US Equity Strategy FLASH - Politico · 2012. 10. 29. · Strategy Current ETF Current P/E...

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North America Equity Research27 June 2011

US Equity Strategy FLASHRepatriation Carries Punch of QE3...$1.4T and Growing Double Digits

US Equity Strategy

Thomas J Lee, CFA AC

(1-212) 622-6505

[email protected]

Daniel M McElligott

(1-212) 622-5598

[email protected]

J.P. Morgan Securities LLC

See page 25 for analyst certification and important disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Please join us for a conference call on Monday, 6/27 at 11:00am ET to discuss the potential for a tax repatriation holiday and the resulting equity strategy implications. Details are on the right panel.

Discussion about a tax repatriation holiday is gaining momentum in Congress. Dane Mott, J.P. Morgan's Accounting Analyst, estimates foreign undistributed earnings are at least $1.4T and growing double digits annually. In 2004, corporates repatriated an est $362B, and we expect a much larger figure today (larger share of profits from overseas today, Figure 3). In our view, this repatriation carries a bigger punch than QE--given use of proceeds likely directly benefits equities or US economy.

The current proposal's framework was introduced by Representative Kevin Brady (R-Texas) and would allow companies to repatriate cash at a 5.25% tax rate rather than current 35% (but a potential $25,000 for each worker if employment dips below the avg). Recently, Senator Schumer (D-NY) said several Democrats would consider supporting funds to create an infrastructure bank.

Foreign operations now generate 24% of profits, nearly double the level from the '90s based on data from the BEA (using NIPA for corporate profits). Undistributed earnings are estimated to be at least $1.4T and growing by double-digits annually. The data was compiled by Dane Mott, J.P. Morgan Accounting Analyst, based on a review of 10-K filing of 883 companies (“Accounting Issues: Undistributed Foreign Earnings…” dated 5/24/11).

Foreign earnings concentrated. Consider that 56% of undistributed foreign earnings are in HealthCare, Technology, and Industrials, accounting for $775b (see Figure 6). The top 20 companies represent a total of $620b (see Figure 10).

Which companies benefit? We based which cos benefit based on the size of undistributed foreign earnings as % of market cap. We found that companies with higher free cash flow yields have a higher share of undistributed foreign earnings as% market cap (18% vs. avg of 13%) (Figure 12); investment grade (14%) (Figure 13); and smaller cap cos (18%) (Figure 14).

Equity markets continue to suffer from disappointing macro headlines as well as tail risks associated with peripheral Europe. So remaining constructive has the feeling of leaning against the wind but conviction likely improves as temporary drags fade (Japan-quake/inventory correction) and also boost from lower oil (better weather as well). Thus, we remain constructive on equities through year-end 2011, predicated on a corporate sector achieving escape velocity (’11/'12 EPS growth of 13%/9% with $120 oil baked in) and attractive relative valuation (equity risk premia is still a hefty 4.83%) against other risky assets.

JPM Baskets to leverage Repatriation. J.P. Morgan Derivatives & Delta One Strategy also created three baskets to leverage the work of Dane Mott. Bloomberg tickers for these baskets are: JPUFERN1, JPUFERN2, and JPUFERN3.

MARKET STRATEGY: 12 cos with higher FCF yield, investment grade. We wanted to provide a list of cos that are likely to benefit from a repatriation opportunity. The following criteria were used: 1) Rated OW by JPM, 2) Undistributed Foreign Earnings as a % of Market Cap >20%, 3) Investment Grade, 4) FCF Yield > 5%. The tickers are: AA, ALV, ADI, MRK, WU, PFE, AMGN, GE, DD, HNZ, ABT, and TUP.

Please join us for a conference call on Monday, June 27 at 11:00am ET for a discussion about the proposed tax repatriation legislation. Conference call details are below:

• Monday, June 27, at 11:00am ET• DIAL-IN: 800-857-9814 (US); +1-212-547-0199 (outside US); Passcode: Repatriation.• Replay through 7/2: 800-570-8795 (US); +1-402-220-2264 (outside US); Passcode: 7272. Replay available approximately one hour after the call ends.Bloomberg :JPUFERN1 <Index><GO>, JPUFERN2 <Index><GO>, JPUFERN3<Index><GO>Bloomberg subscribers can use the tickers above to access tracking information on the baskets created by the J.P. Morgan Delta One desk in coordination with J.P. Morgan’s Accounting & Valuation analyst Dane Mott to leverage the theme discussed in this report. Over time, the performance of these baskets could diverge from returns quoted in this report, because of differences in methodology. J. P. Morgan Research does not provide research coverage of this basket andinvestors should not expect continuous analysis or additional reports relating to it. For information on these baskets, please contact your J.P. Morgan salesperson on the Delta One Desk.Please see related report issued today by Marko Kolanovic.

https://mm.jpmorgan.com/PubServlet?action=open&doc=GPS-599249-0.pdf


2


Thomas J Lee, CFA(1-212) [email protected]

Figure 1: Summary Statistics – S&P 500

Figure 2: Potential Catalysts

Source: J.P. Morgan and FactSet.

JPM Related ETF

Strategy Current ETF Current P/E Buzz-o- Delta vs. % change -- Mkt Cap Weight Equal

GICS # Index Rating Index Ticker Price (NTM) Meter Wk Ago 1 week 1 month YTD YTD

— S&P 500 Index 1,268 SPY $126.81 13.6x 254 (1) (0.2) (3.6) 0.9 3.1

— Russell 2000 798 IWM $79.94 14.9x 209 0 2.1 (1.5) 1.8 0.2

Cyclicals

15 Materials OW 234 XLB $37.47 12.6x 294 (1) 2.4 (1.6) (2.1) 0.1

25 Discretionary N 304 XLY $38.50 14.3x 258 1 1.4 (2.9) 2.9 4.6

20 Industrials OW 308 XLI $35.63 13.8x 285 2 0.3 (2.7) 2.2 1.9

45 Technology OW 391 XLK $24.54 13.2x 251 (0) 0.5 (4.4) (3.2) (1.0)

Near-Cyclicals

10 Energy OW 527 XLE $70.93 13.2x 257 (4) (1.3) (4.6) 4.0 4.8

40 Financials OW 199 XLF $14.76 12.5x 218 (3) (1.0) (4.6) (7.5) (3.5)

Defensives

30 Staples UW 316 XLP $30.61 14.4x 263 (0) (1.7) (4.2) 4.1 7.4

35 Health Care OW 401 XLV $34.68 13.6x 303 1 (0.3) (2.3) 10.0 13.2

50 Telecom N 130 IYZ $24.23 14.8x 211 7 (0.1) (3.7) 1.1 1.7

55 Utilities UW 167 XLU $32.80 13.4x 212 1 (0.7) (2.1) 4.6 6.0

Source: J.P.Morgan. Note: Sector data is for S&P 500 sectors.

Monday Tuesday Wednesday Thursday Friday

6/27 6/28 6/29 6/30 7/1

Economics/Policy Economics/Policy Economics/Policy Economics/Policy Economics/Policy

8:30am Personal income (May) 9:00am S&P/Case-Shiller HPI (Apr) 10:00am Pending home sales (Apr) 8:30am Initial claims (w/e prior Sat) 9:55am Consumer sentiment (Jun final)

10:30am Dallas Fed survey (Jun) 10:00am Consumer confidence (Jun) 9:45am Chicago PMI (Jun) 10:00am ISM manufacturing (Jun)

10:00am Richmond Fed survey (Jun) 11:00am KC Fed survey (Jun) 10:00am Construction spending (May)

Light vehicle sales (Jun)

Corporate Corporate Corporate Corporate Corporate

— — — — —

J.P. Morgan Events J.P. Morgan Events J.P. Morgan Events J.P. Morgan Events J.P. Morgan Events

— Experian (EXPN LN) Investor Tour New York Community Bancorp, Inc (NYB)

Investor Tour & Group Lunch (Long Island, NY)

Telecoms Conference —

J.P. Morgan Cazenove Media CEO Conference J.P. Morgan Cazenove Media CEO Conference

Relevant Sector ET Fs

Double Sectors Single Double

DU G Energy XLE DIG

SMN M aterials XLB UYM

SIJ Industrials XLI U XI

SCC Discretionary XLY U C C

SZK Staples XLP U G E

RXD Health C are XLV RXL

SKF Financials XLF UYG

REW Technology XLK ROM

— Telecom IYZ —

SDP U tilities XLU UPW

SDS S&P 500 SPY SSO

* *Single beta ETFs based on SP500, Double Beta & Tele com on DJ Indicies.

Source: Factset

Positive BetaNegative Beta

3



Why repatriation carries a greater punch of QE...

Given Dane Mott's estimate of $1.4T of undistributed foreign earnings, we estimate that as much as $500b-$1T could be repatriated compared to $362b in '04. In our view, this carries greater positive implication for equities compared to QE. In other words, from a market's perspective, this likely represents a substantial catalyst--like the QE of '11/'12:

Mechanically, repatriation of cash is an injection of liquidity to the US financial system. Thus, $500-$1T is basically the same as the Fed expanding its balance sheet by a similar amount.

The use of proceeds potentially boosts risky assets, particularly more than QE. The reason is companies directly manage this cash and use of proceeds is more directly interacting with equities. Consider that corporates have used 67% of excess cash for dividends and buybacks (see "Investors waiting for cues from data…" dated 6/9/11). By this estimate, $500b-$1T could result in $350-$670b in incremental buybacks and dividends.

To the extent the current proposal requires directed investment or hiring, this is an obviously direct stimulus for the economy. This is arguably less a positive for those companies bringing in the cash but a positive for the economy broadly--and an indirect boost for equities.

QE2's primary impact on equities was to lower equity risk premia (currently 4.83% from 6.21% last Fall). Earnings rose 13% from August to now which implies that of the 21% rise in stocks since then, 8% (21% rise less 13% rise in EPS) is due to lower risk premia--how much is attributed to QE is debatable.

Bottom line--from an equity perspective, the repatriation should reduce equity risk premia (see above) and to the extent shares are repurchased or dividends paid, arguably with a greater effect than with QE2.


4



Tax repatriation is a big deal

Discussion about a tax repatriation holiday is gaining momentum with Congress. The current proposal's framework was introduced in legislation by Representative Kevin Brady (R-Texas) allowing companies to repatriate cash at a 5.25% tax rate rather than current 35% (but a potential $25,000 for each worker if employment dips below the avg). Recently, Senator Schumer (D-NY) recently said several Democrats would consider supporting funds to create an infrastructure bank. Even Andy Stern, former President of Service Employees International Union, predicted the White House would drop its opposition. This is significant for two reasons:

Foreign operations now generate an estimated 24% of profits (Figure 3), nearly double the level from the '90s, based on data from the BEA (we use NIPA as a proxy for corporate profits);

The level of undistributed earnings is estimated to be at least $1.4T and growing by double-digits annually (Figure 4). The data was compiled by Dane Mott, J.P. Morgan Accounting Analyst, based on a review of 10-K filing of 883 companies (see “Accounting Issues: Undistributed Foreign Earnings…” dated 5/24/11). This figure could in fact understate the total as it only focused on publicly traded companies with $3.5b of market cap.

Figure 3: Profits from overseas operations growing as % Total profits

Trailing 8 quarter avg based on NIPA data

Source: J.P. Morgan and BEA.

Figure 4: Undistributed earnings $1.4T and GROWING of 463 companies

$ millions. From “Accounting Issues: Undistributed foreign

earnings…” dated 5/24/11 by Dane Mott

Source: J.P. Morgan. From "Accounting issues: Undistributed foreign earnings..."

dated 5/24/11 by Dane Mott

5.1%5.8%

11.0%

13.8% 14.0%

20.8%

23.9%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

1950-1959 1960-1969 1970-1979 1980-1989 1990-1999 2000-2009 2010-Present

5



2004 Precedent: Est. $362b repatriated under American Jobs Creation Act of 2004, with 79% of cash from 8 countries

Dane Mott, in his recent report, discusses the financial impact from the last tax repatriation. The American Jobs Creation Act of 2004 provided a temporary 85% dividend tax deduction for foreign earnings repatriated. The IRS published a subsequent studyby Melissa Redmiles. According to Redmiles’ report, The One-Time Received Dividend Deduction, about 10% (843 cos of 9,700 with controlled foreign corporations) repatriated earnings under the AJCA. These 843 corporations repatriated almost $362 billion. According to Redmiles, 79.1% of the repatriated earnings came from eight countries listed below in Figure 5.

Figure 5: In 2004, 79% of the funds were from 8 countries…

$ millions. From “Accounting Issues: Undistributed foreign earnings…” dated 5/24/11 by Dane Mott

Source: J.P. Morgan. From "Accounting issues: Undistributed foreign earnings..." dated 5/24/11 by Dane Mott

6



Foreign earnings are concentrated in a few Sectors…

We have highlighted below how the undistributed foreign earnings is heavily concentrated in a few sectors, with HealthCare and Technology accounting for almost half of the total amount of undistributed foreign earnings (see Figure 6).

There is also a clear correlation between the amount of undistributed foreign earnings (as % of market cap) and the % of revenue that is generated outside of the US (see Figure 7). This relationship is intuitive, as companies with a higher % of sales overseas have been building up earnings overseas over the past few years that have not been fully repatriated yet.

Figure 6: SECTORS: Where the earnings are held (sorted by $)

$ in billions. From “Accounting Issues: Undistributed foreign earnings…”

dated 5/24/11 by Dane Mott

Source: J.P. Morgan. From "Accounting issues: Undistributed foreign earnings..." dated

5/24/11 by Dane Mott

Figure 7: Undistributed Foreign Earnings as % of Mkt Cap vs. % of Sales from Outside US

%

Source: J.P. Morgan and FactSet

Rank Sector

Undistributed

Foreign

Earnings % of Total

1 Healthcare $291 21%

2 Information Technology $291 21%

3 Industrials $193 14%

4 Consumer Staples $165 12%

5 Financials $136 10%

6 Energy $128 9%

7 Consumer Discretionary $90 7%

8 Materials $76 6%

9 Utilities $4 0%

10 Telecom Serv ices $1 0%

Total $1,375 100%

Energy

MaterialsIndustrials

Discretionary

Staples

HealthCare

Financials

Technology

TelecomUtilities

Total

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0% 10% 20% 30% 40% 50% 60%

Un

dis

trib

ute

d F

orei

gn E

arni

ngs

% o

f Mar

ket C

ap

% of Revenue from Outside US

7



At the industry level, Pharma, Oil & Gas, and Industrial Conglomerates have the highest concentration of undistributed foreign earnings. The top 20 industries alone account for 82% of all undistributed foreign earnings, highlighting the heavy concentration in a few areas. Office Electronics and Industrial Conglomerates have the highest undistributed foreign earnings as % of mkt cap.

Figure 8: TOP 20 INDUSTRIES: Sorted by $ value

$ in billions. From “Accounting Issues: Undistributed foreign earnings…” dated


Source: J.P. Morgan. From "Accounting issues: Undistributed foreign earnings..." dated 5/24/11 by

Dane Mott

Figure 9: TOP 20 INDUSTRIES: Sorted by % of market cap

$ in billions. From “Accounting Issues: Undistributed foreign earnings…” dated


Source: J.P. Morgan. From "Accounting issues: Undistributed foreign earnings..." dated 5/24/11 by

Dane Mott

Rank Industry

$ in

billions

% of Mkt

Cap

1 Pharmaceuticals $197 28%

2 Oil, Gas and Consumable Fuels $112 10%

3 Industrial Conglomerates $100 35%

4 Diversified Financial Serv ices $71 16%

5 Computers and Peripherals $59 11%

6 Machinery $58 17%

7 Software $55 9%

8 Chemicals $51 16%

9 Beverages $50 11%

10 Healthcare Equipment and Supplies $50 20%

11 Communications Equipment $46 18%

12 IT Serv ices $42 11%

13 Household Products $41 15%

14 Food Products $35 11%

15 Capital Markets $34 12%

16 Semiconductors and Semiconductor Equipment$34 7%

17 Internet Software and Serv ices $29 11%

18 Biotechnology $28 20%

19 Food and Staples Retailing $21 9%

20 Electronic Equipment, Instruments and Components$19 23%

Sub-Total $1,132 15%

% of Total 82%

Undistributed

Foreign Earnings

Rank Industry

$ in

billions

% of Mkt

Cap

1 Office Electronics $7 49%

2 Industrial Conglomerates $100 35%

3 Paper and Forest Products $6 30%

4 Pharmaceuticals $197 28%

5 Auto Components $16 27%

6 Electronic Equipment, Instruments and Components $19 23%

7 Healthcare Equipment and Supplies $50 20%

8 Biotechnology $28 20%

9 Communications Equipment $46 18%

10 Machinery $58 17%

11 Road and Rail $2 17%

12 Diversified Financial Serv ices $71 16%

13 Chemicals $51 16%

14 Household Durables $8 15%

15 Household Products $41 15%

16 Multi-Utilities $2 14%

17 Containers and Packaging $4 14%

18 Life Sciences Tools and Serv ices $12 14%

19 Real Estate Management and Development $1 12%

20 Metals and Mining $15 12%

Sub-Total $734 21%

% of Total 53%

Undistributed

Foreign Earnings

8



The companies with the foreign earnings….

We have also identified the top 20 companies with the highest $ value of undistributed foreign earnings (Figure 10) and the top 20 companies with the highest undistributed foreign earnings as a percentage of market cap (Figure 11). The top companies based on $ amount of earnings have $620b of undistributed foreign earnings and trade at only 9.8x 2012E EPS. The top companies based on % of market cap have undistributed foreign earnings amounting to 87% of market cap and trade at only 9.2x 2012E EPS.

Figure 10: TOP 20 Companies: Sorted by $

$ in billions

Source: J.P. Morgan and FactSet. From "Accounting issues: Undistributed foreign earnings..." dated 5/24/11 by Dane Mott

Figure 11: TOP 20 Companies: Sorted by % of market cap

$ in billions

Source: J.P. Morgan and FactSet. From "Accounting issues: Undistributed foreign earnings..." dated 5/24/11 by Dane Mott

Rank Company Name Ticker

JPM

Rating JPM Analyst Price

P/E

(2012)

Credit

Rating

FCF

Yield

$ in

billions

% of

Mkt Cap

1 General Electric Co. GE OW C. Stephen Tusa, Jr CFA$18.56 11.2x AA+ 12.7% $94.0 48%

2 Pfizer Inc. PFE OW Chris Schott, CFA $20.28 8.9x AA 13.1% $48.2 30%

3 Merck & Co Inc MRK OW Chris Schott, CFA $35.47 9.2x AA 8.7% $40.4 37%

4 Johnson & Johnson JNJ N Michael Weinstein $66.07 12.5x AAA 7.0% $37.0 20%

5 Exxon Mobil Corp. XOM N Katherine Lucas Minyard, CFA$79.82 8.8x AAA 6.1% $35.0 9%

6 Citigroup Inc. C OW Vivek Juneja $39.51 7.4x A -1.1% $32.1 28%

7 Cisco Systems Inc. CSCO N Rod Hall, CFA $15.36 8.9x A+ 10.9% $31.6 37%

8 International Business Machines Corp.IBM OW Mark Moskowitz $165.68 11.3x A+ 7.3% $31.1 15%

9 Procter & Gamble Co. PG N John Faucher $64.06 15.0x AA- 5.3% $30.0 17%

10 Microsoft Corp. MSFT N John DiFucci $24.65 8.9x AAA 11.6% $29.5 14%

11 Abbott Laboratories ABT OW Michael Weinstein $52.08 10.5x AA 10.0% $26.8 33%

12 PepsiCo Inc. PEP OW John Faucher $68.78 14.0x A 4.8% $26.6 24%

13 Hewlett-Packard Co. HPQ N Mark Moskowitz $35.12 6.6x A 12.4% $21.9 30%

14 Chevron Corp. CVX N Katherine Lucas Minyard, CFA$101.07 7.8x AA 6.6% $21.3 11%

15 Coca-Cola Co. KO OW John Faucher $66.40 15.5x A+ 4.1% $20.8 14%

16 Eli Lilly & Co. LLY UW Chris Schott, CFA $37.68 10.2x AA- 14.7% $19.9 46%

17 JPMorgan Chase & Co. JPM — — $40.69 7.2x A+ -17.9% $19.3 12%

18 Apache Corp. APA OW Joseph Allman, CFA $118.30 8.9x A- -12.0% $19.2 42%

19 Bank of America Corp. BAC OW Vivek Juneja $10.79 6.4x A 52.1% $17.9 16%

20 Goldman Sachs Group Inc.GS OW Kian Abouhossein $134.52 7.2x A 2.9% $17.7 25%

Sub-Total 9.8x 8.0% $620.3 25%

% of Total 45%

Undistributed

Foreign Earnings

Rank Company Name Ticker

JPM

Rating JPM Analyst Price

P/E

(2012)

Credit

Rating

FCF

Yield

$ in

billions

% of

Mkt Cap

1 Pulse Electronics Corp. PULS — — $4.42 11.2x 5.5% $0.5 258%

2 Eastman Kodak Co. EK — — $3.50 -6.1x B- -44.6% $2.4 255%

3 Dole Food Co. Inc. DOLE N Ken Goldman $13.07 7.6x B -1.1% $2.3 199%

4 Boston Scientific Corp. BSX UW Michael Weinstein $7.06 15.0x BBB- 2.2% $9.2 85%

5 Vishay Intertechnology Inc.VSH — — $14.32 7.2x BB 19.7% $1.9 85%

6 Goodyear Tire & Rubber Co.GT OW Himanshu Patel, CFA $15.47 7.2x BB- -19.0% $2.9 77%

7 Bunge Ltd. BG N Terry Bivens $66.05 10.1x BBB- -34.1% $6.8 70%

8 Shiner International Inc. BEST — — $1.03 3.6x -49.8% $0.0 68%

9 Lexmark International Inc. LXK N Mark Moskowitz $28.07 6.7x BBB- 13.7% $1.5 66%

10 Office Depot Inc. ODP OW Christopher Horvers, CFA$4.26 25.8x B -8.8% $0.7 60%

11 Modine Manufacturing Co. MOD N Ann Duignan $14.60 8.8x -5.0% $0.4 59%

12 AGCO Corp. AGCO N Ann Duignan $47.43 10.6x BBB- 6.5% $2.6 58%

13 CTS Corp. CTS — — $9.08 10.4x -1.1% $0.2 57%

14 Xerox Corp. XRX N Mark Moskowitz $9.99 8.1x BBB- 13.9% $7.0 50%

15 Western Digital Corp. WDC N Mark Moskowitz $34.57 9.0x 9.5% $4.0 50%

16 Alcoa Inc. AA OW Michael F. Gambardella$15.29 10.0x BBB- 5.1% $8.0 49%

17 Owens-Illinois Inc. OI — — $25.80 8.1x BB+ 0.1% $2.0 48%

18 Ingersoll-Rand Plc IR OW C. Stephen Tusa, Jr CFA$44.38 11.2x BBB+ 3.5% $7.1 48%

19 United States Steel Corp. X OW Michael F. Gambardella$42.60 7.8x BB -16.9% $2.9 48%

20 General Electric Co. GE OW C. Stephen Tusa, Jr CFA$18.56 11.2x AA+ 12.7% $94.0 48%

Sub-Total 9.2x -4.4% $156.4 87%

% of Total 11%

Undistributed

Foreign Earnings

9



Stratification of Undistributed Foreign Earnings

We also looked at how the undistributed foreign earnings are distributed amongst companies. The thinking is whether certain types of businesses naturally generate greater foreign earnings or have these qualities (beyond the obvious % sales overseas, etc):

Higher FCF yield companies saw an increasing amount of undistributed foreign earnings as % of their market cap (see Figure 12), which now stands at 18% of market cap for the highest quintile of FCF yield. This contrasts with those with Low FCF yield at 16%.

Investment Grade companies have also seen an increasing amount of undistributed foreign earnings as % of market cap (see Figure 13, which now stands at 14% of market cap vs. only 11% for non-investment grade companies.

Smaller cap companies have the highest undistributed foreign earnings as % of market cap (see Figure 14) at 18% vs. avg of 13% for all companies. However, this ratio has been falling recently for small caps, whereas the top quintile of market cap has actually seen foreign earnings rise as a % of market cap, which is likely due to more overseas operations for large-caps.

Figure 12:Free Cash Flow Yield Quintiles

Undistributed Foreign Earnings as % of Market Cap; FCF yield

quintiles based on current LTM FCF

Source: J.P. Morgan, FactSet, and "Accounting issues: Undistributed foreign

earnings..." dated 5/24/11 by Dane Mott

Figure 13:Investment Grade vs. Non-Investment Grade

Undistributed Foreign Earnings as % of Market Cap; Credit Rating is

based on S&P long-term debt rating



Figure 14: Market Cap Quintiles

Undistributed Foreign Earnings as % of Market Cap; Market Cap

quintiles based on current market cap



10%

12%

14%

16%

18%

20%

22%

24%

26%

2008 2009 2010

Lowest FCF Yield Quintile 2nd Lowest FCF Yield Quintile

Middle FCF Yield Quintile 2nd Highest FCF Yield Quintile

Top FCF Yield Quintile

16%

14% 14%

27%

15%

11%8%

13%

18%

23%

28%

2008 2009 2010

Investment Grade Non-Investment Grade

10%

12%

14%

16%

18%

20%

22%

24%

26%

2008 2009 2010

Lowest Mkt Cap Quintile 2nd Lowest Mkt Cap Quintile

Middle Mkt Cap Quintile 2nd Highest Mkt Cap Quintile

Top Mkt Cap Quintile

10



Status on Proposal for Tax Repatriation Holiday

As mentioned earlier, bipartisan support for a tax repatriation holiday has gained some momentum in Congress recently. Representative Kevin Brady (R-Texas) introduced a proposal to allow companies to repatriate cash at a 5.25% tax rate rather than the current 35% (but a potential $25,000 for each worker if employment dips below the average). For the proposal to become law, it would need to become part of the debt ceiling increase compromise bill, as chances of it happening outside the package is very small. With this, we cannot lose sight that the largest hurdle currently faced is the ability for the final bill to obtain not only a majority in the House of Representatives but also win 60 votes in the Senate. A package that can get 60 votes, with or without the repatriation is going to be the core of discussion in the coming weeks.

Democrats in Congress and the White House are currently opposed to the idea, as some are cautious about its execution. Tom Block, founder of Tom Block Consults and former Head of Government Relations for J.P. Morgan emphasizes that Democrats feel “betrayed” by the use of funds by corporations during the 2004 tax repatriation holiday. Additionally, opposition to the proposal have highlighted the long term costs of tax repatriation… budget estimates peg it at $78.7 billion in foregone revenue over 10 years.

That said, the proposal does have bi-partisan support. Firstly, although the tax repatriation holiday loses money over 10 years, the Joint Committee on Taxation has noted that the holiday would in fact generate $25.5 billion of revenue in the first 3 years – revenue that would be useful to pay for some programs. Of these, we could see the creation of an infrastructure bank, as highlighted by Senator Schumer (D-NY) which would “guarantee” job creation (and address a critical concern from the Democratic opposition). Even Andy Stern, former President of Service Employees International Union, predicted the White House would eventually drop its opposition to the proposal.

Tom Block believes that the proposal has north of a 50-50 chance that it will make the final debt ceiling package, without which the odds of it standing alone and become law is slim.

11



MARKET STRATEGY: 12 Stocks to benefit from a Tax Repatriation Holiday

In order to leverage the “Tax Repatriation Holiday” theme, we identified 12 quality stocks (Investment Grade) with a sizable amount of undistributed foreign earnings as a % of market cap. Specifically, we used the following criteria:

Rated OW by J.P. Morgan;

Undistributed Foreign Earnings as a % of Market Cap >20%

Investment Grade Companies

FCF Yield >5%

The 12 stocks have 21% upside implied by J.P. Morgan target prices, an average P/E (2012E) of only 10.8x, an average FCF yield of 9%, and an average Undistributed Foreign Earnings as a % of Market Capital of 32%.

12



Figure 15: 12 Stock Ideas to Benefit from Tax Repatriation Holiday

Priced as of 6/23/11


Credit

Rating

Name Industry Ticker

Current

Price

Market

Cap

JPM

Rtg JPM Analyst

Target

Price

Implied

Upside $bn

% of

Market

Cap

Annual

Gth

Since

AJCA

2012E

EPS

P/E

('12E)

Free

Cash

Flow

FCF

Yield

1 Alcoa Inc. Metals & Mining AA $15.28 $16,221 OW Michael F. Gambardella$22.00 44% $8.0 49% 1.1% IG $1.53 10.0x $828 5.1%

2 Autoliv Inc. Auto Components ALV $74.80 $6,670 OW Himanshu Patel, CFA $98.00 31% $3.0 45% 18.2% IG $7.60 9.8x $636 9.6%

3 Analog Devices Inc. Semiconductors & Semiconductor EquipmentADI $37.98 $11,380 OW Christopher Danely $49.00 29% $2.3 20% 18.6% IG $3.04 12.5x $776 6.9%

4 Merck & Co Inc Pharmaceuticals MRK $34.97 $107,938 OW Chris Schott, CFA $44.00 26% $40.4 37% 37.2% IG $3.85 9.1x $9,518 8.7%

5 Western Union Co. IT Services WU $19.42 $12,279 OW Tien-tsin Huang, CFA $24.00 24% $2.5 20% — IG $1.71 11.4x $1,113 9.0%

6 Pfizer Inc. Pharmaceuticals PFE $20.65 $163,158 OW Chris Schott, CFA $25.00 21% $48.2 30% 12.3% IG $2.28 9.1x $20,998 13.1%

7 Amgen Inc. Biotechnology AMGN $57.93 $53,859 OW Geoffrey Meacham, Ph.D.$70.00 21% $17.2 32% 36.5% IG $5.61 10.3x $5,318 9.8%

8 General Electric Co. Industrial ConglomeratesGE $18.38 $194,928 OW C. Stephen Tusa, Jr CFA$22.00 20% $94.0 48% 21.2% IG $1.66 11.1x $25,058 12.7%

9 E.I. DuPont de Nemours & Co.Chemicals DD $51.32 $47,661 OW Jeffrey J. Zekauskas $60.00 17% $12.6 27% 12.4% IG $4.40 11.7x $2,494 5.2%

10 H.J. Heinz Co. Food Products HNZ $52.56 $16,912 OW Terry Bivens $60.00 14% $3.7 22% 10.3% IG $3.65 14.4x $1,248 7.3%

11 Abbott Laboratories Pharmaceuticals ABT $51.92 $80,698 OW Michael Weinstein $55.00 6% $26.8 33% 35.8% IG $4.96 10.5x $8,063 10.0%

12 Tupperware Brands Corp.Household Durables TUP $65.22 $4,070 OW John Faucher $66.00 1% $0.8 21% — IG $5.13 12.7x $214 5.2%

Average 21% 32% 20% 10.8x $6,355 9%

JPM Coverage

Undistributed Foreign

Earnings Fundamentals and Valuation

13



US Equity Strategy Recent Publications Source: J. P. Morgan

US Strategy

Circle of Life: Greece creating overhang on markets. But US private savings at record $1.7T, harbinger for hiring & credit growth —6/17/11

Investors waiting for cues from data… — 6/9/11

Constructive on sell-off. 4 reasons for shifting call to Buy the "Summer of Cyclicals" —6/1/11

Scared in May, bloom in June? Probability flattish June-Sept is front loaded. 14 ideas —5/2611

Three reasons we see less turbulence at end of QE2 (vs. QE1) — 5/19/11

Upgrading Health Care to OW from N. Signs of improving fundamentals, stable regulatory risk and attractive valuation point to sustained outperformance – 5/12/11

Cyclical momentum weakening, but sell-off in commodities takes edge off (i) consumer wallet and (ii) hawkishness; thus, on the margin positive – 5/5/11

3 Reasons Death of Bin Laden Should Have Lasting Positive Effects on Equity Markets– 5/2/11

Raising '12E EPS to $105 (from $102), YE11 Target to 1475 (from 1425). 16 Ideas –4/28/11

Conf Call Summary: 4/21: Synopsis of Conf Call on AAA Sovereign Risk, Technical Default, & Impact on Washington Debate – 4/26/11

Why Equity Markets' Lack of Reaction to AAA Action Is Right. History Shows This. –4/20/11

1Q11 Preview: Pressure from Oil and Japan to Be Seen in 2Q: Cutting 2011E EPS by $1.00 to $96.50. Maintain 2012E $102 – 4/14/11

Why $120 oil is not causing consumers to roll. Stay constructive on YE Target, despite short-term uncertainty – 4/12/11

Circle of Life: Downgrading Consumer Discretionary to N from OW – 4/5/11

Special Reports

Housing Food Chain: Part III: Six key metrics point to housing improving in mid-/late-2011. 18 ideas – 4/8/11

2011 Outlook: YE 2011 Target 1425; Raise '11E EPS to $94 from $91; Introduce '12E EPS of $102 – 12/10/10

US Equity Strategy Slide Deck: July 2010 : 10 Reasons to remain long equities: S&P 500 YE Target of 1300 – 7/15/10

Positive on Housing Food Chain: Homebuilders most attractive, but also Mortgage Insurers, Suppliers, Timber. 12 Ideas – 4/9/10

2010 Outlook: Back to Business: Visibility in 1H. YE Target Is 1300. – 12/10/09

7 Reasons We Are Early in Cycle for Cyclicals – 6/25/09

3PointsTV

(Click the links below for 3PointsTV and to view the required video, click on the “PLAYLIST” option in the video screen.)

Greece Constrains Market But US Private Sector Strengthening — 6/17/11

Cyclicals Today Look Like They Did in Aug '10... Time to Buy – 6/3/11

Recent Signals Suggest Low For Summer is Front-Ended – 5/27/11

Reasons for Sustained Outperformance of HealthCare – 5/12/11

Buying REITS as a Play on Household Formation Recovery – 5/6/11

How Loan Growth Will Get Banks Working. Key to 1475. – 4/29/11

Why Equity Response (lack of) to S&P AAA-rtg action is right – 4/21/11

How Supply Chain Hurts Industrials and Aerospace – 4/15/11

Builders bottoming? – 4/8/11

Airlines in the world of $100 oil – 4/1/11

http://jpmorgan.v.reutersinsider.com/USEquityStrategy/








































14



Ownership vs. Valuation Matrices

Figure 16: Comparative Risk Reward of Industries: Ownership vs. Valuation Matrix X-axis is relative valuation; Y-axis is institutional ownership


Figure 17: Comparative Risk Reward of Styles: Ownership vs. Valuation MatrixX-axis is relative valuation; Y-axis is institutional ownership


Energy Equip & Svcs

Oil Gas & Consumable Fuels

Chemicals

Metals & Mining

Paper & Forest Products

Aerospace & Defense

Building Products

Industrial Conglomerates

Machinery

Commercial Svcs/Supp

Airlines

Other Transports

Autos/Components

Consumer Durables & Apparel

Casinos & Gaming

Hotels, Resorts & Cruise Lines

Restaurants

Media

Internet & Catalog Retail

Multiline Retail

Specialty Retail

Food & Staples Retail

Food Beverage & Tobacco HH & Personal

Products

HealthCare Equip/Svcs

Biotech

Pharm

Life Scnces Tools & Svcs

Banks

Dvrsfd Financial Svcs

Consumer Finance

Capital Markets

Insurance

Real Estate

Software

Comm Equip

Computers & Peripherals

Semiconductors

Telecom SvcsUtilities

0

5

10

15

20

25

30

35

40

0 5 10 15 20 25 30 35 40

Ran

k o

f In

sti.

Ow

ners

hip

Wei

ghti

ng v

s. T

otal

Mkt

Rank of Relative P/E delta vs. 10yr AvgExpensive Cheap

Un

der

ow

ned

Ove

row

ned

Unattractive Risk Reward

Better Risk Reward

High Beta

Low Price

Small Cap

High P/E

S&P Low Quality

High EV/EBITDA

Low Momentum

Pure GrowthCyclical

Least Liked

High P/BLow P/B

Most Liked

Defensive

Pure Value

High Momentum

Low EV/EBITDAS&P High Quality

Low P/E

Large Cap

High Price

Low Beta

0

5

10

15

20

0 5 10 15 20

Ran

k o

f In

sti.

Ow

ners

hip

Wei

ghti

ng v

s. T

otal

Mkt

Rank of Relative P/E delta vs. 10yr AvgExpensive Cheap

Un

der

ow

ned

Ove

row

ned

Unattractive Risk Reward

Better Risk Reward

15



Macro at a Glance

Economic Highlights

Initial jobless claims rise slightly to 429,000

Initial jobless claims for the week ending June 18 rose slightly to 429,000, a 9,000 move up. This increase in claims undid the improvement reported for the prior week, and claims have now hovered around 420,000 in the last five reported weeks (claims were mostly below 400,000 in Feb-April when the labor market appeared to be gaining momentum). Looking ahead, the next few weeks can be volatile for this data series, since there are large swings in the seasonal factors around the July 4th holiday.

New home sales continue to hover around the bottom

New single-family home sales dropped 2.1% in May to an annualized rate of 319,000 units and there were small upward revisions to the data from prior months. This drop in May comes after two months of improved sales. Since the end of the home buyer tax credit, new home sales have looked very depressed although sales have been trending very gradually higher lately. However, thehomebuilder's survey dipped down in June potentially signaling upcoming softening in the sales data.

Figure 18: Jobless Claims

Since 1967

Source: J.P. Morgan and Datastream.

Figure 19: New one-family homes sold

Mn units, saar

Source: J.P. Morgan Economics.

1/75575

2/77565

5/80642

10/82695

3/91509

9/01517

3/09659

6/11429

150

350

550

750

1/67 1/70 1/73 1/76 1/79 1/82 1/85 1/88 1/91 1/94 1/97 1/00 1/03 1/06 1/09 1/12

Recession Initial Jobless Claims 4wk avg

16



Fund Flows

US equity funds saw inflows in the past week, ending several consecutive weeks of outflows. US equity funds saw strong inflows early on in 2011 but have pulled back over the past month or so as economic momentum and investor sentiment have deteriorated. However, the YTD trend is still a vast improvement relative to the past few years, when US equity funds consistently saw outflows.

As shown in the figure on the right below, equity funds have seen the largest inflows YTD, although international and US bondfunds also continue to see a steady stream of inflows.

Figure 20: US Equities’ Cumulative YTD Mutual Fund Flows

$ millions, weekly reporting funds

Source: EPFR Global.

Figure 21: 2011 and 2010 Cumulative Fund Flows

$ billions, monthly & weekly reporting funds

Source: EPFR Global.

-$80,000

-$60,000

-$40,000

-$20,000

$0

$20,000

$40,000

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

2009 2010 2011 5yr Avg

$40

$40

$27

$16

$16

$12

$11

$2

-$18

-$87

$84

$108

-$3

$37

$75

$72

$6

$8

$8

-$444

-$500-$400-$300-$200-$100 $0 $100 $200

All Equities

International Bonds

US Equit ies

US Investment Grade Bonds

US Bonds

International Equities

Balanced Funds

US High Yield Bonds

US Municipal Bonds

Money Market Funds

2011 2010

17



Sector Roadmap

The table below maps the rolling performance of the 10 sectors of the S&P 500 and visually charts a roadmap of sector rotation. As shown below and as we have discussed in several past reports, sector rotation moved from “Risk Off” to “Risk On” in late 2010. In recent weeks, sector rotation has moved back to “Risk Off.”

Defensives have gained the lead and have been consistently outperforming over the last few months

Energy and Financials have also lost their lead and are now the worst performing sectors. Financials in particular was the worst-performing sector over the past three months.

Figure 22: SECTOR ROADMAP: Trailing-Three-Month Relative Performance


7/22/10 8/22/10 9/22/10 10/22/10 11/22/10 12/22/10 1/22/11 2/22/11 3/22/11 4/22/11 5/22/11 6/22/11

Cyclicals

Materials 0.5% 5.3% 6.3% 3.6% 3.3% 5.7% 1.3% 0.8% -2.0% 3.8% -2.5% -0.7%

Industrials -1.4% 0.0% 2.1% 1.5% -0.4% 0.9% 2.4% 4.2% 2.0% 0.4% -0.5% -0.5%

Discretionary -3.0% -1.2% 1.3% 4.1% 5.9% 3.7% -0.2% -2.2% -2.5% 1.5% 1.8% 2.8%

Technology 0.1% -0.8% -2.2% 0.5% 3.4% 1.0% -1.2% -1.1% -2.2% -2.6% -3.6% -2.6%

Near Cyclicals

Financials -4.1% -4.9% -4.1% -7.1% -5.9% -0.7% 4.3% 4.1% -1.0% -6.4% -7.0% -7.3%

Energy -1.8% -0.4% -2.6% 2.5% 8.7% 11.5% 9.6% 10.8% 11.8% 7.7% -3.9% -4.7%

Defensives

Staples 5.7% 2.3% 2.6% -1.0% -3.7% -5.3% -6.0% -7.4% -3.3% 0.7% 7.8% 6.6%

HealthCare 1.2% 1.2% 0.6% 1.7% -3.9% -7.0% -5.7% -5.7% -1.1% 2.2% 10.2% 9.5%

Telecom 8.9% 9.6% 10.4% 4.8% -2.7% -5.6% -5.7% -6.8% -4.4% 1.5% 6.8% 5.3%

Utilities 9.8% 7.9% 3.9% -3.6% -9.3% -10.7% -8.1% -7.9% -3.1% -3.4% 6.0% 5.9%

S&P 500 -9.5% -1.5% 3.6% 8.2% 11.8% 11.0% 8.5% 9.8% 2.8% 4.2% 1.4% -0.5%

18



Index Performance Analysis

Figure 23: Sector Cont. to 5-Day S&P 500 Point Change (as of 6/22)

Source: FactSet and J.P. Morgan.

Figure 24: Sector Cont. to 1-Month S&P 500 Point Change (as of 6/22)


Figure 25: Stock Cont. to 5-Day S&P 500 Point Change (as of 6/22)

Ten Largest Positive Contributors and Ten Largest Negative Contributors


Figure 26: Stock Cont. to 1-Month S&P 500 Point Change (as of 6/22)

Ten Largest Positive Contributors and Ten Largest Negative Contributors


4.0 3.4 3.4

2.8 2.1 2.1

1.8 0.9 0.7 0.6

21.7

0.0 5.0 10.0 15.0 20.0 25.0

FinancialsDiscretionary

IndustrialsEnergy

TechnologyHealthCare

StaplesMaterialsTelecom

Utilities

S&P 500

(0.6)(1.2)(1.3)

(2.3)(3.7)

(4.6)(5.4)(5.6)

(8.0)(13.4)

(46.1)

(50.0) (40.0) (30.0) (20.0) (10.0) 0.0

MaterialsTelecom

UtilitiesEnergy

HealthCareIndustrials

StaplesDiscretionary

FinancialsTechnology

S&P 500

0.8 0.6

0.6 0.6

0.5 0.5

0.4 0.4

0.3 0.3

(0.1)(0.1)(0.1)

(0.1)(0.1)(0.1)(0.1)

(0.2)(0.4)(0.4)

(0.6)(0.4)(0.2) 0.0 0.2 0.4 0.6 0.8 1.0

Microsoft Corp.Exxon Mobil Corp.

Chevron Corp.Oracle Corp.Citigroup Inc.

Wells Fargo & Co.International Business Machines …

ConocoPhillipsCoca-Cola Co.

AT&T Inc.

Adobe Systems Inc.Sprint Nextel Corp.

NVIDIA Corp.Occidental Petroleum Corp.

PNC Financial Services Group Inc.Walgreen Co.

Boeing Co.Philip Morris International Inc.

Apple Inc.Google Inc. Cl A

S&P 500 up 22 points

0.9 0.4

0.2 0.2

0.1 0.1 0.1 0.1 0.1 0.1

(0.9)(0.9)(1.0)

(1.0)(1.0)(1.1)(1.1)

(1.1)(1.2)(1.3)

(1.5) (1.0) (0.5) 0.0 0.5 1.0 1.5

ProLogis Inc.Alpha Natural Resources Inc.

UnitedHealth Group Inc.National Oilwell Varco Inc.

Microsoft Corp.Forest Laboratories Inc.

Marathon Oil Corp.Johnson & Johnson

ConocoPhillipsTiffany & Co.

Bank of America Corp.Exxon Mobil Corp.

Wal-Mart Stores Inc.Procter & Gamble Co.

Google Inc. Cl AIntel Corp.

JPMorgan Chase & Co.Oracle Corp.

General Electric Co.Apple Inc.

S&P 500 down 46 points

Energy and Technology both had 3 stocks in the Top 10

Technology had 4 stocks in the Bottom 10

Technology had 4 stocks in the Bottom 10

Cyclicals led defensives 9.8 points to 5.1 points.

Cyclicals dragged the index lower, pulling it down by 24 points.

Energy had 4 stocks in the Top 10

19



Figure 27: Best Two and Worst Two Sectors – Relative Performance over the Past Month

Performance Relative to the S&P 500


Figure 28: Best Two and Worst Two Sectors – Relative Performance over the Past Three Months



Figure 29: Best Two and Worst Two Industries – Relative Performance over the Past Month



Figure 30: Best Two and Worst Two Industries – Relative Performance over Past Three Months



Materials, 1

HealthCare, 1

Financials, -1

Technology, -1

-3

-2

-2

-1

-1

0

1

1

2

2

3

5/24 5/28 6/1 6/5 6/9 6/13 6/17 6/21

Rel

ativ

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rman

ce

HealthCare, 9

Staples, 7

Energy, -5

Financials, -7-10

-5

0

5

10

15

3/22 4/5 4/19 5/3 5/17 5/31 6/14

Rel

ativ

e 3m

os P

erfo

rman

ce

Trading Cos & Distributors, 5

Gas Utilities, 5

Airlines, -6

Building Products, -11-14

-12

-10

-8

-6

-4

-2

0

2

4

6

5/24 5/28 6/1 6/5 6/9 6/13 6/17 6/21

Rel

ativ

e 1m

os P

erfo

rman

ce

Internet & Catalog Retail, 15

Life Sciences Tools & Svcs, 13

Construction & Engineering, -12

Diversified Financial Svcs, -12

-20

-15

-10

-5

0

5

10

15

20

3/22 4/5 4/19 5/3 5/17 5/31 6/14

Rel

ativ

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rman

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20



Style Roadmap

Below is a Style roadmap that plots the recent relative performances of 10 different style components (Beta, P/B, etc.). These are sorted by volatility (highest to lowest).

Lower risk/volatility styles have gained leadership recently as the market has pulled back.

The best-performing styles were Defensives and Lower Beta.Some higher risk styles like Growth and more expensive P/B outperformed as well.

Figure 31: STYLE ROADMAP: Trailing-Three-Month Relative Performance


7/22/10 8/22/10 9/22/10 10/22/10 11/22/10 12/22/10 1/22/11 2/22/11 3/22/11 4/22/11 5/22/11 6/22/11

Beta — Higher -4.7% -2.2% -0.1% 2.7% 6.1% 9.0% 5.6% 6.8% 0.3% 3.0% -1.8% -3.0%

Price Lower -3.3% -3.6% -2.4% -1.2% 0.7% 3.6% 3.3% 6.7% 2.1% 3.0% 1.5% -1.3%

Market Cap Smaller -0.2% -0.4% -0.4% 0.5% 2.3% 5.5% 2.2% 4.7% 1.8% 4.6% 2.6% 0.2%

P/E — more expensive -0.2% -1.0% -0.2% 1.7% 3.4% 4.5% 2.4% 1.4% -0.5% 2.0% -0.5% -0.4%

S&P Low Quality -0.3% 0.2% -0.3% 0.5% 3.3% 4.9% 2.4% 3.6% 1.4% 3.2% 0.5% -0.7%

EV/EBITDA — more expensive -0.9% 0.8% 1.7% 1.1% 4.1% 5.1% 3.1% 2.6% 0.3% 1.2% -1.7% -1.1%

Broken (low P/200d mavg) 1.4% -0.8% 0.8% -1.1% 2.6% 5.4% 6.5% 5.2% 1.0% 1.6% 4.9% 3.8%

Citigroup Pure Growth 2.4% 3.9% 4.3% 5.0% 7.8% 5.3% 2.1% -0.3% -0.1% 5.0% 3.3% 3.3%

Cyclical -1.1% -0.3% 1.1% 2.2% 4.8% 4.6% 1.4% 1.4% -0.5% 2.6% 0.3% 0.2%

Least Liked -0.9% -1.8% -0.9% -0.5% -1.9% 1.5% 0.1% 1.4% -0.3% 1.6% 1.7% 0.8%

P/B — more expensive 2.1% 3.2% 4.0% 3.3% 3.3% 1.7% -0.5% -2.5% -1.4% 3.4% 3.9% 3.6%

P/B — cheaper -0.8% -1.9% -1.2% -0.8% -0.5% 2.9% 2.0% 4.4% 1.0% 0.7% 0.1% -1.3%

Most Liked -0.1% 1.0% 0.5% 1.6% 2.8% 3.3% -0.2% -0.2% 0.0% 1.2% 1.5% 1.0%

Defensive 4.4% 2.7% 0.5% -0.7% -3.5% -3.6% -3.5% -3.6% -0.5% 2.7% 9.2% 8.0%

Citigroup Pure Value -1.9% -2.5% -3.0% -2.2% -3.1% 0.1% 0.4% 4.5% 2.1% 1.8% 2.0% 0.6%

Momentum (high P/200d mavg) -2.8% 1.5% -0.4% 1.5% 1.2% 1.0% -1.4% 0.0% 0.1% 4.8% -0.8% -1.6%

EV/EBITDA — cheaper -0.2% -1.3% -0.7% 0.8% 1.6% 2.2% 1.3% 1.4% 2.1% 3.4% 3.7% 1.9%

S&P High Quality 0.7% 0.2% 0.5% 0.2% -1.1% 0.2% -0.9% -0.3% -0.6% 1.0% 2.7% 3.2%

P/E — cheaper 0.6% 0.1% -1.0% -0.9% 0.0% 1.6% 1.7% 3.5% 2.7% 2.7% 1.8% 0.4%

Market Cap Larger -0.5% -0.5% 0.1% 0.5% 0.2% -0.7% -0.5% -0.3% 0.2% 0.0% 0.3% 0.6%

Price Higher -0.3% 1.5% 2.4% 3.7% 1.6% 0.9% -0.7% -0.4% 0.8% 3.7% 2.5% 2.7%

Beta — Lower 4.4% 2.8% 0.8% -0.8% -3.4% -4.1% -3.8% -3.8% -0.4% 1.6% 6.0% 5.5%

S&P 500 -9.5% -1.5% 3.6% 8.2% 11.8% 11.0% 8.5% 9.8% 2.8% 4.2% 1.4% -0.5%

High Volatility

Low Volatility

21



Style Analysis

Figure 32: Best Two and Worst Two Styles – Relative Performance over the Past Month


Source: FactSet and J.P. Morgan. Note: Performance is for the top quartile and bottom quartile of stocks in each style.

Figure 33: Best Two and Worst Two Styles – Relative Performance over the Past Three Months



Figure 34: S&P 500 Style Relative Performance over the Past Month



Figure 35: S&P 500 Style Relative Performance over Past Three Months



Beta — Lower, 1.3

Price Higher, 1.2

Price Lower, -2.2

Beta — Higher, -2.4

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

5/18 5/25 6/1 6/8 6/15 6/22

Rel

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Defensive, 8.2

Beta — Lower, 5.6

Momentum (high P/200d mavg), -1.8

Beta — Higher, -3.0-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

3/23 4/6 4/20 5/4 5/18 6/1 6/15

Rel

ativ

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rman

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1.3%1.2%

0.9%0.9%

0.4%0.3%

0.2%0.2%

0.0%-0.1%

-0.2%-0.2%

-0.7%-0.9%

-1.0%-1.2%

-1.3%-1.4%

-1.5%-1.6%

-2.2%-2.4%

-3.0%-2.5%-2.0%-1.5%-1.0%-0.5%0.0%0.5%1.0%1.5%2.0%

Beta — LowerPrice Higher

DefensiveS&P High Quality

P/E — more expensiveMomentum (high P/200d mavg)

P/B — more expensiveMarket Cap Larger

Citigroup Pure GrowthEV/EBITDA — more expensive

Less LikedMore Liked

Citigroup Pure ValueCyclical

EV/EBITDA — cheaperS&P Low Quality

P/B — cheaperBroken (low P/200d mavg)

P/E — cheaperMarket Cap Smaller

Price LowerBeta — Higher

1mos Relative Perf

8.2%5.6%

3.8%3.3%3.2%

2.9%2.5%

1.9%1.2%

0.9%0.7%

0.5%0.3%

-0.1%-0.2%-0.3%

-0.9%-1.1%-1.2%-1.2%

-1.8%-3.0%

-4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0%

DefensiveBeta — Lower

Broken (low P/200d mavg)S&P High Quality

P/B — more expensiveCitigroup Pure Growth

Price HigherEV/EBITDA — cheaper

More LikedLess Liked

Citigroup Pure ValueMarket Cap Larger

P/E — cheaperMarket Cap Smaller

CyclicalP/E — more expensive

S&P Low QualityPrice Lower

P/B — cheaperEV/EBITDA — more expensiveMomentum (high P/200d mavg)

Beta — Higher

3mos Relative Perf

Defensives and Lower Beta styles outperformed their riskier counterparts

Less risky styles outperforming

22



52-Week Highs/Lows

Net 2% of stocks hitting 52-week highs vs. 52-week lows

Despite the sell-off in stocks recently, we actually saw a net positive percentage of stocks hitting 52-week highs vs. 52-week lows in the past week. At the sector level, Telecom saw the largest net percentage of stocks hitting highs (13%).

Figure 36: Net 23% of Stocks Hitting 52-Week High vs. 52-Week Low in Past Five Days – Sectors

Source: FactSet and J.P. Morgan. Note: Calculated as (# of stocks hitting 52-

week high minus # of stocks hitting 52-week low in past five days) divided by

total stocks in that sector.

Figure 37: Net % of Stocks Hitting 52-Week High vs. 52-Week Low – Industries

Source: FactSet and J.P. Morgan. Note: Calculated as (# of stocks hitting 52-week high minus # of stocks hitting 52-week low in past five days) divided by total stocks in that industry.

2%

-7%

5%

3%

-3%

2%

-5%

7%

13%

0%

3%

-10% -5% 0% 5% 10% 15%

S&P 500

Materials

Industrials

Discretionary

Technology

Energy

Financials

Staples

Health Care

Telecom

Utilities

Cyclicals

Defensives

Near-Cyclicals

50%

31%

25%

23%

18%

14%

9%8%7%6%3%

-9%

-11%

-11%

-11%

-12%

-17%

-25%

-50%-60%

-40%

-20%

0%

20%

40%

60%

Ga

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23



Analyst Upgrades/Downgrades

As for the Street’s view, upgrades outnumbered downgrades in the past week, with a net 60 upgrades and a healthy 18 industries with net upgrades. Upgrades were fairly spread out, with Financials most represented with 4 industries.

Figure 38: Net Upgrades in the Past Five Days – Sectors


Figure 39: Net Upgrades in Past Five Days – Industries


60

2

0

6

13

25

13

-4

7

0

-2

-20 0 20 40 60 80

S&P 500

Materials

Industrials

Discretionary

Technology

Energy

Financials

Staples

Health Care

Telecom

Utilities

Defensives

Near-Cyclicals

Cyclicals

16

99

533333333

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-5-5

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24



Stock Highlights: Upgrades and Downgrades

We looked at which stocks have been upgraded and downgraded the most in the past five days by looking at net upgrades (upgrades minus downgrades) as a percentage of analysts covering a stock. Upgrades were spread across several sectors, with Financials the most represented with four stocks. Conversely, Staples was most represented on the Ten Most Downgraded Stocks with 4 stocks making it to the list.

Figure 40: Ten Most Upgraded Stocks

Net # of Upgrades as % of Analysts Covering Stock


Figure 41: Ten Most Downgraded Stocks

Net # of Upgrades as % of Analysts Covering Stock


50%

40%

33%

18%

17%

14%

14%

13%

11%

11%

0% 10% 20% 30% 40% 50% 60%

ProLogis Inc.

Boston Properties Inc.

Ventas Inc.

DaVita Inc.

AES Corp.

Johnson & Johnson

AvalonBay Communities Inc.

Macy's Inc.

Broadcom Corp.

QEP Resources Inc.

-33%

-25%

-22%

-20%

-18%

-14%

-12%

-11%

-10%

-10%

-35% -30% -25% -20% -15% -10% -5% 0%

Kimco Realty Corp.

Apartment Investment & Management Co.

Sempra Energy

J.M. Smucker Co.

Lorillard Inc.

Tiffany & Co.

Avery Dennison Corp.

General Mills Inc.

Dun & Bradstreet Corp.

Molson Coors Brewing Co. (Cl B)

25



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"Other Disclosures" last revised June 13, 2011.

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