economic outlook: debt, inflation & political unrest’s impact on deal markets march 17, 2011

Economic Outlook:Debt, Inflation & Political Unrest’s Impact on Deal Markets

March 17, 2011

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2011 Economic/Credit Market Outlook2011 Economic/Credit Market OutlookMarch 17, 2011March 17, 2011

Jim DeMasi, CFAFixed Income Research & Strategy Group

Stifel, Nicolaus & Company, Incorporated. Refer to page 17 of this report for Stifel Nicolaus

Fixed Income Capital Markets disclosures and analyst certifications.

Stifel, Nicolaus & Company, Incorporated Member NYSE / SIPC



2011 Outlook Overview 2011 Outlook Overview

Economy: Economy:

Moderate growth should continue, though “escape Moderate growth should continue, though “escape

velocity” may remain elusive.velocity” may remain elusive. Interest Rates: Interest Rates:

Steep curve/low rate environment likely to persist as Steep curve/low rate environment likely to persist as the Fed maintains highly accommodative monetary the Fed maintains highly accommodative monetary

policy.policy.

Credit Markets:Credit Markets:Ample liquidity should continue to foster favorable Ample liquidity should continue to foster favorable conditions for debt issuers, while bank underwriting conditions for debt issuers, while bank underwriting standards gradually ease. standards gradually ease.



Economic Outlook Economic Outlook



Recovery progressing, but not yet firing on all Recovery progressing, but not yet firing on all cylinderscylinders

Consumer SpendingConsumer Spending Business InvestmentBusiness Investment

Residential ConstructionResidential Construction International TradeInternational Trade

Exports

120

130

140

150

160

170

180

Jan-07 Jul-07 J an-08 Jul-08 J an-09 Jul-09 J an-10 Jul-10 J an-11

in billions

Source: U.S. Census Bureau as of March '10.Source: U.S. Census Bureau as of J anuary '11.

New Housing Starts

300

600

900

1200

1500

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11

Source: Department of Commerce as of J anuary '11.

in thousands

Retail Sales

330

340

350

360

370

380

390


in billions

Source: U.S. Census Bureau as of February '11.

New Orders & Inventories

350000

375000

400000

425000

450000

475000

500000

J an-07 J ul-07 J an-08 J ul-08 J an-09 J ul-09 J an-10 J ul-10 J an-111300

1350

1400

1450

1500

1550

1600

Inventories (right axis)

New Orders (left axis)

Source: U.S. Census Bureau as of J anuary '11.

in billionsin millions



Severe recession followed by tepid Severe recession followed by tepid recoveryrecovery

The economy is slowly The economy is slowly repairing the damage repairing the damage from the steep from the steep 2008/2009 downturn. 2008/2009 downturn.

However, growth to date However, growth to date has been too slow to has been too slow to significantly reduce the significantly reduce the unemployment rate or unemployment rate or reverse the downward reverse the downward trend in core inflation.trend in core inflation.

Global events threaten Global events threaten to further delay the to further delay the onset of a self-sustaining onset of a self-sustaining recovery. recovery.

Index of Coincident Indicators

98

99

100

101

102

103

104

105

106

107

108

J an-07 J ul-07 J an-08 J ul-08 J an-09 J ul-09 J an-10 J ul-10 J an-11

Source: Conference Board as of J anuary '11.

Inflation vs. Unemployment

0

2

4

6

8

10

12


Core PCE Prices (YoY % Change)

Unemployment Rate

Source: Bloomberg Finance LP as of 2/28/2011.

%



Three factors supporting near-term Three factors supporting near-term growth growth

The release of pent-up The release of pent-up demand for durable goods demand for durable goods is spurring a strong is spurring a strong rebound in consumer rebound in consumer spending. spending.

The double-digit growth The double-digit growth rate in business rate in business investment should investment should continue in 2011, as continue in 2011, as enhancing productivity enhancing productivity remains a key corporate remains a key corporate priority. priority.

Monetary (QE2) and fiscal Monetary (QE2) and fiscal policies should continue policies should continue to provide significant to provide significant short-term stimulus. short-term stimulus.

Industrial Production Index

84

87

90

93

96

99

102

Jan-07 Jul-07 J an-08 Jul-08 J an-09 Jul-09 J an-10 Jul-10 J an-11

Source: Bloomberg Finance LP as of J anuary '11.

Consumer Income vs. Spending

7300

7450

7600

7750

7900

8050

8200

Jan-06 Aug-06 Mar-07 Oct-07 May-08 Dec-08 Jul-09 Feb-10 Sep-109100

9350

9600

9850

10100

10350

10600

Total Compensation (left axis)

P ersonal Expenditures (right axis)

Source: Bloomberg Finance LP as of J anuary '11.

in billions $



FOMC’s ObjectivesFOMC’s Objectives

Prevent deflation by raising Prevent deflation by raising inflation expectations. inflation expectations.

Maintain low real interest Maintain low real interest rates to stimulate loan rates to stimulate loan demand.demand.

Bolster household net worth Bolster household net worth to increase spending. to increase spending.

Promote favorable financial Promote favorable financial conditions to support conditions to support stronger economic and job stronger economic and job growth. growth.

QE2 meeting most of Fed’s objectivesQE2 meeting most of Fed’s objectivesReal Rates vs. Inflation Break-Even Rates

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11

0.0

0.5

1.0

1.5

2.0

2.5

3.0

10-yr "Real" Treasury Yields

10-yr inflation break-even


% %

Bernanke J ackson Hole Speech on 8/27

GDP vs. Financial Conditions

-8

-6

-4

-2

0

2

4

6

Mar-07 Oct-07 May-08 Dec-08 Jul-09 Feb-10 Sep-10-8

-6

-4

-2

0

2

4

6

8GDP Quarterly Growth Rate

Bloomberg US Financial Conditions Index


•Stifel Nicolaus Projection



Three formidable headwinds to stronger Three formidable headwinds to stronger growthgrowth

Debt repayment and Debt repayment and savings accumulation are savings accumulation are diverting funds away diverting funds away from consumption. from consumption.

Massive inventory Massive inventory overhang continues to overhang continues to weigh on housing weigh on housing market.market.

Retrenchment at the Retrenchment at the state and local state and local government level and government level and rising commodity prices rising commodity prices are mitigating federal are mitigating federal stimulus.stimulus.

Existing Home Sales/ Inventory

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

Jan-99 Apr-00 Jul-01 Oct-02 Jan-04 Apr-05 Jul-06 Oct-07 Jan-09 Apr-10

1.3

1.8

2.3

2.8

3.3

3.8

4.3

4.8

Sales (left axis)

Inventory (right axis)

in millions

Source: U.S. Census Bureau as of January '11.

in millions

Consumer Debt/ Personal Income

12%

14%

16%

18%

20%

22%

Mar-60 Mar-67 Mar-74 Mar-81 Mar-88 Mar-95 Mar-02 Mar-09

AverageSource: Bloomberg Finance LP as of 12/31/2010.



Incremental improvement rather than robust Incremental improvement rather than robust growth growth

Downside Risks:Downside Risks: Geopolitical (Euro debt crisis; Middle East unrest, Japan)Geopolitical (Euro debt crisis; Middle East unrest, Japan) Rising food and energy pricesRising food and energy prices Substantial (>10%) decline in national home price Substantial (>10%) decline in national home price

indicesindices

Upside Possibilities:Upside Possibilities: Moderation in commodity pricesModeration in commodity prices Export growth/narrower trade deficitExport growth/narrower trade deficit Decline in personal savings rateDecline in personal savings rate

2010 2011 2010 2011 2010 2011FI Strategy Group Forecast 2.8% 3.3% 0.8% 1.0% 9.4% 8.7%

GDPCore Inflation

(PCE)Year-End

Unemployment Rate



Interest Rate Forecast Interest Rate Forecast



Macro environment points to trading range in Macro environment points to trading range in Treasuries Treasuries

Combination of moderate Combination of moderate growth, low inflation, and growth, low inflation, and high unemployment likely high unemployment likely to keep the Fed on hold to keep the Fed on hold until at least the first until at least the first quarter of 2012. quarter of 2012.

Short-term Treasury Short-term Treasury yields/LIBOR rates should yields/LIBOR rates should remain well anchored until remain well anchored until Fed signals a shift in Fed signals a shift in policy. policy.

Upward adjustment of Upward adjustment of “real” interest rates once “real” interest rates once QE ends should take QE ends should take longer-term yields toward longer-term yields toward top of 2009 – 2010 trading top of 2009 – 2010 trading range. range.

0

1

2

3

4

5

6

7

8

9

10

Jan-90 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10

2Yr Treasury Note Fed Funds Target Rate


%

0

2

4

6

8

10

12

Jan-90 Jan-94 Jan-98 Jan-02 Jan-06 Jan-10

Rate Hikes Fed Funds Rate CPI XYOY Index Unemployment Rate

Source: Bloomberg Finance LP as of January '11.

%



Projecting moderate upward drift in yields Projecting moderate upward drift in yields

Yield Curve Projections1Q 11 2Q 11 3Q 11 4Q 11

Fed Funds 0.25% 0.25% 0.25% 0.25%2-year 0.55% 0.75% 0.85% 1.15%5-year 1.90% 2.05% 2.20% 2.50%10-year 3.25% 3.40% 3.50% 3.75%30-year 4.30% 4.50% 4.60% 4.90%2s to 10s +270 bps +265 bps +265 bps +260 bps*As of J anuary 4, 2011

Source: Stifel Fixed Income Research and Strategy Group.

Downside Risks to Downside Risks to Yields:Yields: Flight to quality Flight to quality Extension/expansion of Extension/expansion of

QEQE Weaker-than-expected Weaker-than-expected

economic growtheconomic growth

Upside Risks to Yields:Upside Risks to Yields: Substantial outflows from Substantial outflows from

bond funds bond funds Sharp upturn in core Sharp upturn in core

inflationinflation Early termination of QE2Early termination of QE2

3-month LIBOR Projections

0.0

0.5

1.0

1.5

2.0

2.5

3.0

1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13

0.0

0.5

1.0

1.5

2.0

2.5

3.0Eurodollar Futures

Stifel Forecast

Source: Stifel Nicolaus and Bloomberg Finance LP as of 3/14/2011.



Credit Market Outlook Credit Market Outlook



Credit spreads reverting to pre-crisis Credit spreads reverting to pre-crisis averagesaverages

*Averages were calculated for the 10-year period from June ’97 to January ’07.

CMBS Spreads

0

200

400

600

800

1000

1200

Jan-00 May-01 Sep-02 Jan-04 May-05 Sep-06 Jan-08 May-09 Sep-10

10-year average

Source: Merrill Lynch Indices as of 3/11/2011.

ABS Spreads

0

200

400

600

800

1000

1200


10-year average


High Yield Spreads

0

500

1000

1500

2000

2500


10-year average


IG Corporate Spreads

0

100

200

300

400

500

600

700

J an-00 May-01 Sep-02 Jan-04 May-05 Sep-06 Jan-08 May-09 Sep-10

10-year average




Fixed Income Total ReturnsFixed Income Total Returns

Description

2009 Total

Return (%)

2010 Total

Return (%)

YTD Total

Return (%)

Cumulative Total Return

(%)

S&P 500 Index 26.46 15.06 4.14 45.66US Broad Market Bond Index 6.12 6.80 0.63 13.55Investment Grade Corporates 19.76 9.52 1.15 30.43High Yield Corporates 57.51 15.19 3.48 76.18CMBS 27.85 18.35 2.30 48.50

Source: Bank of America Merrill Lynch Indices and Bloomberg Finance LP as of 3/11/2011



Slow healing process in banking Slow healing process in banking sector sector

Bank lending has lagged Bank lending has lagged the progress in the public the progress in the public debt markets. debt markets.

C&I lending appears to C&I lending appears to have reached a positive have reached a positive turning point, while CRE turning point, while CRE loan portfolios continue to loan portfolios continue to contract. contract.

Bank balance sheet Bank balance sheet fundamentals continue to fundamentals continue to gradually improve, though gradually improve, though regulatory environment regulatory environment remains difficult and risk remains difficult and risk aversion continues to be aversion continues to be high. high.

Lending Standards (Net Tightening)

-40

-20

0

20

40

60

80

100

1990Q2 1992Q2 1994Q2 1996Q2 1998Q2 2000Q2 2002Q2 2004Q2 2006Q2 2008Q2 2010Q2

-40

-20

0

20

40

60

80

100Loans to Small Firms (C&I)

Commercial Real Estate Loans

Source: Federal Reserve Senior Loan Off icer Opinion Survey

Percent

Bank Credit Outstanding

1000

1100

1200

1300

1400

1500

1600

1700

1800


1000

1100

1200

1300

1400

1500

1600

1700

1800

Commercial real estate loans

Commercial and industrial loans

Source: Federal Reserve

in billions $



Additional information is available upon request.

For Distribution to Institutional Investors Only.

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The information contained herein has been prepared from sources believed reliable but is not guaranteed by Stifel, Nicolaus & Company, Incorporated and is not a complete summary or statement of all available data, nor is it to be construed as an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of investors. Employees of Stifel Nicolaus or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within. No investments or services mentioned are available to “private customers” in the European Economic Area or to anyone in Canada other than a “Designated Institution”. Stifel Nicolaus and/or its employees involved in the preparation or the issuance of this communication may have positions in the securities or options of the issuer/s discussed or recommended herein. Securities identified herein are subject to availability and changes in price. Stifel, Nicolaus & Company, Inc. is a multi-disciplined financial services firm that regularly seeks investment banking assignments and compensation from issuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving as a placement agent in private transactions. Moreover, Stifel Nicolaus and its affiliates and their respective shareholders, directors, officers and/or employees, may from time to time have long or short positions in such securities or in options or other derivative instruments based thereon.

Readers of this report should assume that Stifel Nicolaus or one of its affiliates is seeking or will seek investment banking and/or other business relationships with the issuer or issuers, or borrower or borrowers, mentioned in this report. Stifel Nicolaus’ Fixed Income Capital Markets research and strategy analysts (“FICM Analysts”) are not compensated directly or indirectly based on specific investment banking services transactions with the borrower or borrowers mentioned in this report or on FICM Analyst specific recommendations or views (whether or not contained in this or any other Stifel Nicolaus report), nor are FICM Analysts supervised by Stifel Nicolaus investment banking personnel; FICM Analysts receive compensation, however, based on the profitability of both Stifel Nicolaus (which includes investment banking) and Stifel Nicolaus’ Fixed Income Capital Markets. The views, if any, expressed by FICM Analysts herein accurately reflect their personal professional views about subject securities and borrowers. For additional information on investment risks (including, but not limited to, market risks, credit ratings and specific securities provisions), contact your Stifel Nicolaus financial advisor or salesperson.

I, Jim DeMasi, certify that the views expressed in this presentation accurately reflect my personal views about the subject securities or issuers; and that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this presentation.

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Fixed Income Capital Markets DisclosuresFixed Income Capital Markets Disclosures

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economic outlook: debt, inflation & political unrest’s impact on deal markets march 17, 2011

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