

2.26% -2.15% -7.18%3.20% -1.35%2.85% -1.83% -5.68% -0.51%10.77%-0.10%

-8-6-4-202468

January February March April May June July August Sept. October Nov. Dec.

Daily % Change

Monday Tuesday Wednesday Thursday Friday

Average % Change by Day of Week

+0.00% YTD

0.85%

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Below is a table highlighting the performance of various asset classes (using ETFs) in 2011. The weakness in Europe in the second half of the year is clearly evident in the table, as countries like France, Germany and Italy all fell roughly 30%. For the year, most European countries ended down close to 20% or more.

The US performed well in 2011 compared to the rest of the world. The left half of the matrix consists of US related ETFs, and most were either up or down in the single digits for the full year. Fixed income ETFs as well as defensive sectors like Utilities, Health Care and Consumer Staples were the only areas that generated solid gains in 2011. Unless you were overweight non-risky assets, it was hard to outperform the S&P 500.

US Related 4th Second Full Global 4th Second FullETF Description Quarter Half Year ETF Description Quarter Half YearSPY S&P 500 10.91 -4.90 -0.20 EWA Australia 6.88 -17.70 -15.72DIA Dow 30 11.86 -1.60 5.38 EWZ Brazil 10.34 -21.76 -25.85QQQ Nasdaq 100 6.36 -2.14 2.52 EWC Canada 4.35 -16.01 -14.19IJH S&P Midcap 400 12.33 -10.33 -3.40 FXI China 13.10 -18.81 -19.08IJR S&P Smallcap 600 16.67 -6.85 -0.25 EWQ France 2.78 -29.16 -19.92IWB Russell 1000 10.92 -6.12 -0.70 EWG Germany 5.20 -28.52 -19.72IWM Russell 2000 14.70 -10.93 -5.74 EWH Hong Kong 7.96 -16.47 -18.23IWV Russell 3000 11.16 -6.44 -1.03 INP India -13.39 -33.49 -39.97NYC NYSE Comp 8.35 -10.08 -5.93 EWI Italy 0.93 -31.91 -26.80

EWJ Japan -3.70 -12.66 -16.50IVW S&P 500 Growth 10.11 -2.95 2.71 EWW Mexico 9.76 -14.07 -13.18IJK Midcap 400 Growth 9.90 -11.01 -1.98 RSX Russia 5.34 -30.85 -29.70IJT Smallcap 600 Growth 15.53 -7.38 2.59 EWU UK 9.41 -9.26 -6.97IVE S&P 500 Value 12.12 -6.73 -2.95IJJ Midcap 400 Value 15.10 -9.55 -4.38 EFA EAFE 3.66 -17.64 -14.93IJS Smallcap 600 Value 17.86 -6.07 -2.96 EEM Emerging Mkts 8.11 -20.29 -20.36DVY DJ Dividend 11.46 1.61 7.84 IOO Global 100 8.06 -10.88 -6.95RSP S&P 500 Equalweight 11.79 -8.57 -2.18 EEB BRIC 1.95 -23.35 -24.08

FXB British Pound -0.41 -3.31 -1.07 DBC Commodities 4.23 -7.32 -2.58FXE Euro -3.41 -10.77 -3.13 USO Oil 24.99 2.34 -2.28FXY Yen 0.10 4.41 5.08 UNG Nat. Gas -28.26 -41.38 -46.09

GLD Gold -3.84 4.10 9.57XLY Cons Disc 11.93 -2.96 4.30 SLV Silver -6.81 -20.39 -10.74XLP Cons Stap 9.54 4.03 10.85XLE Energy 18.15 -8.25 1.29 SHY 1-3 Yr Treasuries -0.08 0.24 0.62XLF Financials 10.08 -15.31 -18.50 IEF 7-10 Yr Treasuries 0.48 10.13 12.52XLV Health Care 9.33 -2.36 10.13 TLT 20+ Yr Treasuries 0.37 28.85 28.82XLI Industrials 15.50 -9.37 -3.21 AGG Aggregate Bond 0.44 3.67 4.58XLB Materials 14.12 -14.91 -12.78 BND Total Bond Market 0.22 3.41 4.56XLK Technology 7.84 -0.97 1.03 TIP T.I.P.S. 2.09 5.47 8.53IYZ Telecom 2.99 -15.66 -10.14XLU Utilities 7.02 7.47 14.81

Key ETF Performance (%)

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Decile 1 2 3 4 5 6 7 8 9 Decile 10Market Cap (Largest to Smallest)

0.79% -0.72% 0.03% -2.07% -3.08% 4.48% -4.57% -0.16% -1.68% -7.53%

P/E Ratio (Lowest to Highest)

1.47% -4.39% 7.44% 6.08% -1.17% -2.38% -1.49% -2.22% -2.05% -15.97%

Dividend Yield (Highest to Lowest)

10.42% 6.41% 8.67% -1.10% -2.12% -1.47% -1.25% -11.97% -3.41% -7.26%

Short Interest (Lowest to Highest)

1.70% 4.71% 4.33% 1.38% -7.33% -3.45% -4.30% -2.53% 1.75% -10.84%

Analyst Ratings (Best to Worst)

0.42% -2.12% 4.23% -3.79% -5.39% -2.40% 8.57% -1.46% -6.44% -5.94%

Institutional Ownership (Most to Least)

1.73% 0.78% -0.28% -5.70% -7.08% -0.88% 1.68% -2.13% 1.77% -4.17%

International Revenues (Most to Least)

-7.70% -2.35% -5.48% -6.11% -2.17% 0.36% 0.78% 3.02% 3.02% 3.02%

% Chg in 2010 (Best to Worst)

-8.20% -1.40% -0.23% 1.20% 5.98% -2.67% 1.37% -0.62% -8.53% -1.06%

S&P 500 Decile Performancein 2011

We ran our decile analysis on the S&P 500 to see which stock characteristics helped or hurt stocks in 2011. To do this, we broke the index into deciles (10 groups of 50 stocks each) based on the various categories listed in the matrix below, and then calculated the average perform-ance of stocks in each decile in 2011.

While the overall market was basically flat for the year, our decile analysis shows that 2011 was a year where risky stocks were hit hard while defensive stocks were rewarded. The worst performing decile out of all categories below was the decile of stocks with the highest P/E ra-tios. The stocks in this decile declined 15.97% in 2011. Also, the decile of stocks with the high-est dividend yields was the best performing decile out of all with an average 2011 gain of 10.42%. Stocks with the highest amounts of short interest significantly underperformed, while stocks with the lowest short interest outperformed.

The weakness in Europe also took a toll on stocks in 2011. The three deciles of stocks that generate all of their revenues domestically (inside North America) outperformed, while the top five deciles of stocks that generate the most revenues outside of the US all underper-formed.

If you owned a high yielding domestic stock in 2011, chances are it outperformed. If you owned a stock that pays no dividend, has a high valuation, and generates most of its revenues outside of the US, chances are it underperformed.

That was 2011 in a nutshell.

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Although the S&P 500 finished 2011 with one of the smallest percentage moves on record, the DJIA finished the year with a gain of more than 5%. Going back to 1900, there have actually been 23 other years where the DJIA saw a smaller annual percentage move. As recently as 2005, the DJIA finished the year with a move of only 0.6% (down).

In the chart below, we show annual returns for the DJIA grouped according to their percent-age moves. Underneath each group, we highlight the average annual change in the DJIA in the year after similar moves. Small annual changes in the DJIA are not necessarily such a bad thing, and can even be considered a pause that refreshes. When the DJIA sees an annual gain of between 0% and 10%, the average change in the following year is a gain of 6.1%. Following 2005’s decline of 0.6%, which was the most recent year where the DJIA saw a smaller annual move than it did in 2011, the DJIA rose 16.3% in the following year.

1982: 19.61961: 18.71976: 17.91950: 17.61963: 17.0

1952: 8.4 1959: 16.4 1938: 28.11960: -9.3 1912: 7.7 2006: 16.3 1927: 27.71981: -9.2 1942: 7.6 1998: 16.1 1985: 27.71901: -8.7 2007: 6.4 1967: 15.2 1989: 27.01946: -8.1 1971: 6.1 1909: 15.0 1945: 26.62001: -7.1 2011: 5.2 1980: 14.9 1924: 26.2

1966: -18.9 2000: -6.2 1970: 4.8 1972: 14.6 1996: 26.01910: -17.8 1990: -4.3 1968: 4.3 1964: 14.6 1925: 25.41977: -17.2 1916: -4.2 1979: 4.2 1951: 14.4 2003: 25.31929: -17.1 1953: -3.8 1992: 4.2 1943: 14.1 1999: 25.22002: -16.7 1984: -3.7 1934: 4.1 1993: 13.7 1936: 24.81973: -16.5 1978: -3.1 1926: 4.1 1949: 12.9 1997: 22.6

1907: -37.7 1941: -15.3 1939: -2.9 2004: 3.1 1921: 12.3 1986: 22.6 1935: 38.52008: -33.8 1969: -15.1 1923: -2.7 1956: 2.3 1988: 11.9 1922: 21.5 1975: 38.31930: -33.7 1974: -27.5 1957: -12.7 1906: -2.3 1987: 2.3 1944: 11.8 1955: 20.8 1905: 37.8 1928: 49.51920: -32.9 1903: -23.6 1940: -12.7 1948: -2.1 1947: 2.2 2010: 11.0 1991: 20.3 1958: 34.0 1908: 46.61937: -32.8 1932: -23.0 1962: -10.8 2005: -0.6 1994: 2.1 1965: 10.9 1983: 20.3 1995: 33.5 1954: 44.0 1915: 81.5

1931: -52.6 1914: -30.6 1917: -21.7 1913: -10.3 1902: -0.4 1911: 0.2 1918: 10.5 2009: 20.2 1919: 30.5 1904: 42.6 1933: 66.7-50%+ -40%+ -30%+ -20%+ -10%+ -0%-10% 0%-10% 10%+ 20%+ 30%+ 40%+ 50%+

Average DJIA Return in the Following Year (%)

DJIA: Annual Returns & Average Return in the Following Year: 1900 - 2011

-23.1

22.7

39.5

-0.5

4.2 6.1 6.4 5.8 8.314.1

0.0

-30

-20

-10

0

10

20

30

40

50

-50%+ -40%+ -30%+ -20%+ -10%+ -0%-10% 0%-10% 10%+ 20%+ 30%+ 40%+ 50%+

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While the S&P 500 finished 2011 almost exactly where it started, a lot happened throughout the year to say the least. In terms of sentiment, there is currently a view among skeptics that sentiment is universally bullish. While surveys such as Investors Intelligence and the American Association of Individual Investors show that bullish sentiment is near 50%, relative to the range of the last several years, bullish sentiment is towards the low end of its historical range. Furthermore, according to the Yale Crash Confidence Index, the percentage of individual inves-tors who are NOT expecting a crash in the next six months is nearly as low now as it was in March 2009, when the S&P 500 was nearly half its current level.

While many investors may seem bullish right now, based on traditional valuation metrics, they have good reason to be. The S&P 500 is currently trading below its historical average P/E and P/B ratios, and these ratios are also at their lowest levels in the careers of a large percentage of money managers. If the S&P 500 were to simply trade at an ‘average’ P/E ratio, the index would have to trade above 1,400. Couple the below average valuations with historically low interest rates, and you have a compelling case for equities. What would you rather own, a 10-Year US Treasury trading at record high levels where your return if you hold to maturity is capped at 2% per year, or the S&P 500 which is yielding more than a 10-Year Treasury and trading at historically cheap levels.

While the current level of earnings is by no means guaranteed, the economic backdrop in terms of the US economy remains stable to positive. There is no denying the fact that the re-covery has been tepid, but the manufacturing sector has been a pocket of strength, while the employment picture is really beginning to show improvement. Even the housing sector is showing signs of a bottom, albeit from very low levels. More importantly, monthly supply has been dropping sharply which is a positive going forward.

One caveat to the economic data is that while better than expected economic data has been providing a boost to stocks, investors are getting accustomed to stronger than expected data, so the positive impact of stronger date begins to wane while weaker than expected data is greeted with a negative reaction.

Our View

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The outlook for the US Dollar showed improvement throughout 2011, and in 2012 we expect the greenback to make the transformation from bottoming to a solid uptrend. In 2011, we also saw equities break their inverse relationship with the Dollar, and in 2012 we look for the Dollar and equities to become more positively correlated. A strong Dollar should also put fur-ther pressure on commodity prices. This may not be good for the Energy and Materials sec-tors, but it is a positive for the consumer and most other sectors.

Long term interest rates came in considerably during 2011, which caused the yield curve to flatten. While the current slope is not as conducive for growth as it has been in the past, prior periods where the yield curve was at similar levels have more often than not produced healthy returns for equities.

The two biggest wildcards for 2012 concern Washington and the debt crisis in Europe. Given the fact that this is an election year, the market is sure to see volatility as polls fluctuate to-wards one candidate or the other (or the other if there is a third party candidate!). Histori-cally, election years have been positive for equities, especially when the incumbent is running for re-election.

The international outlook remains cloudy and will also make its impact felt on stock prices. We still don't have a clear picture on how things will pan out in Europe and what its ultimate impact will be. In order to insulate themselves from these events, many investors will choose to shift assets out of the region. Although there is no way to fully insulate yourself from such a large share of the global economy, at the very least, the US provides a relatively safe alterna-tive.

The fact that we are even mentioning that Washington and Europe remain the two biggest risks to the market for 2012 means that they probably won’t be. Over the course of the next twelve months, there will no doubt be a number of issues that unexpectedly surface, but with valuations even more attractive now than they were last year, the market is on a more solid foundation. We expect 2012 to be a positive year for equities, and while a specific year-end close is nearly impossible to predict, based on valuation alone, we could easily see the S&P 500 trade at or above 1,430.

Have a great year!

Our View

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Prognostications: S&P 500 Below we highlight the year-end S&P 500 price targets for the main equity strategists at 12 Wall Street firms as surveyed by Bloomberg. Collectively, strategists are expecting the S&P 500 to finish 2012 at 1,348, which would be a gain of 7.19%. Ten of the strategists are expect-ing gains in 2012, while two are expecting a small decline. HSBC has a year-end 2012 price tar-get of 1,190 (-5.38%), which is the lowest of the bunch. Goldman Sachs is expecting the S&P to finish the year at 1,250, which is 7 points lower than where it started the year. Deutsche Bank has the highest price target at 1,500, which would be a gain of 19.27%. Overall, strate-gists are bullish, but not overly so.

In terms of earnings growth forecasts, below we summarize bottoms up 2012 S&P 500 earn-ings growth estimates. For Q4 2011, earnings are expected to grow 6.2% (versus Q4 2010). Growth is expected to dip a bit in Q1 and Q2 before jumping to 9.3% in Q3. For the full year, earnings are expected to grow 9.6% versus 2011.

Wall Street Strategists 2012 Year-End Price Targets

1190

1250 1257

1325 1325 1330 1340 1348 1350 1360 13751400

1430

1500

1,1001,1501,2001,2501,3001,3501,4001,4501,5001,550

2012 S&P 500 EPS Growth Estimates (%)

6.2

4.1 4.4

9.3 9.6

0

2

4

6

8

10

12

Q4 11 Q1 12 Q2 12 Q3 12 Full Year

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2012 S&P 500 Sector EPS Growth Estimates (%)

-2.0

2.24.7 5.4

8.610.5 10.6

13.1 13.8

19.3

-5

0

5

10

15

20

25

Prognostications—Sector Earnings Growth Below we highlight the 2012 earnings growth expectations for the S&P 500 sectors. Just one sector — Utilities — is expected to see a decline in earnings for the year at –2%. The Financial sector is expected to see the most growth at 19.3%. Four other sectors are projected to see double digit earnings growth—Telecom, Materials, Industrials and Technology. Energy, Health Care, Consumer Staples and Consumer Discretionary are expected to see full-year EPS grow in the single digits.

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Prognostications—US Economy Economists are looking for the US economy to grow modestly at 2.3% in 2012. Inflation is ex-pected to remain very tame as well. The closely watched unemployment rate this election year is expected to drift lower and sit at 8.4% by the fourth quarter, which is 0.4% above the 8% level that President Obama would like to see it below.

Real GDP YoY% Economist Estimates

3.50

3.10

2.701.90

-0.30

-3.50

3.00 1.80 2.30 2.40

-4.0

-2.0

0.0

2.0

4.0

6.0

GDP

Yearly

2.30

0.40

1.30

1.80

3.10

2.00 2.15 2.30 2.50 2.30

0.00.51.01.52.02.53.03.5

Q4

10

Q1

11

Q2

11

Q3

11

Q4

11

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13

GD

P

Quarterly

CPI YoY% Economist Estimates

2.683.38

3.23 2.873.85

-0.35

1.63

3.17

2.10 2.10

-1.00.01.02.03.04.05.06.0

CPI

Yearly

1.27

2.13

3.473.77

3.30

2.402.20

1.802.10 2.20

1.0

2.0

3.0

4.0

5.0

Q4

10

Q1

11

Q2

11

Q3

11

Q4

11

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13

CPI

Quarterly

Unemployment Rate Economist Estimates

5.50

5.104.60 4.60

5.80

9.309.60 9.00 8.50 8.20

3.0

6.0

9.0

12.0

Une

mp.

Rat

e

Yearly9.57

9.009.03 9.07

8.70 8.60 8.50 8.50 8.408.30

8.0

8.5

9.0

9.5

10.0

Q4

10

Q1

11

Q2

11

Q3

11

Q4

11

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13

Une

mp.

Rat

e

Quarterly

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Prognostications—Interest Rates In terms of interest rates, economists expect the yield on the 10-Year Treasury Note to rise in 2012 from 1.88% to 2.59%. They expect the 2-Year Treasury to jump from 0.24% to 0.55% for the full year and then to 0.72% by the first quarter of 2013. Economists have been expecting higher interest rates for the last three years now and it just hasn’t come to fruition. Will they finally be right in 2012?

10-Year Treasury Yield Consensus Economist Estimates

4.224.39

4.704.03

2.21

3.843.30

1.88

2.59

1.0

2.0

3.0

4.0

5.0

Yiel

d

Yearly3.30 3.47

3.16

1.92

1.882.05

2.20 2.392.59 2.75

1.01.52.02.53.03.54.0

Q4

10

Q1

11

Q2

11

Q3

11

Q4

11

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13

Yiel

d

Quarterly

2-Year Treasury Yield Consensus Economist Estimates

3.07

4.404.81

3.05

0.77

1.14 0.600.24 0.55

0.01.02.03.04.05.06.0

Yiel

d

Yearly

0.60

0.83

0.46

0.24

0.24 0.290.35

0.440.55

0.72

0.0

0.2

0.4

0.6

0.8

1.0

Q4

10

Q1

11

Q2

11

Q3

11

Q4

11

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13

Yiel

d

Quarterly

Fed Funds Rate Consensus Economist Estimates

2.25

4.25

5.254.25

0.25 0.25 0.25 0.25 0.250.01.02.03.04.05.06.0

Yiel

d

Yearly

0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25

0.00

0.25

0.50

Q4

10

Q1

11

Q2

11

Q3

11

Q4

11

Q1

12

Q2

12

Q3

12

Q4

12

Q1

13

Yiel

d

Quarterly

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Prognostications—Currencies Currency strategists expect the dollar to remain flat against the Euro for the full year by gain-ing in the first quarter and then giving it back in the fourth quarter.

Euro Consensus Economist Estimates

1.36

1.18

1.32

1.46

1.40

1.431.34

1.30 1.30 1.30

1.01.11.21.31.41.51.6

USD

/EU

R

Yearly

1.34

1.421.45

1.34

1.301.27 1.27 1.27

1.30

1.2

1.3

1.4

1.5

Q4

10

Q1

11

Q2

11

Q3

11

Q4

11

Q1

12

Q2

12

Q3

12

Q4

12

USD

/EU

R

Quarterly

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Valuation Over the last several years, the Financial Crisis in the US, coupled with the ongoing debt crisis in Europe and the complete gridlock in Washington, has caused investors to focus more on macro related issues rather company fundamentals. In 2012, with what is likely to be the cost-liest and nastiest Presidential campaign in history, big picture macro-related issues will still play a large role in the market’s performance. That being said, we believe that in 2012 market fundamentals and valuation will play a larger role in the than in recent years past.

Closing out 2011, the S&P 500 was trading at thirteen times trailing earnings, which is the low-est level since 1990, and below the historical average of 15.35. For the sake of perspective, in order to trade at an ‘average’ multiple, the S&P 500 would have to trade at 1,484, or 18% above current levels.

Data on the S&P 500’s book value doesn’t go back as far, but based on the data available, the current Price/Book Ratio of 2.05 for the S&P 500 is below average. If the S&P 500 were to trade at its average P/B ratio, the index would be trading at 1,491.

S&P 500 Trailing P/E Ratio: 1930 - 2011

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'30 '40 '50 '60 '70 '80 '90 '00 '10

P/E: 13.01

Long Term Average: 15.35

S&P 500 Price/Book Ratio: 1978 - 2011

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'30 '40 '50 '60 '70 '80 '90 '00 '10

P/B: 2..05

Long Term Average: 2.43

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Valuation The S&P 500 finished off 2011 with a dividend yield of 2.10%. While the index’s yield has in-creased by more than 90% from its record lows in late 1999/early 2000, its yield is still well below average.

Although the S&P 500’s dividend yield is low on an absolute basis, relative to the alternatives, it is actually rather attractive. At the end of 2011, the S&P 500 was yielding 13% more than the 10-Year US Treasury. Outside of the credit crisis, the last time the S&P 500 yielded more than the 10-Year Treasury was before 1960. In order for the dividend yield to get back to its historical average relative to US Treasuries, either the 10-Year yield would have to rise back above 2%, the S&P 500 would have to rally to 1,410, or you would have to see some combina-tion of the two.

S&P 500 Dividend Yield: 1930 - 2011

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'30 '40 '50 '60 '70 '80 '90 '00 '10

Dividend Yield: 2.10

Long Term Average: 3.94

S&P 500 Dividend Yield Relative to 10-Year Treasury Yield: 1978 - 2011

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'30 '40 '50 '60 '70 '80 '90 '00 '10

Dividend Yield Relative to 10-Year Yield: 1.12

Long Term Average: 0.99

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Valuation One valuation measure that has gained increased notoriety over the last decade is the earn-ings yield of the S&P 500. Since most earnings are no longer paid out in the form of dividends, some analysts and investors focus instead on the earnings yield which is essentially the re-verse of the Price/Earnings Ratio, or Earnings/Price.

In terms of earnings yield, the S&P 500 is currently yielding 7.68%, which is slightly more than its historical average of 7.35%. With the exception of the peak during the most recent bear market lows, the earnings yield of the S&P 500 has not been above its long-term average at any other time since 1990.

When we compare the Earnings Yield to the 10-Year Treasury Yield, the current level is more than twice its historical norm, and the highest level since the early 1950s.

S&P 500 Earnings Yield: 1930 - 2011

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Earnings Yield: 7.68

Long Term Average: 7.35

S&P 500 Earnings Yield Relative to Treasuries: 1930 - 2010

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'30 '40 '50 '60 '70 '80 '90 '00 '10

EPS Yield Relative to Treasuries: 4.09Long Term Average: 1.96

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Valuation Some strategists and investors will argue that comparing the earnings yield of the S&P 500 (a risky asset) to the yield on the 10-Year US Treasury (a so-called risk-free asset), is an apples to oranges comparison. With that in mind, in the chart below we compare the earnings yield on the S&P 500 to the yield on corporate bonds using the average yield of Moody’s AAA and BAA corporate indices.

Currently, the earnings yield of the S&P 500 is 1.70 times greater than the yield on corporate bonds. This is well above the historical average of 1.43 and the highest reading since the late 1950s. In order for the S&P 500 to trade at an ‘average’ earnings yield relative to corporate bonds, either interest rates would need to rise or the S&P 500 would need to rally to 1,496!

Obviously, with interest rates at record low levels, the earnings yield of the S&P 500 is going to be high relative to bonds. Therefore, it is unlikely that these indicators will revert to their his-torical averages as long as interest rates remain low. That being said, with earnings expected to grow by 10% in 2012, there is significant room for the market to run and still remain fairly valued.

S&P 500 Earnings Yield Relative to Corporates: 1930 - 2010

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'30 '40 '50 '60 '70 '80 '90 '00 '10

EPS Yield Relative to Corporates: 1.70Long Term Average: 1.43

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Valuation Comparing the S&P 500s average P/E ratio since the start of 2010 to the average P/E ratio by decade shows that current valuations haven’t been this low since the 1980s.

At the same time, dividend yields are only slightly higher in this decade than they were in the last decade and that was the lowest average dividend yield of any decade since at least the 1930s.

The most encouraging indicator of the ones we looked at is the average ratio of the earnings yield to the 10-Year Treasury yield. Since 201, this indicator averaged 2.4. The only two other decades where this ratio was higher was in the 1940s and 1950s.

Average P/E Ratio By Decade

17.6

11.2 11.9

17.9

12.3 12.0

19.6 20.2

15.5

0

5

10

15

20

25

30s 40s 50s 60s 70s 80s 90s 00s 2010-

Average Dividend Yield By Decade

5.9 5.7

4.9

3.2

4.0 4.2

2.4

1.8 1.9

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1

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6

7

30s 40s 50s 60s 70s 80s 90s 00s 2010-

Average Earnings Yield Relative to 10-Yr Yield

2.1

5.0

3.4

1.2 1.20.8 0.8

1.2

2.4

0

1

2

3

4

5

6

30s 40s 50s 60s 70s 80s 90s 00s 2010-

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Valuation Looking at the change in P/E ratios of individual sectors since 2000 shows that there was a major contraction in P/E ratios since the start of 2000. The S&P 500 has seen its multiple contract by close to 55%. The only sector that hasn’t seen a contraction in its P/E ratio is Utilities, which saw its P/E ratio rise from 13.7 to 14.2. The biggest decliners were Technology, Energy, Health Care. Boosted by the investor demand for high yielding stocks, the Utilities sector has gone from having the lowest P/E ratio to the fourth highest. Mean-while, Technology went from the most highly valued to the fifth most attractively valued.

S&P 500 Sector P/E Ratios: 2000 - 2011

P/E Ratio: January 2000

P/E Ratio: December 2011

65.4

32.2 29.3 29.0 28.725.5 23.6 23.6

15.4 13.7

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17.916.0 15.5

14.2 14.1 14.012.4 12.0 11.1 10.8

0

4

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12

16

20

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January 2000 December 2011 ChangeTechnology 65.4 14.0 -78.6Energy 28.7 11.1 -61.4Health Care 29.3 12.4 -57.5S&P 500 29.2 13.0 -55.4Materials 23.6 12.0 -49.2Cons Discret. 29.0 15.5 -46.5Industrials 25.5 14.1 -44.6Telecom Svcs 32.2 17.9 -44.2Cons Staples 23.6 16.0 -32.1Financials 15.4 10.8 -29.8Utilities 13.7 14.2 3.6

Sector P/E Ratios

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Valuation The shifts between sectors with the highest divi-dend yields in January 2000 has not seen as dra-matic a shift as the changes in P/E ratios. Over-all, the S&P 500 has seen its yield rise by over 90%, from 1.1 to 2.1%. Utilities and Telecom Services are the two sectors that used to and still do have the highest dividend yields. Tech-nology stocks, on the other hand, still have the lowest yields, but they now yield 1.1% as a sec-tor, and there are many stocks within the sector that yield significantly more than a 10-Year US Treasury. The biggest change among sector ranks has come in Industrials, which went from the third lowest yielding sector to the fourth highest.

S&P 500 Sector Dividend Yields: 2000 - 2011

Dividend Yield: January 2000

Dividend Yield: December 2011

3.9

2.6

1.9 1.7 1.6 1.51.1

0.8 0.8

0.10.00.51.01.52.0

2.53.03.54.0

4.5

Utili

ties

Tele

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Svcs

Cons

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5.3

4.0

2.92.4 2.3 2.2

1.9 1.9 1.71.1

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January 2000 December 2011 ChangeTechnology 0.1 1.1 926.6Industrials 0.8 2.4 204.1Cons Discret. 0.8 1.7 118.6Telecom Svcs 2.6 5.3 103.4Health Care 1.1 2.2 103.0S&P 500 1.1 2.1 94.3Materials 1.5 2.3 53.9Cons Staples 1.9 2.9 53.2Energy 1.6 1.9 17.4Financials 1.7 1.9 6.7Utilities 3.9 4.0 2.1

Sector Dividend Yields

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Valuation On the prior pages we showed the major long-term shift in sector P/E ratios and dividend yields. Over the last year, though, we also saw some notable shifts in sector valuation and dividend payouts.

While economists and investors spent much of 2011 worrying whether or not the US economy would go into another recession, earnings kept on growing. This is evident in the fact that al-though the S&P 500 was flat on the year, the P/E ratio of the S&P 500 contracted from 14.88 to 13.01 (-12.6%). Therefore, in order to get back to last year’s multiple, the S&P 500 would need to rally by more than 10% in 2012.

Of the ten S&P 500 sectors, more than half saw their multiples contract during 2011. Sectors that saw the biggest contraction were Materials, Energy, Industrials, and Financials. Interest-ingly, all four sectors that saw their multiples expand during the year were ones with defen-sive characteristics. Typically, in a year where earnings grew by more than 10%, you would expect to see multiple expansion in cyclical sectors as opposed to defensive sectors.

Sector Change December 2011 December 2010Consumer Discretionary -1.36 15.53 16.90Consumer Staples 0.61 16.04 15.43Energy -3.26 11.07 14.33Financials -2.82 10.83 13.65Health Care 0.41 12.44 12.02Industrials -2.85 14.13 16.99Materials -6.34 11.98 18.32Technology -1.76 14.00 15.76Telecom Svcs 0.02 17.95 17.93Utilities 1.83 14.17 12.34

S&P 500 -1.87 13.01 14.88

Change in Sector P/E Ratios: 2011 vs 2010

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Valuation While most sectors saw multiples contract in 2011, their dividend yields increased. The S&P 500 saw its yield rise above 2% from 1.84%. Along the way, only two sectors saw their divi-dend yields decline, while seven saw an increase (Telecom Services was unchanged at 5.27%). Two years ago, most investors were worried that companies would be cutting or even elimi-nating dividends. Today, companies are so flush with cash that they have nothing better to do with their excess cash than buy back stock or increase payout.

Even the Financial sector, through a combination of increased payouts and falling stock prices, saw its dividend yield rise to 1.86%. Historically, the Financial sector was regarded as one of the higher yielding sectors, but at the end of 2011, it was one of only four sectors that yielded less than 2%. If the sector is able to escape the crisis in Europe and there are no major blow-ups in the US, many companies in the sector will get the go-ahead from regulators to raise those payouts.

For dividends in general, one wild card in the year ahead will be the upcoming change in tax treatment of dividends. Barring any change in policy, beginning in 2013, taxes on qualified dividends will no longer be capped at 15% and instead be treated as ordinary income and taxed accordingly. If that remains the case, the strong outperformance of dividend stocks in 2011 is not likely to last in 2012. Instead, we would expect to see a shift back into growth.

Change December 2011 December 2010Consumer Discretionary 0.21 1.65 1.44Consumer Staples -0.29 2.90 3.19Energy 0.13 1.89 1.76Financials 0.75 1.86 1.11Health Care 0.13 2.21 2.08Industrials 0.45 2.39 1.94Materials 0.61 2.31 1.70Technology 0.22 1.08 0.86Telecom Svcs 0.00 5.27 5.27Utilities -0.31 4.01 4.32

S&P 500 0.26 2.10 1.84

Change in Sector Dividend Yield: 2011 vs 2010

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Sentiment One of the big ironies of 2011 was that in spite of the equity market finishing the year essen-tially unchanged and the US economy showing increased signs of strength, most indicators of sentiment declined.

In the chart below, we highlight where various sentiment surveys currently stand (circle) com-pared to their levels at the start of 2011 (end of tail). We then placed these levels within the context of each indicator’s range since 2006. Using 2006 as a starting point allows us to cap-ture an entire business cycle from the peak of the housing bubble through the entire credit crisis. When the circle is to the right of the chart, it is closer to a five-year high, while readings to the left of the chart mean the indicator is closer to five-year lows.

In terms of economic sentiment, all but two of the seven surveys of economic sentiment are currently in the lower end of their six-year range. More importantly, four out of seven of these indicates were either flat or down on the year.

Given the fact that the US economy showed signs of improvement in 2011, especially towards the end of the year, one would have expected investors to turn more bullish. The reality, how-ever, is that all five indicators of market sentiment are lower now than they were at the end of 2010, and three of the five are in the lower end of their six-year range.

Economic SentimentMichigan ConfidenceConsumer ConfidenceABC NewsIBD/TIPP Economic OptimismNFIB Small Business OptimismGallup National SatisfactionCEO Confidence

Market SentimentAAII - BullishInvestors Intelligence - BullishYale Crash Confidence - InstitutionalYale Crash Confidence - IndividualState Street Investor Confidnece

Five Year Low Five Year High

Sentiment: Five Year Range

Economic & Investor Sentiment Surveys: Current vs YTD Relative to Five Year Range

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Sentiment Taken together, the overriding trend of the sentiment surveys shown on the prior page is that the mood of the country is negative. In fact, by some measures it hasn’t been much worse. According to Gallup, there have only been seven other months where the general mood of the country has been as low or lower than it is now and two of those months were since August 2011!

With 2012 being an election year, the dour mood of the country does not bode well for the Obama Administration. In the Presidential elections following the two other periods where National Satisfaction dropped this low, the incumbent was voted out of office (Carter 1980 & Bush 1992). In 2008, since George W Bush was not running for re-election, he was not voted out, but the Democratic Party did have a big win in the election and gained control of both the House and Senate as well. Looking at the bright side, when this index finally did bottom out and turn higher (early 1980s, early 1990s, and late 2008/early 2009) it also coincided with the start of a new bull market.

Gallup National Satisfaction Index: 1979 -2011

0

10

20

30

40

50

60

70

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'79 '84 '89 '94 '99 '04 '09

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Although both the AAII and Investors Intelligence (II) surveys are currently in the upper half of their six-year range, from a longer term perspective both surveys are only just slightly above their long term averages. This provides just another illustration of how the overall mood of most people is skewed to the pessimistic side. When the two most positive sentiment surveys are only marginally above their historical averages, it represents a lack of overall confidence.

In the table below, we calculated the S&P 500’s average three and six month returns following similar levels in the past. As shown, both surveys have a record of being reliable contrarian indicators. When sentiment is overly positive, the market sees below average returns. When sentiment is overly bearish, equities tend to see above average returns. Following prior peri-ods where AAII bullish sentiment was less than one standard deviation above its historical av-erage, the S&P 500 saw average one and three month returns of 1.49% and 3.61%, respec-tively. Likewise, going all the way back to 1963, when II bullish sentiment is less than one standard deviation above average, the S&P 500 also averages positive returns of between one and three percent.

The only fly in the ointment to these figures is that although the S&P 500 averages positive returns following similar bullish readings in both surveys, in all instances the average returns and the frequency of positive returns is below average over the next three and six months. That being said, bulls will take a positive over a negative any day.

Sentiment

Occurrences Performance (%) Percent of Time Positive Performance (%) Percent of Time Positive2+ Above 42 0.02 54.8 -0.20 50.01+ Above 165 0.34 60.0 0.89 66.1Above Avg 426 1.49 63.9 3.61 70.8

Below Avg 422 1.69 64.7 3.66 66.91+ Below 204 3.39 75.7 7.02 79.22+ Below 16 6.90 100.0 14.39 100.0

All Weeks 1275 1.73 65.7 3.83 70.0

Occurrences Performance (%) Percent of Time Positive Performance (%) Percent of Time Positive2+ Above 30 -0.86 33.3 -0.25 40.01+ Above 330 1.72 62.4 3.21 68.8Above Avg 1088 1.24 61.1 2.35 63.8

Below Avg 856 2.46 65.2 5.15 68.91+ Below 231 2.21 69.7 5.18 67.52+ Below 20 5.34 90.0 7.44 85.0

All Weeks 2555 1.81 63.3 3.66 66.4

AAII Bullish Sentiment vs. Market Performance: 1987 - 2010Standard Deviations vs. Long Term Average

Next Three Months Next Six Months

Investors Intelligence Bullish Sentiment vs. Market Performance: 1963 - 2010Standard Deviations vs. Long Term Average

Next Three Months Next Six Months

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Sentiment Of all the indicators highlighted at the beginning of this section, the Yale Crash Confidence In-dex is the biggest standout. The Yale School of Management has been conducting this survey since 1989. One of its surveys is the Crash Confidence Index, which asks both individual and institutional investors how confident they are that there will not be a stock market crash in the next six months. Recent results from the survey show just how worried investors recently be-came.

The low point of this indicator came in early 2009 for both individual and institutional inves-tors. That was the point where the least number of investors were confident that there wouldn't be a stock market crash in the next six months. Early 2009 was also when the market ultimately made its financial crisis low, so just when investors became most fearful of a crash, the market was about to turn a corner and head significantly higher.

The Crash Confidence Index rebounded somewhat throughout the '09-'11 bull market, but it once again moved sharply lower in late 2011 as the sovereign debt crisis really took hold. Indi-vidual investors were almost as worried in the most recent reading as they were back in early 2009. Institutional investors have also become worried, but not nearly as worried as the indi-vidual has become or they were back in 2009.

There's a general consensus in the financial community that things in the US aren't nearly as bad in 2012 as they were back in '08 and early '09, but don't try and tell the retail investor that. They're truly spooked. Fortunately, this is a contrarian indicator, which provides a rea-son to be bullish on the market going forward.

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Washington Each time we update the chart below we are always reminded about how perception and real-ity can vastly differ. In his first three years as President, Barack Obama has seen the DJIA rise more than 50%, which is a claim that only four other US Presidents (Coolidge, FDR, Eisen-hower, and Clinton) since 1900 can make. While his critics would argue otherwise, President Obama is going down in history as one of the equity market’s most loved Presidents. Obama’s first three years in office have seen a better return than even Ronald Reagan. On a broader scale, it is interesting to note that although Republicans are often considered to be more busi-ness friendly, three of the five US Presidents who have presided over a 50% rally in the DJIA during their first three years have come from the Democratic Party.

Critics and opponents of President Obama will argue that the market was so far down when he came into office that it had nowhere to go but up. While there may be some credibility to that argument, and opponents continue to claim that Obama is an enemy of business and capitalism, so far at least the market seems to think otherwise.

President StartT Roosevelt 9/15/01Taft 3/5/09Wilson 3/5/13Harding* 3/5/21Coolidge 8/3/23Hoover 3/5/29FDR 3/5/33Truman 4/13/45Eisenhower 1/21/53JFK* 1/21/61Johnson 11/23/63Nixon 1/21/69Ford* 8/10/74Carter 1/21/77Reagan 1/21/81Bush I 1/21/89Clinton 1/21/93Bush II 1/21/01Obama 1/21/09

*President in Office Less Than Three Years. Performance Shown measures, President's total time in office.

First Two Years Change (%) First Two Years Change (%)

DJIA Performance During First Three Years of a President's Term: 1900 - 2012

-0.6

-9.6

-3.2

-72.6

0.0-16.3

-200 -150 -100 -50 0

60.0

59.945.6

32.4

23.4

12.212.2

61.213.3

190.1

81.917.4

13.6

0 50 100 150 200

through 1/20/12

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Washington As shown in the chart on the prior page, Obama is one of only five US Presidents since 1900 to preside over a 50%+ gain in the DJIA in his first three years in office, and one of four US Presi-dents elected to office who saw a gain of 50% (Coolidge replaced Harding mid-term). Below we highlight the performance of the DJIA during the first full term of each of the four Presidents who were elected to office, and the table to the right shows the perform-ance by year.

For all three prior Presidents, the DJIA saw an average gain of 19.7% during the fourth year of their term in office. Additionally, all three Presidents were re-elected to a second term. Therefore, if Obama loses in this November’s election, he will go down as the first President to see a 50% rally in the DJIA and not win a second term. For the Republicans looking to unseat President Obama in November, history is not on their side.

DJIA Performance During Obama's First Term: 2009 -

-30

-20

-10

0

10

20

30

40

50

60

70

1/09 1/10 1/11 1/12 1/13

Year FDR (33-37) Eisenhower (53-57) Clinton (93-97) Obama (09-13)1st Year 96.1 0.4 20.0 33.42nd Year -2.8 35.9 -0.6 11.53rd Year 52.8 18.2 34.0 5.34th Year 23.9 2.5 32.8

DJIA Returns By Yr: FDR, Eisenhower, Clinton, and Obama

DJIA Performance During FDR's First Term: 1933 - 1937

0

50

100

150

200

250

300

3/33 3/34 3/35 3/36 3/37

DJIA Performance During Clinton's First Term: 1945-1949

0

20

40

60

80

100

120

1/93 1/94 1/95 1/96 1/97

DJIA Performance During Eisenhower's First Term: 1953 - 1957

-20

0

20

40

60

80

100

1/53 1/54 1/55 1/56 1/57

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Washington Based on the Presidential Election Cycle, the third year of a President’s term was supposed to be positive. Unfortunately for the bulls, the S&P 500 finished marginally lower, although if you account for dividends, it technically was a gain. With the caveat that 2011 did not exactly work out according to plan, the table below highlights the S&P 500’s change during year four of the Presidential Election Cycle.

As shown, besides the third year of a President’s term in office, where the S&P 500 has never been down and averages a gain of 16.13%, all other years of the four-year cycle average a gain of between 5.3% and 6.3%. We would note, however, that although year four averages a gain of just 5.68%, the S&P 500 has only been down four out of 16 times (25%).

Year Average S&P 500 Change (%) Percent of Time Down (%)1 6.33 412 5.32 413 16.13 04 5.68 25

President Year Change (%)Truman 1948 -0.7Truman 1952 11.8Eisenhower 1956 2.6Eisenhower 1960 -3.0JFK/LBJ 1964 13.0LBJ 1968 7.7Nixon 1972 15.6Nixon/Ford 1976 19.1Carter 1980 25.8Reagan 1984 1.4Reagan 1988 12.4Bush I 1992 4.5Clinton 1996 20.3Clinton 2000 -10.1Bush II 2004 9.0Bush II 2008 -38.5

Average (All Years) 5.68Average (1st Term) 11.06

S&P 500 Average Presidential Cycle Returns: 1945 - 2010

One interesting aspect of the fourth year of the Presidential Election Cycle is the difference in returns depending on whether or not the President was running for re-election or not. Of the 16 years shown to the right, there were six where the sitting President was not running for re-election. (LBJ originally ran in 1968 but then dropped out after the New Hampshire Primary.) In those six years, the S&P 500 averaged a decline of 3.3% with positive returns only half of the time.

In the ten years where the sitting President was running for re-election, the S&P 500 has averaged a gain of 11.06% with posi-tive returns in nine out of ten years. These types of returns would certainly be welcomed by the bulls, but skeptics of the Presidential Election Cycle would argue that just as this year has bucked the historical trend of prior third years, year four will likely deviate from the norm for the same reason. More specifi-cally, while most Presidents will do whatever it takes in the form of fiscal stimulus to get re-elected, in the current environ-ment, the political will to get much stimulus out the door is sim-ply not there.

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Washington The table below highlights the average return of the S&P 500 and each of the ten sectors dur-ing year four of the election cycle. As highlighted on the prior page, the S&P 500 averages a gain of just under 6% during the year with positive returns 75% of the time. When the Presi-dent is running for re-election, though, the average return nearly doubles, and the S&P 500 rises 90% of the time.

Looking out at the individual years, 2008 sticks out like a sore thumb and skews the results by a significant margin. During that year, all ten sectors saw double digit declines and all but two sectors declined by more than 25%. In terms of consistency, Utilities, Financials, Industrials, and Consumer Staples have risen more than 80% of the time during the fourth year of a Presi-dent’s term. When the President is running for re-election the consistency of positive returns is even greater. The S&P 500 and half of the ten sectors have seen positive returns during year four 90% of the time.

Year S&P 500 UtilitiesTelecom

Svcs Fin'ls Technology EnergyHealth

CareCons

Discret. IndustrialsConsumer

Staples Materials1948 -0.65 -1.48 -0.43 1.99 -0.59 -16.27 2.69 -0.40 -12.76 2.031952 11.78 12.99 13.45 11.52 8.92 -13.00 21.56 10.94 13.51 8.081956 2.62 0.15 1.36 48.92 16.41 12.91 3.31 3.38 -7.97 -6.981960 -2.97 15.69 -10.18 32.69 -9.29 3.78 -11.95 -4.67 33.67 -22.511964 12.97 12.20 -0.67 9.31 1.62 22.57 13.20 22.32 13.08 8.70 14.981968 7.66 5.46 4.77 40.01 -0.62 19.19 6.93 38.16 7.53 13.53 4.151972 15.63 2.04 14.75 24.99 18.94 15.77 30.08 -1.99 16.99 18.44 16.641976 19.15 22.02 25.46 13.12 21.50 29.05 -6.90 25.28 18.42 9.62 2.041980 25.77 4.40 -9.39 12.82 6.22 56.05 20.27 5.43 27.62 4.56 4.911984 1.40 14.69 20.69 10.17 -2.25 11.26 11.29 7.08 0.06 9.80 -16.581988 12.40 10.30 12.47 22.53 -4.79 13.00 12.35 22.83 12.38 27.80 2.651992 4.46 0.35 11.01 19.75 0.58 -2.35 -18.08 17.47 6.77 3.03 7.201996 20.26 0.18 -2.18 31.88 43.27 21.74 18.76 10.54 22.73 23.18 13.392000 -10.14 51.67 -39.67 23.43 -40.97 13.23 35.54 -20.73 4.53 14.47 -17.722004 8.99 19.60 15.97 8.23 2.14 28.77 0.23 12.14 15.95 6.04 10.792008 -38.49 -31.55 -33.61 -56.95 -43.68 -35.93 -24.48 -34.72 -41.52 -17.66 -47.05

Average 5.68 8.67 1.63 10.22 6.07 12.99 5.41 7.46 7.11 9.25 -1.50% Positive 75.0 87.5 43.8 81.3 68.8 75.0 68.8 75.0 81.3 81.3 68.8

Avg 1st Term 11.06 7.41 9.45 13.12 14.29 19.87 6.55 10.43 12.46 6.26 4.84% Positive 90.0 90.0 50.0 90.0 90.0 80.0 70.0 90.0 90.0 80.0 80.0

Percent Change (%)

S&P 500 Sector Performance During Year Four of Election Cycle: 1945 - 2008

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Washington In all year fours of the Election cycle, Energy and Financials have both averaged gains of at least 10%, while Materials is the only sector that has averaged a decline during a President’s fourth year in office.

When the President is running for re-election, Energy is the top performing sector in year four with an average return of 19.87%. Other sectors that have averaged double digit returns and outperformed the S&P 500 include Technology, Financials, and Industrials. On the other side of the spectrum, no sectors have historically averaged negative returns during the fourth year of a President’s term when he is running for re-election, but Materials, Consumer Staples, Health Care, Utilities, and Telecom Services have all underperformed the S&P 500 and seen average returns of less than 10%.

Average Sector Performance During Year Four of Election Cycle: 1945 - 2010All Year Fours

12.99

10.229.25 8.67

7.46 7.116.07 5.68 5.41

1.63

-1.50-3.0

-1.0

1.0

3.0

5.0

7.0

9.0

11.0

13.0

15.0

Average Sector Performance During Year Four of Election Cycle: 1945 - 2010Year Fours Where President is Running For Re-Election

19.87

14.2913.12 12.46

11.06 10.439.45

7.41 6.55 6.264.84

0

5

10

15

20

25

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Seasonality—Indices, Sectors, and Commodities In this section we highlight the typical seasonal patterns for the S&P 500 (large cap), S&P 400 (mid cap), and Russell 2000 (small caps). We have also calculated the average monthly returns for the ten S&P 500 sectors (and DJ Transports) and some major commodities. For each index, we provide a graph of the average pattern since 1980, the average change over the prior five years (2006—2010), and 2011. Below each chart we also include the average performance during each month.

The table below summarizes the average monthly returns since 1980 for each of the indices/sectors/commodities on the following pages. For each category, green shading highlights the month of the year which has historically been the best, while red shading indicates the month of the year which has traditionally been the worst. Using the S&P 500 as an example, April has been the index’s best month since 1980 with an average return of 1.78%, while September has been the worst with an average return of –0.82%.

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecS&P 500 0.97 -0.04 0.98 1.78 1.13 0.00 0.56 0.05 -0.82 1.16 1.52 1.65Mid Caps 0.77 1.09 1.79 1.94 1.59 0.02 -0.07 0.39 -0.68 0.38 1.66 3.10Russell 2000 1.45 1.12 0.97 1.90 1.61 0.18 -0.60 0.03 -0.57 -0.22 1.60 2.74

Consumer Discretionary 0.96 1.55 2.80 2.25 2.39 0.09 -0.50 -0.20 -0.95 0.80 1.98 0.94Consumer Staples -0.74 0.78 1.49 1.17 2.18 0.64 0.58 0.80 -0.04 2.10 1.85 1.53Energy 0.19 1.18 1.97 3.13 1.23 -0.48 0.69 0.46 -0.15 0.52 0.68 1.52Financials 0.29 0.03 1.91 2.86 1.57 -0.72 -0.18 0.10 -0.88 0.40 1.24 1.92Health Care 0.99 -0.12 0.78 1.63 1.54 1.06 0.19 0.52 0.39 1.17 2.25 1.70Industrials 0.60 0.24 1.57 2.51 0.99 -0.34 0.57 -0.25 -0.99 0.47 1.92 2.33Materials -0.12 1.71 1.74 2.80 1.07 -0.67 0.40 0.35 -2.69 -0.06 2.42 2.04Technology 2.95 -0.35 -0.69 2.60 0.58 0.27 0.27 0.65 -0.88 1.07 2.34 1.57Telecom Svcs 0.62 -1.98 0.91 1.09 1.24 0.33 -0.20 -0.40 0.95 1.08 1.05 1.88Transports 1.19 0.60 1.81 2.01 1.25 -0.17 1.17 -1.11 -1.33 2.43 2.20 1.82Utilities 0.16 -1.34 0.42 1.69 1.18 0.07 0.10 1.40 -0.52 1.03 0.24 1.94

CRB Commodity 0.16 0.02 0.77 0.28 0.14 -0.36 -0.09 0.37 -0.13 -0.35 0.33 -0.02US Dollar Index 1.41 0.16 0.27 -0.46 0.49 0.13 -0.28 0.19 -0.70 -0.15 -0.03 -0.83Long Bond -0.16 -0.15 -1.02 -0.20 0.45 0.45 0.12 1.22 0.12 0.84 1.22 -0.45Crude Oil -0.58 0.01 3.32 2.60 1.17 0.39 1.22 2.24 2.35 -1.95 -2.18 0.30Gold 0.29 -0.22 -1.01 0.88 0.26 0.05 -0.02 1.60 1.66 -0.54 1.63 0.17

= Best month for Index/Sector = Worst month for Index/Sector

Average Monthly Percent Change (%)

Average Monthly Performance for Indices, Sectors, and Commodities: 1980 - 2011

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Three Best and Worst Performing Sectors on a Seasonal Basis vs S&P 500: 2011

100.0

106.4

97.8

80.0

85.0

90.0

95.0

100.0

105.0

110.0

1/1 2/1 3/1 4/1 5/1 6/1 7/1 8/1 9/1 10/1 11/1 12/1

S&P 500

Best Sectors

Worst Sectors

Whenever we discuss investing based on the calendar, we often receive feedback that is criti-cal of the approach. While we would be the first to caution that no one should use the sea-sonal trends as their sole input in the investment process, it should certainly be considered.

In order to highlight this, we used the table on the prior page and constructed equally weighted portfolios based on the three best and worst performing sectors for each month of the year. For example, during the month of January, Technology, Transports, and Health Care have historically been the best performing sectors, while Consumer Staples, Materials, and Utilities have historically done the worst of the ten sectors during the month. At the end of the month, we then changed the portfolio to include the three best and worst performing sec-tors for the month of February.

In the chart below, we have compared the results of each approach to the S&P 500 in 2011. Using the approach that invests in the three sectors that typically do best each month, $100 invested at the start of the year would have been worth $106.4 at the end of 2011. This com-pares to a total of $100.0 by investing solely in the S&P 500. If you had taken a contrarian ap-proach and invested in the sectors that typically do the worst each month you would have not only underperformed, but you would have also lost $2.20.

Seasonality—Sectors

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Seasonality—S&P 500 (Large Cap) and S&P 400 (Mid Cap) While January has historically been a positive month for the S&P 500, that wasn’t the case

from 2006 to 2010. While the S&P 500 was positive in January of 2011, the index averaged a decline of 2.9% in the five prior years. Seasonal factors that typically unfold at the end of the year, however, appear to be intact. Best months: April (1.8%), December (1.6%), and November (1.5%). Worst month: September (-0.8%).

Like the S&P 500, the S&P 400’s tendency to rally at the start of the year has not been as evident in recent years. While the index was positive in January and February of last year, in the five prior years it averaged declines of more than 1%. The month of December has traditionally been strong over all time periods, but in 2011 mid-caps actually saw losses. Best months: December (3.1%) and April (1.9%). Worst months: September (-0.7%) and July (-0.1%).

1980 - 2011 1.0 0.0 1.0 1.8 1.1 0.0 0.6 0.1 -0.8 1.2 1.5 1.6

2006 - 2010 -2.9 -2.8 3.2 4.2 -0.3 -3.1 2.1 0.6 1.9 -2.1 -0.9 1.9

2011 2.3 3.2 -0.1 2.8 -1.4 -1.8 -2.1 -5.7 -7.2 10.8 -0.5 0.9

S&P 500 Average Performance: 1980 - 2011

Perc

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e (%

)

-12

-9

-6

-3

0

3

6

9

12

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average Since 1980Prior Five Years (2006 - 2010)2011

1982 - 2011 0.8 1.1 1.8 1.9 1.6 0.0 -0.1 0.4 -0.7 0.4 1.7 3.1

2006 - 2010 -1.5 -1.4 3.7 6.2 0.1 -3.1 1.2 0.5 1.8 -3.3 -1.0 3.2

2011 1.9 4.5 2.3 2.7 -1.5 -2.2 -3.6 -7.3 -10.7 13.7 -0.5 -0.5

S&P Mid Cap Index Average Performance: 1982 - 2011

Perc

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e (%

)

-18

-15

-12

-9

-6

-3

0

3

6

9

12

15

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average Since 1982Prior Five Years (2006 - 2010)2011

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Seasonality—Russell 2000 (Small Caps) Small cap stocks have historically started off the year on a positive note with an average

January return of 1.4% since 1980. However, in 2011 and the prior five years, the returns were considerably worse. Like mid and large caps, though, they usually close out the year on a strong note with an average December return of 2.7% over the last thirty years and 4.2% over the last five. Best months: December (2.7%) and April (1.9%). Worst months: September and July (-0.6%).

In the lower chart we have calculated a composite relative strength chart of large vs. small cap stocks. This chart shows which times of year small caps have historically done best relative to large caps. As shown, small cap stocks have historically outperformed large caps in the first half of the year, but in the second half large caps typically outperform small caps, until the very end of the year when small caps outperform on a relative basis.

1980 - 2011 1.4 1.1 1.0 1.9 1.6 0.2 -0.6 0.0 -0.6 -0.2 1.6 2.7

2006 - 2010 -2.3 -2.6 4.5 5.3 -0.4 -3.1 1.9 0.8 2.4 -3.1 -2.1 4.2

2011 -0.3 5.4 2.4 2.6 -2.0 -2.5 -3.7 -8.8 -11.4 15.0 -0.5 0.5

Russell 2000 Average Performance: 1980 - 2011

Perc

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-25

-20

-15

-10

-5

0

5

10

15

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average Since 1980Prior Five Years (2006 - 2010)2011

Average Relative Strength: Large Caps vs Small Caps (1980 - 2011)

0.97

0.98

0.99

1.00

1.01

1/1 2/1 3/1 4/1 5/1 6/1 7/1 8/1 9/1 10/1 11/1 12/1

Rising line indicates large caps outperforming small caps.Falling line indicates small caps outperforming large caps.

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Seasonality—Consumer Discretionary & Consumer Staples For the Consumer Discretionary sector, 2011 followed the pattern of the prior five years

relatively closely and that was nearly a mirror image of the long-term pattern since 1980. The sector was very streaky during the year, and although it was up on the year, there were only four up months resulting in one stretch where the sector was down five months in a row! Best months: Mar (2.8%) and May (2.4%). Worst months: September (-1.0%) and July (-0.5%).

Consumer Staples started off 2011 on a weak note, but then rallied for four straight months with only three additional down months (June, July, and September). Looking ahead to 2012, January has traditionally been weak with negative average returns. Best months: May (2.2%) and October (2.1%). Worst months: January (-0.7%).

1980 - 2011 1.0 1.5 2.8 2.2 2.4 0.1 -0.5 -0.2 -1.0 0.8 2.0 0.9

2006 - 2010 -2.1 -2.0 3.7 6.5 -1.3 -4.8 1.7 1.7 2.7 -2.0 -1.1 2.1

2011 -0.7 5.8 -0.6 3.9 -0.5 -0.3 -1.5 -5.5 -7.0 11.8 -0.9 1.0

Cons Discretionary Sector Average Performance: 1980 - 2011

Perc

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-10

-5

0

5

10

15

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average Since 1980Prior Five Years (2006 - 2010)2011

1980 - 2011 -0.7 0.8 1.5 1.2 2.2 0.6 0.6 0.8 0.0 2.1 1.8 1.5

2006 - 2010 -2.5 -1.1 2.4 1.0 0.7 -2.1 2.9 1.6 2.2 -0.7 0.4 0.7

2011 -1.8 2.4 1.1 5.1 2.4 -2.9 -1.6 0.4 -3.7 4.3 2.4 2.4

Consumer Staples Sector Average Performance: 1980 - 2011

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-5

0

5

10

15

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average Since 1980Prior Five Years (2006 - 2010)2011

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Seasonality—Energy & Financials Energy started out 2011 following the historical script pretty closely. That is until May. At

that point, the bottom fell out of the sector, and by October it was down 15%. Like the rest of the market, the sector has seen a significant rebound in the last three months of the year. Best months: April (3.1%) and March (2.0%). Worst months: June (-0.5%) and September (-0.1%).

The performance of Financials during 2011 bore no resemblance to the historical averages since 1980 or the five prior years. This is likely due to the fact that regulatory concerns and the ongoing credit crisis dominated the sector’s day to day movements. Best months: April (2.9%), March (1.9%) and December (1.9%). Worst months: September (-0.9%) and June (-0.7%).

1980 - 2011 0.2 1.2 2.0 3.1 1.2 -0.5 0.7 0.5 -0.1 0.5 0.7 1.5

2006 - 2010 -1.3 -2.9 2.8 6.1 1.0 -0.9 0.8 -1.7 1.4 -0.8 2.5 1.8

2011 7.3 6.8 1.5 1.5 -4.6 -1.9 0.6 -10.0 -12.6 17.0 1.7 -1.1

Energy Sector Average Performance: 1980 - 2011

Perc

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)

-16

-12

-8

-4

0

4

8

12

16

20

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average Since 1980Prior Five Years (2006 - 2010)2011

1980 - 2011 0.3 0.0 1.9 2.9 1.6 -0.7 -0.2 0.1 -0.9 0.4 1.2 1.9

2006 - 2010 -5.4 -5.6 4.5 7.6 -0.9 -6.4 3.3 1.1 1.8 -5.4 -4.6 1.3

2011 2.8 2.8 -2.7 -0.1 -3.4 -2.9 -3.7 -9.7 -11.6 14.2 -5.0 1.6

Financials Sector Average Performance: 1980 - 2011

Perc

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e (%

)

-30

-20

-10

0

10

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average Since 1980Prior Five Years (2006 - 2010)2011

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Seasonality—Health Care & Industrials If you take out the Summer months, Health Care’s pattern in 2011 almost looks like a car-

bon copy of the traditional pattern. It’s pretty remarkable that even after that large drop in the Summer of 2011, the sector still saw a return similar to the historical average. Best months: November (2.3%) and December (1.7%). Worst months: February (-0.1%)

Industrials ended 2011 modestly lower but well off their lows of the year. The pattern in 2011 in the second half was a mirror image of the typical pattern as the sector bottomed at nearly the exact time that it typically tends to peak for the year. Best months: April (2.5%) and December (2.3%). Worst months: September (-1.0%) and June (-0.3%).

1980 - 2011 1.0 -0.1 0.8 1.6 1.5 1.1 0.2 0.5 0.4 1.2 2.3 1.7

2006 - 2010 -0.3 -3.4 0.5 0.1 0.1 -1.5 2.6 1.4 1.5 -2.0 -0.2 2.2

2011 0.4 2.8 1.7 6.4 2.2 -1.3 -3.9 -2.4 -4.6 5.6 0.7 2.8

Health Care Sector Average Performance: 1980 - 2011

Perc

ent C

hang

e (%

)

-8

-4

0

4

8

12

16

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average Since 1980Prior Five Years (2006 - 2010)2011

1980 - 2011 0.6 0.2 1.6 2.5 1.0 -0.3 0.6 -0.2 -1.0 0.5 1.9 2.3

2006 - 2010 -3.5 -3.1 5.3 6.0 -0.7 -4.5 3.4 -0.1 2.8 -3.9 0.1 1.8

2011 4.2 2.0 1.7 2.7 -3.0 -0.8 -7.0 -6.8 -9.4 13.9 0.6 0.9

Industrials Sector Average Performance: 1980 - 2011

Perc

ent C

hang

e (%

)

-20

-15

-10

-5

0

5

10

15

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average Since 1980Prior Five Years (2006 - 2010)2011

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Seasonality—Materials & Technology For the first half of 2011, the performance of the Materials sector closely tracked the pat-

tern of the prior five years. However, once the second half began the sector came off the rails of its typical pattern. Best months: April (2.8%) and November (2.4%). Worst months: September (-2.7%) and June (-0.7%).

While Technology typically peaks at the end of the year, in 2011 the sector saw its highs in February and then made a series of lower highs as the year progressed. The sector did have a strong October, however, which helped the sector to finish in the black for the year after being down more than 10% in late August. Best months: January (2.9%) and April (2.6%). Worst months: September (-0.9%) and March (-0.7%).

1980 - 2011 -0.1 1.7 1.7 2.8 1.1 -0.7 0.4 0.3 -2.7 -0.1 2.4 2.0

2006 - 2010 -2.2 -0.6 5.4 5.3 0.3 -3.7 3.1 -0.4 0.5 -2.2 0.0 2.4

2011 -0.1 2.5 1.7 2.1 -2.9 -0.5 -3.4 -6.9 -16.6 17.6 -0.1 -2.4

Materials Sector Average Performance: 1980 - 2011

Perc

ent C

hang

e (%

)

-25

-20

-15

-10

-5

0

5

10

15

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average Since 1980Prior Five Years (2006 - 2010)2011

1980 - 2011 2.9 -0.3 -0.7 2.6 0.6 0.3 0.3 0.6 -0.9 1.1 2.3 1.6

2006 - 2010 -3.9 -1.7 4.4 5.0 -0.7 -2.5 2.2 1.6 2.3 -0.1 -2.6 2.5

2011 4.2 1.8 -2.7 2.9 -1.8 -2.6 1.6 -6.2 -3.4 11.5 -1.9 -0.9

Technology Sector Average Performance: 1980 - 2011

Perc

ent C

hang

e (%

)

-12

-8

-4

0

4

8

12

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average Since 1980Prior Five Years (2006 - 2010)2011

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Seasonality—Telecom Services & Utilities Telecom Services has had a fairly consistent pattern since 1980 and 2011 was no excep-

tion. As it typically does, the sector started off the year on a weak note and finished on a strong one. The only difference was that its decline during the Fall was sharper than nor-mal. Best months: December (1.9%) and May (1.2%). Worst months: February (-2.0%) and August (-0.4%).

Although Utilities are typically one of the most neglected sectors of the market, investors who neglected them this year likely underperformed the market. While the sector’s pat-tern this year was similar to the historical average, the magnitude of the move was much better than average. Best months: December (1.9%) and April (1.7%). Worst months: February (-1.3%) and September (-0.5%).

1980 - 2011 0.6 -2.0 0.9 1.1 1.2 0.3 -0.2 -0.4 1.0 1.1 1.0 1.9

2006 - 2010 -4.8 -1.6 4.6 0.4 0.9 -1.8 1.2 0.9 1.3 -2.5 0.8 4.1

2011 -3.8 2.3 5.2 0.7 1.6 -1.5 -6.7 -1.4 -1.4 1.8 0.8 3.7

Telecom Services Sector Average Performance: 1980 - 2011

Perc

ent C

hang

e (%

)

-12

-9

-6

-3

0

3

6

9

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average Since 1980Prior Five Years (2006 - 2010)2011

1980 - 2011 0.2 -1.3 0.4 1.7 1.2 0.1 0.1 1.4 -0.5 1.0 0.2 1.9

2006 - 2010 -2.2 -2.9 1.0 2.7 0.3 0.0 1.2 0.7 -1.3 -0.4 1.0 1.3

2011 1.1 0.8 -0.2 3.8 1.6 -0.5 -1.1 1.7 -0.1 3.5 0.5 3.0

Utilities Sector Average Performance: 1980 - 2011

Perc

ent C

hang

e (%

)

-9

-6

-3

0

3

6

9

12

15

18

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average Since 1980Prior Five Years (2006 - 2010)2011

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Seasonality— 10-Yr Treasury & CRB Commodity Index Although most strategists recommended to avoid US Treasuries in 2011, they turned out

to be one of the best performing asset classes in the financial markets. Like the Utilities sector, 2011’s pattern was similar to the average pattern right down to the traditional late October early November decline. Best months: August and November (1.2%). Worst months: March (-1.0%) and December (-0.4%).

Commodities also followed a pattern that was similar to its pattern of the prior five years with a strong first half followed by a weak second half. This year, however, the peak came earlier in the year and the sell off was steeper.. Best month: March (0.8%). Worst months: October and June (-0.3%).

1980 - 2011 -0.2 -0.1 -1.0 -0.2 0.5 0.4 0.1 1.2 0.1 0.8 1.2 -0.4

2006 - 2010 -1.0 0.4 -0.9 -1.2 -0.8 0.6 1.0 2.7 -0.3 -1.0 4.0 -1.5

2011 -1.2 1.1 -1.4 1.8 3.1 -2.5 4.1 7.2 3.9 -2.5 1.9 2.3

Long Bond Future Average Performance: 1980 - 2011

Perc

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hang

e (%

)

-5

0

5

10

15

20

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average Since 1980Prior Five Years (2006 - 2010)2011

1980 - 2011 0.2 0.0 0.8 0.3 0.1 -0.4 -0.1 0.4 -0.1 -0.4 0.3 -0.1

2006 - 2010 -0.8 1.6 0.3 2.4 1.4 2.3 0.5 -4.4 0.0 -1.6 -1.0 1.7

2011 2.6 3.3 1.9 3.1 -5.5 -3.4 1.2 0.1 -13.0 7.3 -1.9 -2.7

CRB Commodity Index Average Performance: 1980 - 2011

Perc

ent C

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e (%

)

-12

-9

-6

-3

0

3

6

9

12

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average Since 1980Prior Five Years (2006 - 2010)2011

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Seasonality— Oil & Gold Oil followed the same pattern of the CRB index for much of the year, but it managed to

buck the overall weakness in commodities and close out the year on a positive note with gains of 17.7% in October and 7.7% in December. Best months: March (3.1%) and April (2.6%). Worst months: November (-2.2%) and October (-1.9%).

The traditional late year rally in gold never materialized this year. In fact, the metal hit its high for the year in early September and sold off sharply. Last year, gold started off the year uncharacteristically weak with a decline of 6.2% which was the worst January since 1997. Best months: September (1.7%), August (1.6%) and November (1.6%). Worst months: March (-1.0%) and October (-0.5%).

1980 - 2011 -0.6 0.0 3.3 2.6 1.2 0.4 1.2 2.2 2.3 -1.9 -2.2 0.2

2006 - 2010 -2.5 4.9 6.1 5.1 4.9 6.2 0.8 -5.2 -0.2 -2.5 -3.0 -0.4

2011 0.9 5.2 10.1 6.8 -9.9 -7.1 0.3 -7.2 -10.8 17.7 7.7 -1.5

Oil Average Performance: 1980 - 2011

Perc

ent C

hang

e (%

)

-20

-10

0

10

20

30

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average Since 1980Prior Five Years (2006 - 2010)2011

1980 - 2011 0.3 -0.2 -1.0 0.9 0.3 0.1 0.0 1.6 1.7 -0.5 1.6 0.1

2006 - 2010 5.2 2.5 -1.2 2.5 2.0 -0.8 0.4 -0.7 4.2 -0.5 6.9 1.8

2011 -6.2 5.7 2.1 8.2 -1.3 -2.2 8.4 12.3 -11.4 6.5 1.2 -10.2

Gold Average Performance: 1980 - 2011

Perc

ent C

hang

e (%

)

-9

0

9

18

27

36

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Average Since 1980Prior Five Years (2006 - 2010)2011

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Sector Weightings and Technicals Below is a table and a chart showing historical sector weightings for the S&P 500. After taking the number one spot from Financials in 2008, Technology widened its lead as the biggest S&P 500 sector in 2011. Tech currently makes up 19% of the index, which is 4.9 percentage points above Financials in second place at 14.1%. Energy holds a small lead over Health Care for the number three spot. Health Care, Consumer Staples and Utilities saw the biggest gains in sec-tor weightings in 2011, while the Financial sector suffered the only real losses.

On the following page, we provide historical S&P 500 weighting charts for each sector since 1990. The red line in each chart shows the sector’s average weighting over the entire time period.

Historical Sector Weightings of the S&P 500: 1990 - Current

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Telecom

Utilities

Materials

Cons Disc

Industrials

Cons Stap

H. Care

Energy

Financials

Tech

\Sector 1990 1993 1996 1998 1999 2000 2001 2002 2004 2006 2007 2008 3/09 2009 2010 2011 CurrentTech 6.3 5.9 12.4 17.7 29.2 21.2 17.6 14.3 16.1 15.1 16.7 15.3 17.6 19.9 18.7 19.0 19.0Financials 7.5 11.2 15.0 15.4 13.0 17.3 17.8 20.5 20.6 22.3 17.6 13.3 8.9 14.4 16.1 13.4 14.1Energy 13.4 10.0 9.2 6.3 5.6 6.6 6.3 6.0 7.2 9.8 12.9 13.3 14.3 11.5 12.0 12.3 12.0H. Care 10.4 8.2 10.4 12.3 9.3 14.4 14.4 14.9 12.7 12.0 12.0 14.8 16.1 12.6 10.9 11.9 11.8Cons Stap 14.0 12.5 12.7 11.1 7.2 8.1 8.2 9.5 10.5 9.3 10.2 12.9 13.8 11.4 10.6 11.5 11.1Industrials 13.6 13.9 12.7 10.1 9.9 10.6 11.3 11.5 11.8 10.8 11.5 11.1 9.5 10.3 11.0 10.7 11.0Cons Disc 12.8 16.4 11.7 12.5 12.7 10.3 13.1 13.4 11.9 10.6 8.5 8.4 8.3 9.6 10.6 10.7 10.8Materials 7.2 7.1 5.8 3.1 3.0 2.3 2.6 2.8 3.1 3.0 3.3 2.9 3.2 3.6 3.7 3.5 3.7Utilities 6.2 5.6 3.7 3.0 2.2 3.8 3.1 2.9 2.9 3.6 3.6 4.2 4.4 3.7 3.3 3.9 3.7Telecom 8.7 9.1 6.5 8.4 7.9 5.5 5.5 4.2 3.3 3.5 3.6 3.8 4.0 3.2 3.1 3.2 2.8

Historical Sector Weightings of the S&P 500: 1990 - Current

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Technicals S&P 500 Historical Sector Weightings

0

5

10

15

2025

30

35

40 Technology

19.04%

579

1113151719212325 Financials

14.14%

6

8

10

12

14

16

18 Health Care

11.80%

4

6

8

10

12

14

16 Consumer Staples

11.11%

3

5

7

9

11

13

15

17 Energy12.01%

8

9

10

11

12

13

14

15

16 Industrials

10.96%

6

8

10

12

14

16

18 Cons. Discretionary

10.76%

1

2

3

4

5

6

7

8

9 Materials

3.69%

2.02.53.03.54.04.55.05.56.06.57.0 Utilities

3.66%

23456789

1011 Telecom

2.85%

Average

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Technicals In the daily and weekly publications that we send out to Bespoke subscribers, we tend to focus more on the short-term technicals of the market, so below and on the following pages, we take a look at long-term charts of the S&P 500 and its ten sectors and analyze multi-year tech-nical formations instead.

The S&P 500 remains in the bull market that began in March 2009, but just barely. In 2011, the index hit the 20% threshold for a new bear market on an intraday basis, but on a closing basis it was just shy of the 20% level (19.4%). The index has now bounced more than 20% off of its 2011 lows, making up for a lot of the technical damage that was done last year, but not all of it.

The 2011 correction broke the nice uptrend that had been in place for the S&P 500 since the 2009 lows. A new uptrend can’t be confirmed until the index can break back above its April 2011 bull market highs, which is 4.8% from current levels. To get back to all-time highs, the index still needs to gain 20.3%.

S&P 500: 1998-Present

600

800

1000

1200

1400

1600

1800

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

4.8%

20.3%

Former uptrend

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Technicals S&P 500 Consumer Discretionary: 1998-Present

0

50

100

150

200

250

300

350

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

The Consumer Discretionary sector is nowtrading less than a percentage point from ALL-TIME highs. We expect these highs to be brokensoon, which should make 2012 a banner year forthe sector.

All-time high!

S&P 500 Consumer Staples: 1998-Present

100

150

200

250

300

350

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Don't tell the Consumer Staples sector that thestock market had a tough time in 2011. Asshown, the sector just recently traded to a newall-time high. Unfortunately, this does put thesector in a long-term overbought position, sowe'd shy away from it in the year ahead.

All-time high!

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Technicals

S&P 500 Financials: 1998-Present

0

100

200

300

400

500

600

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Financials struggled mightily in 2011. Thesector will need to gain 25% just to get back toits bull market highs. There is lots of upside forFinancials, but lots of risk as well. Risk averseinvestors should tread carefully.

+25%

S&P 500 Energy: 1998-Present

100

200

300

400

500

600

700

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

The technicals for the Energy sectorlook very bullish after it held its bullmarket uptrend channel during the2011 correction. We expect Energyto be a big outperformer during anymarket rally.

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Technicals

S&P 500 Industrials: 1998-Present

0

50

100

150

200

250

300

350

400

450

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Industrials sold off sharply from its April 2011 highs, but it heldabove a key support level that formed in 2010. It has ralliednicely over the last month and has its sights set on resistanceat its bull market highs. We expect a test and eventual breakof this resistance at some point in 2012.

S&P 500 Health Care: 1998-Present

100

150

200

250

300

350

400

450

500

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Health Care held up extremely well during the downturn we saw in the back halfof 2011. This outperformance has left it just 7.7% from its all-time high seen in2000. The sector faces significant resistance as it approaches this high,however, so it could see some choppiness in the yearahead.

Two key resistance levels

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Technicals

S&P 500 Technology: 1998-Present

0

200

400

600

800

1000

1200

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

The Technology sector is currently just 2.4% from its2007 and 2011 highs. This is a key resistance level thatinvestors are watching closely. A break above thisresistance will open up a huge upside window. Anotherfailure to break through this resistance will surely puttech bulls in a depressive state. We'll be keeping aclose eye on this level in the early part of 2012.

S&P 500 Materials: 1998-Present

75

125

175

225

275

325

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Technical damage was done to the Materialssector during the 2011 market correction. Thecorrection broke the multi-year uptrend channelthat Materials had formed off the 2009 lows.The sector has recently gotten close to tradingback inside this channel, which would make usmuch more positive on it than we are now.

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Technicals

S&P 500 Utilities: 1998-Present

50

100

150

200

250

300

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

The Utilities sector has benefitted immensely frominvestors flocking to dividend yields in recent years asfixed income rates remain low. The sector remains in asolid uptrend channel, and it has quite a bit of room torun before getting to its 2007 highs. We expect acontinued rally in the sector.

S&P 500 Telecom: 1998-Present

50

100

150

200

250

300

350

400

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12

Telecom had a strong 2011 as high-dividend paying companies in the sectorperformed well. In early 2011, the sectorbroke a very long-term downtrend that ithad been in since its peak during theInternet boom of the late 90s.

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Economic Indicators In terms of the ebbs and flows of economic activity, 2011 was a lot like 2010. The year started off on a positive note, and there was a feeling among many that the economy was returning to a state of normalcy. That all changed in early March with the major earthquake/tsunami/nuclear meltdown in Japan. While the ultimate impact of the disaster was unclear at the time, it was apparent that it would have far-reaching effects. Even though Japan may not be the economic powerhouse that it once was, it remains the world’s third largest economy, and when one of the largest economies in the world grinds to a halt, the rest of the world feels it.

The Japanese earthquake made its presence felt here in the United States as economic indica-tors in the months that followed showed a notable slowdown in their growth rates. With global supply chains disrupted, economic activity slowed, raising fears among investors and economists that the US economy was on the verge of a double dip. At the time of the quake we looked back at the 1995 Kobe quake as a potential parallel. We noted that during that pe-riod, the US economy saw a slowdown of about six months before the global economy got back on track.

As if the Japanese quake wasn’t enough to rattle already shell-shocked investors and economists, in late Spring the ongoing debt crisis in Europe spread from the periphery of Greece and Portugal into the core of Italy and France. By the end of the Summer, many economists and investors were forecasting not if, but when the economy would slide back into recession. By the end of the Sum-mer, the odds over on Intrade of the US economy going into recession were at 50%.

Just as it is often darkest before the dawn, when sentiment towards the economy was at its worst, we started to see an improvement in the economic numbers. For much of the Fall, the number of economic indicators showing year/year improvement began to expand again. Fears of a recession subsided, and by the end of the year, the Intrade odds of a recession were back down to 25%.

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Economic Indicators While the trend of economic indicators is important, their levels versus expectations are just as critical in determining the market’s direction. An economic report that shows growth of 2.5% may seem like a good thing, but it will be viewed entirely differently based on what the consensus was expecting heading into the report. What would be considered bad under one scenario can be considered great under a completely different set of circumstances.

Our Economic Indicator Diffusion Index, which measures the pace in which indicators are com-ing in ahead of (or below) expectations over a 50-day period, provides a nice illustration of this trend. In 2011, the Diffusion Index started off the year firmly in positive territory. Shortly, af-ter the March earthquake in Japan, however, the index began a steady slide lower that lasted through July when it fell below the 2010 lows and bottomed out at the lowest levels since the credit crisis. From that point forward, the economy began to stabilize and for the last five months we have seen consistent improvement in the Diffusion Index, indicating that econo-mists became overly pessimistic in their economic growth assumptions.

50-Day Rolling Net Total of Better Than Expected ReportsBespoke Economic Indicator Diffusion Index: 1999 - 2012

Last 12 Months

-25-20-15-10

-505

10152025

1/11 4/11 7/11 10/11 1/12

-40

-30

-20

-10

0

10

20

30

40

1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12

11

11

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Economic Indicators On the following pages, we highlight the long range charts of more than 25 economic indica-tors covering different aspects of the economy. For each chart we have also shaded periods when the economy was in a recession. Slowly but surely, many of these indicators are begin-ning to return to what can be considered normal levels. Even on the employment front, where the unemployment rate is still at unacceptably high levels, 2011 saw significant im-provement as jobless claims saw big declines and the monthly change in non-farm payrolls moved to levels that were above 100K in nine out of twelve months.

The most notable improvement for the year, however, was in housing. It is hard to believe the peak of the housing bubble occurred nearly seven years ago (July 2005), but what may be even more surprising to some is that the sector is showing significant signs of improvement. As shown on the page of housing indicators, New Home Sales, Housing Starts and Building Per-mits are showing consistent growth with higher lows and higher highs. Even the monthly sup-ply of housing, while still elevated, is approaching levels that are inline with their historical av-erage. As they say, time heals all wounds.

Category Indicator Start Date Category Indicator Start DateConsumer Personal Income 1/31/47 Housing New Home Sales 1/31/64

Personal Spending 1/31/60 Housing Starts 1/31/60Consumer Confidence 2/28/69 Building Permits 1/31/61Michigan Confidence 1/31/79 Monthly Supply 1/31/64

Employment Non Farm Payrolls 1/31/47 Inflation CPI 1/31/48Unemployment Rate 1/31/47 Core CPI 1/31/58Average Workweek 1/31/64 PPI 4/30/48Average Hourly Earnings 1/31/65 Core PPI 1/31/75Jobless Claims 1/6/67 PCE 1/31/60Jobless Claims (4 Wk Avg) 1/27/67 Core PCE 1/31/60

GDP Nominal 3/31/47 Manufacturing Industrial Production 1/31/45Real 6/30/47 ISM Manufacturing 1/31/48Price Index 3/31/47 Capacity Utilization 1/31/68

Durable Goods 2/28/59Durable Goods Ex Trans. 2/28/59

Economic Indicators Highlighted

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Economic Indicators—Consumer

Moving in the wrong direction, but still firmly positive.

Showing a slight pullback after reaching pre-recession levels.

After sharp spikes in early 2010 and then early 2011, the rate of change in consumer confidence has leveled off.

Consumer Confidence has been drifting lower but is stabilizing after making a higher low.

Consumer - Personal Spending (Y/Y Percent Change)

-6-4-202468

101214

'47 '57 '67 '77 '87 '97 '07

Consumer - Consumer Confidence (Y/Y Percent Change)

-75

-50

-25

0

25

50

75

100

125

150

'47 '57 '67 '77 '87 '97 '07

Consumer - Personal Income (Y/Y Percent Change)

-5

0

5

10

15

20

'48 '58 '68 '78 '88 '98 '08

Consumer - Michigan Confidence (Y/Y Percent Change)

-50

-25

0

25

50

'49 '59 '69 '79 '89 '99 '09

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Economic Indicators—Employment

Growth in jobs is now positive but still anemic.

Unemployment rate looks to have peaked below peaks from early 1980s, but still extremely high no matter how you look at it.

.

Average workweek has been consistently increasing in what is shaping up to be one of its most sustained improvements in recent history.

Employment - Non Farm Payrolls (Y/Y Percent Change)

-6

-3

0

3

6

9

12

'47 '57 '67 '77 '87 '97 '07

Employment - Unemployment Rate (Actual Level)

23456789

101112

'47 '57 '67 '77 '87 '97 '07

Employment - Average Workweek (Hours)

32

33

34

35

36

37

38

39

'47 '57 '67 '77 '87 '97 '07

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Economic Indicators—Employment

Growth in average hourly earnings is on par with lowest readings ever.

Initial claims have seen a major improve-ment and are now inline with historical norms.

Continuing claims moving in the right direc-tion, but due to extended benefits still at similar levels to the peaks of the last two recessions

Employment - Initial Jobless Claims ('000s)

100

200

300

400

500

600

700

800

'47 '57 '67 '77 '87 '97 '07

Employment - Average Hourly Earnings (Y/Y Percent Change)

0

2

4

6

8

10

'40 '50 '60 '70 '80 '90 '00 '10

Employment - Continuing Claims ('000s)

1000

2000

3000

4000

5000

6000

7000

'47 '57 '67 '77 '87 '97 '07

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Economic Indicators—GDP

Initial momentum from surge in GDP has slowed

Pace of growth in Real GDP is slowing down.

Price Index trending higher.

GDP - Nominal (Y/Y Percent Change)

-10

-5

0

5

10

15

20

'47 '57 '67 '77 '87 '97 '07

GDP - Real (Y/Y Percent Change)

-6-4-202468

101214

'47 '57 '67 '77 '87 '97 '07

GDP - Price Index (Y/Y Percent Change)

-4

0

4

8

12

16

'47 '57 '67 '77 '87 '97 '07

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Economic Indicators—Housing

New Home Sales saw a sharp pullback but made a lower low. Forming an attractive uptrend.

Similar trend to new home sales.

Ditto for permits.

Monthly supply has improved dramatically, and keeps trending lower. However, outside of the last five years it is still at the highest levels since the 1990 recession.

Housing - New Home Sales (Y/Y)

-60

-40

-20

0

20

40

60

80

100

'60 '70 '80 '90 '00 '10

Housing Starts (Y/Y)

-60

-40

-20

0

20

40

60

80

100

'60 '70 '80 '90 '00 '10

Housing - Building Permits (Y/Y)

-60

-40

-20

0

20

40

60

80

100

'60 '70 '80 '90 '00 '10

Housing - Monthly Supply (Actual Months of Supply)

3

6

9

12

15

'60 '70 '80 '90 '00 '10

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Economic Indicators—Inflation

Trended higher throughout 2011.

Nearing the historically high side of its range since the mid-1980s.

Trended higher throughout 2011.

Inflation - PPI (Y/Y)

-7

-2

3

8

13

18

'48 '58 '68 '78 '88 '98 '08

Inflation - PCE (Y/Y)

-3

0

3

6

9

12

'48 '58 '68 '78 '88 '98 '08

Inflation - CPI (Y/Y)

-4-202468

10121416

'48 '58 '68 '78 '88 '98 '08

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Economic Indicators—Inflation

Rebounded from record low levels in 2011. Still below average historical levels

Core PPI now at level considered high by historical standards..

Like the Core CPI, Core PCE rebounded from record low levels in 2011 but still low by historical standards.

Inflation - Core PPI (Y/Y)

-3

0

3

6

9

12

15

'48 '58 '68 '78 '88 '98 '08

Inflation - Core PCE (Y/Y)

0

2

4

6

8

10

12

'48 '58 '68 '78 '88 '98 '08

Inflation - Core CPI (Y/Y)

0

2

4

6

8

10

12

14

'48 '58 '68 '78 '88 '98 '08

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Economic Indicators—Manufacturing

Industrial Production at normalized levels.

After a strong surge in capacity utilization growth, current levels are inline with the historical average

ISM Manufacturing saw a sharp pullback following the quake in Japan but is now stabilizing

Manufacturing - Industrial Production (Y/Y)

-40

-30

-20

-10

0

10

20

30

'45 '55 '65 '75 '85 '95 '05

Manufacturing - Capacity Utilization (Y/Y)

-15

-10

-5

0

5

10

15

'45 '55 '65 '75 '85 '95 '05

Manufacturing - ISM Manufacturing

25

35

45

55

65

75

85

'45 '55 '65 '75 '85 '95 '05

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Economic Indicators—Manufacturing

Durable Goods y/y change sitting right at pre-Lehman levels.

Ex Transportation levels are slightly above pre-Lehman levels.

Manufacturing - Durable Goods (Y/Y)

-40

-30

-20

-10

0

10

20

30

'60 '70 '80 '90 '00 '10

Manufacturing - Durable Goods Ex Transportation (Y/Y)

-30

-20

-10

0

10

20

30

40

'60 '70 '80 '90 '00 '10

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Economic Expansions In this section we wanted to look to see how the current recovery compares to the average post WWII recovery. To do this we compared the rate of change in economic indicators and the market during the current expansion to the average Post WWII expansion. Interestingly, although we still here people talk about a ‘double dip’ recession, the current expansion is cur-rently clocking in at 2.5 years and counting. We realize its just semantics, but at what point will investors recognize that the current recovery is past the emerging stage.

The current period marks the 12th US economic expansion for the US economy since the end of WWII. In the table below, we highlight each of those expansions including the performance of the S&P 500 during the first 30 months of the recovery, the next six and twelve months, as well as the entire expansion. This allows us to compare the gains in the current period to other periods, and it gives us a blueprint on what to expect in the months and year ahead.

Since the end of WWII, the average recovery in the United States has lasted five years. Of those expansions that have lasted 2.5 years or longer, the average S&P 500 return has been 74.5%. During the first 30 months of the recovery, the S&P 500 has historically averaged a gain of 20.24%, which makes the gain of 36.8% in the current recovery among the strongest (3rd strongest).

Looking out over the next six and twelve months, the S&P 500 has averaged gains of 4.7% and 8.2%, respectively. In the two expansions where the S&P 500 saw stronger returns in the first 30 months (shaded) , the returns were even weaker. This suggests that economic data alone will not be a major catalyst on the positive side in the year ahead.

Trough Peak First 30 Months Next Six Months Next Year Entire Expansion10/31/49 7/31/53 3.8 39.84 2.27 3.97 54.305/31/54 8/31/57 3.3 55.91 -0.68 -0.94 54.924/30/58 4/30/60 2.02/28/61 12/31/69 8.8 -6.81 8.74 22.63 45.11

11/30/70 11/30/73 3.0 25.61 6.52 -4.18 10.053/31/75 1/31/80 4.8 26.25 -6.48 -8.28 36.957/31/80 7/31/81 1.0

11/30/82 7/31/90 7.7 8.67 8.87 25.91 157.073/31/91 3/31/01 10.0 11.35 8.11 9.84 209.24

11/30/01 12/31/07 6.1 -15.43 9.82 16.30 28.876/30/09 12/31/11 2.5 36.80

Average 5.0 20.24 4.65 8.16 74.56

S&P 500 Performance (%)Duration (Years)

US Economic Expansions: 1949 - 2012

n/a

n/a

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Economic Expansions Even as the equity market has seen one of its strongest performances during the current re-covery compared to other post WWII expansions, it is in no way indicative of a stronger than expected rebound in the economy. In the chart and table below, we highlight the change in GDP in the ten quarters following the end of prior recessions since 1949. The current expan-sion is the first recovery in the post WWII period where the US economy has not seen even one single quarter of growth that is higher than the median for all quarters. The strongest quarter of economic growth so far this expansion that we have seen is 3.9% in Q1 10. Inter-estingly, when Q4 11 GDP is released at the end of the month, if the reported number is inline with current forecasts, it will be the first quarter of this expansion where growth was equal to or above the median.

While the pace of recovery in this expansion has so far been weak, we would note that this isn’t necessarily a new phenomenon. In the prior two economic expansions (‘91 & ‘01) growth during the first ten quarters of the recovery was also subpar.

Median GDP Growth Following Recessions: 1949 - 2011

Quarter Following Recession End

3.3

7.3

6.0

7.8

6.8

4.53.9

3.34.0

3.0

1.7

3.8 3.9 3.8

2.5 2.3

0.4

1.31.8

3.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

1 2 3 4 5 6 7 8 9 10

Current

Average

Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 Q9 Q1010/31/49 17.2 12.7 16.6 7.2 5.1 6.8 8.2 0.7 4.1 0.45/31/54 0.5 4.6 8.3 12.0 6.8 5.4 2.3 -1.8 3.2 -0.54/30/58 2.5 9.7 9.7 8.3 10.5 -0.5 1.4 9.32/28/61 2.4 7.7 6.6 8.4 7.4 4.5 3.7 1.0 5.3 5.1

11/30/70 11.5 2.3 3.2 1.1 7.3 9.8 3.9 6.8 10.6 4.73/31/75 3.1 6.9 5.3 9.4 3.0 2.0 2.9 4.7 8.2 7.47/31/80 7.6 8.6 -3.2 4.9

11/30/82 5.1 9.3 8.1 8.5 8.0 7.1 3.9 3.3 3.8 3.43/31/91 2.7 1.7 1.6 4.5 4.3 4.2 4.3 0.7 2.6 2.1

11/30/01 3.5 2.1 2.0 0.1 1.7 3.4 6.7 3.7 2.7 2.66/30/09 1.7 3.8 3.9 3.8 2.5 2.3 0.4 1.3 1.8 3.0

Average 3.3 7.3 6.0 7.8 6.8 4.5 3.9 3.3 4.0 3.0

Red font indicates quarter with weaker growth than median for all quarters.

End of Recession

GDP Following Recessions: 1949 - 2011Annualized Quarterly Change (%)

Estimated

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Economic Expansions Overall, the pace of economic recovery has been weak during this expansion, but the weak-ness hasn’t been spread equally among sectors. As we did last year, the table below summa-rizes the change in fifteen different economic indicators during this expansion and compares that change to the average change of the indicator over the same period during prior expan-sions since 1960. We would have liked to go back further, but the reality is that most eco-nomic data beyond fifty years is sparse and unreliable.

While most economic sectors have seen below average growth, the manufacturing sector con-tinues to show stronger than average growth. Industrial Production, Capacity Utilization, and Durable Goods are all growing faster in the current expansion than they have in the ‘average’ expansion.

Housing and the Consumer have been weak. Employment indicators have also seen weaker than average growth, but in the last twelve months we have seen some improvement. The growth in the length of the average workweek is still above average and even the change in non-farm payrolls, while still weaker than average, is now in positive territory. If you calculate total hours worked by combining the growth in jobs with the increase in the length of the av-erage workweek, the growth shows a somewhat better picture.

Please see the following pages for charts of each in-dicator.

Indicator Current Average Current vs AverageEmployment

Non Farm Payrolls 1.1 4.9 -3.8Average Hourly Earnings 5.2 12.6 -7.4Average Workweek 2.1 0.5 1.6Growth in Hours Worked 3.2 5.4 -2.2

Housing StartsHousing Starts 12.3 41.8 -29.5Monthly Supply -29.4 3.7 -33.2

ManufacturingCapacity Utilization 16.0 6.6 9.5Durable Goods 38.2 31.4 6.9Industrial Production 14.1 12.1 2.0ISM Manufacturing 20.6 41.6 -21.0

ConsumerConsumer Confidence 30.8 -4.5 35.3Personal Income 9.6 20.7 -11.1Personal Spending 10.6 21.8 -11.2

InflationCPI 5.7 11.4 -5.7PPI 10.8 9.3 1.5PCE 5.4 10.9 -5.5

Change (%) Since End of Recession

Change in Economic Indicators Since End of Recession

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Average Workweek: Current vs Average

0.0

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1.0

1.5

2.0

2.5

0 6 12 18 24 30 36 42

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Current Expansion

Average Expansion

Economic Expansions

Employment

Housing

Change in Non Farm Payrolls: Current vs Average

-2-10123456789

0 6 12 18 24 30 36 42

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Average Hourly Earnings: Current vs Average

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Housing Starts: Current vs Average

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Monthly Supply: Current vs Average

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Average Total Hours Worked: Current vs Average

-2.0

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Current Expansion

Average Expansion

Average workweek multiplied by change in non farm payrolls.

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Economic Expansions

Manufacturing Capacity Utilization: Current vs Average

0

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Durable Goods: Current vs Average

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Industrial Production: Current vs Average

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ISM Manufacturing: Current vs Average

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Economic Expansions Consumer Inflation

Consumer Confidence: Current vs Average

-30

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Personal Income: Current vs Average

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Personal Spending: Current vs Average

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CPI: Current vs Average

0

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PPI: Current vs Average

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Housing Housing had its dreaded double dip in late 2010 and early 2011, but the general consensus heading into 2012 seems to be that housing has indeed made a bottom. There are a number of indicators that point to a bottom being made, but this is housing, and it’s hard to give it the benefit of the doubt since it has been so weak for so long.

One of the main reasons for all the bottom calling is due to how well the housing stocks have performed recently. As shown below, the S&P 1500 Homebuilder Index has surged since Oc-tober and is trading at extreme overbought levels. The Homebuilder ETF (XHB) has been the most overbought ETF that we track for multiple weeks now as well.

From a longer term perspective (2nd chart below), a double bottom appears to have been made, but the sector still has a LONG way to go before a new uptrend can be confirmed.

S&P 1500 Homebuilder Index: Last Six Months

150

170

190

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7/19 8/16 9/14 10/12 11/9 12/8 1/9

50-DMA

S&P 1500 Homebuilder Index: Since 1994

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Housing The continued drop in mortgage rates to unbelievably low levels also has to be having an im-pact. A 30-year fixed mortgage rate of 3.88% is hard to pass up, and if it weren’t so hard for people to actually get the loans, we’d likely be seeing an even stronger pickup in real estate. One negative, though, is that the Fed is projecting rates to remain low for the foreseeable fu-ture, so potential home buyers don’t have a fear that they need to buy now ahead of any rate increase.

As we noted in the prior section on Economic Indicators, all of the housing indicators are see-ing a pickup, but it’s worth highlighting the monthly supply chart once again because it’s so important. Supply has to come down for the market to pick up, and as shown below, it has just made a new post-recession low.

Bankrate.com's National Avg. 30-Year Fixed Mortgage Rate

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3.88%

Housing - Monthly Supply (Actual Months of Supply)

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'60 '70 '80 '90 '00 '10

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Housing Below we take a look at how various parts of the country are doing based on the S&P/Case-Shiller Home Price Indices. In the first chart, we highlight how far each city remains below its all-time highs seen at the peak of the housing boom in the mid-2000s. As shown, the two composite indices are still down 32% from their highs. Las Vegas, Phoenix and Miami are the three cities that remain more than 50% from their highs, while Dallas and Denver are the clos-est to their prior highs at roughly 10%.

Only two cities remain at their respective lows — Atlanta and Las Vegas, while Tampa, Phoe-nix, Miami and Seattle are still close to their lows. Washington DC, San Francisco and Detroit have seen the biggest bounces off of their lows, as they’re all up double-digit percentage points.

% Change from All-Time Highs for S&P/Case-Shiller Home Prices

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-51-47

-44-40 -39 -39

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Housing On the following pages we provide historical charts of the year-over-year percent change for each of the 20 Case-Shiller cities on a monthly basis.

-60

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92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

Phoenix

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San Diego

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Denver

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Tampa

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Detroit

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1318

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

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Portland

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Composite 10 City

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Composite 20 City

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Interest Rates—Yield Curve The NY Fed defines the yield curve as the difference between the yield on the 10-Year and 3-Month US Treasuries, and based on their research the yield curve is an effective predictor of future economic activity.

After interest rates failed to rise in 2010, many investors doubled down on their expectations for an increase in rates in 2011. Once again the market fooled most people in this regard as the yield on the 10-Year Treasury actually fell by nearly 50% from 3.29% down to 1.87%! So the wait for the long awaited rise in interest rates continues.

Short term interest rates are still pretty much at zero and even saw several days where the yield was negative. Yes, investors were paying the government to take their money! With the yield on the 3-Month Treasury essentially pegged at zero now that the Fed has said short term rates will remain at current levels for the foreseeable future, movements in the yield curve will become solely a factor of the change in the 10-Year yield.

US Ten Year Treasury Yield: 1962 - 2011

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'62 '67 '72 '77 '82 '87 '92 '97 '02 '07

1.52.02.53.03.54.04.5

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US Three Month Treasury Yield: 1962 - 2011

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Yield Curve Although it started off the year at relatively steep levels, the yield curve flattened consid-erably throughout the year. The reason behind the drop was two-fold. In early August, S&P’s downgrade of the ‘AAA’ credit rating of the United States led to a huge flight to safety trade and the primary beneficiary was ironically enough — US Treasuries! Then in the Fall, the Fed launched its ‘Operation Twist’ program of selling short term treasuries and redirecting the proceeds to longer term maturities.

According to analysis on the NY Fed’s website, “the yield curve—specifically, the spread be-tween the interest rates on the ten-year Treasury note and the three-month Treasury bill—is a valuable forecasting tool. It is simple to use and significantly outperforms other financial and macroeconomic indicators in predicting recessions two to six quarters ahead.”

Relative to its historical average, the steepness of the yield curve is only slightly above aver-age. Although the Fed’s intention of Operation Twist was to lower long term interest rates, based on their own analysis of the yield curve, the Fed’s actions could ultimately end up hin-dering economic growth as the slope of the yield curve flattens. At the same time, one could argue that the predictive power of the yield curve is no longer useful given all the manipula-tion within the Treasury market.

Yield Curve (bps): 2011

150

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Yield Curve (10-Year Minus Three Month Treasury Yield): 1962 - 2011

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'62 '67 '72 '77 '82 '87 '92 '97 '02 '07 '12

2.0 St Dev1.5 St Dev1.0 St Dev

Average

-1.0 St Dev-1.5 St Dev-2.0 St Dev

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Yield Curve Taking a broader look at how the yield curve impacts equity prices, we calculated the average six month forward return of the S&P 500 when the curve was in each of the regions in the chart on the prior page of this section. We further filtered the performance for periods when the yield curve had risen or fallen over the last six months. As shown below, the current level is within a range that has historically produced positive returns for equities with gains nearly 80% of the time.

Range Direction Six Month S&P 500 Return Percent of Time PositiveRising 26.41 100.0Falling n/a

Rising 1.94 66.8Falling 4.22 87.7

Rising 2.42 66.8Falling 6.24 73.7

Rising 2.75 61.5Falling 6.27 78.0

Rising 3.82 59.1Falling 5.59 76.0

Rising -4.75 34.1Falling 1.05 58.3

Rising -15.15 4.9Falling -5.95 25.7

Rising -3.84 8.3Falling 2.59 50.2

Overall 3.67 66.4

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2.0 Below

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S&P 500 Average Six Month Return Following Various Yield Curve Levels

2 Above

1.5+ Above

1.0+ Above

Positive

Negative

1.0+ Below

Current Level

S&P 500 Average Forward Six Month Return Based on Yield Curve Spread

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2 Above 1.5+ Above 1.0+ Above Positive Negative 1.0+ Below 1.5+ Below 2.0 Below

Curve Rising

Curve Falling

Current Level

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Yield Curve We also looked at sector performance following periods when the yield curve is at levels simi-lar to where it is right now. The table is sorted by the average overall six month change re-gardless of whether or not the curve is rising for falling. Based on prior history, when the yield curve is at similar levels, Technology, Consumer Staples, and Consumer Discretionary have seen the best performance while Financials, Utilities, and Telecom Service underperformed. It is interesting to see that three sectors that have historically been associated with high divi-dends all tend to underperform.

Change Percent of Time Positive Change Percent of Time Positive Change Percent of Time PositiveTechnology 4.1 57.3 9.2 72.7 6.7 65.2Cons Staples 4.9 70.6 7.0 76.8 6.0 73.8Cons Discret. 4.4 58.6 7.3 64.4 5.9 61.6Health Care 5.0 62.7 6.6 73.7 5.8 68.4Energy 3.0 60.8 6.9 75.5 5.0 68.4Materials 3.0 60.5 6.1 63.3 4.6 61.9Industrials 2.5 59.5 6.4 73.0 4.5 66.4S&P 500 2.8 61.5 6.3 78.0 4.5 69.6Financials 0.9 55.0 6.6 61.5 3.8 58.3Utilities -1.6 47.6 4.5 73.5 1.5 60.9Telecom Svcs -1.8 44.0 4.6 66.1 1.5 55.4

Rising Falling Overall

Sector Performance When Yield Curve is Between 1 and 1.5 Standard Deviations Above Average

Sector Performance When Yield Curve is Less Than 1 St. Dev. Above Average

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

Rising Falling Overall

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Dollar and Stocks For the US Dollar, 2011 was certainly a tale of two years. As global markets rallied during the first four months of the year, the Dollar Index saw a steady decline of 8%. Then as the EU debt crisis intensified in the late Spring and early Summer, the Dollar was the prime beneficiary. From its lows in early May, the Dollar Index rallied by nearly 12% and finished the year with a gain of 1.5%.

Longer term, the US dollar remains in a bull market, and although it seems as though the re-cent strength in the greenback is a nascent trend, the Dollar bottomed nearly four years ago in April 2008. While it hasn’t exactly been In full bull mode since then, prior bottoms in the dol-lar have been slow to develop, and for now the US Dollar Index is still up more than 10% from its record lows in 2008.

US Dollar Index: 1971 - 2011

60

80

100

120

140

160

180

'71 '76 '81 '86 '91 '96 '01 '06 '11

Dollar Bears Dollar Bulls

Longest Dollar Bear Market Ever

Higher low

US Dollar Index: 2011

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74

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78

80

82

1/3 2/7 3/14 4/18 5/23 6/27 8/1 9/5 10/10 11/14 12/19

Down 8%

50-DMA

Up 11.9%

Up 1.5%

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Dollar and Stocks Based on the history of the last several years, many traders have been conditioned to believe that a weak Dollar is good for equities (and other assets), while a strong Dollar is a headwind. While that was the case during the last bear market and the early stages of this bull market, the inverse relationship between the two assets began to break down in the second half of 2011.

The chart below compares the US Dollar Index to the S&P 500 over the last two years. When the US Dollar Index peaked in the Summer of 2010, the S&P 500 saw its low shortly thereafter. From there, the Dollar Index declined 18%, narrowly avoiding a new bear market. At the same time, the S&P 500 saw a historic rise when the Fed embarked on QE2.

Towards the end of the Summer, the inverse relationship between the Dollar and equities be-gan to break down as both rallied to close out the year. From Labor Day through year end, the US Dollar Index rallied by 7.3%, while the S&P 500 rallied 7.1%.

US Dollar Index vs S&P 500: 2010 - 2011

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1/10 5/10 9/10 1/11 5/11 9/11 1/12

2010 - S&P 500 (Left Axis) US Dollar Index (Right Axis)

2011

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Dollar and Stocks The fact that the US Dollar Index rallied with equities is a positive development. For literally years, the market has traded in a binary manner with the dollar. Fundamentals seemed to have little or no role in the movement of the markets and took a back seat to the currency markets. While it is normal for currency movements to play some role in equity prices due to factors such as international exposure to different markets, they shouldn’t be the only impact.

The chart below highlights the rolling six-month correlation between the US Dollar Index and the S&P 500. Here again, we can see the breakdown in the inverse relationship between the two assets. The recent move into positive territory for the correlation between the S&P 500 and the US Dollar Index was actually the second time in six months that the correlation be-tween the two assets moved into positive territory. More importantly, the last two times the correlation declined it made a lower low.

2011

S&P 500 vs Dollar: Rolling Six Month Correlation

-1.0

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0.0

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1.0

'01 '03 '05 '07 '09 '11

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Dollar and Stocks While the US Dollar and the S&P 500 have had an inverse relationship for much of the last dec-ade, from a longer term perspective, US equities have tended to do better when the dollar has rallied. The table below highlights the different performances of the S&P 500 during US Dollar bull and bear markets. The average return of the S&P 500 during the five Dollar bull markets has been a gain of 67.5%. In Dollar bear markets, the average return for stocks is considerably lower (15.61%). If we look at returns on a median basis, during Dollar bull markets the S&P 500 gains 31.1% compared to 13.3% during dollar bear markets.

Bull/Bear Begin End % Change Days S&P 500 Performance (%)Bull 7/6/1973 1/23/1974 20.9% 201 -4.16Bear 1/23/1974 10/30/1978 -25.1% 1,741 -2.07Bull 10/30/1978 2/25/1985 100.7% 2,310 88.54Bear 2/25/1985 12/31/1987 -48.2% 1,039 37.86Bull 12/31/1987 6/14/1989 23.7% 531 31.06Bear 6/14/1989 2/11/1991 -23.8% 607 13.82Bull 2/11/1991 7/5/2001 50.2% 3,797 230.79Bear 7/5/2001 4/22/2008 -41.0% 2,483 12.85Bull1 4/22/2008 12/31/2011 12.5% 1,348 -8.60

Average - Dollar Bull Markets 67.53Average - Dollar Bear Markets 15.61

Median - Dollar Bull Markets 31.06Median - Dollar Bear Markets 13.34

1 Current rally peaked in March 2009 at 24%.

S&P 500 Performance During Dollar Bull and Bear Markets

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Dollar and Stocks In 2012, our view is that the US Dollar will continue to benefit from slower global growth (or worse) and rally. That being the case, the charts below summarize the average performance of sectors during dollar bull and bear markets.

If you are of the view that the Dollar will rally during 2012, sectors to overweight include Fi-nancials, Consumer Discretionary, Technology, and Health Care. On the underweight side of the ledger, sectors to avoid include Energy, Telecom Services, Utilities, and Materials.

Investors who are looking for the US Dollar to make new lows in 2011 should overweight the commodity related sectors that dollar bulls will be selling along with Consumer Staples, and Health Care. At the same time, sectors to underweight would include Telecom Services, Utili-ties, and Financials.

Average Sector Performance During Dollar Bears

55.250.7 48.3

40.1

20.4 20.3 18.615.9

4.4 4.4 2.20

10

20

30

40

50

60

Average Sector Performance During Dollar Bulls

107.6102.1

90.8 86.8

73.367.5 63.3

52.0

35.7 32.722.2

0

20

40

60

80

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120

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Dollar and Stocks One final way to illustrate why investors should focus on US equities when the Dollar is rallying is by comparing a long term chart of the US Dollar to the relative strength of the US versus the rest of the world. The red line in the chart below shows the relative strength of the United States compared to the MSCI All Country (Ex US) equity index. When the line is rising, it indi-cates that US stocks are outperforming their global peers, while a falling line indicates interna-tional stocks are outperforming the United States.

The decade of the 1990s was essentially the decade of the United States. In 1992, the US Dol-lar Index was trading below 90 and ran all the way up to 120 (green line) when it peaked in the third quarter of 2001. As the dollar rallied, the S&P 500 outperformed its global peers until Q4 of 2001.

Just as the Dollar and US equities peaked simultaneously, they both declined in tandem. From late 2001 through early 2008, US equities underperformed the rest of the world as the US Dol-lar saw its longest bear market since the index began in the early 1970s. The two then bot-tomed in tandem and have started to trend higher. While the rebound has been anything but steady, we expect the Dollar to continue to trend higher, and therefore would prefer US over international equities. Broadly speaking, the 1990s was the decade of the US, the ‘naughts’ were the decade of international stocks, and now the teens will once again be a period where US stocks resume a leadership role.

US Dollar Index vs S&P 500 Relative Strength: 1992 - 2011

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Commodities Along with stocks, 2011 took commodities on a wild ride as well. After surging over the first three quarters of the year, gold experienced its sharpest pullback in years in the fourth quar-ter. Even after its pullback, however, gold managed to close up 10.23% for the year, which was second best out of the key commodities that we track. Believe it or not, corn was the best performer in 2011 with a gain of 13.47%. Oil was the only other gainer at 8.15%. Natural gas was once again the worst performing commodity in 2011 with a decline of 32.15%. Wheat, copper and platinum all saw losses of 20% or more as well.

Looking ahead, commodity analysts are the most bullish on natural gas in 2012, expecting a gain of 31.48%. They’re expecting platinum and silver to gain roughly 25%, and 14% for gold. Expectations for corn, copper, oil and wheat are flat, and for whatever reason, analysts are expecting coffee to decline nearly 18% in the year ahead.

Major Commodities - 2011 % Change

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Oil bounced back in Q4 2011 after experiencing a severe downtrend in the middle part of the year. It’s been in a side-ways trading range for the past two months now. Whichever way it breaks will spark its next long-term trend.

Natural gas has started 2012 right where it left off in 2011. It’s already down 24% this year and has broken to a 10-year low. If it can somehow stabi-lize, however, it just may offer up the trade of a lifetime.

Corn has been in a sideways trading range for the past three months after falling out of bed in September. For investors to turn bullish again it needs to break above its October highs.

Wheat has been in a down-trend for the last year now and it is once again about to re-test its lows. If a higher low can ever be made, a long opportu-nity will finally pop up.

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After breaking its long-term up-trend in late 2011, a new down-trend has formed for gold. The metal is currently working its way to the top of this down-trend channel, which is at $1,700. $1,700 is the level to watch for a breakout.

While gold peaked in late Au-gust, silver peaked last April after going parabolic for the first 4 months of 2011. It is now stuck in a downtrend and has a lot of work to do to get out of it.

Platinum is stuck in a significant downtrend as well. It has bounced off of extreme over-sold levels in recent weeks, but like silver, it needs to see sig-nificant gains before a new up-trend can form.

Unlike the other metals, copper has moved into overbought ter-ritory in recent weeks. It also just broke out of the sideways trading range it had been in since October, so a new up-trend is in place.

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Along with copper, orange juice is the only other commodity to end 2011 in overbought terri-tory. A winter freeze in Florida was the cause, and OJ is now sitting close to one-year highs.

Coffee, like wheat, is in a long-term downtrend with no end in sight as of now.

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Commodities As we do each year, below we highlight the ratios of gold to silver and gold to platinum. After reaching a 20-year low in early 2011 as silver significantly outperformed gold, the gold to silver ratio has trended higher over the last eight months and now stands at 54. This is still relatively low, which suggests that gold’s outperformance of silver could continue for some time.

The gold to platinum ratio has skyrocketed over the past couple of years, and it’s now at its highest level ever. Gold is currently 10% pricier than platinum, even though platinum is 30x more rare in nature. We’d say a reversion to the mean trade is well overdue.

Gold/Platinum Ratio: 1986-Present

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Gold/Silver Ratio: 1975-Present

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Commodities If the gold to platinum ratio has skyrocketed, we don't know what to call the oil to natural gas ratio, which currently stands at 43. As oil sits near $100, the denominator of natural gas con-tinues to fall. The ratio has never been anywhere close to this level, and just like gold to plati-num, we believe oil to natural gas is due for reversion to the mean as well. Since 1990, the average of this ratio has been 10, so it currently sits at 4.3 times the historical average. Al-though the supply equation of natural gas has shifted substantially, if the ratio isn’t lower than where it is now at this time next year we would be shocked.

Oil/Natural Gas Ratio: 1990-Present

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International On the following pages we analyze inter-national equity markets and economic expectations for countries around the world.

At right is a table showing the 2011 stock market performance for the major equity market indices of 78 different countries.

Overall, 10 countries were up in 2011, one was flat (the US), and 67 were down.

The average country declined 13.43% in 2011. Compared to the rest of the world, the United States’ flat return for the year was excellent. The US was also the top performing G7 country, and it outperformed all of the BRICs as well.

Not surprisingly, Greece saw the biggest decline of all the countries in 2011 at –51.88%. Italy was the worst G7 coun-try with a decline of 25.2%, and India was the worst BRIC at –24.64%. Brazil was the BEST performing BRIC with a decline of 18.11%, showing just how poor all of them did. China was down 21.68, and Russia was down 21.94%.

Venezuela saw the best stock market returns of any country in 2011 with a gain of 79.13%, but this was largely due to a much weaker Bolivar and skyrocket-ing inflation in the country.

Country YTD % Chg Country YTD % ChgVenezuela 79.13 Nigeria -16.31Jamaica 11.82 Kuwait -16.41Botswana 8.70 Peru -16.69Philippines 4.07 France -16.95Indonesia 3.20 Dubai UAE -17.00Iceland 2.03 Singapore -17.04Ecuador 1.90 Japan -17.34Qatar 1.12 Croatia -17.56Malaysia 0.78 Romania -17.68Ireland 0.58 Brazil -18.11United States 0.00 Malta -18.15South Africa -0.41 Colombia -18.27Thailand -0.72 Belgium -19.20New Zealand -1.04 Hong Kong -19.97Saudi Arabia -3.06 Israel -20.06Namibia -3.34 Bahrain -20.15Mexico -3.82 Lebanon -20.25Mauritius -4.02 Portugal -20.37Britain -5.55 Hungary -20.41Pakistan -5.61 Taiwan -21.18Latvia -5.68 China -21.68Slovakia -6.48 Poland -21.85Switzerland -7.77 Russia -21.94Sri Lanka -8.46 Turkey -22.33Bermuda -8.56 Serbia -23.82Norway -10.69 Estonia -23.94South Korea -10.98 India -24.64Canada -11.07 Italy -25.20Bulgaria -11.11 Czech Republic -25.61Abu Dhabi (UAE) -11.68 Luxembourg -26.39Netherlands -11.87 Lithuania -27.06Morocco -12.81 Vietnam -27.46Spain -13.11 Kenya -27.69Australia -14.51 Finland -30.11Sweden -14.51 Argentina -30.11Germany -14.69 Austria -30.77Denmark -14.78 Bangladesh -36.58Chile -15.22 Ukraine -45.19Oman -15.69 Greece -51.88

G7 Countries BRICs

Country Stock Market 2011 Performance

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Country Current Start of 2011 ChangeUnited States 32.58 29.68 2.90Japan 7.34 7.69 -0.35China 6.66 7.23 -0.57United Kingdom 6.54 6.42 0.12Hong Kong 4.70 4.78 -0.08Canada 4.10 4.04 0.05France 3.09 3.38 -0.30Germany 2.77 2.89 -0.12Brazil 2.76 2.78 -0.02Australia 2.62 2.85 -0.23India 2.42 3.13 -0.72Switzerland 2.33 2.31 0.02South Korea 2.15 2.07 0.08Russia 1.79 1.33 0.46Taiwan 1.50 1.77 -0.26Spain 1.14 1.22 -0.08Sweden 1.08 1.15 -0.07Singapore 1.04 1.11 -0.07Italy 1.02 1.15 -0.14South Africa 0.98 1.03 -0.05Mexico 0.91 0.96 -0.04Malaysia 0.84 0.78 0.06Indonesia 0.84 0.69 0.15Saudi Arabia 0.70 0.68 0.02Chile 0.61 0.65 -0.05Thailand 0.57 0.53 0.04Norway 0.55 0.56 -0.01Netherlands 0.52 0.63 -0.11Belgium 0.48 0.52 -0.04Turkey 0.44 0.58 -0.13Denmark 0.42 0.47 -0.05Finland 0.33 0.41 -0.08Israel 0.30 0.39 -0.09Austria 0.20 0.26 -0.06Kuwait 0.20 0.23 -0.03Argentina 0.09 0.12 -0.02Greece 0.07 0.13 -0.06

G7 Countries BRICs

% of World Stock Market Cap by Country

International At right we highlight the percentage of world market cap that the largest countries (by stock market size) make up. We also highlight the change in the share of market cap that each country saw in 2011.

As shown, the US currently makes up just under a third of the world’s stock market cap at 32.58%, and saw the largest increase in market cap share in 2011. Japan has the second biggest stock market with a share of 7.34% of the world. China — no longer an emerging market at least by size — makes up 6.66% of the world’s market cap, while the UK ranks fourth at 6.54%. Canada has a bigger stock market that both France and Germany by more than a full percentage point.

All four of the BRICs (China, Brazil, India and Russia) have bigger stock markets than Italy, which has just 1.02% of the world’s market cap. Russia is at 1.79%, India is at 2.42%, and Brazil is at 2.76%.

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International At right we highlight the same table as the prior page, except we have sorted it by the change in percentage of world market cap in 2011.

As shown, the US saw by far the biggest gain in its share of world market cap in 2011 at 2.90 percentage points. This was a result of the US seeing flat returns in 2011, while the rest of the world largely saw big declines.

Russia saw the second biggest gain in world market cap at 0.46 percentage points as its public offerings increased.

The UK saw the second biggest increase of the G7 countries at 0.12 percentage points, followed by Canada at 0.05%.

Germany, Italy, France and Japan are all G7 countries that saw some of the biggest de-clines in world market cap in 2011. India saw the biggest decline at –0.72 percentage points, followed by China at –0.57.

Country Current Start of 2011 ChangeUnited States 32.58 29.68 2.90Russia 1.79 1.33 0.46Indonesia 0.84 0.69 0.15United Kingdom 6.54 6.42 0.12South Korea 2.15 2.07 0.08Malaysia 0.84 0.78 0.06Canada 4.10 4.04 0.05Thailand 0.57 0.53 0.04Switzerland 2.33 2.31 0.02Saudi Arabia 0.70 0.68 0.02Norway 0.55 0.56 -0.01Brazil 2.76 2.78 -0.02Argentina 0.09 0.12 -0.02Kuwait 0.20 0.23 -0.03Belgium 0.48 0.52 -0.04Mexico 0.91 0.96 -0.04Chile 0.61 0.65 -0.05Denmark 0.42 0.47 -0.05South Africa 0.98 1.03 -0.05Austria 0.20 0.26 -0.06Greece 0.07 0.13 -0.06Sweden 1.08 1.15 -0.07Singapore 1.04 1.11 -0.07Spain 1.14 1.22 -0.08Finland 0.33 0.41 -0.08Hong Kong 4.70 4.78 -0.08Israel 0.30 0.39 -0.09Netherlands 0.52 0.63 -0.11Germany 2.77 2.89 -0.12Turkey 0.44 0.58 -0.13Italy 1.02 1.15 -0.14Australia 2.62 2.85 -0.23Taiwan 1.50 1.77 -0.26France 3.09 3.38 -0.30Japan 7.34 7.69 -0.35China 6.66 7.23 -0.57India 2.42 3.13 -0.72

G7 Countries BRICs

% of World Stock Market Cap by Country

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International Below is the matrix that we have done in each of our yearly Bespoke Reports since 2008. The matrix highlights key statistics for 22 of the biggest countries in the world.

In the matrix, we highlight 2011 stock market change, current valuations and dividend yields, 2012 GDP, CPI and Unemployment Rate expectations, and 2012 Central Bank and 10-Year yield estimates.

The color coding helps identify which countries have the best and worst stats compared to the other countries.

We focus on the individual categories on the next few pages.

Country 2011 % Chg Current P/ECurrent Div

Yield (%)

2012 GDP Estimate (YoY%)

2012 CPI Est.

2012 Unemp. Rate Est.

2012 Central Bank Rate

Estimate (%)

2012 10-Year Yield

Estimate (%)Australia -14.51 13.63 4.79 3.70 3.30 5.2 3.88 4.45Brazil -18.11 10.16 3.75 3.40 5.55 6.4 9.75 -Canada -11.07 14.95 2.70 2.00 1.90 7.4 1.00 2.66China -21.68 12.14 2.09 8.50 3.40 4.1 6.50 3.50France -16.95 9.74 4.67 0.05 1.80 10.1 0.75 3.48Germany -14.69 10.75 3.78 0.45 1.80 6.9 0.75 2.44Hong Kong -19.97 9.13 3.40 4.00 4.50 3.6 - 1.76India -24.64 15.22 1.49 - - - 7.00 7.96Italy -25.20 20.19 5.14 -0.30 2.30 8.2 0.75 6.28Japan -17.34 10.35 2.15 1.66 -0.28 4.3 0.10 1.27Malaysia 0.78 16.71 3.40 4.85 2.70 - 2.88 3.93Mexico -3.82 18.67 1.40 3.20 3.60 5.0 4.25 -Russia -21.94 5.34 2.34 3.60 7.00 6.5 7.88 -Singapore -17.04 7.03 3.85 3.55 3.00 - - 1.34South Africa -0.41 11.66 2.71 3.40 6.10 24.4 6.13 7.80South Korea -10.98 28.38 0.45 3.80 3.20 3.4 3.00 4.30Spain -13.11 9.13 5.47 0.25 1.55 21.6 0.75 5.77Sweden -14.51 12.67 4.08 1.60 1.50 7.5 1.63 2.36Switzerland -7.77 15.05 2.46 0.85 0.10 3.4 0.50 1.45Taiwan -21.18 16.66 4.61 4.05 1.30 4.3 1.75 1.92UK -5.55 10.23 3.79 0.60 2.55 8.7 0.50 2.75United States 0.00 13.87 2.04 2.12 2.10 8.5 0.25 2.58

Key Country and Equity Market Statistics

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International Below we highlight the ratio of P/E to GDP for each country, which is similar to a PEG ratio for individual stocks. The lower the ratio, the better.

As shown, China has the lowest country PEG ratio at 1.43, with a current P/E ratio of 12.14 and GDP growth estimates of 8.5%. Russia ranks second at 1.48. Russia has lower GDP growth es-timates than many other countries, but its P/E ratio is the lowest of all countries, which keeps its PEG low.

The US has previously had one of the worst PEG ratios over the past few years, but this year it is in the middle of the pack at 6.55 (with a P/E of 13.89 and GDP growth of 2.12%).

Unsurprisingly, European countries are the least attractive because their GDP growth expecta-tions are so small.

Country Index Current P/EEst. 2012 GDP

GrowthP/E to GDP

GrowthChina Shanghai Comp 12.14 8.50 1.43Russia Russian Trading 5.34 3.60 1.48Singapore Straits Times 7.03 3.55 1.98Hong Kong Hang Seng 9.13 4.00 2.28Brazil Bovespa 10.19 3.40 3.00South Africa FTSE/JSE Top 40 11.66 3.40 3.43Malaysia Kuala Lumpur 16.71 4.85 3.44Australia S&P/ASX 200 13.63 3.70 3.68Taiwan TWSE 16.66 4.05 4.11Mexico Mexican Bolsa 18.65 3.20 5.83Japan Nikkei 225 10.35 1.66 6.23US S&P 500 13.89 2.12 6.55South Korea Kospi 28.38 3.80 7.47Canada S&P/TSX 14.96 2.00 7.48Sweden OMX 30 12.67 1.60 7.92UK FTSE 100 10.23 0.60 17.05Switzerland Swiss Market 15.05 0.85 17.70Germany DAX 10.75 0.45 23.90Spain IBEX 35 9.13 0.25 36.50France CAC-40 9.74 0.05 194.78Italy FTSE MIB 20.19 -0.30 Neg.

Country PEG Ratios

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International Below we highlight the consensus GDP and CPI estimates for each country in 2012. As shown, China has the highest expected GDP growth at 8.5%, and then there is a big drop-off to Malay-sia in second place at 4.85%. Taiwan ranks 3rd at 4.05%, followed by Hong Kong in 4th at 4%. Here again, the US is in the middle of the pack at 2.12%.

Russia has the highest 2012 inflation expectations with CPI estimates of 7%. South Africa ranks 2nd at 6.1%, followed by Brazil in 3rd at 5.55%. Japan once again has the lowest CPI es-timates, with deflation of –0.28% actually projected.

2012 GDP Estimates (YoY%)

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International Below and on the following page are trading range charts for 20 key country indices.

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Inve

stm

ent G

roup

Bespoke Investm

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International

30000

32000

34000

36000

38000

40000

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11

Pric

e

Mexico - Bolsa

1000

1200

1400

1600

1800

2000

2200

2400

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11

Pric

e

Russia - Russian Trading System

2400

2600

2800

3000

3200

3400

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11

Pric

e

Singapore - Straits Times

24000

25000

26000

27000

28000

29000

30000

31000

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11

Pric

e

South Africa - Top 40

6500

7500

8500

9500

10500

11500

12500

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11

Pric

e

Spain - IBEX

750

850

950

1050

1150

1250

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11

Pric

e

Sweden - OMX

1500

1700

1900

2100

2300

2500

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11

Pric

e

South Korea - KOSPI

4400

4900

5400

5900

6400

6900

7400

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11

Pric

e

Switzerland - SMI

6000

6500

7000

7500

8000

8500

9000

9500

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11

Pric

e

Taiwan - TWSE

4500

5000

5500

6000

6500

Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11

Pric

e

UK - FTSE 100

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The Year in Headlines Label Date WSJ Lead Headline

1 1/4 Stock Surge Rings in New Year.2 1/18 Apple Chief to Take Leave.3 1/28 Arab Unrest Spreading.4 2/2 Mubarak Promises to Step Down.5 2/9 Inflation Worries Spread.6 2/23 Middle East Roils Markets.7 2/26 Parties Eye Deal to Avert Shutdown.8 3/12 Quake, Tsunami Slam Japan.9 3/15 Japan's Nuclear Crisis Escalates.10 3/18 UN Clears Way for Attack on Libya.11 3/31 Buffett Jolted as Aide Quits.12 4/9 Last Minute Deal Averts Shutdown.13 4/26 Financiers Switch to GOP.14 4/29 Officials Unfazed By Dollar Slide.15 5/2 US Forces Kill Osama bin Laden.16 5/6 Commodity Prices Plunge.17 5/10 Greek Woes Fuel Fresh Fears.18 5/24 Europe Sinks Markets.19 6/2 Economic Outlook Darkens.20 6/20 Europe Wrangles Over Greece.21 7/8 Sights Set on Grand Debt Deal.22 7/19 Debt Worries Roil Markets.23 8/3 Economic Fears Hit Global Markets.24 8/6 S&P Strips US of Top Credit Rating.25 8/13 Global Crisis Of Confidence.26 8/20 Bank Woes Take Center Stage.27 8/29 Weakened Irene Rakes Coast.28 9/1 US Sues to Stop AT&T Deal.29 9/15 Europe Lending Woes Deepen.30 9/22 Fed Launches New Stimulus.31 10/4 Market Nears Bear Territory.32 10/6 Steven Paul Jobs, 1955 - 2011.33 10/21 Gadhafi's Death Ushers in New Era.34 11/4 MF Global Masked Debt Risks.35 11/10 Italy Fears Rattle World's Investors.36 11/16 Turmoil Spreads in Europe.37 11/21 Deficit Effort Nears Collapse.38 12/3 Jobless Rate Nears Three-Year Low.39 12/9 Tensions Rise at EU Summit.40 12/19 North Korean Leader Kim Jong Il Is Dead.41 12/31 Dow Ends Year of Tumult Up 6%.

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101

S&P 500: 2011

1,050

1,100

1,150

1,200

1,250

1,300

1,350

1,400

1/3 2/3 3/3 4/3 5/3 6/3 7/3 8/3 9/3 10/3 11/3 12/3

12

39

45

6

7

810

11 12

15

1618

19

20

2122

23

24

2728

30 31

32

34

2933

26

1314

17

35

36

25

37

38

39

40

41

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Stock CompanyCurrent

PricePortfolio

Weight (%)Entry Price

Stop Price Date Added % Change

Consumer Discret. 16.8PII Polaris 60.84 5.7 54.16 44.25 9/8/11 12.3UA Under Armour 73.66 5.2 71.80 49.90 9/8/11 2.6VFC VF Corp 133.50 5.8 118.65 96.90 9/8/11 12.5

Consumer Staples 5.5CHD Church & Dwight 46.35 5.5 43.02 34.80 9/8/11 7.7

Energy 10.8KOG Kodiak Oil & Gas 9.24 4.9 9.46 7.90 1/17/12 -2.4XOM Exxon Mobil 87.23 5.9 73.87 64.90 9/8/11 18.1

Financials 10.2

NYX NYSE Euronext 27.37 5.0 28.34 24.65 12/6/11 -3.4RJF Raymond James 34.60 5.2 32.80 28.70 1/17/12 5.5

Health Care 5.5

BIIB Biogen Idec 118.25 5.5 111.68 98.00 12/6/11 5.9

Industrials 22.7CTAS Cintas 37.80 6.3 30.51 27.95 12/6/11 23.9GE General Electric 19.15 5.6 16.41 14.20 8/5/10 16.7TGI Triumph Group 59.35 5.9 50.67 41.90 9/8/11 17.1WCN Waste Connections 32.30 4.8 34.30 27.80 9/8/11 -5.8

Materials 5.0X US Steel 27.76 5.0 27.73 22.80 1/17/12 0.1

Technology 10.7AAPL Apple 421.28 5.7 387.14 295.00 9/8/11 8.8NUAN Nuance Commun. 29.00 5.0 28.82 23.20 1/17/12 0.6

Telecom Services 0.0

Utilities 5.0

AEE Ameren 31.65 5.0 32.26 29.40 12/6/11 -1.9ETFs 0.0

Cash 7.9

Performance (%): Since Inception1 YTD = Recently Added

S&P 500 -13.5 4.4 = Changed Stop PriceModel Portfolio 10.2 2.8

vs. S&P 500 23.7 -1.61 Bespoke's Model Portfolio began with an initial value of $100,000 on 5/29/07.

Bespoke Model Portfolio: 1/20/12

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CurrentTicker Description Weight Shares Value ($)

EquitiesLarge and Mid Cap

SPY S&P 500 Spyder 4.0 32 144.4 131.1 -13.3 4,195IJH S&P Midcap 400 2.0 23 79.3 92.6 13.3 2,130IWF Russell 1000 Growth 3.5 60 58.7 60.5 1.8 3,630

Small CapIWO Russell 2000 Growth 3.5 41 81.8 89.3 7.4 3,660

Sector & Group SpecificXLP Consumer Staples 2.0 65 22.9 32.3 0.0 2,102BBH Biotechnology 2.0 17 90.2 120.9 0.0 2,055XHB US Homebuilders 2.0 112 22.7 18.7 -4.0 2,093XLK Technology 2.0 78 16.8 26.8 0.0 2,087OIH Oil Services 2.0 17 85.8 121.9 36.1 2,073XLV Health Care 2.0 58 26.0 35.8 9.8 2,076

InternationalEFA MSCI EAFE 8.0 162 67.1 51.7 -15.4 8,378EWZ Brazil 3.0 48 44.6 65.0 20.5 3,121FXI China 25 3.0 81 42.2 38.5 -3.7 3,119

EEM Emerging Market 5.0 126 27.9 41.4 13.5 5,214VPL MSCI Pacific 6.0 125 57.6 50.1 -7.5 6,258

Fixed IncomeAGG Barclays Aggregate Bond 10.0 95 102.4 109.9 7.6 10,443HYG Invst Grade Corp Bond 5.0 58 86.0 89.7 3.7 5,201TLT Barclays UST 20+ Yrs 5.1 45 94.6 117.2 22.6 5,273

MUB National Muni Bond Index 5.0 47 100.8 110.4 9.6 5,187

Real EstateVNQ Vanguard REIT Index 10.0 175 32.4 59.6 27.2 10,423RWX DJ REIT ex US 5.0 152 50.5 34.3 -16.2 5,215

Commodities/CurrencyGLD Gold ETF 2.0 13 89.3 161.7 72.3 2,102USO Oil ETF 2.0 55 40.4 37.8 -2.6 2,076DBA Agriculture ETF 2.0 73 26.1 28.8 2.7 2,103UUP US Dollar 4.0 187 23.9 22.4 -1.5 4,189

Bespoke Model ETF Portfolio

Cost Basis

CurrentPrice

After completing our year-end rebalancing, the green shaded ETFs saw shares added and the red shaded ETFs saw shares sold in order to get our target weightings back inline.

Current Bespoke BenchmarkEquity 50.00 50 Portfolio Summary

US 25.00 25 Starting Value 100,000Int'l 25.00 25 Current Value 104,526

Fixed Income 25.00 25 Change (%) 4.53Real Estate 15.00 15 S&P 500 Chg (%) -13.50Comm/Curncy 10.00 10

Weightings

Bespoke's ETF Portfolio began with an initial value of $100,000 on 5/29/07. While the portfolio will be rebalanced on a quarterly basis to keep weights inline with the Bespoke Benchmark, changes to positions can be made at any time.

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