economy and markets · treasury and the 10-year treasury inflation protected security (tips),...

Economy and MarketsRetrospective and Perspective

October 1, 2012

Economy and Markets • October 1, 2012 1

Table of Contents

REVIEW 2

• Retrospective and Perspective 2

• Spotlight 3

• Highlighted Charts 4

• Market Performance Summary 5

ECONOMY 7

STOCKS 21

BONDS 26

ALTERNATIVE ASSETS 32


Retrospective and PerspectiveReview

Europe, particularly southern Europe, continues to struggle. For example, both Italy and Spain are riding through serious economic contraction. And while Germany and France have dodged the recessionary bullet so far, the drag of Europe strains growth in China with over 15% of their exports to EU, the U.S. and elsewhere. The good news is the European Central Bank (ECB) made substantial progress for plans to provide assistance to these troubled countries, subject to certain conditions. Just the verbal commitment to these initiatives substantially reduced the yields and volatility on debt issued by Spain and Italy. Hopefully in the next few months, the ECB will also take the reins of oversight of EU banks. The main debate here is whether the ECB should oversee all EU banks (some 6,000) or just the largest ones.

China is in a slowdown, but its current GDP growth of roughly 7.5% is still a lift to the globe. Troubling aspects in China include not only slowing exports to EU but to other countries such as Brazil, which is seeing a pull back in manufacturing, and slowing profits in their industrial complex. However, China’s push back included lower bank reserve requirements, lower lending rates, and additional lending initiatives. The Chinese consumer uptick helped offset some of the export slippage. The formal handoff to new political leadership in China comes in early October. It is important to remember that this is a one party system, tightly controlled by the Communist Party of China.

U.S. had a heck of a monetary and market month. The aggressive Fed actions (see our Spotlight) motivated investors, and stocks jumped over 1.5% on the day. Add those actions to those of other central banks and we are awash in liquidity. The world-wide reaction was a push-up in asset prices. So, in spite of concerns on global and local growth, our fiscal cliff, etc., the “risk on” assets outperformed in September, as well as for the third quarter and year-to-date. Stocks in Europe (e.g. Stoxx 600 Index) actually outshined U.S stocks in the 3rd Quarter.

Within the U.S. economy, September produced more of the same: mixed results. On the positive side, unemployment claims declined, retail and vehicle sales were up, and the service sector survey remained positive. On the downside, durable goods orders fell, the manufacturing survey deteriorated, and private job creation is still slow. Looking just a bit ahead to the third quarter corporate results the consensus estimates from Bloomberg are S&P 500 corporate profits to grow 1.8% and sales up 3.0%. The 4th quarter estimates, particularly for corporate profits growing nearly 10%, may be tough to hit.

Potential Actions:

1) Can Draghi, ECB and EU convert plans into actions?

2) Spain’s 2013 budget, bank stress tests/funding and loan agreement, each to be released in the very near term.

3) Congress in lame duck session seizes chance to reduce size of the Fiscal Cliff

4) U.S. companies meet or beat consensus earnings and sales targets for third quarter

5) Consumers hold steady

6) Solid solutions addressed for fiscal and tax reform

"Risk On" Worked Again

TOTAL RETURNS (as of 09/30/2012) September

Third Quarter Year-to-Date

S&P 500® Index 2.58 6.35 16.45

STOXX 600 Index 1.03 7.48 13.64

U.S. 10-Yr Treasury -0.54 0.92 4.39

Sources: Bloomberg L.P., BMO Global Asset Management


Spotlight: QE3 or Pushing on a String“Nothing is so permanent as a temporary government program.”

Milton Friedman, Nobel prize economistReview

On September 13th, Chairman Ben Bernanke emerged from the Fed’s scheduled meeting and announced QE3, another step in its Quantitative Easing effort; the Fed will continue indefinitely to purchase Government Agency mortgage bonds. The financial markets rallied on the announcement, with the S&P 500® Index surging 2% by the end of the next day. The 10-year Treasury yield initially declined 3 basis points, but by the time markets had closed on the following day, the yield had climbed 14 basis points. Inflation expectations, measured as the difference between the nominal 10-year Treasury and the 10-year Treasury Inflation Protected Security (TIPS), increased 24 basis points, and the price of gold increased 2% over the two- day period. Since the announcement, Treasury yields have declined below their level before the announcement, while the equity market and inflation expectations have returned close to their pre-announcement levels. The price of gold has remained at its highest level.

Investors can be forgiven for asking several related questions: Just what has the Fed accomplished with its on-going bond purchases, and what more does it expect to accomplish with its open-ended extension? With rates already near historical lows, how much lower can they go? With the Fed ‘s success in keeping rates low, where are their effects in the economy? Finally, what else can (should?) be done to get the economy on a sound footing?

The only interest rate that the Fed can effectively control is the short-term Federal Funds rate. Through its ongoing bond purchases, the Fed has attempted to influence longer-term Treasury rates, along with other interest rates that are based on Treasury yields. In this, the Fed has appeared to have had some success. (See Exhibit 1 on page 4.)

Despite the Fed’s unrelenting stimulus, the economic recovery from the Great Recession has been extremely slow, which has kept unemployment stubbornly high. However, other than the reaction to Lehman, the announcement and launch of each of the Fed’s actions has been followed by a small dip in unemployment. (See Exhibit 2 on page 4.) The challenge has been that the declines were small and short-lived. The nominal results from this unprecedented activity has been disappointing, to say the least.

The Fed does appear to be merely pushing on the proverbial string. Skeptics voicing doubts about the effectiveness of the Fed action do have a point.

Chairman Bernanke knows the limits of the Fed’s tools, and he also knows what else needs to be done. He has communicated this to those who also must act: the fiscal policy makers (Congress and the President). A simple chart studied by everyone who has taken an Economics course provides useful insight. The mechanism by which lower interest rates work through the economy is to lower financing costs to consumers and businesses, thereby spurring spending and investment. In supply and demand curve space, demand shifts right, resulting in a higher level of equilibrium GDP (See Exhibit 3 on page 4.)

The slow growth, however, is in part a result of a basic economic fact: Consumers and business operators respond to incentives and expectations and are waiting to see how the Fiscal Cliff will play out. The cliff will shift aggregate demand left (see Exhibit 4 on page 4). The lower demand comes from less government spending, as well as reduced spending by consumers and businesses as a result of tax increases. In addition, the higher tax rates in top income tax brackets amounts to an increase in taxes on most small businesses, as their corporate structures result in taxes being paid through the individual returns of their owners. As a consequence, the aggregate supply curve will shift left. The result is an unambiguous decline in equilibrium GDP.

Fiscal policy makers face a dilemma that should be dealt with carefully. A cut in government spending and increase in taxes will reduce GDP; it is only a matter of the magnitude depending on the details. A cut in government spending, upon which nearly all participants in the debate agree, only affects demand. Tax increases, the topic of heated differences of opinion, provide a “double whammy.” The consumption and investment sectors of the economy have the potential to offset the effects of only a cut in spending. Tax increases, even if delayed for some years, could make it more difficult for the economy to grow to offset the initial declines in consumption and investment.


Highlighted ChartsThe Fed’s actions are trying to push aggregate demand up to bolster GDP (Exhibit 3).The fiscal cliff threats to shift both aggregate demand and supply leftward, which would severely reduce GDP (Exhibit 4).

Review

Unemployment and Fed Action

Lehman Reaction

QE2Oper. Tw ist

QE3

0

2

4

6

8

10

12

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10

Dec

11

%

Unemployment Rate

Source: Bloomberg L.P., BMO Global Asset Management

Interest Rates and Fed Action

Lehman Reaction

QE2 Oper. Tw istQE3

0

2

4

6

8

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10

Dec

11

%

30-year Mortgage Rates

10-Yr Tsy Note


QESupply & Demand

Current Demand

Current Supply QE Demand

70

80

90

100

110

120

130

70 80 90 100 110 120 130

GDP

Pric

e


Fiscal Cliff Supply & Demand

Current Demand

Current SupplyClif f Demand

Clif f Supply

70

80

90

100

110

120

130

70 80 90 100 110 120 130

GDP

Pric

e


Exhibit 1 Exhibit 2

Exhibit 3 Exhibit 4


Highlighted items represent either the best- or worst-performing equity sector for the period.Total returns for periods of one year or more are annualized. MSCI indices performance is net of foreign taxes on dividends. Sources: Bloomberg L.P., BMO Global Asset Management

Market Performance SummaryAs of September 30, 2012 Review

EQUITIES (% Returns) 1-Mo 3-Mo 6-Mo 1-Yr 3-Yrs 5-Yrs 10-Yrs 1Q 2012 2Q 2012 3Q 2012 YTD 2012 2011

U.S. Large Cap EquitiesS&P 500® Index 2.58 6.35 3.42 30.21 13.21 1.05 8.01 12.59 -2.75 6.35 16.45 2.11Dow Jones Industrial Average Index 2.75 5.02 3.08 26.52 14.45 2.16 8.60 8.84 -1.85 5.02 12.19 8.38Russell 1000® Index 2.57 6.32 3.01 30.11 13.30 1.24 8.38 12.91 -3.11 6.32 16.31 1.53Russell 1000® Growth Index 1.96 6.11 1.84 29.19 14.73 3.24 8.42 14.69 -4.02 6.11 16.80 2.64Russell 1000® Value Index 3.17 6.50 4.16 30.91 11.83 -0.91 8.17 11.12 -2.20 6.50 15.74 0.39

U.S. Mid Cap EquitiesRussell Midcap® Index 2.14 5.63 1.20 28.43 14.42 2.33 11.27 12.95 -4.19 5.63 14.30 -1.50Russell Midcap® Growth Index 2.00 5.35 -0.56 26.68 14.73 2.53 11.14 14.52 -5.60 5.35 13.88 -1.65Russell Midcap® Value Index 2.23 5.80 2.35 29.27 13.85 1.73 10.98 11.41 -3.26 5.80 14.03 -1.38

U.S. Small-Mid Cap Equities (SMID)Russell 2500TM Index 2.65 5.63 1.28 31.14 13.76 2.34 - 13.04 -4.12 5.63 14.49 -2.75

U.S. Small Cap EquitiesRussell 2000® Index 3.28 5.25 1.60 31.91 12.99 2.22 10.20 12.44 -3.47 5.25 14.23 -4.17Russell 2000® Growth Index 3.00 4.84 0.71 31.18 14.19 2.96 10.59 13.28 -3.94 4.84 14.08 -2.91Russell 2000® Value Index 3.56 5.67 2.49 32.63 11.72 1.35 9.69 11.59 -3.01 5.67 14.37 -5.50

International EquitiesMSCI ACWI ex USA Index (Devlp. & EM) 3.04 7.30 -0.43 13.76 2.50 -4.84 8.66 10.37 -7.20 7.30 9.90 -12.21MSCI EAFE Index (Developed Markets) 2.96 6.92 -0.70 13.75 2.12 -5.24 8.20 10.86 -7.13 6.92 10.08 -12.14MSCI European Monetary Union Index (in €) 0.89 7.99 1.66 18.03 -0.06 -7.51 4.99 9.42 -5.86 7.99 11.23 -15.06MSCI AC Asia Pacific Index 4.57 5.56 -1.55 11.33 3.87 -3.22 8.88 12.01 -6.74 5.56 10.27 -15.11MSCI Emerging Markets Index 6.03 7.74 -1.84 16.93 5.63 -1.28 17.00 14.07 -8.89 7.74 11.98 -18.42

Technology and Growth StocksNASDAQ Composite Index 1.70 6.54 1.47 30.64 14.90 3.96 11.20 18.98 -4.76 6.54 20.73 -0.79

ALTERNATIVES (% Returns) 1-Mo 3-Mo 6-Mo 1-Yr 3-Yrs 5-Yrs 10-Yrs 1Q 2012 2Q 2012 3Q 2012 YTD 2012 2011

DJ UBS Commodity Index 1.71 9.69 4.70 5.99 5.26 -3.03 5.20 0.89 -4.55 9.69 5.63 -13.32MSCI ACWI Commodity Producers Index 4.28 6.90 -4.60 9.79 1.53 -5.11 10.42 4.79 -10.76 6.90 -0.03 -13.84Wilshire U.S. REIT Index -2.23 -0.99 1.81 27.81 16.29 -2.74 6.18 9.87 2.82 -0.99 11.86 5.35S&P Global REIT Index -0.48 2.60 4.63 24.59 11.02 -5.62 5.34 9.90 1.98 2.60 15.00 -2.65S&P Global Infrastructure Index 2.71 4.63 2.21 15.43 5.57 -4.20 9.30 6.85 -2.32 4.63 9.21 -0.21


Total returns for periods of one year or more are annualized. Sources: Barclays Capital, Bloomberg L.P., BMO Global Asset Management

Market Performance SummaryAs of September 30, 2012 Review

U.S. FIXED INCOME (% Returns) 1-Mo 3-Mo 6-Mo 1-Yr 3-Yrs 5-Yrs 10-Yrs 1Q 2012 2Q 2012 3Q 2012 YTD 2012 2011

Barclays U.S. Aggregate Index 0.14 1.58 3.68 5.16 6.19 6.53 5.32 0.30 2.06 1.58 3.99 7.84Barclays U.S. Interm. Gov/Crd Index 0.24 1.40 2.90 4.40 5.18 5.71 4.76 0.61 1.48 1.40 3.53 5.80Barclays U.S. Corporate Index 0.70 3.83 6.45 10.76 9.09 8.06 6.56 2.08 2.52 3.83 8.66 8.15Barclays U.S. Treasury Index -0.31 0.57 3.42 2.99 5.41 6.24 4.81 -1.29 2.83 0.57 2.08 9.81Barclays Securitized Index 0.27 1.28 2.37 4.17 5.56 6.25 5.17 0.74 1.07 1.28 3.13 6.22Barclays High Yield Index 1.39 4.53 6.45 19.37 12.90 9.34 10.98 5.34 1.83 4.53 12.13 4.98Merrill Lynch High Yield BB/B Constr. Index 1.28 4.45 6.44 17.70 11.90 8.35 9.61 4.43 1.91 4.45 11.16 5.40Barclays 1-10 yr Municipals Index 0.50 1.41 2.70 5.14 4.61 5.44 4.30 0.53 1.27 1.41 3.25 7.62Barclays Global Aggregate Bond Index 1.22 3.27 3.91 5.07 5.04 6.22 6.45 0.87 0.62 3.27 4.82 5.64Barclays Global Credit Index 1.46 4.75 5.13 10.97 7.26 6.34 7.37 4.19 0.36 4.75 9.54 4.36

BOND YIELDS Sep 2012 Aug 2012 Jul 2012 Mar 2012 Dec 2011 Sep 2011

Fed Funds Rate (Effective Rate) 0.09 0.13 0.13 0.09 0.04 0.063-month Treasury Bill 0.09 0.07 0.10 0.07 0.01 0.022-year Treasury Note 0.23 0.22 0.21 0.33 0.24 0.255-year Treasury Note 0.63 0.59 0.58 1.04 0.83 0.9510-year Treasury Note 1.63 1.55 1.47 2.21 1.88 1.9230-year Treasury Bond 2.82 2.67 2.55 3.34 2.90 2.91Barclays U.S. Aggregate Index 1.61 1.75 1.73 2.23 2.24 2.35Barclays Corporate Index 2.80 2.90 2.94 3.41 3.76 3.84Barclays High Yield Index 7.19 7.39 7.56 7.73 8.66 9.63Barclays Emerging Markets Index 4.69 4.84 5.00 5.37 6.10 6.61Barclays Emerging Markets Corporate Index 5.10 5.21 5.39 5.55 6.85 7.47

INFLATION Sep 2012 Aug 2012 Jul 2012 Mar 2012 Dec 2011 Sep 2011

Headline CPI YoY NA 1.70 1.40 2.70 3.00 3.90Core CPI YoY NA 1.90 2.10 2.30 2.20 2.00Core PCE YoY NA 1.60 1.60 2.00 1.90 1.60

OTHER MARKETS Sep 2012 Aug 2012 Jul 2012 Mar 2012 Dec 2011 Sep 2011

US$ / Euro 1.286 1.258 1.230 1.334 1.296 1.339WTI Crude Oil Price ($/barrel) 92.2 96.5 88.1 103.0 98.8 79.2Gold ($/troy oz) 1,772 1,692 1,614 1,668 1,564 1,624


Components of Nominal GDP

Government Spending 20.0%

Consumption 70.4%

Investment (ex. Housing) 10.9%

Housing 2.4%

Net Exports-3.8%


As of 06/30/2012

U.S. GDP Growth

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0D

ec 0

1

Dec

02

Dec

03

Dec

04

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10

Dec

11

QoQ

gro

wth

(%)

11,000

11,500

12,000

12,500

13,000

13,500

14,000

GD

P Le

vel (

$ bl

n)

RecessionReal GDP QoQReal GDP Level


$625 bln of output lost

$848 bln of output gained

Nominal GDP Annualized Percentage Growth By Components

-0.1

3.7

0.2

9.8

23.0

-0.6

3.4

12.6

10.9

-0.8

Government Spending

Consumption

Investment (ex. Housing)

Housing

Net Exports

YoY 06/30/2012

QoQ 06/30/2012


U.S. Economic GrowthThe U.S. economy grew modestly in the second quarter, with real GDP inching upwards by 1.3%, a number that was revised downward from a previously reported 1.7% growth. Housing and other investments made the largest contribution to economic growth in the last year.

Economy


Inflation Expectations and Nominal CPI

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Dec

05

Jun

06

Dec

06

Jun

07

Dec

07

Jun

08

Dec

08

Jun

09

Dec

09

Jun

10

Dec

10

Jun

11

Dec

11

Jun

12

CPI YoYShort-Term Inflation ExpectationsLong-Term Inflation Expectations


Headline Inflation and 5-yr Treasury Bond Yield

-3.0-2.0-1.00.01.02.03.04.05.06.07.08.0

Dec

99

Dec

00

Dec

01

Dec

02

Dec

03

Dec

04

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10

Dec

11

5-Yr Tsy BondCPI YoY


negative real yield

negative real yield

Urban CPI Components YoY % Change

Weight in Headline CPI

(%)

Headline CPI 1.7 100.0

Food 2.0 13.7

Energy -0.6 8.4

Core CPI (excl. Food and Energy) 1.9 77.9

Housing 1.4 37.9

Transportation 1.4 12.3

Medical Care 4.1 6.5

Recreation 1.2 6.4

Education & Communication 1.5 6.4

Apparel 1.6 3.7

Other Goods & Services 2.4 3.5

Beverages 1.6 1.1

Seasonally adjusted values, as of 08/31/2012


U.S. InflationDeclining nominal yields pushed real yields into negative territory, despite moderate inflation near the Fed’s unofficial 2% target. Headline inflation (CPI including food and energy) increased by 1.7% in August, but remains materially lower than the 2.0 - 2.3% earlier in the year.

Economy


Consumer Confidence

0

20

40

60

80

100

120

Dec

05

Jun

06

Dec

06

Jun

07

Dec

07

Jun

08

Dec

08

Jun

09

Dec

09

Jun

10

Dec

10

Jun

11

Dec

11

Jun

12

Univ. Of Michigan Survey of Consumer Confidence SentimentConference Board Consumer Confidence Index


Savings Rate and Debt

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

Dec

05

Jun

06

Dec

06

Jun

07

Dec

07

Jun

08

Dec

08

Jun

09

Dec

09

Jun

10

Dec

10

Jun

11

Dec

11

Jun

12

Savi

ngs

Rat

e (%

)

2,200

2,300

2,400

2,500

2,600

2,700

2,800

Deb

t

U.S. Savings RateTotal Consumer Debt


38.9%

17.9%

11.4%

6.8%

25.0%Real Estate

Other Tangible

Deposits

Pension Funds

Other Financial Assets

Consumer Balance Sheet

U.S. ConsumerConsumer confidence reports were mixed in August, as one indicator showed an improvement, while another one declined. A nominal and temporary decline in consumer debt in 2011 has given way to rising consumer debt.

Economy

82.3%

12.6%

5.1%Other Liabilities

Mortgages

Net Worth

38.7%

16.8%

9.3%

5.9%

29.2%Real Estate

Other Tangible

Deposits

Pension Funds

Other Financial Assets

Sources: Federal Reserve Bank, BMO Global Asset Management

82.0%

13.3%

4.8%Other Liabilities

Mortgages

Net Worth

12/31/2007 6/30/2012


U.S. Home Prices-30%

-60%

-48%

-47%

-44%

-38%

-37%

-37%

-35%

-30%

-30%

-28%

-23%

-23%

-22%

-21%

-17%

-12%

-9%

-5%

-3%

1%

-1%

17%

5%

4%

0%

6%

1%

5%

-1%

-10%

6%

-3%

4%

3%

3%

0%

1%

2%

5%

4%

S&P/Case-Shiller Home Prices

Las Vegas NV

Phoenix AZ

Miami FL

Tampa FL

Los Angeles CA

Detroit MI

San Diego CA

San Francisco CA

Chicago IL

Atlanta GA

Minneapolis MN

New York NY

Washington DC

Portland OR

Seattle WA

Cleveland OH

Boston MA

Charlotte NC

Denver CO

Dallas TX

Jul 2012 vs. Peak (Jul 2006)

Jul 2012 vs. Jul 2011


Housing Affordability Index and Existing Home Sales

100

120

140

160

180

200

220

Dec

98

Dec

99

Dec

00

Dec

01

Dec

02

Dec

03

Dec

04

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10

Dec

11

Affo

rdab

ility

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

Sale

s (m

ill un

its)

Housing Affordability Index

Existing Homes Sales


Homebuilders Sentiment and Building Permits

0

10

20

30

40

50

60

70

Dec

05

Jun

06

Dec

06

Jun

07

Dec

07

Jun

08

Dec

08

Jun

09

Dec

09

Jun

10

Dec

10

Jun

11

Dec

11

Jun

12

Build

ers

Sent

imen

t

0

500

1,000

1,500

2,000

2,500

Perm

its (t

hous

and

units

)Homebuilders Sentiment

Building Permits


U.S. Housing MarketRecent housing indicators came in below expectations. Nonetheless, the S&P/Case-Shiller price index has been steadily increasing for four consecutive months, and homebuilders continue to express confidence in sales.

Economy


Job Gain/Losses

-1,000

-800

-600

-400

-200

0

200

400

600

Dec

06

Jun

07

Dec

07

Jun

08

Dec

08

Jun

09

Dec

09

Jun

10

Dec

10

Jun

11

Dec

11

Jun

12

Mon

thly

(tho

usan

d jo

bs)

-10

-9

-8

-7

-6

-5

-4

-3

-2

-1

0

Cum

ulat

ive

(mill

jobs

)

MonthlyCumulative


Payrolls Change by Industry

-3%

15%

11%

2%

2%

0%

-1%

-2%

-3%

-5%

-6%

-7%

-13%

-13%

-28%

1%

5%

2%

2%

2%

3%

-1%

1%

2%

1%

2%

1%

1%

2%

0%

Total Non-Farm Payrolls

Mining

Education and Health Services

Utilities

Leisure and Hospitality

Professional and Business Services

Govt Payrolls

Other Services

Transportation and Warehousing

Retail

Wholesale

Finance, Insurance, and Real Estate

Information

Manufacturing

Construction

5-Yr Payroll Change

1-Yr Payroll Change


As of 08/31/2012

U.S. Job Gains/LossesThe economy added only 96,000 jobs in August, below expectations, and prior month’s gains were revised downward. Total non-farm payrolls increased 1% on a year-over-year basis through the end of August 2012.Cumulative job losses since the onset of the 2008 recession stand at 4.6 million.

Economy

Jobless Claims

300

350

400

450

500

550

600

650

700

Dec

06

Jun

07

Dec

07

Jun

08

Dec

08

Jun

09

Dec

09

Jun

10

Dec

10

Jun

11

Dec

11

Jun

12

Initia

l Cla

ims

(4 w

eek

avg,

in th

ousa

nds)

2.02.53.03.54.04.55.05.56.06.57.0

Con

tinui

ng C

laim

s (th

ousa

nds)

Continuing ClaimsInitial Jobless Claims



Unemployment RateWorst 10 States

13.5

12.1

10.7

10.6

9.9

9.7

9.6

9.4

9.2

9.1

Puerto Rico

Nevada

Rhode Island

California

New Jersey

North Carolina

South Carolina

Michigan

Georgia

New York


Best 10 States

3.0

4.0

4.5

5.1

5.3

5.5

5.7

5.7

5.8

5.9

North Dakota

Nebraska

South Dakota

Oklahoma

Vermont

Iow a

New Hampshire

Wyoming

Utah

Minnesota

08/31/201208/31/2011


Unemployment Rate and Duration

3

4

5

6

7

8

9

10

11

12

Dec

71

Dec

76

Dec

81

Dec

86

Dec

91

Dec

96

Dec

01

Dec

06

Dec

11

Une

mpl

oym

ent R

ate

(%)

5

10

15

20

25

30

35

40

45

Dur

atio

n (w

eeks

)

RecessionAvg. Unemployment DurationUnemployment Rate


U.S. UnemploymentThe unemployment rate unexpectedly declined 20 bps in August to 8.1%, primarily due to workers leaving the workforce. The private sector has been steadily adding jobs since early 2010.

Economy

Government and Private Employment

19.0

19.5

20.0

20.5

21.0

21.5

22.0

22.5

23.0

23.5

Dec

95

Dec

96

Dec

97

Dec

98

Dec

99

Dec

00

Dec

01

Dec

02

Dec

03

Dec

04

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10

Dec

11

Gov

ernm

ent E

mpl

oym

ent (

mill

95

100

105

110

115

120

Priv

ate

Empl

oym

ent (

mill)

Private EmploymentGovernment Employment



Other U.S. Economic IndicatorsRecent leading economic indicators have hooked up.Chicago Fed National Activity Index affirms current growth is below its trend-line average, approaching its lowest point since the recession.

Economic Cycle Research Institute (ECRI) Weekly Leading Index

-40

-30

-20

-10

0

10

20

30

Dec

87

Dec

89

Dec

91

Dec

93

Dec

95

Dec

97

Dec

99

Dec

01

Dec

03

Dec

05

Dec

07

Dec

09

Dec

11

Inde

x G

row

th (%

)

RecessionECRI US Weekly Leading Grow th Rate

Sources: w w w .businesscycle.com, BMO Global Asset Management

Chicago Fed National Activity Index (CFNAI) and Credit Spreads(3-month moving average for CFNAI)

-4.5

-3.5

-2.5

-1.5

-0.5

0.5

1.5

Dec

87

Dec

89

Dec

91

Dec

93

Dec

95

Dec

97

Dec

99

Dec

01

Dec

03

Dec

05

Dec

07

Dec

09

Dec

11

CFN

AI M

A3

50

150

250

350

450

550

650

Cor

pora

te O

AS (b

ps)

RecessionCFNAI 3-Mo MA-0.7 LineCorporate OAS

Sources: Chicago Federal Reserve Bank, Barclays Capital, BMO Global Asset Management

Economy

Conference Board Leading Index Growth

-25

-20

-15

-10

-5

0

5

10

15

Dec

87

Dec

89

Dec

91

Dec

93

Dec

95

Dec

97

Dec

99

Dec

01

Dec

03

Dec

05

Dec

07

Dec

09

Dec

11

Inde

x G

row

th (%

)

Recession LEI CHNG (YoY)



U.S. Corporate Profits

65

265

465

665

865

1,065

1,265

1,465

1,665

Dec

80

Dec

82

Dec

84

Dec

86

Dec

88

Dec

90

Dec

92

Dec

94

Dec

96

Dec

98

Dec

00

Dec

02

Dec

04

Dec

06

Dec

08

Dec

10

($ b

illion

s)

RecessionU.S. Corporate Profits


U.S. Business ActivityHousing investment level remains weak, but other fixed investment activity has steadily increased to pre- recession levels. Corporations have reported solid profits, but the growth has recently leveled off.

U.S. Fixed Investment

65

265

465

665

865

1,065

1,265

1,465

1,665

1,865

Dec

80

Dec

82

Dec

84

Dec

86

Dec

88

Dec

90

Dec

92

Dec

94

Dec

96

Dec

98

Dec

00

Dec

02

Dec

04

Dec

06

Dec

08

Dec

10

($ b

illion

s)

RecessionInvestment (ex. Housing)Housing


Capacity Utilization

65

70

75

80

85

90

Dec

80

Dec

82

Dec

84

Dec

86

Dec

88

Dec

90

Dec

92

Dec

94

Dec

96

Dec

98

Dec

00

Dec

02

Dec

04

Dec

06

Dec

08

Dec

10

(%)

Recession

% Capacity Utilization

Avg. Capacity Utilization During Non-Recessionary Periods


ISM Purchasing Managers Index (PMI)

30

35

40

45

50

55

60

65

70

75

Dec

80

Dec

82

Dec

84

Dec

86

Dec

88

Dec

90

Dec

92

Dec

94

Dec

96

Dec

98

Dec

00

Dec

02

Dec

04

Dec

06

Dec

08

Dec

10

Inde

x Le

vel

RecessionISM Manufacturing PMIISM Non-Manufacturing PMI

Sources: Institute for Supply Management, Bloomberg L.P., BMO Global AssetManagement

Economy


Net % of U.S. Lenders Reporting Higher Demand for Commercial and Industrial Loans

-80

-60

-40

-20

0

20

40

60

Dec

03

Jun

04

Dec

04

Jun

05

Dec

05

Jun

06

Dec

06

Jun

07

Dec

07

Jun

08

Dec

08

Jun

09

Dec

09

Jun

10

Dec

10

Jun

11

Dec

11

Jun

12

(%)

Large and Medium Size FirmsSmall Firms


U.S. Lending and Banking ActivityDemand for commercial and industrial loans has decreased and banks are tightening credit standards. Loan growth, though, has varied by region.Commercial banks recorded a slow but steady growth in total loans and leases.

U.S. Banks Tightening or Easing Credit Standards(based on Fed survey)

0

10

20

30

40

50

60

70

80

90

2Q 2

007

3Q 2

007

4Q 2

007

1Q 2

008

2Q 2

008

3Q 2

008

4Q 2

008

1Q 2

009

2Q 2

009

3Q 2

009

4Q 2

009

1Q 2

010

2Q 2

010

3Q 2

010

4Q 2

010

1Q 2

011

2Q 2

011

3Q 2

011

4Q 2

011

1Q 2

012

(%)

% Tightening

% Easing


Economy

U.S. Commercial Banks Assets

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

Dec

03

Jun

04

Dec

04

Jun

05

Dec

05

Jun

06

Dec

06

Jun

07

Dec

07

Jun

08

Dec

08

Jun

09

Dec

09

Jun

10

Dec

10

Jun

11

Dec

11

Jun

12

($ b

illion

s)

Loans & LeasesTotal Assets



Developed Countries CPI (YoY %)

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

World Europe G10 CountriesU.S. Japan


Emerging Markets CPI (YoY %)

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

World BRIC U.S. China


World Economic Growth and InflationSeveral European economies have slipped into recession. Economic growth slowed in Brazil and India in the first quarter of 2012.World inflation has been declining slightly since the end of 3Q 2011.

Economy

Real GDP Growth for Eurozone and PIIGS Countries

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

2006

2007

2008

2009

2010

2011

YoY

GD

P G

row

th (%

)

Portugal Italy IrelandGreece Spain EurozoneGermany


Real GDP Growth for BRIC Countries

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

2006

2007

2008

2009

2010

2011

YoY

GD

P G

row

th (%

)

Brazil Russia India China



Eurozone Percentage Debt to GDP by Country on 12/31/2011

67.7

16.9

37.5

44.2

48.6

52.4

56.7

65.2

68.1

73.6

81.8

84.7

86.3

99.7

105.4

120.1

128.3

161.7

UNITED STATES

LUXEMBOURG

SWEDEN

DENMARK

FINLAND

SWITZERLAND

POLAND

NETHERLANDS

SPAIN

AUSTRIA

GERMANY

FRANCE

BRITAIN

BELGIUM

IRELAND

ITALY

ICELAND

GREECE


European Governments 10-yr Bond Yields

0

5

10

15

20

25

30

35

Dec

07

Apr 0

8

Aug

08

Dec

08

Apr 0

9

Aug

09

Dec

09

Apr 1

0

Aug

10

Dec

10

Apr 1

1

Aug

11

Dec

11

Apr 1

2

Aug

12

(%)

GermanGreeceItalyIreland (9-year)PortugalSpain

Greek debt restructured


European EconomiesMany European economies are struggling, being hampered by recession, high debt-to-GDP ratios and high sovereign yields.Efforts to restrain spending are facing hostile opposition with demonstrations in Greece and Spain.

Economy

Real GDP

100

105

110

115

120

125

130

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

GD

P (4

Q02

= 1

00)

USWorldEurozone

G10Japan



European Central Bank SurveyChange in Demand for Loans to Enterprises Last 3 Months

-50

-40

-30

-20

-10

0

10

20

30

Dec

03

Jun

04

Dec

04

Jun

05

Dec

05

Jun

06

Dec

06

Jun

07

Dec

07

Jun

08

Dec

08

Jun

09

Dec

09

Jun

10

Dec

10

Jun

11

Dec

11

Jun

12

Inde

x Le

vel

ECB Survey - Loan Demand


European Countries Purchasing Managers Index (PMI)

30

35

40

45

50

55

60

65

Dec

04

Jun

05

Dec

05

Jun

06

Dec

06

Jun

07

Dec

07

Jun

08

Dec

08

Jun

09

Dec

09

Jun

10

Dec

10

Jun

11

Dec

11

Jun

12

Inde

x Le

vel

European Countries PMI Output Index


European Economic Sentiment Indicators

60

70

80

90

100

110

120

Dec

04

Mar

05

Jun

05

Sep

05

Dec

05

Mar

06

Jun

06

Sep

06

Dec

06

Mar

07

Jun

07

Sep

07

Dec

07

Mar

08

Jun

08

Sep

08

Dec

08

Mar

09

Jun

09

Sep

09

Dec

09

Mar

10

Jun

10

Sep

10

Dec

10

Mar

11

Jun

11

Sep

11

Dec

11

Mar

12

Jun

12

Inde

x Le

vel

Eurozone Economic SentimentPortugalItalyGreeceSpainGermany


European EconomiesDownward trending sentiment indicators from several European countries have been the norm since late 2010. A declining trend in the European Purchasing Managers Index has been broken, the index remaining relatively flat in the last three months.

Economy


BRIC EconomiesOver the past 10 years, emerging markets economies boomed. China grew by approximately 50%, while other Asian and BRICs economies doubled in size. As the world economies slow, near term growth prospects are unambiguously much lower.

Economy

BRIC CountriesPercentage Debt to GDP by Country on 12/31/2011

54.2

8.3

48.5

43.5

64.2

67.7

BRAZIL

RUSSIA

INDIA

CHINA

ENTIRE WORLD

UNITED STATES


BRIC Governments 10-yr Bond Yields

0

2

4

6

8

10

12

14

Apr 1

0

Jun

10

Aug

10

Oct

10

Dec

10

Feb

11

Apr 1

1

Jun

11

Aug

11

Oct

11

Dec

11

Feb

12

Apr 1

2

Jun

12

Aug

12

(%)

Brazil Russia India China


Real GDP

100

120

140

160

180

200

220

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

GD

P (4

Q02

= 1

00)

US

World

BRICS

China



U.S. Dollar Strength Relative to a Basket of Currencies

60

70

80

90

100

110

120

130

Dec

90

Dec

92

Dec

94

Dec

96

Dec

98

Dec

00

Dec

02

Dec

04

Dec

06

Dec

08

Dec

10

Inde

x Le

vel


U.S. Dollar Strength Relative to Euro

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70

Dec

90

Dec

92

Dec

94

Dec

96

Dec

98

Dec

00

Dec

02

Dec

04

Dec

06

Dec

08

Dec

10

USD

/Eur

o


Stronger Dollar

Stronger Euro

U.S. Dollar Strength Relative to Chinese Yuan

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

Dec

90

Dec

92

Dec

94

Dec

96

Dec

98

Dec

00

Dec

02

Dec

04

Dec

06

Dec

08

Dec

10

Yuan

/USD


Stronger Yuan

Stronger Dollar

U.S. Dollar Strength Relative to Japanese Yen

60

7080

90

100110

120

130140

150

Dec

90

Dec

92

Dec

94

Dec

96

Dec

98

Dec

00

Dec

02

Dec

04

Dec

06

Dec

08

Dec

10

Yen/

USD


Stronger Yen

Stronger Dollar

CurrenciesThe U.S. dollar has been strengthening since early 2011. The dollar’s relative strength is one factor which explains weak revenue growth in the second quarter.The Fiscal Cliff has the potential to reverse the dollar’s recent strength.

Economy


Total returns are based on Russell-style indices performance and include dividends. Graphs depict price levels only. Sources: Bloomberg L.P., BMO Global Asset Management.

Investment Style PerformanceAll equity styles and market caps posted positive returns YTD. Large cap stocks have outperformed the small cap stocks YTD, as investors de-risked their portfolios in light of renewed concerns regarding the Eurozone debt crisis.

Large Cap Stocks

550

600

650

700

750

800

850

Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12

Inde

x Le

vel

Russell 1000 Index

2011: 1.5% TRYTD 2012 : 16.3% TR


Small Cap Stocks

600

650

700

750

800

850

900

Dec 10 Mar 11 Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12

Inde

x Le

vel

Russell 2000 Index


2011: -4.2% TRYTD 2012 : 14.2% TR

YTD9/30/2012

Value Blend Grow th

Larg

e

15.7 16.3 16.8

Mid 14.0 14.3 13.9

Smal

l

14.4 14.2 14.1

Stocks

Total Returns (%)

2011Value Blend Grow th

Larg

e

0.4 1.5 2.6

Mid -1.4 -1.5 -1.7

Smal

l

-5.5 -4.2 -2.9


Total returns are based on Russell-style indices performance and include dividends. Total returns are cumulative returns for the period, not annualized. Peak market date is 10/09/2007. Low market date is 03/09/2009. Graphs depict price levels only. Sources: Bloomberg L.P., BMO Global Asset Management.

Investment Style PerformanceAll equity indices across styles and sizes have doubled in size since their post-crisis lows. However, large cap value stocks remain below their all time highs.

Total Returns (%)As of 09/30/2012

Small Cap Stocks

300

400

500

600

700

800

900

Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11

Inde

x Le

vel

Russell 2000 Index


Since 10/09/2007Peak: 6.2% TR

Since 03/09/2009 Low: 156.2% TR

Large Cap Stocks

350

450

550

650

750

850

Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11

Inde

x Le

vel

Russell 1000 Index

Since 10/09/2007Peak: 3.6% TR

Since 03/09/2009 Low: 132.4% TR


10/9/2007Value Blend Grow th

Larg

e

-6.9 3.6 14.2

Mid 5.8 8.8 9.8

Smal

l

2.3 6.2 9.6

Since Peak

Stocks

3/9/2009Value Blend Grow th

Larg

e

132.2 132.4 132.9

Mid 170.2 162.5 153.8

Smal

l

153.1 156.2 158.8

Since Low


Investment Style ValuationsCurrent multiples of U.S. small cap companies are near their historical norms, but appear elevated relative to large cap companies P/Es. Growth stocks appear cheap across the market cap spectrum.

*Data begins in June 1988. Data based on Russell- style indices. Earnings are estimated earnings for the next 12 months (NTM). Sources: Factset, BMO Global Asset Management.

Stocks

Value vs. Growth Price to NTM Earnings

0.3x

0.4x

0.5x

0.6x

0.7x

0.8x

0.9x

1.0x

1.1x

Jun 88 Jun 90 Jun 92 Jun 94 Jun 96 Jun 98 Jun 00 Jun 02 Jun 04 Jun 06 Jun 08 Jun 10 Jun 12

Valu

e PE

/ G

row

th P

E

Value / Grow th Avg. sinceJun '88

Russell 1000 Value PE /Russell 1000 Grow th PE

Grow th Cheaper

Value Cheaper

Sources: FactSet, BMO Global Asset Management

Small vs. Large Price to NTM Earnings

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

Jun 88 Jun 90 Jun 92 Jun 94 Jun 96 Jun 98 Jun 00 Jun 02 Jun 04 Jun 06 Jun 08 Jun 10 Jun 12

Smal

l Cap

PE

/ Lar

ge C

ap P

E

Small / Large Avg. since Jun '88Russell 2000 PE / Russell 1000 PE


Large Cap Cheaper

Small Cap Cheaper

Current P/E (Avg. P/E)

Value Blend Grow th

Larg

e 11.6 (13.5)

13.0 (16.0)

14.9 (19.9)

Mid 12.7

(13.6)14.1

(15.5)16.2

(19.6)

Smal

l 13.2 (13.6)

14.4 (15.4)

15.8 (18.0)

Current PE as % of Avg PE

Value Blend Grow th

Larg

e

86.2% 81.5% 74.9%

Mid 92.9% 91.0% 82.7%

Smal

l

97.2% 93.1% 88.0%

P/E vs. Long Term Average* As of 09/30/2012


As of 09/30/2012 Russell Index Materials and

Processing Utilities Consumer Staples Energy Producer

Durables Health Care Consumer Discretionary Financials Technology

YTD 2012 16.3% 12.9% 12.7% 9.6% 6.9% 11.8% 19.6% 22.3% 20.9% 20.0%

MTD 2.6% 3.5% 2.6% 1.1% 3.5% 2.1% 4.2% 3.0% 3.1% 0.8%

2011 1.5% -6.9% 12.6% 12.1% 3.5% -1.9% 11.8% 5.5% -12.9% 0.3%

YTD 2012 14.2% 18.2% 8.6% 11.2% -3.0% 8.2% 26.3% 19.5% 18.6% 6.7%

MTD 3.3% 5.8% 4.2% 2.0% 5.5% 3.4% 4.6% 3.1% 3.0% 0.6%

2011 -4.2% -8.9% 10.5% 5.0% -6.4% -6.1% 2.2% -7.2% -2.9% -8.4%

LARG

E CA

P EQ

UITI

ESSM

ALL

CAP

EQUI

TIES

Russell 1000 Index Composition

4.4%6.2%

10.6%

11.2%14.7%

16.8%

17.1%

10.3%

8.6%

Russell 2000 Index Composition

7.2%4.1%

13.1%

13.3%15.2%

22.6%

14.3%

3.8%

6.5%

Sources: Bloomberg L.P., BMO Global Asset Management . Sector break-down based on Russell categories.

Sector PerformanceThe Consumer Discretionary sector was the top performer in the large cap category and the Health Care sector was the leader in the small cap category through the end of September 2012.The energy sector was the laggard in 2012 through the end of September 2012.

Materials and Processing

Utilities

Consumer Staples

Energy

Producer Durables

Health Care

Consumer Discretionary

Financials

Technology

Stocks


Dividend Yield

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Dec

82

Dec

84

Dec

86

Dec

88

Dec

90

Dec

92

Dec

94

Dec

96

Dec

98

Dec

00

Dec

02

Dec

04

Dec

06

Dec

08

Dec

10

(%)

Russell 1000 Div YldAverage Div YldAvg +/- Stdev Div Yld5-Yr Tsy Bond

Sources: FactSet, Bloomberg L.P., BMO Global Asset Management

Year-End Consensus EPS Estimate for the S&P500 Index

2011 YE 96.8

2012 YE

103.1

114.9

2013 YE

90

95

100

105

110

115

120

125

Dec

09

Mar

10

Jun

10

Sep

10

Dec

10

Mar

11

Jun

11

Sep

11

Dec

11

Mar

12

Jun

12

($)/S

hare


Implied Stock Market Volatility and the S&P 500 Index

600700

800900

1,0001,1001,200

1,3001,400

1,5001,600

Dec

07

Mar

08

Jun

08

Sep

08

Dec

08

Mar

09

Jun

09

Sep

09

Dec

09

Mar

10

Jun

10

Sep

10

Dec

10

Mar

11

Jun

11

Sep

11

Dec

11

Mar

12

Jun

12

Sep

12

S&P

500

Inde

x

0

10

20

30

40

50

60

70

80

90

VIX

Inde

x

S&P 500 IndexVIX Index


Other Stock Valuations and MetricsStocks offer an attractive dividend yield when compared to the risk-free rate. The estimated EPS for 2012 translates into an 6.5% growth in earnings, recording a small improvement from prior month. At its 2012 peak, the estimated growth in earnings was 10.2%.

Stocks

U.S. Large Cap Stocks Price to NTM Earnings

8

10

12

14

16

18

20

22

24

26

Jun

88

Jun

90

Jun

92

Jun

94

Jun

96

Jun

98

Jun

00

Jun

02

Jun

04

Jun

06

Jun

08

Jun

10

Jun

12

Larg

e C

ap P

E

Russell 1000 PEAvg. Large Cap PE since Jun '88



0.1 0.0 0.21.3

0.2 0.7 0.21.4

0.61.6

0.8 1.2

3.8

1.1

3.82.5

4.5

2.1

4.0

2.03.4

8.3

2.8

8.7

6.7

12.1

-0.3

-3.0-1.50.01.53.04.56.07.59.0

10.512.013.5

Treasuries U.S. Agg. Agencies ABS CMBS MBS Corporates Non-Corp HY

Bon

ds T

otal

Ret

urns

(%)

1-Mo 3-Mo YTD (09/28/2012)

U.S. Bond Market Performance All bond sectors posted positive returns in 2012. Despite renewed Eurozone fears, credit sectors posted strong returns and High Yield leads with 12.1% YTD. Bonds

40 15 21129

30117 62

14710737 77

332

71

324191

394

19886

226

713

115

604

427

1,025

NA

-300-150

0150300450600750900

1,0501,200

Treasuries U.S. Agg. Agencies ABS CMBS MBS Corporates Non-Corp HYBon

ds E

xces

s R

etur

ns v

s. T

reas

urie

s W

ith S

imila

r Dur

atio

n (b

ps)

Sources: Barclays Capital, BMO Global Asset Management


Fed Funds Futures- Market Expectations for the Fed Funds Rate -

0.0

0.1

0.2

0.3

0.4

Sep

11

Dec

11

Mar

12

Jun

12

Sep

12

Dec

12

Mar

13

Jun

13

Sep

13

Dec

13

Mar

14

Jun

14

Sep

14

Futures Expiration Date

(%)

09/30/201106/29/201209/28/2012Target


Treasury Yield Curve

0.0

1.0

2.0

3.0

4.0

5.0

3 m

o6

mo

2 yr

5 yr

10 y

r

20 y

r

30 y

r

(%)

12/31/201012/31/201109/30/2012


U.S. Treasury Yields

0.0

1.5

3.0

4.5

6.0

Dec

05

Jun

06

Dec

06

Jun

07

Dec

07

Jun

08

Dec

08

Jun

09

Dec

09

Jun

10

Dec

10

Jun

11

Dec

11

Jun

12

(%)

3-Mo T-Bill2-Yr Tsy Note10-Yr Tsy Note


Implied Forecast of Treasury Yields from Futures Market

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

3 m

o6

mo

2 yr

5 yr

10 y

r

20 y

r

30 y

r(%)

Implied Yields from FuturesCurve on 06/28/2013

Yield Curve on 09/30/2012


U.S. Treasury Yields In 2012, yields have decreased modestly across the yield curve, reaching historical lows. Fed Funds rate expectations have fallen further, as the Fed expects to maintain low rates “at least through mid-2015.” Bonds


U.S. Credit OAS(month-end)

0

100

200

300

400

500

600

Jan

97

Jan

98

Jan

99

Jan

00

Jan

01

Jan

02

Jan

03

Jan

04

Jan

05

Jan

06

Jan

07

Jan

08

Jan

09

Jan

10

Jan

11

Jan

12

Avg (147 bps)Avg + 1 Stdev (231 bps)Avg + 2 Stdev (315 bps)

Source: Barclays Capital, BMO Global Asset Management

U.S. Investment Grade Corporates OAS(month-end)

0

100

200

300

400

500

600

700

Jan

97

Jan

98

Jan

99

Jan

00

Jan

01

Jan

02

Jan

03

Jan

04

Jan

05

Jan

06

Jan

07

Jan

08

Jan

09

Jan

10

Jan

11

Jan

12



The average and standard deviation are calculated using monthly data starting January 1997.

Bond SpreadsCorporate spreads have been on a declining path since end of May through mid-September, as investors searched for yields. Even though spreads have widened in the past two weeks as Eurozone fear moved investors away from risk, they landed below the August 31 level.

Bonds

Corporate Bonds OAS Level(daily)

100

150

200

250

300

350

400

Jan

10

Mar

10

May

10

Jul 1

0

Sep

10

Nov

10

Jan

11

Mar

11

May

11

Jul 1

1

Sep

11

Nov

11

Jan

12

Mar

12

May

12

Jul 1

2

Sep

12

Inve

stm

ent G

rade

OAS

(bps

)

400

450

500

550

600

650

700

750

800

850

900

Hig

h Yi

eld

OAS

(bps

)

CorporatesFinancialsHY

Sources: Barclays Capital, BMO Global Asset Management


BBB-Rated U.S. Corporates OAS

0

100

200

300

400

500

600

700

800

Jan

97

Jan

98

Jan

99

Jan

00

Jan

01

Jan

02

Jan

03

Jan

04

Jan

05

Jan

06

Jan

07

Jan

08

Jan

09

Jan

10

Jan

11

Jan

12



Emerging Markets OAS

0

100

200

300

400

500

600

700

800

900

1,000

Aug

00

Aug

01

Aug

02

Aug

03

Aug

04

Aug

05

Aug

06

Aug

07

Aug

08

Aug

09

Aug

10

Aug

11

Aug

12



Emerging Markets Corporates OAS

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Aug

00

Aug

01

Aug

02

Aug

03

Aug

04

Aug

05

Aug

06

Aug

07

Aug

08

Aug

09

Aug

10

Aug

11

Aug

12



The average and standard deviation are calculated using monthly data starting in January 1997 for the U.S. series, and starting in August 2000 for the Emerging Markets series.

Bond Spreads Emerging market spreads on government and corporate debt tightened in September.

Bonds

U.S. High Yield Corporates OAS

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Jan

97

Jan

98

Jan

99

Jan

00

Jan

01

Jan

02

Jan

03

Jan

04

Jan

05

Jan

06

Jan

07

Jan

08

Jan

09

Jan

10

Jan

11

Jan

12




AAA Municipals and Treasury Yield Curves

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

3 m

o6

mo

2 yr

5 yr

10 y

r

20 y

r

30 y

r

Yiel

d (%

)

Municipals Curve on 09/30/2012

Treasury Curve on 09/30/2012


AAA Municipals vs. Treasury Yields

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Dec

05

Jun

06

Dec

06

Jun

07

Dec

07

Jun

08

Dec

08

Jun

09

Dec

09

Jun

10

Dec

10

Jun

11

Dec

11

Jun

12

Ratio of 10-Yr AAA Muni Yield to 10-Yr Treasury YieldRatio of 30-Yr AAA Muni Yield to 30-Yr Treasury YieldRatio of 1

Sources: Bloomberg, L.P., BMO Global Asset Management

Yield Spread vs. 10-year AAA Municipal Bond

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Dec

00

Dec

01

Dec

02

Dec

03

Dec

04

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10

Dec

11

A SpreadBBB Spread


AAA Municipals Bond Yields

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Dec

00

Dec

01

Dec

02

Dec

03

Dec

04

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10

Dec

11

10-Yr AAA Muni30-Yr AAA Muni


Municipal Bonds Longer-maturity AAA-rated Municipals bonds carry a higher yield than Treasury securities with similar maturities. In addition, investors get a healthy yield pick-up by moving down the quality spectrum. Bonds


* The average OAS and standard deviation of OAS for Emerging Markets indices are based on monthly data starting in August 2000.Sources: Barclays Capital, BMO Global Asset Management

Bond Market SnapshotBonds

09/28/2012 U.S. Aggregate

U.S. Treasury

1-10 yr Municipals

Inv. Grade Corporates

Finance Industrial MBS High Yield

Emerging Markets

(EM)

EM Corporates

MTD Total Return 0.14 -0.31 0.50 0.70 1.31 0.47 0.21 1.39 1.59 1.59

3-Mo Total Return 1.58 0.57 1.41 3.83 5.05 3.26 1.13 4.53 6.77 5.71

YTD Total Return 3.99 2.08 3.25 8.66 12.51 6.82 2.80 12.13 14.19 13.63

12-Mo Total Return 5.16 2.99 5.14 10.76 13.89 9.26 3.71 19.37 19.82 19.10

MTD Excess Return 0.40 NA NA 1.17 1.58 1.00 0.30 1.47 1.92 1.79

3-Mo Excess Return 1.07 NA NA 3.24 4.45 2.67 0.71 3.94 6.06 4.97

YTD Excess Return 1.98 NA NA 6.04 10.32 4.02 1.15 10.25 11.17 10.89

12-Mo Excess Return 2.30 NA NA 6.99 10.74 5.26 1.41 16.71 15.53 15.16

Yield to Maturity 1.61 0.82 NA 2.80 2.77 2.76 1.77 7.19 4.69 5.10

OAS 49 NA NA 156 179 143 24 551 330 387

Average* OAS (since Jan 1997) 66 NA NA 158 168 153 61 567 421 528

Stdev* of OAS (since Jan 1997) 36 NA NA 96 133 76 31 273 203 318

Duration (Mod. Adj.) 4.85 5.59 4.20 7.20 5.71 7.67 2.34 4.04 6.78 5.93

Maturity (years) 6.73 6.82 6.12 10.65 7.91 11.52 3.80 6.65 11.13 8.73

Coupon 3.67 2.28 4.83 5.11 5.08 5.05 4.44 8.04 6.83 6.38

Price 109.94 108.45 113.23 114.48 111.53 115.43 108.62 103.29 113.26 107.02

Market Value ($ millions) 16,815,236 6,067,598 656,423 3,551,384 1,147,492 2,006,601 5,051,508 1,081,790 798,335 170,994

Quality AA1/AA2 AAA/AAA AA2/AA3 A3/BAA1 A2/A3 A3/BAA1 AAA/AAA B1/B2 BAA3/BA1 BAA3/BA1


Commodities Commodities have seen increased correlation to equity prices since the onset of the last credit crisis, but a short-lived decoupling can be observed at the beginning of 2012.

Alternative Assets

Commodities and Stocks

0

50

100

150

200

250

Dec

91

Dec

92

Dec

93

Dec

94

Dec

95

Dec

96

Dec

97

Dec

98

Dec

99

Dec

00

Dec

01

Dec

02

Dec

03

Dec

04

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10

Dec

11

Com

mod

ities

Inde

x Le

ve

0

500

1,000

1,500

2,000

Stoc

k In

dex

Leve

l

DJ UBS Commodity Index

S&P 500 Index


As of 09/30/2012

DJ UBS Agriculture

Index

DJ UBS Livestock

Index

DJ UBS Grains Index

DJ UBS Energy Index

DJ UBS Precious

Metals Index

DJ UBS Industrial

Metals Index

DJ UBS Commodity

IndexS&P 500 Index

MTD -4.4 -2.1 -4.9 2.3 10.2 11.0 1.7 2.6

YTD 15.8 -7.9 33.7 -4.4 -0.4 4.4 5.6 16.4

2011 -14.4 -2.4 -14.5 -16.0 -18.5 -24.3 -13.3 2.1



Crude Oil and Natural Gas Prices

0

20

40

60

80

100

120

140

160

Dec

90

Dec

92

Dec

94

Dec

96

Dec

98

Dec

00

Dec

02

Dec

04

Dec

06

Dec

08

Dec

10

Cru

de O

il ($/

barb

ell

0

2

4

6

8

10

12

14

16

Nat

ural

Gas

($/B

tu)

Crude Oil

Natural Gas


CommoditiesMost major commodity groups have posted positive returns year to date. Oil prices are the exception.The effect of the drought is evident in grain returns.

Alternative Assets

Price of Gold

0

250

500

750

1,000

1,250

1,500

1,750

2,000

Dec

90

Dec

92

Dec

94

Dec

96

Dec

98

Dec

00

Dec

02

Dec

04

Dec

06

Dec

08

Dec

10

Gol

d ($

/troy

oz)

Gold


Commodities Total Return

-15.2

2.810.1

-18.5

5.7

-32.1

-13.3

28.6

17.013.3

-7.0

11.15.6

1.5 4.78.7

-4.4

18.6

1.78.6

-5.8

-40.0

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

Wheat Corn Gold Copper West Texas Oil Natural Gas DJ UBS CommodityIndex

(%)

2011 YTD (09/30/12) MTD (09/30/12)



REITS and Stocks

0

50

100

150

200

250

300

Dec

99

Dec

00

Dec

01

Dec

02

Dec

03

Dec

04

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10

Dec

11

REI

T In

dex

Leve

0

500

1,000

1,500

2,000

Stoc

k In

dex

Leve

l

Wilshire U.S. REIT IndexS&P 500 Index


Global Infrastructure and Stocks

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Dec

99

Dec

00

Dec

01

Dec

02

Dec

03

Dec

04

Dec

05

Dec

06

Dec

07

Dec

08

Dec

09

Dec

10

Dec

11

Infra

stru

ctur

e In

dex

Leve

l

0

500

1,000

1,500

2,000

Stoc

k In

dex

Leve

l

S&P Global Infrastructure IndexS&P 500 Index


Other Alternative AssetsREITs have underperformed the large cap equities year to date. Alternative

Assets

Alternatives Total Return

82.268.2

116.1

-13.0-25.1 -19.3

5.45.4

-2.7

2.111.9 15.0 9.2

16.4

143.3

-0.2

-50.0

-25.0

0.0

25.0

50.0

75.0

100.0

125.0

Wilshire U.S. REIT Index S&P Global REIT Index S&P Global Infrastructure Index S&P 500 Index

(%) 10-Yr (09/30/12)5-Yr (09/30/12)2011YTD (09/30/12)



Dan Sido Chief Investment Strategist

Sandy Lincoln Chief Market Strategist

Bob Decker, CFA Director, Quantitative Strategies

Irina Pacheco, CFA Vice President, Quantitative Strategies

Investment Strategy Group


Index Definitions

Equity IndicesS&P 500 IndexS&P 500® Index is an unmanaged index of large-cap common stocks. Dow Jones Industrial AverageThe Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq.Russell 1000 IndexRussell 1000® Index consists of approximately 1,000 of the largest companies in the U.S. equity markets.Russell 1000 Growth IndexRussell 1000® Growth Index measures the performance of those Russell 1000 Companies with higher price-to-book ratios and higher forecasted growth values.Russell 1000 Value IndexRussell 1000® Value Index measures the performance of those Russell 1000 Companies with lower price-to-book ratios and lower forecasted growth values.Russell Midcap IndexRussell Midcap® Index measures the performance of the smallest 800 U.S. companies in the Russell 1000 Index. Russell Midcap Growth IndexRussell Midcap® Growth Index measures the performance of those Russell Midcap companies with higher price-to-book ratios and higher forecasted growth values.Russell Midcap Value IndexRussell Midcap® Value Index measures the performance of those Russell Midcap companies with lower price-to-book ratios and lower forecasted growth values.Russell 2500 IndexThe Russell 2500TM Index measures the performance of the small to mid-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index.Russell 2000 IndexRussell 2000® Index is an unmanaged index that measures the performance of the smallest 2000 U.S. companies in the Russell 3000® Index.Russell 2000 Growth IndexRussell 2000® Growth Index measures the performance of those Russell 2000 Companies with higher price-to-book ratios and higher forecasted growth values.Investments cannot be made in an index.

Russell 2000 Value IndexRussell 2000® Value Index measures the performance of those Russell 2000 Companies with lower price-to-book ratios and lower forecasted growth values.MSCI ACWI ex USA IndexThe MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets.MSCI EAFE Index (Developed Markets)The MSCI EAFE Index Europe, Australasia, and Far East Index (EAFE) is a standard unmanaged foreign securities index representing major non-U.S. stock markets, as monitored by Morgan Stanley Capital International.MSCI European Monetary Union IndexThe MSCI EMU (European Economic and Monetary Union) Index is a free float- adjusted market capitalization weighted index that is designed to measure the equity market performance of countries within EMU.MSCI AC Asia Pacific IndexThe MSCI AC Asia Pacific Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of Asia and Pacific region.MSCI Emerging Markets IndexThe MSCI Emerging Markets Index is a market capitalization weighted index comprised of over 800 companies representative of the market structure of the emerging countries in Europe, Latin America, Africa, Middle East and Asia. Prior to January 1, 2002, the returns of the MSCI Emerging Markets Index were presented before application of withholding taxes.NASDAQ Composite IndexThe NASDAQ Composite Index is a market-cap weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange.STOXX Europe 600 IndexThe STOXX Europe Index represents 600 large, mid, and small capitalization companies across 18 countries of the European Region.


Fixed Income IndicesBarclays U.S. Aggregate IndexBarclays Capital U.S. Aggregate Bond Index is an unmanaged index that covers the U.S. investment-grade fixed-rate bond market, including government and credit securities, agency mortgage pass-through securities, asset-backed securities and commercial mortgage-based securities.Barclays U.S. Interm. Gov/Crd IndexBarclays Capital Intermediate U.S. Government/Credit Index (Barclays Capital Int Gov’t/Credit) is an unmanaged index comprised of government and corporate bonds rated BBB or higher with maturities between 1-10 years.Barclays U.S. Corporate IndexThe Barclays Capital U.S. Corporate Bond Index is designed to measure the performance of the U.S. corporate bond market.Barclays U.S. Treasury IndexThe Barclays Capital U.S. Treasury Index is an unmanaged index that includes a broad range of U.S. Treasury obligations and is considered representative of U.S. Treasury bond performance overall.Barclays Securitized IndexThe Barclays Capital U.S. Securitized Bond Index is an unmanaged index of asset- backed securities, collateralized mortgage-backed securities (ERISA-eligible), and fixed-rate mortgage-backed securities.Barclays High Yield IndexThe Barclays Capital U.S. Corporate High-Yield Bond Index is an unmanaged index that covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market.BofA Merrill Lynch High Yield BB/B Constr. IndexThe BofA Merrill Lynch BB-B Global High Yield Index is a subset of The BofA Merrill Lynch Global High Yield Index including all securities rated BB1 through B3, inclusive.

Barclays 1-10 yr Municipals IndexThe Barclays Capital 1-10 Year Municipal Blend Index is a market value-weighted index which covers the short and intermediate components of the Barclays Capital Municipal Bond Index—an unmanaged, market value-weighted index which covers the U.S. investment-grade tax-exempt bond market.

Investments cannot be made in an index.

Barclays Global Aggregate Bond IndexThe Barclays Capital Global Aggregate Bond Index is an index of global government, government-related agencies, corporate and securitized fixed-income investments.Barclays Global Credit IndexThe Barclays Global Credit Index is the credit component of the Barclays Global Aggregate Index, an index of global government, government-related agencies, corporate and securitized fixed-income investments.

Index Definitions


Index Definitions

Alternative Investments IndicesDJ UBS Commodity IndexThe Dow Jones-UBS Commodity Index is composed of commodities traded on U.S. exchanges.MSCI ACWI Commodity Producers IndexThe MSCI ACWI Commodity Producers Index is a component of the broader MSCI Commodity Producers Indices and covers large, mid and small cap companies across 45 Developed and Emerging Markets.Wilshire US REIT IndexThe Wilshire US REIT Index measures U.S. publicly traded Real Estate Investment Trusts. It is a subset of the Wilshire US Real Estate Securities Index.S&P Global REIT IndexThe S&P Global REIT Index measures the performance of real estate investment trusts in both developed and emerging markets.S&P Global Infrastructure IndexThe S&P Global Infrastructure Index provides liquid and tradable exposure to 75 companies from around the world that represent the listed infrastructure universe including utilities, transportation and energy.

Other IndicesS&P/Case-Shiller 20-City IndexThe S&P/Case-Shiller 20-City Index is a composite index of the home price index for 20 major metropolitan statistical areas in the U.S.VIX IndexThe Chicago Board Options Exchange Market Volatility Index is a measure of implied volatility of S&P 500 index options, often referred to as the “fear” index.CPI IndexThe Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care.

Investments cannot be made in an index.

Economic Cycle Research Institute (ECRI) Weekly Leading IndexECRI Index is released each Friday by the Economic Cycle Research Institute, and identifies turning points in the economic cycle that are indicated by pronounced changes in the index. The index contains money supply data, stock prices, an industrial markets price index developed by the organization, mortgage applications, bond quality spread, bond yields, and initial jobless claims. An advantage of the index is that it is very timely. ECRI is a New York-based independent forecasting group.Conference Board Leading Economic Index® (LEI) for the U.S.The leading economic index is composite average of several individual leading indicators. It is constructed to summarize and reveal common turning point patterns in economic data in a clearer and more convincing manner than any individual component – primarily because it smoothes out some of the volatility of individual components.Chicago Fed National Activity (CFNAI) IndexThe Chicago Fed National Activity Index (CFNAI) is a monthly index designed to gauge overall economic activity and related inflationary pressure and it is a weighted average of 85 existing monthly indicators. A zero value indicates that the economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth. When the 3-month moving average moves below -0.7 following a period of economic expansion, there is an increased likelihood that a recession has begun. When the 3-month moving average moves above +0.7 more than two years into an economic expansion, there is an increased likelihood that a period of sustained increasing inflation has begun (source: www.chicagofed.org).Citigroup Economic Surprise IndexThe Citigroup Economic Surprise Index is a weighted historical standard deviations of data surprises (actual releases vs. Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have, on balance, been beating consensus. The indices are calculated daily in a rolling three-month window. The weights of economic indicators are derived from relative high-frequency spot FX impacts of 1 standard deviation data surprises. The index also employs a time decay function to replicate the limited memory of markets.

http://www.chicagofed.org/


Not FDIC Insured No Bank Guarantee May Lose ValueInvestment products are:

Disclosures

For further information, please visit our websites at

BMO Funds www.bmofundsus.com

BMO Asset Management Corp. www.bmogamus.com

This is not intended to serve as a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. Information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. This publication is prepared for general information only. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investment involves risk. Market conditions and trends will fluctuate. The value of an investment as well as income associated with investments may rise or fall. Accordingly, investors may receive back less than originally invested. Investments cannot be made in an index. Past performance is not necessarily a guide to future performance.

BMO Global Asset Management is the brand name for various affiliated entities of BMO Financial Group, that provide trust, custody, securities lending, investment management, and retirement plan services. Certain of the products and services offered under the brand name BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO).

BMO Harris Financial Advisors, Inc. is a member FINRA/SIPC, SEC-registered investment adviser. BMO Harris Financial Advisors, Inc. is an affiliate of the companies within BMO Global Asset Management.

©2012 BMO Financial Corp.

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