A Flock of Black Swans

Global Interdependence Center

Rome - April 2011

Constance Hunter

Managing Director and Chief Economist

chunter@aladdincapital.com

203-326-6895

2

Global Equity Markets: Past, Present and Future

2003-2006 It’s a Wonderful Life

2007 The Tide Changes

2008 A Year of Reckoning

2009 A Rising Tide Lifted All Boats

2010Low Rates, Refinancing and Top-Line

Growth

2011Low Rates, Stock Buy Backs, M&A and

Black Swans

3

• Earthquake/Tsunami in Japan

• Middle East Uprisings

• European Debt Woes

• US Debt Woes

• Chinese Hard Landing Fears

• Rising Commodity Costs

Wind in the Sails of Equity Markets... Black Swans on the Horizon

• Low Interest Rates

• M&A to Accelerate

• Share Buy Backs are Starting in Earnest

• Cash on the Sidelines

• Earnings Growth Momentum

• Profit Margins High but not Peaked

4

M&A Activity off to a Robust Start for Q1

Source: Bloomberg

High cash levels and low interest rates will buttress M&A activity this year

M&A Activity Breakdown

Target Industry Volume ($bn) Count

Oil & Gas 60.45 174

Telecommunications 59.46 169

Electric 45.39 72

REITs 41.52 85

Chemicals 24.45 117

5

Significant Amount of Cash on the Sidelines… a Powerful Technical Factor

Money Stock: Savings Deposits, including Money Market Deposit Accounts (SA, Bil $)

Source: Federal Reserve Board/Haver Analytics

Money Stock: Savings Deposits, including MMDAs

SA, Bil.$

100908070605040302010099989796

6000

5000

4000

3000

2000

1000

6000

5000

4000

3000

2000

1000

6

Outperforming Equity Markets are in Growing Economies

Source: Haver Analytics

Strong growth and inflation trump rate increases; markets outperforming

40

60

80

100

120

140

160

180

200

220

Sep

-08

Dec

-08

Mar

-09

Jun

-09

Sep

-09

Dec

-09

Mar

-10

Jun

-10

Sep

-10

Dec

-10

Mar

-11

Countries in Rate Hiking Mode

Indonesia Turkey South Korea China

Brazil Norway Canada

7

Quantitative Easing has yet to help equities as much as organic growth

Source: Haver Analytics

50

60

70

80

90

100

110

120

130

Sep

-08

Dec

-08

Mar

-09

Jun

-09

Sep

-09

Dec

-09

Mar

-10

Jun

-10

Sep

-10

Dec

-10

Mar

-11

QE Countries Equity Market Performance Since LEH

UK Germany US Japan

It does not help that countries engaging in QE also have high debt

8

Quantitative Easing Can’t Overcome the Burden of High Debt

Source: Haver/Bloomberg

40

50

60

70

80

90

100

110

120

Sep

-08

Dec

-08

Mar

-09

Jun

-09

Sep

-09

Dec

-09

Mar

-10

Jun

-10

Sep

-10

Dec

-10

Mar

-11

Countries with High Debt - Performance Since LEH

US Portugal Japan Ireland Greece

High debt hampers market performance, the US is underperforming Canada

9

Market Performance Since Lehman Brothers Collapse

Countries with lower government debt are outperforming

Source: Haver/Bloomberg

Indonesia

Brazil

Canada

Turkey

Germany

Norway

UKUS

Japan

Greece

Spain

Ireland

Portugal

ChinaSouth Korea

-60.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

0% 50% 100% 150% 200% 250%

Ret

urn

sin

ce L

ehm

an

Gross Debt Level

Government Debt and Equity Market Returns Post LEH

10

When will U.S. Debt Levels Weigh on Profit Margins and Share Prices?

Source: Bloomberg

5

6

7

8

9

10

11

12

13

14

15

500

700

900

1100

1300

1500

1700

Mar

-00

Sep

-00

Mar

-01

Sep

-01

Mar

-02

Sep

-02

Mar

-03

Sep

-03

Mar

-04

Sep

-04

Mar

-05

Sep

-05

Mar

-06

Sep

-06

Mar

-07

Sep

-07

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Pro

fit Marg

inS

&P

500

S&P 500 and Profit Margins

S&P 500

Profit Margin

11

The Spanish Market is Weighed Down by the Poor Economy

Source: Bloomberg

0

5

10

15

20

25

4000

6000

8000

10000

12000

14000

16000

18000

Mar

-01

Sep

-01

Mar

-02

Sep

-02

Mar

-03

Sep

-03

Mar

-04

Sep

-04

Mar

-05

Sep

-05

Mar

-06

Sep

-06

Mar

-07

Sep

-07

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Pro

fit Marg

inIB

EX

Spanish IBEX and Profit Margins

IBEX

Profit Margin

12

Diverging Economies Will Lead to Diverging Markets

Country / Region

GDP Q/Q Annualized %

Industrial Production

CPIBudget Balance as a % of GDP*

Current Account as a

% of GDPPMI Reading

US 3.1% 5.3 2.2% -8.8 -3.4 59.9

Canada 3.3% 5.93 2.2% -2.1 -2.5 69.3

UK -1.9% 3.9 4.3% -9.0 -1.7 55.0

Japan -1.3% 1.8 0.1% -7.9 3.3 51.0

EUR Area 1.1% 5.92 2.4% -4.1 -0.3 58.2

China** 10.1% 27.69 5.0% -1.7 4.1 51.7

Brazil 3.0% 2.75 5.9% -2.5 -2.9 52.7

India** 2.6% 9.4 8.8% -5.0 -2.7 56.5

Russia 11.4% 6.5 9.4% -3.4 4.8 55.2

South Africa 4.4% 1.7 3.7% -5.3 -5.5 54.8

South Korea 2.0% 17.3 4.5% -1.6 2.0 53.4

Mexico 5.1% 7.2 3.5% -2.1 -1.0 n/a

*The Economist poll or Economist Intelligence Unit Estimate FY2010 ** Y/Y data, not SAAR

Source: Bloomberg, Haver, The Economist

13

Consensus Forecasts not Aligned with Fundamentals

P/EForward

P/EMean

ForecastMax

ForecastMin

Forecast

US 14.2 12.7 11.45% 27.43% -7.11%

Japan 17.6 16.7 23.72% 48.60% 1.68%

Norway 13.3 11.1 7.54% 36.93% -14.18%

Turkey 11.0 10.0 14.63% 39.02% -5.93%

Spain 9.4 10.6 11.71% 38.01% -14.29%

Portugal 12.5 13.0 14.11% 34.23% -7.40%

Greece 27.3 11.3 11.25% 44.99% -6.53%

Ireland neg 17.8 11.64% 45.25% -3.24%

Source: Bloomberg Consensus Forecasts

It does not help that countries engaging in QE also have high debt

14

Divergent Performance over Past Two Years

(1) Annualized standard deviation of monthly returns ending with February 2011 (2) 23 months

Source: Barclays, Credit Suisse, Bloomberg, Aladdin Capital

Annualized Return versus Volatility (2)

S&P 500

Independent Credit

Fund

Barlays U.S. Credit

Total Return

Barclays U.S. Credit

Excess Return

FTSE 250

CS Leveraged Loan

Index

Commodities

5%

10%

15%

20%

25%

30%

35%

40%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

Ret

urn

Volatility

High

Low

Safe Risky

15

US Forecast: Above Trend Growth for the Next Two Years

Year Annual Rate Year-End Forecast

GDP PCEPrivate

InvestmentResidentialInvestment

Unemployment Inflation 10-yr Yield

2010 2.4% 1.7% 6.2% -4.2% 9.7% 1.6% 3.30%

2011 3.5% 3.1% 10.7% -3.1% 8.0% 1.8% 3.65%

2012 4.3% 2.7% 11.0% 9.0% 7.5% 3.5% 5.10%

2013 2.6% 2.7% 5.0% 7.5% 7.0% 2.8% 4.50%

2014 2.9% 2.9% 4.9% 8.5% 6.5% 3.1% 4.80%

Source: Aladdin Research

Fiscal and Monetary Stimulus producing higher growth….. But can it last?

16

Conclusion

• Equities have strong tailwinds… But caution is warranted

• Strong GDP growth is necessary for equity markets to grow at rates that compensate for the volatility

• QEII and Bush tax cut extensions function as a massive stimulus for the U.S. in 2011

• The U.S. economic recovery continues and gains momentum (3.5% real GDP for 2011).

• High debt levels borrow from future growth and equity markets seem to discount this.

• Restructuring and stimulative government policies continue to support markets…

• … But Black Swans hover on the horizon

17

Constance Hunter - Bio

CONSTANCE HUNTER, Managing Director & Chief Economist. Prior to joining Aladdin,

Ms. Hunter was with Galtere Ltd., a global macro hedge fund, where she served as a Chief

Economist. Prior to and concurrently with, Galtere Ltd., she was the Managing Member and

Chief Investment Officer of Coronat Asset Management. In that role, Ms. Hunter identified

macro themes and invested in global equity and FX markets to capitalize on these themes.

Prior to founding Coronat, Ms. Hunter was a Partner and Portfolio Manager at Quantrarian

Capital Management, a hedge fund that invests in Asian markets. In addition, she has

worked as a Portfolio Manager at Salomon Smith Barney, Inc., and Firebird Management,

LLC. Ms. Hunter received a Bachelor of Arts from New York University, as well as a Masters

of International Affairs from Columbia University.

18

This document was prepared by Aladdin Capital Management LLC, and reflects the current opinion of thecontributor. It is based upon sources and data believed to be accurate and reliable. Opinions and forwardlooking statements expressed are subject to change without notice. This document is for informationalpurposes only and does not constitute a solicitation or an offer to buy or sell any investment security, norprovide investment advice.

Neither Aladdin Capital Management LLC nor any officer or employee of Aladdin Capital Management LLCor any affiliate thereof accepts any liability whatsoever for any direct, indirect or consequential damages orlosses arising from any use of this report or its contents.

No part of this document may be reproduced in any manner without the permission of Aladdin CapitalManagement LLC.

Disclaimer