2013 Bespoke Report

THE BESPOKE REPORT
Bespoke Investment Group LLC

1
The Bespoke Report2013
Bespoke Investment Group
The Bespoke Report

Everything Investors Must Know About the Markets in 2013
Written by Co-Founders Paul Hickey and Justin Walters
Bespoke Investment Group LLC 105 Calvert Street Harrison, NY 10528 914-315-1248
Copyright 2012, Bespoke Investment Group, LLC. Bespoke Investment Group, LLC believes all information contained in this report to be accurate, but we do not guarantee its accuracy. None of the information in this report or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities.

Table of Contents I. Our View II. III. IV. V. VI. VII. VIII. IX. X. XI. XII. XIII. XIV. XV. XVI. XVII.
Page 4 6 11 16 26 30 41 53 62 74 95 101 106 113 117 123 133
Introduction Prognostications Valuation Sentiment Washington Seasonality Sector Weightings & Technicals Economic Indicators Economic Cycles Housing Yield Curve Dollar & Stocks Credit Markets Commodities International The Year in Headlines
The Bespoke Report2013 About Bespoke

Bespoke Investment Group prides itself on its original content and intuitive thinking. Our unique ability to analyze financial markets in ways unlike traditional Wall Street firms is what helps us stay one step ahead of the investment community. Bespoke provides financial research to individual and institutional investors as well as money management services. Our work has been used extensively by some of the most prestigious Wall Street firms and major media outlets including CNBC, Bloomberg, the Wall Street Journal and Barrons. Bespoke Investment GroupTurning Information Into Wealth To learn more about Bespoke, please visit www.bespokepremium.com.

Our View
With 2012 now relegated to the highlight reel, investors have plenty of reasons to bid goodbye to the year. For many, the simple fact that we will not have to endure a Presidential campaign is reason enough to look forward to 2013. While there are no shortages of reasons to be thankful 2012 is behind us, there was plenty to be thankful for in 2012 as well. The S&P 500 finished 2012 with a gain of more than 10%, and while we didnt get there in a straight line, anyone who bought the S&P 500 on the last day of 2011 was in the black on that trade for every day of 2012. Up years are common in the equity market, but going back to 1928, there have only been nine other years where the S&P 500 was up YTD at the close of trading every day of the year. As the report that follows illustrates, the current economic recovery has been one of the weakest on record in terms of GDP growth and just about every other metric outside of manufacturing. Not only has the recovery been weak, but it is also no longer a spring chicken. At a length of 42 months, the recovery off the June 2009 lows is now just three months shorter than average. With a weak foundation already, bears would argue that the stage is set for a recession in 2013. As if the weak recovery was not bad enough, we have complete dysfunction out of Washington. For businesses and consumers alike, Reagans comments from thirty years ago have never rung more true. Far from being the solution to the problems faced by Americans, Washington is the problem. Unlike any other time in a generation, individuals and businesses are increasingly concerned with how events in Washington will negatively affect their lives. In addition to the current situation, the historical precedent suggests that Washington will not be a positive influence on the market in 2013 and the years ahead. The second terms of US Presidents have been notoriously bad for financial markets as administrations tend to lose focus or scandals are uncovered. Going back to 1900, the S&P 500 has averaged a decline of 3.8% during the first year of a re-elected Presidents second term. With an already slow recovery thats not getting any younger and continued dysfunction out of Washington, it should not be a surprise that economists are expecting growth of just 2% in 2012. Along with low economic growth, it is not surprising that strategists, a normally bullish group, are expecting a gain of less than 8% for the S&P 500 in 2013. it doesnt seem like there is a lot to be bullish about these days.

Our View
Yes, there are plenty of aspects regarding the market and economy that are less than optimal, but when is that not the case? There are also plenty of positives that emerged in 2012 that we think can continue to move into the spotlight in 2013. For starters, in spite of all the negative events within the market and the numerous pullbacks we saw in 2012, the S&P 500s uptrend off the March 2009 lows remains intact. The economy, while not particularly strong, has not been especially weak either. It is a little less hot than Goldilocks, but the US economy did finish 2012 with some positive momentum, and this came in spite of all the roadblocks from Washington. Housing has been and will continue to provide a boost to US economic growth. Provided we dont see even more onerous regulations on the energy sector, the US also has the potential to see an energy boom in the years ahead. As the fiscal cliff and debt ceiling debates become resolved (not necessarily a foregone conclusion), we expect the US to resume its trend of outperformance relative to the rest of the world. This will boost the dollar, and a strong dollar has historically been a positive for US equities. Sectors that tend to benefit the most form a strong dollar are the ones that derive the majority of their revenues in the United States like Consumer Discretionary, Financials, Health Care, and even Utilities. If these positive headwinds can continue in 2013, the potential for US equities is extremely positive. Closing out the year, the S&P 500s valuation is cheap by just about every traditional measure, and it is not just slightly cheap. Analysts are currently expecting operating earnings of $112.82 for the S&P 500. If the index were to trade simply at an average P/E ratio of 15.33, that would translate to a level of around 1,730 on the S&P 500 for year end 2013, or a gain of 22%. Granted, analysts are often overly optimistic, but even if there is no earnings growth in 2012, earnings would come in at $99.38. Based on this level of earnings, an average P/E ratio of the S&P 500 would still work out to 1,523.5, or 7% above current levels.
Where will 2013 pan out? We expect it to be somewhere in between, and we see the S&P 500 trading at or near a level of 1,600 in the year ahead. In terms of percentages, this works out to a gain of around 13%. 13% in 13 we like the sound of that. Happy New Year!

The S&P 500 started 2012 with a rip-roaring rally, gaining more than 10% in the first quarter. But what goes up must come down, and thats just what happened in April and May when the market gave up ALL of its first quarter gains due to the euro crisis. On the day that the Supreme Court health care ruling came down, the market bottomed, however, and it didnt look back from June through mid-September. Unfortunately, what could have been a stellar year turned into just a decent one when fiscal cliff issues took control of the market in the fourth quarter, leaving the S&P up 12.5% YTD, well below its third quarter high.
S&P 500 in 2012

1500
January February March April May June July August Sept. October Nov.
+13% YTD
Dec.
1450 1400
1350 1300
4.36% 4.06% 3.13% -0.75% -6.26% 3.96% 1.26% 1.98% 2.42% -1.97% 0.28% 0.42%
1250 8
January February March April May June July August Sept. October Nov. Dec.
6 4 2 0 -2
Daily % Change
-4
Average % Change by Day of Week 0.2 0.2 0.1 0.1 0.0 -0.1
-0.01 -0.03 0.04 Monday Tuesday 0.10 Wednesday Thursday 0.13 Friday
Average Day of Week % Chg by Month

Monday Tuesday Wednesday Thursday Friday

Below is a table highlighting the performance of various asset classes (using ETFs) in 2012. After falling significantly in 2011, Europe bounced back in a big way in 2012, with France, Germany, the UK and even Italy posting gains of more than 10%. Mexico and Germany were the best performing ETFs on the entire list in 2012 with gains of more than 28%. US index ETFs were mostly up in the mid-teens in 2012, but Midcaps performed the best. Of the ten S&P 500 sectors, the Financials did the best with a gain of 25.69%, followed by Consumer Discretionary at +21.23%. The Utilities sector was the only one that declined for the year at 3.49%. The bulk of the red on the matrix comes from the commodities sector, while fixed income posted minimal gains for the full year even though it struggled in the 2nd half.
Key ETF Performance (%)

US Related ETF Description SPY S&P 500 DIA Dow 30 QQQ Nasdaq 100 IJH S&P Midcap 400 IJR S&P Smallcap 600 IWB Russell 1000 IWM Russell 2000 IWV Russell 3000 NYC NYSE Comp IVW IJK IJT IVE IJJ IJS DVY RSP FXB FXE FXY XLY XLP XLE XLF XLV XLI XLB XLK IYZ XLU S&P 500 Growth Midcap 400 Growth Smallcap 600 Growth S&P 500 Value Midcap 400 Value Smallcap 600 Value DJ Dividend S&P 500 Equalweight British Pound Euro Yen Cons Disc Cons Stap Energy Financials Health Care Industrials Materials Technology Telecom Utilities Dec. -0.15 0.17 -1.20 1.46 2.11 0.09 2.33 0.35 1.34 -0.94 0.70 2.03 1.07 2.11 2.40 -1.09 1.37 1.25 1.45 -5.03 -0.48 -3.58 0.00 3.68 -1.13 1.75 2.04 -0.88 1.21 -1.68 Q4 -1.41 -2.78 -5.19 2.94 1.09 -0.82 0.67 -0.62 1.83 -2.92 2.14 0.24 0.49 3.47 2.05 -1.16 1.82 0.43 2.56 -10.16 1.10 -3.00 -3.23 4.81 -0.83 3.42 1.77 -6.33 -5.33 -4.58 2012 13.10 6.95 16.44 15.95 14.07 13.64 13.89 13.67 11.97 12.09 15.83 12.54 14.32 15.77 15.57 6.03 14.80 4.13 1.58 -11.65 21.23 6.96 2.79 25.69 14.69 11.94 11.79 13.46 15.10 -3.49 Global ETF EWA EWZ EWC FXI EWQ EWG EWH INP EWI EWJ EWW EWP RSX EWU EFA EEM IOO EEB DBC USO UNG GLD SLV SHY IEF TLT AGG BND TIP Description Australia Brazil Canada China France Germany Hong Kong India Italy Japan Mexico Spain Russia UK EAFE Emerging Mkts Global 100 BRIC Commodities Oil Nat. Gas Gold Silver 1-3 Yr Treasuries 7-10 Yr Treasuries 20+ Yr Treasuries Aggregate Bond Total Bond Market T.I.P.S. Dec. 0.52 8.36 1.10 8.82 4.99 4.89 1.67 0.46 5.10 4.50 4.49 4.36 7.29 1.04 3.03 6.01 1.32 4.00 -1.28 2.43 -7.31 -2.39 -9.02 -0.04 -1.22 -3.02 -0.65 -0.58 -1.23 Q4 5.51 3.39 -0.25 16.84 12.25 9.30 6.76 1.16 11.39 6.27 7.48 8.99 3.75 2.69 7.06 7.19 2.08 1.10 -3.28 -2.26 -11.43 -5.71 -12.07 -0.11 -0.91 -2.58 -0.82 -0.83 -0.30 2012 17.07 -2.61 6.84 15.93 20.28 28.36 25.60 27.37 11.76 6.97 30.73 -0.30 12.08 10.54 14.56 16.75 9.94 2.40 3.35 -12.49 -26.86 6.64 9.28 -0.11 1.80 -0.19 1.15 1.17 4.04

We ran our decile analysis on the S&P 500 to see which stock characteristics helped or hurt stocks in 2012. To do this, we broke the index into deciles (10 groups of 50 stocks each) based on the various categories listed in the matrix below, and then we calculated the average performance of stocks in each decile in 2012. A few key characteristics impacted performance significantly in 2012. These were P/E ratio, dividend yield and international revenue exposure. As shown below, the best performing decile in the entire matrix was the one made up of the 50 S&P 500 stocks with the highest P/E ratios. These stocks were up an average of 29.25%. The worst performing decile in the entire matrix was the one made up of the S&P 500 stocks with the highest dividend yields. The stocks in this decile actually averaged a decline of 0.63% in 2012, compared to an average gain of 12% for all S&P 500 stocks. Based on the weak performance of high yielding stocks and the strong performance of the stocks with the least attractive valuations, investors were clearly in risk-on mode in 2012, looking for growth instead of value. The final characteristic that impacted performance in 2012 is international revenue exposure. As shown, the decile of stocks with the most international revenue exposure were up just 0.21% in 2012. While global stock markets did well during the year, the euro crisis caused US investors to shun US stocks with heavy international exposure.
S&P 500 Decile Performance in 2012
Decile 1 Market Cap (Largest to Smallest) 2 3 4 5 6 7 8 9 Decile 10
14.47%
12.77%
9.94%
7.84%
14.74%
13.22%
11.22%
13.43%
11.18%
18.27%
P/E Ratio (Lowest 14.39% to Highest) Dividend Yield (Highest to Lowest)* Short Interest (Lowest to Highest)
-0.32%
14.75%
11.75%
12.26%
13.08%
10.69%
12.58%
8.64%
29.25%
-0.63%
8.51%
15.19%
14.54%
11.12%
10.23%
13.43%
14.49%
17.82%
16.75%
7.75%
18.73%
13.50%
12.50%
16.85%
12.16%
12.49%
8.56%
7.80%
16.74%
Analyst Ratings (Best to Worst)
14.92%
10.99%
10.26%
11.25%
17.11%
6.75%
21.75%
13.37%
4.51%
16.18%
Institutional Ownership (Most 12.26% to Least) International 0.21% Revenues (Most to Least)** % Chg in 2011 (Best to Worst)
9.72%
8.57%
16.86%
14.61%
25.45%
16.16%
8.91%
7.21%
7.39%
12.16%
12.43%
11.01%
23.71%
14.87%
14.66%
11.58%
11.76%
13.10%
12.32%
9.30%
11.00%
14.07%
13.72%
10.04%
16.89%
11.15%
9.92%
17.61%
*Decile 10 of dividend yield category is made up of all stocks that pay no dividend. **Decile 10 of international revenues category is made up of all stocks that have no international revenues.

With a gain of more than 10% in 2012, the S&P 500s bull market that began back on March 9th, 2009 continued. (To begin a new bear market, the index would need to fall 20% from its bull market high.) Below is a snapshot of all S&P 500 bull markets (a rally of 20%+ that was preceded by a decline of 20%+) since 1928. As shown, the average bull market has seen a gain of 102.22%, and it has lasted 906 days. The current bull market has eclipsed both of these averages with a gain of 116.66% and a length of 1,285 days. While it may not seem like it, the current bull market currently ranks as the 9th longest on record, and if the S&P 500 makes a new high in 2013, it could move all the way up to the 6th longest depending on when the high occurs.
S&P 500 Bull Markets

Begin 12/4/1987 6/13/1949 10/3/1974 7/23/2002 8/12/1982 10/22/1957 4/28/1942 6/26/1962 3/9/2009 5/26/1970 10/7/1966 3/14/1935 12/30/1927 5/19/1947 3/31/1938 4/11/1939 6/10/1940 11/13/1929 2/27/1933 10/19/1933 9/21/2001 6/1/1932 12/16/1930 11/20/2008 10/5/1931 6/2/1931 End 3/24/2000 8/2/1956 11/28/1980 10/9/2007 8/25/1987 12/12/1961 5/29/1946 2/9/1966 9/14/2012 1/11/1973 11/29/1968 3/10/1937 9/16/1929 6/15/1948 11/9/1938 10/25/1939 11/7/1940 4/10/1930 7/18/1933 2/6/1934 1/4/2002 9/7/1932 2/24/1931 1/6/2009 11/9/1931 6/26/1931 Average % Change 582.15% 267.08% 125.63% 96.21% 228.81% 86.35% 157.70% 79.78% 116.66% 73.53% 48.05% 131.64% 80.41% 23.89% 62.24% 26.78% 26.70% 46.77% 120.61% 37.28% 21.40% 111.59% 25.83% 24.22% 30.61% 25.82% 102.22% Days 4,494 2,607 2,248 1,904 1,839 1,512 1,492 1,324 1,285 961 784 727 626 393 223 197 150 148 141 110 105 98 70 47 35 24 906
S&P 500 Bull Markets

Begin 12/30/1927 11/13/1929 12/16/1930 6/2/1931 10/5/1931 6/1/1932 2/27/1933 10/19/1933 3/14/1935 3/31/1938 4/11/1939 6/10/1940 4/28/1942 5/19/1947 6/13/1949 10/22/1957 6/26/1962 10/7/1966 5/26/1970 10/3/1974 8/12/1982 12/4/1987 9/21/2001 7/23/2002 11/20/2008 3/9/2009 End 9/16/1929 4/10/1930 2/24/1931 6/26/1931 11/9/1931 9/7/1932 7/18/1933 2/6/1934 3/10/1937 11/9/1938 10/25/1939 11/7/1940 5/29/1946 6/15/1948 8/2/1956 12/12/1961 2/9/1966 11/29/1968 1/11/1973 11/28/1980 8/25/1987 3/24/2000 1/4/2002 10/9/2007 1/6/2009 9/14/2012 Average % Change 80.41% 46.77% 25.83% 25.82% 30.61% 111.59% 120.61% 37.28% 131.64% 62.24% 26.78% 26.70% 157.70% 23.89% 267.08% 86.35% 79.78% 48.05% 73.53% 125.63% 228.81% 582.15% 21.40% 96.21% 24.22% 116.66% 102.22% Days 626 148 70 24 35 98 141 110 727 223 197 150 1,492 393 2,607 1,512 1,324 784 961 2,248 1,839 4,494 105 1,904 47 1,285 906

Although the S&P 500 finished 2012 with a gain of more than 10%, the DJIAs return came in at a much tamer 6.1%. Going back to 1900, there have actually been 18 other years where the DJIA saw a single digit percentage gain. In the chart below, we show annual returns for the DJIA grouped according to their percentage moves. Underneath each group, we highlight the average annual change in the DJIA in the year after similar moves. Small annual changes in the DJIA are not necessarily such a bad thing, and can even be considered a pause that refreshes. When the DJIA sees an annual gain of between 0% and 10%, the average change in the following year is a gain of 6.2%. Of those 18 years, the index has been up 61% of the time which is slightly less than the historical average for all years since 1900 (64% of the time positive).
DJIA: Annual Returns & Average Return in the Following Year: 1900 - 2012
1982: 19.6 1961: 18.7 1976: 17.9 1950: 17.6 1963: 17.0 1959: 16.4 2006: 16.3 1998: 16.1 1967: 15.2 1909: 15.0 1980: 14.9 1972: 14.6 1964: 14.6 1951: 14.4 1943: 14.1 1993: 13.7 1949: 12.9 1921: 12.3 1988: 11.9 1944: 11.8 2010: 11.0 1965: 10.9 1918: 10.5 10%+
1931: -52.6 -50%+

50
-40%+
1907: -37.7 2008: -33.8 1930: -33.7 1920: -32.9 1937: -32.8 1914: -30.6 -30%+
1974: -27.5 1903: -23.6 1932: -23.0 1917: -21.7 -20%+
1966: -18.9 1910: -17.8 1977: -17.2 1929: -17.1 2002: -16.7 1973: -16.5 1941: -15.3 1969: -15.1 1957: -12.7 1940: -12.7 1962: -10.8 1913: -10.3 -10%+
1960: -9.3 1981: -9.2 1901: -8.7 1946: -8.1 2001: -7.1 2000: -6.2 1990: -4.3 1916: -4.2 1953: -3.8 1984: -3.7 1978: -3.1 1939: -2.9 1923: -2.7 1906: -2.3 1948: -2.1 2005: -0.6 1902: -0.4 -0%-10%
1952: 8.4 1912: 7.7 1942: 7.6 2012: 7.1 2007: 6.4 1971: 6.1 2011: 5.2 1970: 4.8 1968: 4.3 1979: 4.2 1992: 4.2 1934: 4.1 1926: 4.1 2004: 3.1 1956: 2.3 1987: 2.3 1947: 2.2 1994: 2.1 1911: 0.2 0%-10%
1938: 28.1 1927: 27.7 1985: 27.7 1989: 27.0 1945: 26.6 1924: 26.2 1996: 26.0 1925: 25.4 2003: 25.3 1999: 25.2 1936: 24.8 1997: 22.6 1986: 22.6 1922: 21.5 1955: 20.8 1991: 20.3 1983: 20.3 2009: 20.2 20%+
1935: 38.5 1975: 38.3 1905: 37.8 1958: 34.0 1995: 33.5 1919: 30.5 30%+
1928: 49.5 1908: 46.6 1954: 44.0 1915: 81.5 1904: 42.6 1933: 66.7 40%+ 50%+
Average DJIA Return in the Following Year (%)

39.5
40 30 20 10 0 -0.5 -10 -20 -30 -23.1 -50%+ -40%+ -30%+ -20%+ -10%+ -0%-10% 0%-10% 10%+ 20%+ 30%+ 40%+ 50%+ -6.5 4.2 6.2 5.4 5.8 3.7 22.7 24.6
10

PrognosticationsS&P 500
Below we highlight the 2013 year-end S&P 500 price targets for the main equity strategists at fourteen Wall Street firms as surveyed by Bloomberg. Collectively, strategists are expecting the S&P 500 to finish 2013 at 1,531, which would be a gain of roughly 9%. All but one strategist is expecting the index to gain in 2013, with Citigroup and Bank of America expecting the largest gains. Citigroup has a 2013-year end price target of 1,615, while Bank of America is at 1,600. Oppenheimer, JP Morgan, Bank of Montreal and Goldman Sachs all have price targets between 1,575 and 1,585, and then HSBC, Credit Suisse, Barclays, Weeden and Stifel Nicolaus are at 1,500 to 1,560. The three most bearish strategists for 2013 are Morgan Stanley, UBS and Wells Fargo. Morgan Stanley expects the S&P 500 to finish 2013 at 1,434, which would be a gain of just 1.85%, while UBS is at 1,425 (+1.21%). Wells Fargo is the lone strategist that expects the S&P 500 to decline in 2013 down to 1,390.
2013 Wall Street Strategist S&P 500 Year-End Price Targets

Firm 2013 Year-End Target % Change Citigroup 1,615 14.70 Bank of America 1,600 13.64 Oppenheimer 1,585 12.57 JPMorgan 1,580 12.22 Bank of Montreal 1,575 11.86 Goldman Sachs 1,575 11.86 HSBC 1,560 10.80 Credit Suisse 1,550 10.09 Barclays 1,525 8.31 Weeden 1,525 8.31 Stifel Nicolaus 1,500 6.53 Morgan Stanley 1,434 1.85 UBS 1,425 1.21 Wells Fargo 1,390 -1.28 Average 1,531 8.76
Citigroup Bank of America Oppenheimer JPMorgan Goldman Sachs Bank of Montreal HSBC Credit Suisse Average Weeden Barclays Stifel Nicolaus Morgan Stanley UBS Wells Fargo -1.3 -5
1.8 1.2
14.7 13.6 12.6 12.2 11.9 11.9 10.8 10.1 8.8 8.3 8.3 6.5
0 5 10 15 2013 % Change
20
11

PrognosticationsS&P 500 Earnings Growth
Below we highlight the 2013 earnings growth expectations for the S&P 500 and its ten sectors. For the index as a whole, the year is expected to start out weak with earnings growth of just 1.5% in the first quarter, but it picks up to the high single digits in the second and third quarter, and for the full year earnings are expected to grow 8.8%. All ten S&P 500 sectors are expected to see earnings growth in 2013, with Telecom and Materials expected to see the strongest growth at 20.4% and 19.6%, respectively. The biggest sector of the market Technology is expected to grow 8.1%, while the second biggest Financials is expected to grow 14.3%. Health Care, Energy and Utilities are set to grow in the mid to low single digits.
2013 S&P 500 Consensus EPS YoY % Growth Estimates

12 10 8 6 4 2 0 Q4 12 Q1 13 Q2 13 Q3 13 Full Year 3.1 1.5 9.6 8.7 8.8
2013 S&P 500 Sector Consensus EPS Growth Estimates

25 20 19.6 14.3 8.1 9.5 20.4
15 10 5 1.4 0 4.8 5.2 7.7 7.8
12

PrognosticationsUS Economy
Economists are looking for the US economy to grow just 2% in 2013, which would mean sub3% growth for 8 straight years. Inflation is expected to remain very tame as well at just 1.9%. The unemployment rate is expected to continue lower but not by much, falling from an average of 8.1% in 2012 down to 7.7% in 2013. By the fourth quarter of 2013, economists expect the unemployment rate to be at 7.5%, which is well above the 6.5% level the Fed needs to see before thinking about tightening monetary policy.
Real GDP YoY% Economist Estimates 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 -3.0 -4.0
3.10 1.90 2.70 -0.30
Yearly
2.40 1.80 2.20 2.00
2.80
5.0
4.10
Quarterly
3.10
4.0 GDP 3.0 2.0 1.0

2.00 1.30 2.10 1.40 1.60 2.80 2.50 2.70
GDP
-3.10
0.0 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q4 13 Q4 13 Q1 14 Q1 14 Q1 14
CPI YoY% Economist Estimates 5.0 4.0

3.38 3.23 2.87 1.63 3.85
Yearly
3.17 2.10 1.90 2.10
5.0 4.0
3.30 2.83 1.90
Quarterly
CPI
3.0 2.0 1.0 0.0
CPI
3.0 2.0 1.0

1.70 2.00 1.70 2.00 1.90 2.10 2.10
-1.0
-0.35
0.0
Q4 11
Q1 12
Q2 12
Q3 12
Q4 12
Q1 13
Q2 13
Unemployment Rate % Economist Estimates 10.0
Yearly
9.30 9.60
9.00
9.0
8.10 7.30
8.70
Quarterly
8.07
Unemp. Rate
8.0 6.0 4.0 2.0

5.10 5.80 4.60 4.60
Unemp. Rate
7.70
8.5 8.0 7.5 7.0

8.27 8.17 7.80 7.80 7.80 7.70 7.50 7.50
Q4 11
Q1 12
Q2 12
Q3 12
Q4 12
Q1 13
Q2 13
13
Q3 13
Q3 13

PrognosticationsInterest Rates
In terms of interest rates, economists expect the yield on the 10-Year Treasury Note to rise to 2.17% in 2013. They expect the 2-Year Treasury to jump from 0.26% to 0.43% for the full year and then to 0.51% by the first quarter of 2014. The 10-Year/2-Year spread would jump from 1.4 percentage points up to 1.74 percentage points if estimates are correct, which would likely be a signal of economic strength if it pans out. The Fed Funds Rate is obviously expected to remain where it is.
10-Year Treasury Yield Consensus Economist Estimates 5.0 4.0
4.39 4.70 4.03
Yearly
3.84 3.30 2.21
Yield
Yield
3.0 2.0 1.0 0.0
1.88
1.66
2.17
2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0
Quarterly
2.21 2.34 2.17 1.88 1.65 1.63 1.66 1.77 2.02 1.88
Q4 11
Q1 12
Q2 12
Q3 12
Q4 12
Q1 13
Q2 13
Q3 13
Q4 13
0.43
2-Year Treasury Yield Consensus Economist Estimates 6.0 5.0 4.0 3.0 2.0 1.0 0.0
3.05 0.77 1.14 0.60 0.24 0.26 0.43 4.40 4.81
Yearly
0.6 0.5
Quarterly
0.51
Yield
Yield
0.4 0.3
0.33 0.30 0.23 0.26 0.27 0.32 0.36
0.2 0.1
0.24
Q4 11
Q1 12
Q2 12
Q3 12
Q4 12
Q1 13
Q2 13
Q3 13
Q4 13 Q4 13
Fed Funds Rate Consensus Economist Estimates 6.0 5.0

4.25 5.25 4.25
Yearly
0.4 0.3
Quarterly
0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25
Yield
3.0 2.0 1.0 0.0

0.25 0.25 0.25 0.25 0.25 0.25
Yield
4.0
0.2 0.1
Q4 11
Q1 12
Q2 12
Q3 12
Q4 12
Q1 13
Q2 13
Q3 13
14
Q1 14
Q1 14
Q1 14

PrognosticationsCurrencies
Currency strategists expect the dollar to gain slightly versus the euro in 2013 from 1.28 to 1.27. The euro is expected to gain the loss back in 2014 with a jump back up to 1.28.
Euro Consensus Economist Estimates 1.5
Yearly
1.40 1.32 1.18
1.3 1.3
1.33 1.30
Quarterly
1.29 1.28 1.28 1.28 1.27 1.27 1.27
USD/EUR
USD/EUR
1.4 1.3 1.2 1.1 1.0
1.46
1.43 1.34 1.30 1.28 1.27 1.28
1.3 1.3 1.3 1.2
Q4 11
Q1 12
Q2 12
Q3 12
Q4 12
Q1 13
Q2 13
Q3 13
15
Q4 13

Valuation
In last years report we identified a trend that began with the Financial Crisis and continued in the years that followed. That trend is investors increasingly shifting their focus from fundamentals and valuations to more macro related issues. Whether it has been the ongoing debt crisis in Europe, the economic slowdown and transition of power in China, geo-political issues in the Middle East, or political issues here at home, valuations have taken a back seat. In last years report, we argued that this would be less evident in 2012, and while macro related issues still moved the market up and down, attractive valuations provided a cushion on the downside and room for multiple expansion. Part of the reason for the lack of focus on company fundamentals may be related to the fact that holding periods have shortened so much. If you only plan on holding a stock for a few weeks, you are less likely to care as much about the stocks valuation. That being said, ultimately valuations matter. As we began to see in 2012, as the market becomes less volatile, valuations will play a larger role. Closing out 2012, the S&P 500 is trading at about 14.64 times trailing earnings (through Q3 2012), which is a modest increase from the start of the year when the index was trading at just above 13 times trailing earnings. Even after this years multiple expansion, though, the index is still trading below its historical average of 15.33 times trailing earnings. In order to trade at an average valuation, the S&P 500 would need to trade at 1,500, or 5% above current levels.
S&P 500 Trailing P/E Ratio: 1929 - 2012
35 P/E: 14.64 Long Term Average: 15.33
25
15
5 '29 '39 '49 '59 '69 '79 '89 '99 '09
16

Valuation
It is always dicey to try and place a valuation on future earnings. We know all too well that analysts have a tendency of being overly optimistic in their assumptions when things are going well and overly dour when things are bad. With that caveat in mind, the chart below shows the P/E ratio of the S&P 500 based on 12-month forward earnings. For this chart we looked at actual 12-month forward earnings where available and have used estimated earnings to cover the next four quarters. Currently, the S&P 500 is trading at 13.7 times next years earnings forecast of 104.55 (Q4 2012 through Q3 2013). This is eight percent below the historical average of 14.91, meaning that the S&P 500 would have to trade at 1,560 to get to average. So whether you want to look at earnings on a trailing or forward basis, the S&P 500 is anywhere from 5% to 9% undervalued. This relative undervaluation implies that even if earnings growth for calendar year 2013 comes in below the 14% growth currently forecast, there is still room for error. In fact, even if earnings show zero growth in 2013, the S&P 500 would still be modestly undervalued based on its historical average P/E ratio.
S&P 500Forward P/E Ratio: 1929 - 2012
45 Forward P/E: 13.70 Long Term Average: 14.91 35
25
15
5 '29 '39 '49 '59 '69 '79 '89 '99 '09
With regards to the S&P 500s book value, the index is currently trading at 2.24 times its book value of $640. Since 1978, the average P/B ratio has been 2.42. Using the average valuation, the price target for the S&P 500 would be 1,547 assuming no change in book value in 2013.
S&P 500 Trailing P/E Ratio: 1929 - 2012
6 5 4 3 2 1 0 '29 '39 '49 '59 '69 '79 '89 '99 '09 P/B: 2.24 Long Term Average: 2.42
17

Valuation
With respect to dividend yields, the S&P 500 is finishing off 2012 exactly where it finished off 2011, with a dividend yield of 2.10%. While the index is cheap by just about any measure, dividend yield is one measure which is significantly below average. Going back to 1929, the average dividend yield on the S&P 500 has been 87% higher at 3.92%.
S&P 500 Dividend Yield: 1929 - 2012
20 Dividend Yield: 2.10% Long Term Average: 3.92% 16
12
0 '29 '39 '49 '59 '69 '79 '89 '99 '09
Although the S&P 500s dividend yield is low on an absolute basis, relative to the alternatives, it is very attractive. At the end of 2011, the S&P 500 was yielding 25% more than the 10-Year US Treasury. Outside of the credit crisis, the last time the S&P 500 yielded more than the 10Year Treasury was before 1960. In order for the dividend yield to get back to its historical average relative to US Treasuries, either the 10-Year yield would have to rise back above 1.9%, the S&P 500 would have to rally to 1,600, or you would have to see some combination of the two.
S&P 500 Dividend Yield Relative to Treasuries: 1929 - 2012
6
Dividend Yield Relative to Treasuries: 1.25 Long Term Average: 1.12
5 4 3 2 1 0 '29 '39
'49
'59
'69
'79
'89
'99
'09
18

Valuation
Another way to look at valuations is through the earnings yield of the S&P 500. This is simply a reverse of the P/E ratio, so instead of dividing price by earnings, you divide earnings by price. In terms of earnings yield, the S&P 500 is currently yielding 6.83%, which is down from levels where we started the year and below the historical average of 7.35%. Based on this measure, the S&P 500 is closing out 2012 at slightly overvalued levels. All else being equal, in order to have an average earnings yield of 7.35%, the S&P 500 would need to fall to 1,330 based on the last four quarters of earnings.
S&P 500 Earnings Yield (%): 1929 - 2012
18 Earnings Yield: 6.83% Long Term Average: 7.35%
12
0 '29 '39 '49 '59 '69 '79 '89 '99 '09
Although the S&P 500s earnings yield is modestly below average, relative to an alternative of long-term US Treasuries, the yield looks considerably more attractive. Going back to 1929, the S&P 500s earnings yield has averaged twice the yield of the 10-year US Treasury. Currently, the S&P 500s yield is more than four times the yield on the 10-year. So to get to an average premium, you would need to see some combination of earnings declining, the S&P 500 rising, and yields rising.
S&P 500 Earnings Yield vs Treasuries: 1929 - 2012

9 Earnings Yield vs Treasuries: 4.13 Long Term Average: 1.99 6
0 '29 '39 '49 '59 '69 '79 '89 '99 '09
19

Valuation
Some strategists and investors will argue that comparing the earnings yield of the S&P 500 (a risky asset) to the yield on the 10-Year US Treasury (a so-called risk-free asset) is an apples to oranges comparison. With that in mind, in the chart below we compare the earnings yield on the S&P 500 to the yield on corporate bonds using the average yield of Moodys AAA and BAA corporate indices. The earnings yield of the S&P 500 is currently 1.67 times greater than the yield on corporate bonds. This represents a slight decline from where we were last year at this time (1.70). Relative to history, the current level is well above the historical average of 1.43 and near its highest reading since the late 1950s. In order for the S&P 500 to trade at an average earnings yield relative to corporate bonds, either interest rates would need to rise or the S&P 500 would need to rally to 1,667!
S&P 500 Earnings Yield vs Corporate Bond Yields: 1929 - 2012
6 Earnings Yield vs Corporates: 1.67 Long Term Average: 1.43
0 '29 '39 '49 '59 '69 '79 '89 '99 '09
Obviously with interest rates at record low levels, the earnings yield of the S&P 500 is going to be high relative to bond yields. Therefore it is unlikely that these indicators will revert to their historical averages as long as interest rates remain low. That being said, what we said last year at this time is just as applicable today. With earnings expected to grow by 11% in 2013, there is significant room for the market to run and still remain fairly valued. Looking at the chart above, it is amazing to see how investor sentiment has shifted in the last decade. From 1980, through 2010, equities traded at a premium to corporate bonds, but since 2010 investors have preferred bonds to stocks. Eventually that sentiment will reverse back to equities over bonds, but historically these shifts have occurred over decades as opposed to months or years.
20

Valuation
Comparing the S&P 500s average P/E ratio since the start of 2010 to the average P/E ratio by decade shows that current valuations havent been this low since the 1980s. At the same time, dividend yields are only slightly higher in this decade than they were in the last decade and that was the lowest average dividend yield of any decade since at least the 1930s. The most encouraging indicators of the ones we looked at is the average ratio of the earnings yield to the 10-Year Treasury yield and corporate bonds. Since 2010, the earnings yield has averaged a premium of nearly three times the yield on the 10-Year US Treasury, and premium of 1.4 times the yield on corporate bonds. The only decades where these two ratios was higher was in the 1940s and 1950s.
Average P/E Ratio By Decade
25 19.6 17.6 17.9 5 15.1 15 11.2 10 11.9 12.3 12.0 4 3.2 3 2 5 1 0 30s 40s 50s 60s 70s 80s 90s 00s 20100 30s 40s 50s 60s 70s 80s 90s 00s 20102.4 1.8 2.0 20.2 7 6 5.9 5.7 4.9 4.0 4.2
Average Dividend Yield By Decade
20
Average Earnings Yield Relative to 10-Yr Yield

6 5.0 5 4 3 2.1
Average Earnings Yield Relative to Moodys Corporate Bonds

3.5 3 2.5 3.2 2.7
3.4 2.9 2 1.5 1.2 1.2 0.8 0.8 1.2 1 0.5 0 30s 40s 50s 60s 70s 80s 90s 00s 201030s 40s 50s 60s 70s 80s 90s 00s 20101.3 1.1 1.0 0.7 0.7 0.8 1.4
2 1 0
21

Valuation
So how have P/E ratios changed in this bull market relative to the last bull market? In the table to the right and the chart below, we have shown how sector P/E ratios have changed since January 2007, which was near the height of the last bull market and before the credit crisis began to unfold. As shown to the right, P/E ratios for the S&P 500 as a whole have compressed by 13.9% from 16.9 times trailing earnings down to 14.6 times trailing earnings today.
Sector P/E Ratios
Telecom Svcs Energy Materials Utilities Financials S&P 500 Cons Discret. Cons Staples Health Care Industrials Technology January 2007 December 2012 Change (%) 19.3 22.5 16.5 10.6 11.8 11.5 15.1 15.6 3.0 17.2 15.4 -10.3 14.2 12.3 -13.0 16.9 14.6 -13.9 21.0 17.8 -15.6 20.6 17.0 -17.7 18.6 14.4 -22.7 18.6 13.8 -25.9 23.3 15.1 -35.1
Looking at individual sectors, seven have seen a compression in their P/E ratios over the last six years, while just three (Telecom Services, Energy, and Materials) have seen an expansion in their P/E ratios. Technology has seen the largest compression in its P/E ratio. In January 2007, the sector had the highest P/E ratio at a level of 23.3. Today, the sectors P/E ratio has declined to 15.1 and now has the fifth lowest P/E ratio of the ten sectors.
S&P 500 Sector P/E Ratios: 2007 - 2012
25 20 15 10 5 0 Cons Discret. Telecom Svcs Industrials Health Care Technology Cons Staples Financials Materials Utilities Energy 23.3 21.0 20.6
P/E Ratio: January 2007

19.3 18.6 18.6 17.2 15.1 14.2 10.6
Technology, Health Care, and Energy have seen the largest move down in the rankings, while Utilities and Consumer Staples have seen the biggest move up in the rankings.
Telecom Svcs
Cons Discret.
Cons Staples
Health Care
Technology
Industrials
Financials
Materials
Utilities
24 20 16 12 8 4 0
22.5 17.8 17.0
15.6
15.4
15.1
14.4
13.8
12.3
11.8
P/E Ratio: December 2012
22
Energy

Valuation
In terms of dividend yields, there have been some big shifts since the height of the last bull market. Technology has seen its dividend yield increase by 120%, but because the yield was rising off of such a low base, it still has the lowest dividend yield of the ten sectors. Interestingly, eight of the ten sectors have seen their dividend yields rise by more than the S&P 500. This is due entirely to the 44% decline in the yield of the Financials, which saw its yield drop from 3.4% down to 1.9%.
Sector Dividend Yields
Technology Telecom Svcs Energy Utilities Cons Staples Cons Discret. Health Care Industrials S&P 500 Materials Financials January 2007 December 2012 Change (%) 0.6 1.4 119.9 3.1 4.7 53.0 1.5 2.2 51.5 2.9 4.2 43.8 2.2 3.1 42.8 1.2 1.6 37.5 1.6 2.1 35.6 1.9 2.4 26.7 1.8 2.1 22.9 -1.4 2.6 2.6 3.4 1.9 -44.7
In terms of sector rankings, besides the large decline in the rank of Financials from highest yield in January 2007 to third lowest now, there has not been much in the way of big moves. As shown, besides Financials, only two other sectors have seen their ranking move by more than one place (Consumer Staples and Energy).
S&P 500 Sector Dividend Yields: 2000 - 2011
4.0 3.4 3.1 3.0 2.9 2.6 2.2 2.0 1.9 1.6 1.5 1.2 1.0 0.6
Dividend Yield: January 2007
0.0
Technology saw the largest increase in its yield but is still the lowest yielding of the ten sectors. That being said, the sectors yield is now only 50 basis points below the yield of the Financial sector.
Energy
Telecom Svcs
Cons Discret.
Industrials
Telecom Svcs
Cons Staples
Health Care
Health Care
Cons Discret.
Cons Staples
5.0 4.0
4.7 4.2 3.1
3.0 2.0 1.0 0.0
2.6
2.4
2.2
Energy
2.1
1.9
1.6
1.4
Dividend Yield: December 2012
23
Technology
Industrials
Financials
Materials
Utilities
Technology
Financials
Materials
Utilities

Valuation
On pages 22 and 23 we showed the major long-term shift in sector P/E ratios and dividend yields. Over the last year, though, we also saw some notable shifts in sector valuations and dividend payouts. Although investors seem no more eager to buy stocks this year than they did last year, we saw a broad expansion in multiples. The S&P 500 saw a 12.5% increase in its P/E ratio this year, so investors as a whole were willing to pay a higher premium for equities. As we noted earlier in this section, however, the current multiple on the S&P 500 is below the historical average, so we are still quite a ways from the days of irrational exuberance. Of the ten individual sectors, nine out of ten saw their P/E multiple expand this year. Industrials was the only sector that saw its multiple contract, as fears of recession in international markets weighed on this sector where many companies have heavy revenue exposure outside of the United States. On the positive side, sectors that saw the greatest expansion in their P/E ratios were Materials, Telecom Services, Health Care, Consumer Discretionary, and Financials. Outside of the Materials sector, the one common trait between these sectors is that they have heavy domestic exposure on the revenue side, and with the US economy outperforming its global peers, investors have been shifting into US centric assets.
Change in Sector P/E Ratios: 2012 vs 2011

Sector Change (%) December 2012 December 2011 Consumer Discretionary 14.28 17.75 15.53 Consumer Staples 5.87 16.98 16.04 Energy 6.80 11.82 11.07 Financials 14.02 12.35 10.83 Health Care 15.87 14.41 12.44 Industrials -2.59 13.77 14.13 Materials 29.96 15.57 11.98 Technology 8.13 15.14 14.00 Telecom Svcs 25.18 22.46 17.95 Utilities 8.92 15.44 14.17 S&P 500 12.53 14.64 13.01
24

Valuation
Even though most sectors saw multiples expand in 2012, for most their dividend yields increased as well. Even though the S&P 500 saw its dividend yield remain flat at 2.10%, seven sectors saw their dividend yields expand during the year. The three sectors that saw a decline in their yields were Telecom Services, Health Care, and Consumer Discretionary. The decline in yields, however, was the result of prices rising faster than payouts rather than dividends being cut. On the upside, three sectors (Technology, Energy, and Materials) all saw their dividend yields increase by more than 10% this year. Even with a gain of more than 20% this year, the Financial sector still saw a modest increase in its dividend yield, which rose from 1.86% to 1.90%. 2012 was a year where Financials found a firmer foundation, and as the Financial crisis drifts further back into the rearview mirror, companies in the sector will be increasingly raising their payouts. Keep in mind that in early 2007 the sectors dividend yield was 80% higher than it is now. With tax treatment of dividends likely to change in 2013, the big wildcard is how will companies react to the changes. Since taxes on dividends dropped to 15% under President George W Bush, dividends have slowly been trending higher. With higher dividend tax rates on the horizon, companies issued special and accelerated dividend payments to 2012. Going further out, will higher taxes make companies less open to raising payouts? Its likely.
Change in Sector Dividend Yield: 2012 vs 2011

Change (%) December 2012 December 2011 Consumer Discretionary -3.05 1.60 1.65 Consumer Staples 7.53 3.12 2.90 Energy 18.47 2.24 1.89 Financials 2.35 1.90 1.86 Health Care -4.98 2.10 2.21 Industrials 1.59 2.43 2.39 Materials 12.86 2.61 2.31 Technology 29.58 1.40 1.08 Telecom Svcs -10.76 4.70 5.27 Utilities 4.42 4.19 4.01 S&P 500 0.00 2.10 2.10
25

Sentiment
Although the current bull market is approaching four years in duration, if you talk to the average investor, many will not even call it a bull market. In 2012, the S&P 500 was up by more than 10%, but if you asked most casual observers how the market was doing, they would probably tell you that it was flat, or maybe even down. Furthermore, while the S&P 500 has yet to take out its 2007 highs in terms of price, on a total return basis, 2012 was the year where the S&P 500 broke out to a new all-time high.
S&P 500 Total Return Index: 2004 - 2012

2,400
2,000
1,600
1,200
800 '04 '05 '06 '07 '08 '09 '10 '11 '12
26

Sentiment
Individual investors are less connected to the market these days than they have probably been in a generation, but after the events of the last few years, can you really blame them? With two 50%+ haircuts in the S&P 500 over the last twelve years, countless scandals, and market breakdowns, there is an attitude among most investors that the game is rigged against them. Because of that attitude, they now have little to no faith in what were once highly regarded institutions. Just ten years ago, names like Goldman Sachs, Merrill Lynch, Morgan Stanley, and Smith Barney were considered the gold standard of and the smartest players within the financial advisory industry. After the scandals and losses of the financial crisis, these firms have lost most of their cachet. At the same time, the New York Stock Exchange was the pillar of strength in the financial universe, and Dick Grasso was a household name. Today, the NYSE is in the process of being acquired by the Intercontinental Exchange (ICE), which is an organization that didnt even exist 20 years ago! Likewise, the Federal Reserve and its chairman is no longer referred to as the maestro, but instead Helicopter Ben. After enduring the events of the last ten plus years, investors are in a bunker mentality where they will slowly move into the market as it rises, but once even the slightest hint of trouble arises, they are quick to get out. The chart below is a composite index of market sentiment going back to 1990. For this index we used all of the widely followed sentiment indices around today, and created a normalized index of sentiment. In the chart, 100% represents average sentiment, so that readings below 100% indicate (red shading) that sentiment is below the historical average, while readings above 100% are indicative of above average sentiment. As shown in the chart, outside of two brief periods in this bull market, sentiment towards the equity market has been below average. In fact, the current stretch of below average sentiment has lasted longer than any other period going back to 1990. Even during the financial crisis, the streak of below average sentiment was not as long.
Bespoke Composite Market Sentiment index: 1990 - 2012
160% 140% 120% 100% 80% 60% 40% '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12
27

Sentiment
Like the chart of market sentiment on page 27, the chart below is a composite index of economic sentiment using widely followed economic sentiment indices. Some of the indices included in the index are Consumer Confidence, Michigan Confidence, and the NFIB Small Business Optimism Index. Like market sentiment, economic sentiment has also been below average for an extended period of time. In fact, it has now been five years since economic sentiment was above average. Just like most investors still arent willing to say we are in a bull market, most Americans still think the economy is in recession.
Bespoke Composite Economic Sentiment index: 1990 - 2012
140% 120% 100% 80% 60% 40% '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12
The chart below overlays our market and economic sentiment indices since the start of 2009. The two key takeaways are that sentiment on both fronts remains depressed, and the two indices track each other very closely. The only time they diverged meaningfully was in the late Summer of 2012, when market sentiment improved as economic sentiment was depressed. Not long after the S&P 500 peaked in mid September and sold off nearly 10%. If youre a contrarian, current sentiment towards both the market and the economy should have you gobbling up stocks like turkey on Thanksgiving!
Market vs Economic Sentiment: 2009 - 2012
160% 140% 120% 100% 80% 60% 40% 1/09 Market Sentiment (Left Axis) Economic Sentiment (Right Axis)
7/09
1/10
7/10
1/11
7/11
1/12
7/12
28

Sentiment
Although most measures of investor sentiment portray investors to be less bullish than average, short interest figures provide an alternate narrative. The charts below show the short interest as a percentage of float for the S&P 1500 (all caps), S&P 500 (large caps), S&P 400 (mid caps), and S&P 600 (small caps) going back to early 2007, before the onset of the Financial crisis. Even though investors have yet to embrace the bull market after nearly four years of gains, short interest has been in steady decline. For all four indices shown, short interest as a percentage of float dropped down to or neared multi-year lows at some point in 2012. Based on this trend there appears to be a divergence between what investors are saying and actually doing. Our view, however, is that the deviation represents apathy more than anything else. As we highlighted earlier in the section, investors seem to be more disconnected to the markets today than at any other point in the last several years.
S&P 1500 Short Interest (Percentage of Float): 2007 12.0 11.0 10.0 9.0 8.0 7.0 6.0 13.0 12.0 11.0 10.0 9.0 8.0 7.0
S&P 400 Short Interest (Percentage of Float): 2007 -
6.3%
1/07 1/08 1/09 1/10 1/11 1/12
5.8
5.0 1/07 6.0 1/08 1/09 1/10 1/11 1/12
S&P 500 Short Interest (Percentage of Float): 2007 6.25 5.75 5.25 4.75 18.0 16.0 14.0 12.0 10.0
S&P 600 Short Interest (Percentage of Float): 2007 -
4.25 3.75 3.25 1/07 1/08 1/09 1/10 1/11 1/12
3.9%
8.0 6.0 1/07
7.1%
1/08 1/09 1/10 1/11 1/12
29

Washington
Unlike any other time in history, Washington DC is more involved in the American economy than ever before. This is not a political statement, but simply a fact. The chart below shows the historical share of total GDP that Federal government spending accounts for. After WWII in 1947, the Federal government accounted for 15.8% of GDP, and except for a period from the mid 1980s through 2001, this total has been in a steady ascent. As of the end of Q2 2012, Federal spending now accounts for 23.8% of GDP, representing an increase of 51%!
Total Federal Government Spending (Percent of GDP): 1947 - 2012
26 24 22 20 18 16 14 12 '47 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07 '12 Federal/GDP 23.78 Average Federal: 19.7%
As if the Federal total wasnt already large enough, when you add up government spending from all sources as a percent of GDP, you get to a level of 34.8%. This represents an increase of 72.6% from the 1947 level of 20.15%. For better or worse, government is becoming a larger share of the US economy. At the rate things are going, this trend will only continue as government spending balloons with increased Social Security and Medicare spending. Also, if interest rates start to rise, the cost of servicing the debt load will surge.
Total Government Spending (Percent of GDP): 1947 - 2012
40 Total Govt/GDP 35 Average Total Government: 28.5%
34.79
30
25
20
15 '47 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07 '12
30

Washington
In some respects, the large increase in government spending has been a buffer for the US economy. Without much of the government expenditures we have seen in the last four years, some would argue that the economy and ultimately the market would be worse off and the recession that began in late 2007 would have been much worse. Unlike the private sector, government spending is not cyclical so you can argue that is helps to smooth the business cycle. That may be true, but the other side of the argument is that government spending is less productive than private sector spending, so when government crowds out the private sector, you get anemic growth like we have seen during the current economic recovery off the June 2009 trough. Whatever side of the argument you take on spending and political ideology, US equities have performed well during President Obamas first term. With a gain of 63.7% (through 12/30), only four other Presidents have seen a better stock market return during their first 1,440 days in office. Those four Presidents were evenly split between Republicans (Coolidge & Eisenhower) and Democrats (FDR & Clinton).
DJIA Performance During First 1,440 Days of a President's Term: 1900 - 2012
President T Roosevelt Taft Wilson Harding* Coolidge Hoover FDR Truman Eisenhower JFK* Johnson Nixon Ford* Carter Reagan Bush I Clinton Bush II Obama
-50 0
-81.1
Start 22.8 9/14/01 3/4/09 0.5 13.4 3/4/13 17.4 3/4/21 8/2/23 3/4/29 3/4/33 10.3 4/12/45 1/20/53 12.2 1/20/61 21.9 11/22/63 9.5 1/20/69 23.8 8/9/74 1/20/77 0.3 26.7 1/20/81 1/20/89 1/20/93 1/20/01 2.0 1/20/09
0
96.3
246.5
72.4
48.6 102.0 63.7 50 100 150
-150
-100
Percent Change (%)
Percent Change (%)
*President in Office Less Than 1,368 Years. Performance Shown measures, President's total time in office. = Republicans = Democrats
31

Washington
Taking a look at the returns of the DJIA during each US Presidents entire term shows a similar picture. Of the eleven Republican US Presidents since 1900, the DJIA has averaged an annualized return of 3.0%. Under the eight Democratic US Presidents, the DJIA has now averaged an annualized return of 6.9%, or more than twice the average annualized return of Republicans. Even though it is Republicans who are more often considered to be better for business, based on the returns of the DJIA over Obamas first 1,440 days in office and the average returns under Democratic Presidents since 1900, equities have historically preferred the spending tendencies of Democrats. The argument can be made that you cant just look at the returns of a President while he was in office as it often takes time for a Presidents policies to take effect and for the policies of the prior Administration to wear off. Just as Democrats argue that you cant pin the job losses of Obamas first few months in office on him, Republicans argue that the market was so far down when Obama took office that all it could do was go up. No method no matter how consistently applied is perfect, so there will always be detractors, but the method we used was consistent for each President, so its hard to argue that this method favored any one specific party. DJIA Returns Under US Presidents Since 1900
President Start T Roosevelt 9/14/01 Taft 3/4/09 Wilson 3/4/13 Harding 3/4/21 Coolidge 8/2/23 Hoover 3/4/29 FDR 3/4/33 Truman 4/12/45 Eisenhower 1/20/53 JFK 1/20/61 Johnson 11/22/63 Nixon 1/20/69 Ford 8/9/74 Carter 1/20/77 Reagan 1/20/81 Bush I 1/20/89 Clinton 1/20/93 Bush II 1/20/01 Obama 1/20/09 Average Average Republican Average Democratic DJIA Percent Change (%) End Change as President Annualized Return 3/4/09 21.6 2.7 3/4/13 -1.3 -0.3 3/4/21 -6.9 -0.9 8/2/23 17.4 6.9 3/4/29 255.9 25.5 3/4/33 -82.8 -35.6 4/12/45 194.4 9.3 1/20/53 81.7 8.0 1/20/61 120.3 10.4 11/22/63 12.2 4.1 1/20/69 30.9 5.3 8/9/74 -16.5 -3.2 1/20/77 23.4 8.9 1/20/81 -0.9 -0.2 1/20/89 135.1 11.3 1/20/93 45.0 9.7 1/20/01 226.6 15.9 1/20/09 -24.9 -3.5 12/27/12 63.7 13.3 57.6 44.8 75.2 4.6 3.0 6.9
32

Washington
As mentioned earlier in this section, there have only been four US Presidents since 1900 that saw a better DJIA performance during their first term than President Obama. Of those four, Coolidge was the only President who was not elected to his first term as he came into office following the death of Warren Harding. For the remaining three Presidents, we analyzed the DJIAs performance during their second term in office and found mixed results. The charts below highlight the performance of the DJIA during each of those three periods as well as the performance of the DJIA during each year of the Presidents second term in office. As shown in the table and the charts, during the first year of these three second terms, the DJIA averaged a decline of 7.6% with losses two out of the three times. Although the first year of these three terms was biased towards the weak side, the second year was positive for all three Presidents with an average return of 23.2%. In the third year, returns were generally good with an average return of 11.0%, but in year four the DJIA declined each time for an average loss of 8.0%. For each of the four-year terms, the DJIA has averaged a gain of 10.4% with positive returns two-thirds of the time. We would note, though, that for each term, however, the market was either up or down ~30% or more.
First Term President Political Party All 4 Years FDR Democrat 241.8 Eisenhower Republican 66.4 Clinton Democrat 109.9 Average
DJIA: 1/20/37 - 1/20/41 (FDR)
10 0 -10 20 -20 10 50 40 30
1st Year -29.3 -7.0 13.5 -7.6
DJIA Performance (%) 2nd Term 2nd Year 3rd Year 14.9 -2.4 34.1 9.8 20.5 25.5 23.2 11.0
4th Year -11.4 -3.0 -9.7 -8.0
Entire Term -29.8 32.9 55.0 19.4
DJIA: 1/21/57 - 1/20/61 (Eisenhower)
-30 -40 -50 1/19/37
0 -10 -20 1/18/57
1/19/38
1/19/39
1/19/40
1/19/41
1/18/58
1/18/59
1/18/60
1/18/61
DJIA: 1/20/97 - 1/20/01 (Clinton)

80 70 60 50 40 30 20 10 0 -10 -20 1/17/97 1/17/98 1/17/99 1/17/00 1/17/01
33

Washington
Looking at second terms from a wider angle, we analyzed the performance of the DJIA during the second elected term of US Presidents who were elected to office two or more times since 1900. This is a modified look at the Presidential Election Cycle using second terms only. For the purpose of this analysis, we omitted Presidents who served shortened first terms due to the fact that they were unelected to office during their 1st term (T. Roosevelt, Coolidge, Truman, and Johnson). Since 1900, there are now eight US Presidents who have been re-elected to office, which we have highlighted in the table below (charts of each second term are on page 35). For each President, we have also listed how the DJIA performed during their 1st term in office as well as the indexs performance during each year of their second terms.
DJIA Performance During Re-Elected Presidents Second Terms: 1900 - 2012
First Term President Political Party All 4 Years Wilson Democrat 15.1 FDR Democrat 241.8 Eisenhower Republican 66.4 Nixon Republican 9.7 Reagan Republican 26.4 Clinton Democrat 109.9 -0.4 Bush Republican Obama Democrat 63.7 Average Percent of Time Positive 66.6 85.7 DJIA Performance (%) 2nd Term 2nd Year 3rd Year 8.4 7.1 14.9 -2.4 34.1 9.8 -9.1 35.1 -5.4 20.5 25.5 15.5 -3.7
1st Year -15.6 -29.3 -7.0 -16.6 25.2 13.5 3.2
4th Year -18.1 -11.4 -3.0 13.8 -9.7 -34.3
Entire Term -19.8 -29.8 32.9 -24.3 82.1 55.0 -24.6
-3.8 42.9
17.1 85.7
5.2 50.0
-10.5 16.7
10.2 42.9
Of the seven US Presidents highlighted above, George W. Bush is the only one who was reelected after the market declined during his first term in office (-0.4%). For all seven Presidents, the DJIA averaged a gain of 67% during their 1st term in office. Although voters were happy to re-elect these Presidents based on their 1st term market returns, a sense of buyers remorse most certainly followed suit. During the first year of their second terms, the DJIA has averaged a decline of 3.8% with positive returns just 43% of the time.
Year two for two-termers has tended to see a rebound, as the DJIAs average return has been +17%. In fact, Richard Nixon, who resigned during year two of his 2nd term, was the only one who saw a decline during year two of his 2nd term. While year three of a second term averages a gain of 5.2%, year four has been a disaster. For the six Presidents who made it to year four of their second term (Nixon resigned), the DJIA averaged a decline of 10.4% with positive returns just 17% of the time. Only Reagan saw a gain during his final year in office. Overall, the DJIA has averaged a gain of just 10.2% during the second term of US Presidents who were re-elected to office. Even in this low rate environment, an annualized return of less than 2.5% is hardly anything to get excited about.
34

Washington
The charts below show the performance of the DJIA during the second terms of the re-elected US Presidents highlighted on page 34.
DJIA: 3/5/17 - 3/4/21 (Wilson)
40 30 20 10 0 -10 -20 -30 -40 3/3/17 -40 -50 1/19/37 -10 -20 -30 10 0
DJIA: 1/20/37 - 1/20/41 (FDR)
3/3/18
3/3/19
3/3/20
3/3/21
1/19/38
1/19/39
1/19/40
1/19/41
DJIA: 1/21/57 - 1/20/61 (Eisenhower)

50 40 30 20 10 0 -10 -20 1/18/57 0 -5 -10 -15 -20 -25 -30 -35 -40 -45 1/18/58 1/18/59 1/18/60 1/18/61 -50 1/19/73
DJIA: 1/20/73 - 1/20/77 (Nixon)
Nixon Resignation: 8/9/74
1/19/74
1/19/75
1/19/76
1/19/77
DJIA: 1/21/85 - 1/20/89 (Reagan)

140 120 100 80 60 40 80 70 60 50 40 30 20 10 0
DJIA: 1/20/97 - 1/20/01 (Clinton)
20 0 1/18/85
-10 1/18/86 1/18/87 1/18/88 1/18/89 -20 1/17/97 1/17/98 1/17/99 1/17/00 1/17/01
DJIA: 1/20/05 - 1/20/09 (Bush II)

40 30 20 10 0 -10 -20 -30 -40 1/19/05
1/19/06
1/19/07
1/19/08
1/19/09
35

Washington
On page 38 we have broken out the performance of the S&P 500 and each individual sector during each session of Congress from 1961 through the present. In addition to the ten sectors, we have also included the performance of the Transportation sector since up until just a little over ten years ago, it too was also a sector. The graphic provides a handy reference tool to quickly assess which sectors did what under different political scenarios. In the table below we have summarized the performance of the S&P 500 and all ten sectors under various political scenarios (President, Senate, House) sorted horizontally from most frequent to least frequent. As shown, the two most popular scenarios we have seen are full Democratic Control (eight sessions) and a split between a Republican President and Democratic Control of both the Senate and House. Prior to 2011, the current political makeup of Democratic control of the Presidency and Senate and Republican control of the House had never happened before. Through December 20th, this split Congress under a Democratic President has worked out pretty well as the S&P 500 has risen 12.0% through 12/27, with nine out of ten sectors advancing (Materials down 2%). The best performing sectors under this scenario have been Health Care (26.1%), Consumer Discretionary (24.8%), and Consumer Staples (18.2%).
S&P 500 Sector Performance Based on Political Makeup

Control Congresses S&P 500 Cons Discret. Cons Staples Energy Financials Health Care Industrials Materials Technology Telecom Svcs Transports Utilities DDD 8 17.8 35.4 10.7 31.8 12.4 16.8 20.0 13.9 33.1 0.3 27.6 5.2 RDD 8 7.6 13.5 24.8 7.9 0.5 16.3 7.8 7.6 -0.6 6.7 9.3 0.6 RRD 3 22.4 56.4 46.2 13.6 32.4 39.3 21.7 33.6 17.5 31.0 27.2 22.4 DRR 3 44.9 37.9 37.3 34.8 61.0 68.3 42.9 10.7 77.3 36.6 29.4 29.3 RRR 2 27.4 30.6 14.5 57.7 29.5 12.2 30.9 33.8 28.9 20.0 42.2 38.3 RDR 1 -33.4 -23.0 -14.1 -24.0 -25.2 -30.3 -32.6 -6.8 -53.8 -44.7 -21.6 -54.7 DDR 1 12.0 24.8 18.2 4.0 1.6 26.1 7.8 -2.0 12.9 12.6 2.0 10.5
= Current Makeup = Makeup With Best Returns for Sector = Makeup With Worst Returns for Sector
36

Washington
Looking at all the various sector performance characteristics based on political control, the table below lists average sector performance when either Democrats or Republicans control the Presidency, the Senate, and the House. Based on average returns, the current political makeup looks positive for equities. For the Presidency, the S&P 500 typically does best when a Democrat is President with an average return of 24.1% vs. 10.7% when a Republican is President. In the Senate, the S&P 500 has historically done better when the Republican party is in control (32.1% vs. 10.1%). Finally, in the House, the S&P 500 has averaged a gain of 24.1% when Republicans are in control and a gain of 14.2% when Democrats are in control. Based on the election results in November, the political makeup in Washington is best for the market in terms of the party controlling the Presidency and the House. It would have been the best of all worlds had Republicans gained control of the Senate, but two out of three isnt bad.
Average Sector Performance Based on Party Control in Washington: 1961 - 2012
Sector Cons Discret. Technology Energy Health Care Transports Cons Staples Financials Industrials Materials Utilities Telecom Svcs S&P 500 President Democrat Republican 35.2 22.5 42.5 3.7 30.3 14.0 30.7 17.3 26.0 15.7 18.3 25.1 23.5 9.6 24.8 11.2 11.5 15.9 11.8 6.7 10.5 10.1 24.1 10.7 Senate Democratic Republican 21.9 43.0 12.2 42.8 16.6 32.6 14.6 43.4 15.4 31.8 16.2 35.0 4.3 42.4 11.0 32.0 8.9 25.0 0.2 29.0 1.4 30.3 10.1 32.1 House Democratic Republican 29.5 25.4 16.5 35.6 18.9 28.7 20.2 32.5 19.9 21.9 22.2 21.3 10.5 30.9 15.2 23.7 14.3 12.6 6.0 17.4 7.8 17.0 14.2 24.1
The last two months of 2012 have been a period where the investment community focused more on Washington than ever before. If there is a smooth resolution to the fiscal cliff early in 2013, the investment community may breathe a big sigh of relief, but based on the experience of the last few years, and the governments increasingly large role in the economy, we would expect events in Washington to continue to play an abnormally large role in the markets behavior. With respect to Washington, the short term issue is the resolution of the fiscal cliff. On a longer term basis, investors need to monitor governments share of the economy as well as the tendency for problems to arise as second term administrations have tended to lose focus.
37
Parties Controlling Office and Year/Year S&P 500 Performance: 1961 - 2012
Start Year President Senate House
JFK/LBJ Johnson Nixon Nixon/Ford Carter Reagan Reagan Bush Clinton Clinton Bush Bush Obama 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 D D D D R R R R D D R R R R R R D D D D R R R R D D D D D D D D D D D D R R R D D D D R R R D R R D D D D D D D D D D D D D D D D D D D D R R R R R R D D R
38
'69 '73 '77 '81 '85 '89 '93
S&P 500 Cons Discret. Cons Staples Energy Financials Health Care Industrials Materials Technology Telecom Svcs Transports Utilities
1961 8.6 22.2 5.3 32.7 30.2 -1.4 7.3 12.8 -2.2 9.2 7.8 29.2
1963 34.3 70.7 21.7 44.8 16.0 33.4 35.8 34.1 30.8 19.3 45.6 20.1
1965 -5.2 -6.1 -4.2 -11.3 -11.3 27.5 -4.9 -29.4 40.3 -16.4 -1.2 -12.2
1967 29.3 111.0 42.9 33.4 38.7 29.3 32.6 15.4 72.0 -1.6 33.8 0.7
1969 -11.3 -8.4 13.8 -18.6 -5.7 16.0 -10.7 -19.1 -4.4 -9.8 -36.8 -11.2
1971 28.1 27.6 37.7 16.8 34.8 52.7 30.7 38.1 33.3 7.0 32.4 -1.9
1973 -41.9 -65.0 -43.8 -24.6 -29.1 -26.4 -42.0 -25.9 -50.1 -20.8 -36.9 -42.5
1975 56.7 115.2 48.3 55.1 18.1 -4.3 56.2 52.5 55.0 46.4 65.2 57.6
1977 -10.6 -10.6 -1.6 -4.2 -19.6 -3.4 -10.3 -30.2 6.9 -5.1 -12.9 -9.4
1979 41.3 19.7 -1.8 117.4 16.9 33.0 44.1 19.9 -1.1 -19.8 92.7 16.5
1981 3.6 74.6 39.4 -34.9 29.4 13.6 2.1 -7.0 20.7 24.0 12.6 4.4
1983 18.9 26.6 21.1 38.4 12.2 16.0 18.2 9.7 21.8 24.2 24.5 25.2
1985 44.8 68.1 78.1 37.3 55.6 88.2 44.8 98.2 10.0 44.7 44.6 37.8
1987 14.7 9.7 39.4 21.0 -13.2 22.4 19.0 17.1 2.4 13.1 20.2 -9.6
1989 18.9 10.2 68.4 28.8 -7.3 67.5 10.7 3.9 -13.0 26.0 -6.1 16.5
1991 31.9 62.4 42.6 0.0 72.2 23.0 34.5 30.3 7.2 19.8 59.2 16.4
1993 5.4 1.7 0.1 10.7 0.9 -1.9 10.3 14.2 43.5 1.5 0.4 -10.7
1995 61.3 30.7 67.8 53.4 97.3 83.5 66.8 33.0 98.8 34.3 55.0 25.4
1997 65.9 84.7 48.6 19.6 59.3 101.6 36.6 -2.2 127.6 104.7 39.6 30.3
1999 7.4 -1.7 -4.5 31.3 26.3 19.8 25.4 1.2 5.3 -29.2 -6.4 32.2
2001 -33.4 -23.0 -14.1 -24.0 -25.2 -30.3 -32.6 -6.8 -53.8 -44.7 -21.6 -54.7
2003 37.7 52.6 15.8 57.6 38.5 13.6 50.4 49.3 49.7 19.8 64.4 44.8
2005 17.0 8.6 13.3 57.8 20.5 10.9 11.4 18.2 8.1 20.2 20.1 31.8
2007 -36.3 -44.1 -8.1 -15.2 -65.9 -20.4 -35.8 -36.5 -34.9 -28.0 -22.4 -20.7
2009 39.2 74.5 23.1 31.2 27.2 17.9 45.3 74.1 74.5 15.3 54.9 7.7
2011 12.0 24.8 18.2 4.0 1.6 26.1 7.8 -2.0 12.9 12.6 2.0 10.5
60
S&P 500 Y/Y (%)
-60 '97 '01 '05 '09
'61
'65

Washington
As noted earlier, the fiscal cliff provides a perfect example of how Washington is playing a larger role in the market and broader economy than nearly any other variable. To illustrate this, we wanted to focus on the NFIB Small Business Optimism, which was released in midDecember. In that report, the headline reading fell from 93.1 down to 87.5 for a decline of 6%. Since the NFIB began releasing the results of this survey on a monthly basis in 1986, there has never been a larger monthly drop. The only other time the index saw a larger decline was back in April 1980 when the index saw a 13% drop from its January 1980 reading three months prior. As shown in the chart below, in the nearly forty years that this index has been in existence, the only three prior periods where the index was below 90 was in 1974, 1980, and during the Financial Crisis. Furthermore, all of these periods occurred during recessions.
NFIB Small Business Optimism Index: 1974 - 2012
110 105 100 95 90 85 80 '74 '79 '84 '89 '94 '99 '04 '09
-6%
In each months NFIB survey, small business owners are NFIB Single Most Important Problem asked what the single most important problem they Problem Percent Poor Sales 23 face is. In this months survey, Poor Sales and Taxes Taxes 23 were tied at the top of the list with 23%. Third on the Govt Requirements & Red Tape 18 7 list, though, at 18%, was Government Requirements Cost/Availability of Insurance Inflation 6 and Red Tape. The impact of Hurricane Sandy has been Quality of Labor 6 5 cited as a reason for Poor Sales as the number one Competition From Big Businesses Other 5 problem, but the real standout in this table is Taxes and Cost of Labor 4 Govt Requirements. Combined, these two Washington Fin & Interest Rates 3 centered problems account for 41% of the total responses. At current levels, the combined reading of Taxes and Government Requirements is at multi-year highs. Ever since the election, we have been hearing about the potential what if negative scenarios of going over the fiscal cliff. Based on the large decline in the Michigan Confidence Expectations Index earlier in December as well as Decembers record monthly decline in the NFIB Small Business Optimism Index, those what ifs may already be what is, and they illustrate that right now, rather than solving problems, Washington is the problem.
39

Washington
Decembers release of the final Michigan Confidence report provides evidence of how the fiscal cliff is impacting not only business behavior but also the actions of individuals. Decembers release of the final confidence reading for December showed considerable weakness. Not only was the headline number worse than expected, but the expectations component declined even more.
Michigan Confidence: 2000 - 2012
120 110 100 90 80 70 60 50 '00 '02 '04 '06 '08 '10 '12 72.9
Michigan Confidence (Current Conditions): 2000 - 2012

130 120 110 100 80 90 80 70 60 50 '00 '02 '04 '06 '08 '10 '12 87 70 60 50 40 '00 110 100 90
Michigan Confidence (Expections): 2000 - 2012
63.8
'02
'04
'06
'08
'10
'12
Decembers 13.8% decline in the expectations components of the Michigan Confidence report ranks as the third steepest one month decline for the index since at least 1979. If you are looking for any indication of whether or not the Fiscal Cliff negotiations are having (or will have) an impact on the economy, the expectations component illustrates that consumers are not very optimistic that there will be a smooth process in reaching a deal. While negative sentiment may be considered a good Large Drops in Consumer Expectations contrary indicator, history shows that large drops in S&P 500 Performance (%) Date Decline 3 Months 6 Months 1 Year the expectations component of the Michigan Confi12/31/80 -16.5 0.6 -4.4 -9.7 dence report have been followed by weaker than aver- 8/31/90 -14.4 -0.1 14.9 22.6 age equity market returns. After the nine prior periods 12/31/12 -13.8 -0.4 -12.5 6.2 where expectations dropped by more than ten per- 3/31/11 -13.7 9/30/05 -13.6 1.6 5.4 8.7 centage points, the S&P 500 has averaged a decline of 9/30/01 -11.7 11.5 10.2 -21.7 -2.1 -3.2 5.1 0.4% over the next three months, and then gains of 2/29/04 -11.6 12/31/00 -10.9 -12.1 -7.3 -13.0 just 1.6% and 4.3% over the next six months and one 3/31/80 -10.6 11.9 21.0 33.2 year, respectively. In terms of the frequency of posi- 10/31/08 -10.2 -14.7 -9.4 7.0 tive returns, over the next one and three months, the Average 1.4 3.0 3.9 % Positive 44.4 44.4 66.7 S&P 500 has only been positive 44.6% of the time, while the S&P 500 has been up two-thirds of the time one year later.
40

SeasonalityIndices, Sectors, and Commodities
As we do each year, in this section we highlight the typical seasonal patterns for the S&P 500 (large cap), S&P 400 (mid cap), and Russell 2000 (small caps). We have also calculated the average monthly returns for the ten S&P 500 sectors (and DJ Transports) and some major commodities. For each index, we provide a graph of the average pattern since 1980, the average change over the prior five years (20072011), and 2012. Below each chart we also include the average performance during each month. The table below summarizes the average monthly returns since 1980 for each of the indices/ sectors/commodities on the following pages. For each category, green shading highlights the month of the year which has historically been the best, while red shading indicates the month of the year which has traditionally been the worst. Using the S&P 500 as an example, April has been the indexs best month since 1980 with an average return of 1.78%, while September has been the worst with an average return of 0.82%.
Average Monthly Performance for Indices, Sectors, and Commodities: 1980 - 2011
Average Monthly Percent Change (%) Apr May Jun Jul Aug Sep Oct 1.78 1.13 0.00 0.56 0.05 -0.82 1.16 1.94 1.59 0.02 -0.07 0.39 -0.68 0.38 1.90 1.61 0.18 -0.60 0.03 -0.57 -0.22 2.25 1.17 3.13 2.86 1.63 2.51 2.80 2.60 1.09 2.01 1.69 2.39 2.18 1.23 1.57 1.54 0.99 1.07 0.58 1.24 1.25 1.18 0.14 0.49 0.45 1.17 0.26 0.09 -0.50 -0.20 -0.95 0.80 0.64 0.58 0.80 -0.04 2.10 -0.48 0.69 0.46 -0.15 0.52 -0.72 -0.18 0.10 -0.88 0.40 1.06 0.19 0.52 0.39 1.17 -0.34 0.57 -0.25 -0.99 0.47 -0.67 0.40 0.35 -2.69 -0.06 0.27 0.27 0.65 -0.88 1.07 0.33 -0.20 -0.40 0.95 1.08 -0.17 1.17 -1.11 -1.33 2.43 0.07 0.10 1.40 -0.52 1.03 -0.36 -0.09 0.13 -0.28 0.45 0.12 0.39 1.22 0.05 -0.02 0.37 0.19 1.22 2.24 1.60 -0.13 -0.70 0.12 2.35 1.66
S&P 500 Mid Caps (since 1981) Russell 2000 Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Materials Technology Telecom Svcs Transports Utilities CRB Commodity US Dollar Index Long Bond Crude Oil Gold
Jan 0.97 0.63 1.45 0.96 -0.74 0.19 0.29 0.99 0.60 -0.12 2.95 0.62 1.19 0.16
Feb -0.04 1.09 1.12
Mar 0.98 1.79 0.97
Nov 1.52 1.66 1.60 1.98 1.85 0.68 1.24 2.25 1.92 2.42 2.34 1.05 2.20 0.24
Dec 1.63 3.07 2.69 0.92 1.52 1.49 1.90 1.68 2.33 2.00 1.55 1.89 1.82 1.92
1.55 2.80 0.78 1.49 1.18 1.97 0.03 1.91 -0.12 0.78 0.24 1.57 1.71 1.74 -0.35 -0.69 -1.98 0.91 0.60 1.81 -1.34 0.42
0.16 0.02 0.77 0.28 1.41 0.16 0.27 -0.46 -0.16 -0.15 -1.02 -0.20 -0.58 0.01 3.32 2.60 0.29 -0.22 -1.01 0.88
-0.35 0.33 -0.05 -0.15 -0.03 -0.82 0.84 1.22 -0.40 -1.95 -2.18 0.22 -0.54 1.63 0.12
= Best month for Index/Sector

41
= Worst month for Index/Sector

SeasonalitySectors
Whenever we discuss investing based on the calendar, we often receive feedback that is critical of the approach. While we would be the first to caution that no one should use the seasonal trends as their sole input in the investment process, it should certainly be considered. In order to highlight this, we used the table on the prior page and constructed equally weighted portfolios based on the three best and worst performing sectors for each month of the year. For example, from 1980 through 2011, Technology, Transports and Health Care have historically been the best performing sectors during the month of January, while Consumer Staples, Materials, and Utilities have historically done the worst. At the end of the month, we then changed the portfolio to include the three best and worst performing sectors for the month of February. In the chart below, we have compared the results of each approach compared to the S&P 500 in 2012. Using the approach that invests in the three sectors that typically do the best each month, $100 invested at the start of the year would have been worth $115.0 now. This compares to a total of $111.7 by investing solely in the S&P 500. If you had taken a contrarian approach and invested in the sectors that typically do the worst each month, you would have $103.1. While a gain is still better than a loss, it still underperformed the approach of buying the best performers by more than 1,000 basis points.
Three Best and Worst Performing Sectors on a Seasonal Basis vs S&P 500: 2011
120.0 115.0 115.0
110.0
111.7
105.0 S&P 500 100.0 Best Sectors Worst Sectors 95.0 1/1 2/1 3/1 4/1 5/1 6/1 7/1 8/1 9/1 10/1 11/1 12/1 103.1
42

SeasonalityS&P 500 (Large Cap) and S&P 400 (Mid Cap)
While January has historically been a positive month for the S&P 500, that wasnt the case from 2007 to 2011. In 2012, the S&P 500 deviated from its typical long-term pattern as wells as its pattern over the last five years. For example, all of 2012s negative months occurred during months that have historically averaged gains of more than 1%. Best months: April (1.8%), December (1.6%), and November (1.5%). Worst month: September (-0.8%). Like the S&P 500, the S&P 400s performance in 2012 was nearly the exact opposite of its pattern over the last five years. While the year has recently started off on a weak note, in 2012, mid caps started of the year strong and then sold off in the Spring, which has been a time of year when they typically see strength. Best months: December (3.1%) and April (1.9%). Worst months: September (-0.7%) and July (-0.1%).
S&P 500 Average Performance: 1980 - 2012
20 15 Average Since 1980 Prior Five Years (2007 - 2011) 2012
Percent Change (%)
10 5 0 -5 -10 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1980 - 2011 1.0 2007 - 2011 -2.9 2012 4.4
0.0 -2.1 4.1
1.0 2.9 3.1
1.8 4.6 -0.7
1.1 0.0 -6.3
0.0 -3.5 4.0
0.6 1.6 1.3
0.1 -0.9 2.0
-0.8 -0.1 2.4
1.2 -0.6 -2.0
1.5 -1.4 0.3
1.6 1.8 -0.8
S&P 400 (Mid Cap) Average Performance: 1981 - 2012

20
Percent Change (%)
15
Average Since 1981 Prior Five Years (2007 - 2011) 2012
10
-5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1980 - 2011 0.6 2007 - 2011 -2.3 2012 6.5
1.1 -0.3 4.4
1.8 3.6 1.7
1.9 6.4 -0.3
1.6 0.8 -6.6
0.0 -3.6 1.7
-0.1 1.1 -0.1
0.4 -1.2 3.3
-0.7 -0.5 1.8
0.4 -1.4 -0.9
1.7 -1.7 2.0
3.1 3.3 0.5
43

SeasonalityRussell 2000 (Small Caps)
Like mid cap stocks, small caps in 2012 performed in nearly the opposite pattern that they have over the prior five years. Instead of selling off through March and then rallying, small caps rallied through March and then sold off. Likewise, while small caps have traditionally been weak in the Summer, during the Summer of 2012 they rallied. Best months: December (2.7%) and April (1.9%). Worst months: September and July (-0.6%). In the lower chart we have calculated a composite relative strength chart of large vs. small cap stocks since 1980 and from the years 2007 through 2011. This chart shows which times of year small caps have historically done best relative to large caps. As shown, whether you look at recent history or further back to 1980, small cap stocks have historically outperformed large caps in the first half of the year. In the second half, large caps typically outperform small caps until the very end of the year when small caps outperform on a relative basis.
Russell 2000 Average Performance: 1980 - 2012
Percent Change (%)
10 5 0 -5 -10 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1980 - 2011 1.4 2007 - 2011 -4.1 2012 7.0
1.1 -1.4 2.3
1.0 4.1 2.4
1.9 5.9 -1.6
1.6 0.3 -6.7
0.2 -3.7 4.8
-0.6 1.9 -1.4
0.0 -1.6 3.2
-0.6 0.0 3.1
-0.2 -1.2 -2.2
1.6 -2.7 0.4
2.7 4.3 1.2
Average Relative Strength: Large Caps vs Small Caps (1980 - 2011)

1.03 1.02 1.01 1.00 0.99 0.98 0.97 1/1 2/1 3/1 4/1 5/1 6/1 7/1 8/1 9/1 10/1 11/1 12/1
Rising line indicates large caps outperforming small caps. Falling line indicates small caps outperforming large caps.
2007 - 2011
Since 1980
44

SeasonalityConsumer Discretionary & Consumer Staples
For the Consumer Discretionary sector, 2012 followed the opposite pattern of the prior five years, but it did follow the longer term pattern pretty closely. The only major difference between this year and the long term pattern is that instead of a Summer sell-off, we saw a Spring sell-off. Best months: Mar (2.8%) and May (2.4%). Worst months: September (-1.0%) and July (-0.5%). Consumer Staples followed its long-term and recent patterns pretty closely in 2012 up until Q4. While the sector has typically been strong to close the year, 2012 saw sharp pullbacks in October and December. Best months: May (2.2%) and October (2.1%). Worst months: January (-0.7%).
Cons Discretionary Sector Average Performance: 1980 - 2012

Percent Change (%)
15 10 5 0 -5 -10 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1980 - 2011 1.0 2007 - 2011 -2.6 2012 5.9
1.5 -0.9 4.5
2.8 3.5 4.4
2.2 7.0 1.2
2.4 -1.1 -5.9
0.1 -4.8 1.8
-0.5 2.0 -0.3
-0.2 0.2 4.2
-1.0 0.1 3.1
0.8 -0.9 -1.6
2.0 -1.5 3.0
0.9 1.9 -1.4
Consumer Staples Sector Average Performance: 1980 - 2012

14
12
Percent Change (%)
10 8 6 4 2 0 -2 -4 -6 Jan Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
1980 - 2011 -0.7 2007 - 2011 -2.8 2012 -1.7
0.8 -0.8 3.4
1.5 2.5 3.0
1.2 1.9 0.1
2.2 1.1 -1.3
0.6 -2.9 3.3
0.6 2.2 2.6
0.8 0.9 -0.6
0.0 1.5 1.1
2.1 -0.3 -1.4
1.8 1.1 1.4
1.5 0.7 -3.8
45

SeasonalityEnergy & Financials
When you compare the charts of Energy in 2012 to the pattern over the prior five years, you see two completely opposite patterns. When the chart for the prior five years rises, the 2012 chart falls and vice versa. Strength that is typical towards the end of the year was weakness in 2012 as the sector finished nearly unchanged for the year. Best months: April (3.1%) and March (2.0%). Worst months: June (-0.5%) and September (-0.1%). Like the Energy sector, the 2012 pattern of the Financial sector was the complete opposite of the pattern in the prior five years. Hopefully, this is a sign that the sector is returning back to a more normal trading environment. Best months: April (2.9%), March (1.9%) and December (1.9%). Worst months: September (-0.9%) and June (-0.7%).
Energy Sector Average Performance: 1980 - 2012
Percent Change (%)
5 0 -5 -10 -15 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1980 - 2011 0.2 2007 - 2011 -2.6 2012 1.5
1.2 0.1 5.5
2.0 2.3 -3.4
3.1 5.4
1.2 0.7
-0.5 -1.7 5.6
0.7 -0.1 4.1
0.5 -2.9 1.9
-0.1 -0.6 3.3
0.5 1.7 -2.0
0.7 1.2 -1.8
1.5 2.0 -1.6
-1.0 -10.6
Financials Sector Average Performance: 1980 - 2012

40
30
Percent Change (%)
20 10 0 -10 -20 -30 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1980 - 2011 0.3 2007 - 2011 -5.0 2012 8.0
0.0 -5.4 4.8
1.9 4.0 7.3
2.9 6.7 -2.5
1.6 -0.8 -9.3
-0.7 -6.8 4.9
-0.2 2.1 0.0
0.1 -1.0 3.0
-0.9 -1.4 3.3
0.4 -3.0 1.8
1.2 -5.7 -1.1
1.9 0.8 3.2
46

SeasonalityHealth Care & Industrials
Outside of a few gyrations, the Health Care sector followed its long-term pattern pretty closely in 2012. The sector sold off in the spring but quickly resumed its uptrend after the Supreme Court upheld ObamaCare. Best months: November (2.3%) and December (1.7%). Worst months: February (-0.1%) Like Health Care, Industrials, finished off 2012 nearly exactly where they tend to finish in the average year. Once again, this is a positive as the indexs trading pattern is distancing itself from the pattern of the chaos in the last five years. Best months: April (2.5%) and December (2.3%). Worst months: September (-1.0%), June (-0.3%), and September (-0.2%).
Health Care Sector Average Performance: 1980 - 2012

Percent Change (%)
15 10 5 0 -5 -10 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1980 - 2011 1.0 2007 - 2011 -0.5 2012 3.0
-0.1 -3.0 1.0
0.8 1.1 4.3
1.6 2.0 -0.3
1.5 0.9 -3.9
1.1 -1.8 5.6
0.2 0.7 0.9
0.5 0.4 0.8
0.4 0.4 3.8
1.2 -0.9 -0.4
2.3 0.1 0.3
1.7 2.5 -1.5
Industrials Sector Average Performance: 1980 - 2012

15
Percent Change (%)
10
0 Average Since 1980 Prior Five Years (2007 - 2011) 2012 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
-5
-10
1980 - 2011 0.6 2007 - 2011 -2.6 2012 6.9
0.2 -3.2 2.3
1.6 4.7 1.2
2.5 6.1 -1.1
1.0 -1.0 -6.4
-0.3 -4.6 3.5
0.6 3.1 0.4
-0.2 -1.7 1.1
-1.0 0.1 1.5
0.5 -1.5 -0.7
1.9 -0.2 1.3
2.3 1.9 0.5
47

SeasonalityMaterials & Technology
Like many other sectors, 2012 was practically a mirror image of the pattern of the last five years for the Materials sector, and as of mid-December the sector was right where it is at the end of an average year. Best months: April (2.8%) and November (2.4%). Worst months: September (-2.7%) and June (-0.7%). Here again, Technology followed nearly the exact opposite pattern that it has seen over the last five years. Best months: January (2.9%) and April (2.6%). Worst months: September (-0.9%), March (-0.7%), and February (-0.3%).
Materials Sector Average Performance: 1980 - 2012

15 12
Percent Change (%)
9 6 3 0 -3 -6 Jan Feb Mar Apr May Jun Jul Average Since 1980 Prior Five Years (2007 - 2011) 2012 Aug Sep Oct Nov Dec
1980 - 2011 -0.1 2007 - 2011 -3.1 2012 11.1
1.7 0.4 -0.5
1.7 4.9 0.1
2.8 5.0 -1.0
1.1 0.6 -8.0
-0.7 -3.8 4.6
0.4 3.1 -1.3
0.3 -2.3 2.2
-2.7 -2.8 3.5
-0.1 0.1 -2.3
2.4 -0.8 1.5
2.0 1.9 1.4
Technology Sector Average Performance: 1980 - 2012

25
20
Percent Change (%)
15 10 5 0 -5 -10 Jan Feb Mar Apr May Jun Jul Average Since 1980 Prior Five Years (2007 - 2011) 2012 Aug Sep Oct Nov Dec
1980 - 2011 2.9 2007 - 2011 -3.7 2012 7.6
-0.3 -1.2 7.2
-0.7 3.5 5.0
2.6 5.8 -1.9
0.6 0.3 -7.8
0.3 -2.7 2.9
0.3 3.2 1.0
0.6 -1.3 4.8
-0.9 0.8 1.2
1.1 1.4 -6.8
2.3 -3.6 0.8
1.6 2.6 -1.6
48

SeasonalityTelecom Services & Transports
The spring and Summer was uncharacteristically kind to the Telecom Services sector in 2012. While the sector has averaged declines of more than 1% during June and July over the last five years, this year the sector saw gains of more than 5% in both months! Best months: December (1.9%) and May (1.2%). Worst months: February (-2.0%) and August (-0.4%). The performance of the DJ Transports in 2012 closely resembled the indexs performance in the prior five years, and it finished off the year on a positive note with nearly an identical return to the average of the last five years, although still well below the historical average return going back to 1980. Best months: December (1.9%) and April (1.7%). Worst months: February (-1.3%) and September (-0.5%).
Telecom Services Sector Average Performance: 1980 - 2012
Percent Change (%)
15 10 5 0 -5 -10 -15 Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
1980 - 2011 0.6 2007 - 2011 -6.2 2012 -3.9
-2.0 -2.4 3.7
0.9 5.1 1.0
1.1 1.1 4.2
1.2 1.9 2.6
0.3 -3.0 5.4
-0.2 -1.0 5.5
-0.4 0.4 -2.5
1.0 0.2 3.9
1.1 -2.8 -5.2
1.0 1.0 -0.9
1.9 4.0 -2.0
DJ Transports Average Performance: 1980 - 2012

15
Percent Change (%)
10
-5
1980 - 2011 1.2 2007 - 2011 -2.2 2012 6.0
0.6 -2.7 -3.1
1.8 4.3 1.9
2.0 8.1 -0.4
1.2 0.8 -3.0
-0.2 -4.0 2.7
1.2 3.6 -2.3
-1.1 -3.3 -1.6
-1.3 -1.5 -2.3
2.4 0.5 3.9
2.2 -0.5 0.7
1.8 1.9 2.6
49

SeasonalityUtilities
For the first half of 2012, the Utilities sector followed its typical pattern pretty closely. In the second half of the year, though, Utilities sold off on the looming hikes in taxes on dividends even though it is typically a time of year where the sector sees strength. Best months: December (1.9%) and April (1.7%). Worst months: February (-1.3%) and September (-0.5%).
Utilities Sector Average Performance: 1980 - 2012
Percent Change (%)
4 2 0 -2 -4 -6 -8 Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
1980 - 2011 0.2 2007 - 2011 -2.4 2012 -3.7
-1.3 -2.9 0.0
0.4 1.9 1.0
1.7 3.2 1.8
1.2 0.4 -0.1
0.1 -0.5 3.8
0.1 0.0 2.5
1.4 0.5 -4.8
-0.5 -1.0 0.9
1.0 -0.8 1.4
0.2 0.7 -5.0
1.9 1.7 -1.9
50

Seasonality 10-Yr Treasury & CRB Commodity Index
The Spring sell-off for Treasuries came right on schedule this year. The long bond future declined 3.7% in March, which is typically the worst month of the year for the asset class. Likewise, the Long Bond Future closed out 2012 with a decline in December, which is historically its second worst month of the year. Best months: August and November (1.2%). Worst months: March (-1.0%) and December (-0.4%). The pattern of commodities in 2012 was nearly the complete opposite of its typical pattern over the last five years. During periods when they have typically rallied in the last five years, in 2012 they were selling off. Best month: March (0.8%). Worst months: October and June (-0.4%).
US Long Bond Future Average Performance: 1980 - 2012
Percent Change (%)
6 4 2 0 -2 -4 -6 Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
1980 - 2011 -0.2 2007 - 2011 -1.0 2012 0.4
-0.1 0.5 -1.6
-1.0 -0.4 -3.7
-0.2 -0.5 3.7
0.5 -0.1 5.2
0.4 0.0 -1.5
0.1 1.5 2.1
1.2 3.7 -0.4
0.1 0.2 -0.7
0.8 -1.6 0.0
1.2 4.1 1.4
-0.4 -0.5 -2.3
CRB Index Average Performance: 1980 - 2012

10
Percent Change (%)
-5 Average Since 1980 Prior Five Years (2007 - 2011) 2012
-10
1980 - 2011 0.2 2007 - 2011 -1.3 2012 2.3
0.0 3.6 3.2
0.8 0.2 -4.3
0.3 2.0
0.1 0.6
-0.4 1.6 4.1
-0.1 0.6 5.4
0.4 -3.1 3.4
-0.1 -1.2 -0.1
-0.4 -0.2 -4.4
0.3 -2.4 1.1
-0.1 2.0 -1.4
-0.8 -10.8
51

Seasonality Oil & Gold
Like the CRB index, oil followed the opposite pattern that it had followed in the prior five years and since 1980. Following the commoditys peak in February, oil was never able to regain its footing, trending lower throughout the year. Best months: March (3.3%) and April (2.6%). Worst months: November (-2.2%) and October (-1.9%). The pattern of gold in 2012 was similar to its long term pattern going back to 1980, which may be signaling that the seemingly endless run-up of the prior five years may be on hold. Best months: September (1.7%), August (1.6%) and November (1.6%). Worst months: March (-1.0%) and October (-0.5%).
Oil Average Performance: 1980 - 2012

30 20
Percent Change (%)
10 0 -10 -20 -30 Jan Average Since 1980 Prior Five Years (2007 - 2011) 2012 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1980 - 2011 -0.6 2007 - 2011 -4.5 2012 -0.4
0.0 7.8 8.7
3.3 6.5 -3.8
2.6 4.8 1.8
1.2 3.1
0.4 4.1
1.2 0.7 3.6
2.2 -5.5 9.6
2.3 -0.2 -4.4
-1.9 2.3 -6.5
-2.2 -2.9 3.1
0.2 0.0 1.8
-17.5 -1.8
Gold Average Performance: 1980 - 2012

25
20
Percent Change (%)
15 10 5 0 -5 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
1980 - 2011 0.3 2007 - 2011 2.0 2012 10.9
-0.2 3.9 -1.5
-1.0 -1.6 -2.5
0.9 1.7 -0.3
0.3 2.1 -6.1
0.1 -0.3 2.7
0.0 1.4 0.4
1.6 2.0 4.6
1.7 2.8 5.1
-0.5 0.5 -2.9
1.6 5.7 -0.5
0.1 0.1 -2.8
52

Sector Weightings and Technicals
Below is a table and a chart showing historical sector weightings for the S&P 500. The Technology sector remains the biggest sector in the S&P 500, but its weighting fell slightly in 2012 as other sectors took some share. The Technology sector currently makes up 18.95% of the S&P 500, while it ended 2011 at 19.02%. The Financial sector gained by far the most market share in 2012. At the end of 2011, the Financial sector made up 13.43% of the S&P 500. It currently makes up 15.63%. This move has closed the weighting gap between Technology and Financials by 2.27 percentage points. If this happens again in 2013, the two sectors will have pretty similar weightings. Consumer Discretionary, Health Care and Materials are the other three sectors that saw their S&P 500 weightings increase in 2012. On the downside, the Energy sector has lost the most share at -1.22 percentage points. While Energy ended 2011 as the third biggest sector in the market, it is now just the fifth largest. Consumer Staples also lost quite a bit of share at -0.89 percentage points. On the following page we provide historical weighting charts for the ten S&P 500 sectors.
Historical Sector Weightings of the S&P 500: 1990 - 2012

Sector Technology Financials Energy Industrials Health Care Cons Stap Cons Disc Materials Utilities Telecom 1990 6.3 7.5 13.4 13.6 10.4 14.0 12.8 7.2 6.2 8.7 1993 5.9 11.2 10.0 13.9 8.2 12.5 16.4 7.1 5.6 9.1 1996 12.4 15.0 9.2 12.7 10.4 12.7 11.7 5.8 3.7 6.5 1998 17.7 15.4 6.3 10.1 12.3 11.1 12.5 3.1 3.0 8.4 1999 29.2 13.0 5.6 9.9 9.3 7.2 12.7 3.0 2.2 7.9 2000 21.2 17.3 6.6 10.6 14.4 8.1 10.3 2.3 3.8 5.5 2001 17.6 17.8 6.3 11.3 14.4 8.2 13.1 2.6 3.1 5.5 2002 14.3 20.5 6.0 11.5 14.9 9.5 13.4 2.8 2.9 4.2 2004 16.1 20.6 7.2 11.8 12.7 10.5 11.9 3.1 2.9 3.3 2006 15.1 22.3 9.8 10.8 12.0 9.3 10.6 3.0 3.6 3.5 2007 16.7 17.6 12.9 11.5 12.0 10.2 8.5 3.3 3.6 3.6 2008 15.3 13.3 13.3 11.1 14.8 12.9 8.4 2.9 4.2 3.8 3/09 17.6 8.9 14.3 9.5 16.1 13.8 8.3 3.2 4.4 4.0 2009 19.9 14.4 11.5 10.3 12.6 11.4 9.6 3.6 3.7 3.2 2010 18.7 16.1 12.0 11.0 10.9 10.6 10.6 3.7 3.3 3.1 2011 19.0 13.4 12.3 10.7 11.9 11.5 10.7 3.5 3.9 3.2 2012 18.9 15.6 11.0 10.1 12.0 10.6 11.4 3.6 3.5 3.1
2012 Sector Weight Change in S&P 500

Sector Financials Cons Disc Health Care Materials Technology Telecom Utilities Industrials Cons Stap Energy S&P 500 Weight (%) S&P 500 Weight (%) End of 2011 End of 2012 13.43 15.63 10.67 11.40 11.85 12.05 3.50 3.62 19.02 18.95 3.17 3.07 3.87 3.47 10.69 10.13 11.54 10.64 12.27 11.04 Change in S&P 500 Weight 2.20 0.73 0.20 0.12 -0.07 -0.10 -0.40 -0.56 -0.89 -1.22
53

S&P 500 Historical Sector Weightings
40 35 30 25 20 15 10 5 0
Average 18.95%
Technology
25 23 21 19 17 15 13 11 9 7 5
Financials
15.63%
18 16 14
Health Care
12.05%
16 14 12 10 8 6 4
Consumer Staples
12 10 8 6
10.64%
17 15 13 11 9 7 5 3
Energy
16 15 14 13 12
11.04%
Industrials
11 10 9 8
10.13%
18 16 14
Cons. Discretionary
11.40%
9 8 7 6 5 4 3
Materials
12 10
8 6
3.62%
2 1
7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0
Utilities
3.47%
11 10 9 8 7 6 5 4 3 2
Telecom
3.07%
54

In the daily and weekly publications that we send out to Bespoke subscribers, we tend to focus more on the short-term technicals of the market, so below and on the following pages, we take a look at long-term charts of the S&P 500 and its ten sectors and analyze multi-year technical formations instead. The S&P 500 remains in the bull market that began in March 2009. Since March 9th, 2009, the index is up 110% over a 1,393 day span, which represents an annualized gain of 21%. The bull markets uptrend channel is shown in the chart below, and nothing happened in 2012 to threaten this uptrend channel. Investors have their eyes set on the S&P 500s all-time high of 1,565, which would be a gain of roughly 10% from where the index is ending 2012. To get there its going to first have to get past resistance at its 2012 high of 1,465 and its March 2000 high of 1,529. These will be two key levels to watch in 2013 if the market does manage to continue higher. On the downside, the bottom of the S&Ps uptrend channel is around the 1,300 level, and if this level breaks, we could certainly find ourselves in a new bear market in 2013.
S&P 500: 1998-Present

1750 1550 1350 1150
950 750 550 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
55

S&P 500 Consumer Discretionary Sector: 1998-Present
400 350 300 250 200 150 100 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
The Consumer Discretionary broke to a new all-time high in 2011, and it continued its strong run higher in 2012. The sector is now overbought based on its long-term pattern, so it wouldnt be surprising to see relative underperformance in 2013.
S&P 500 Consumer Staples Sector: 1998-Present

375 325
The Consumer Staples sector also broke to a new all-time high in 2011 and continued its run higher in 2012. While its long-term uptrend channel is intact, Staples could also, like Consumer Discretionary, see relative underperformance in 2013 as it works off overbought levels.
275 225 175 125 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
56

S&P 500 Energy Sector: 1998-Present
725 625 525 425 325 225 125 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
The Energy sector had a mediocre 2013, and it is still well below its alltime high reached in 2008. The sector has developed a flag pattern over the last four years, with a series of lower highs and higher lows. Once the flag comes to a point, the sector should see a significant break to the upside or downside, and the move should be extreme.
S&P 500 Financial Sector: 1998-Present

550 500 450 400 350
300 250 200 150 100 50 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

While Financials had a banner year, the sector still has a huge amount of work to do before its longterm technicals look bullish. A break to a new bull market high in 2013 would be just a start.
57

S&P 500 Technology Sector: 1998-Present
1050 950 850 750 650 550 450 350 250 150 50 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Even though the Technology sector is the biggest sector in the S&P 500, its still a shell of its former self from the days of the Internet bubble. That being said, Tech remains in its bull market uptrend channel, but its now closer to the bottom of this channel than the top, and a break below would be negative.
S&P 500 Health Care Sector: 1998-Present

525 475 425
The Health Care sector had a strong end to 2012, which finally pushed it to a new all-time high. By breaking its prior highs, a new long-term support level has been formed, which should help limit any damage done if the overall market takes a hit.
375 325 275 225 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
58

S&P 500 Industrials Care Sector: 1998-Present
400 350 300 250 200 150 100 50 0 98
The Industrials sector is at a key inflection point heading into 2013. It is currently pushing up against resistance at its prior bull market high, and a failure to break this resistance would confirm a nasty long-term head and shoulders pattern that has formed. The sector should see smooth sailing if it can break this resistance, but if it cant, look out below.
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
S&P 500 Materials Sector: 1998-Present

325
Like the Energy sector, Materials is also in a long-term flag pattern marked by a series of lower highs and higher lows. Once the flag comes to a point, the sector will likely have a big break up or down.
275
225
175
125
75 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
59

S&P 500 Telecom Sector: 1998-Present
400 350 300 250 200 150 100 50 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13
Telecom broke its long-term downtrend in the middle of 2011, and it had a nice run in mid-2012 before pulling back quite a bit in the fourth quarter. For now, its uptrend off of its 2009 lows remains in place, and the sector is well above the bottom of this uptrend channel.
S&P 500 Utilities Sector: 1998-Present

250 230 210 190
170 150 130 110 90 70 50 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13

Utilities had a huge run in early 2012 as the quest for yield peaked, but a fourth quarter run on dividend stocks due to looming tax increases hit the sector hard. For now its uptrend channel is holding, but its close to breaking support.
60

Below is one final chart that we wanted to highlight in this section. A lot of comparisons have been made between the Technology sector post-Internet bubble and the Financial sector postfinancial crisis. Below is a chart that highlights each sector's percentage change from its alltime high on the same time-scale (in days). The "crash" pattern for both sectors occurred over a similar time period, and they both experienced declines of roughly 85% from their highs. The Technology sector is now ten years removed from its post-bubble low, while the Financial sector will be four years removed from its 2009 low in March 2013. As shown, the two patterns coming out of their big declines have been somewhat similar so far, but Financials have already bounced more than Technology had at this point in its recovery. Tech went roughly five years before experiencing a second big drop from late 2007-2009 (caused by the financial crisis nonetheless), which suggests that the Financial sector has another year left before it has another big drop if the same pattern holds.
S&P 500 Technology vs. Financial Sector Since Bubble Peaks (%)
0 -10 Technology (3/27/00-Present) -20 -30 -40 -50 -60 Financials (2/20/07-Present)
-70 -80 -90 0 300 600 900 1200 1500 1800 2100 2400 2700 3000
61

Economic Indicators
The chart below highlights the net number of economic indicators showing improvement on a monthly basis in their year over year changes out of a universe of forty indicators we track on a monthly basis in our Matrix of Economic Indicators. On the following page, we have broken out the net number of indicators showing improvement by economic sector. 2012 was a year where the economy once again moved in fits and starts. The year started off on a positive note in terms of economic data, with optimism in the first quarter particularly focused on the labor market. Like other years in recent memory, however, first quarter optimism morphed into fears of a slowdown in the second quarter. In 2011, the slowdown was due to the earthquake/ tsunami in Japan, but this year economic activity slowed on weakness in Europe and higher gas prices. By the end of May, investors were bracing for the global slowdown to impact growth in the US, and by late June the Fed was talking about potential risks to the US economic outlook. With the threat of slower growth, central banks took coordinated measures to help spur growth, and by the end of the Summer, economic growth started to show signs of improvement. It was this strength in economic momentum in October (+14) that helped to put Obama over the top in his re-election campaign, but following his re-election, fears over the fiscal cliff immediately set in, causing the positive momentum of October to reverse itself in November. Closing out the year, the net number of indicators showing improvement is right at zero, indicating that for every indicator showing improvement, there is one showing slower momentum. Net Total of Economic Indicators Showing Year/Year Improvement
20 15 14 10 10 5 0 0 -5 -10 -10 -15 -15 -20 -11 -7 -10 -1 -6 -10 8
One Year Ago
Most Recent
62

Economic Indicators
The charts below show the net number of economic indicators showing improvement broken out by economic sector. Within the Manufacturing sector, the year closed off on a positive note, with a net of four indicators showing strong growth. This is the highest level in seven months. Likewise, employment finished off the year on a positive note, after some Sandy related weakness in November. In fact, in the final initial claims report of the year, the fourweek moving average dropped to a post-recession low for the first time since March. While Manufacturing and Employment finished off 2012 on a good note, Housing ended the year with two straight months of weakness. Throughout 2012, this sector was the brightest point of the economy, so the slower momentum is a bit of a disappointment. That being said, current levels remain positive, and much of the weakness was Sandy related, so we expect to see the sector to resume its momentum in 2013.
Manufacturing/Output
6 4 4 2 2 0 0 -2 -2 -4 -4 -6 -8 -8 -10 -4 -2 -2 0 4 4 5 4 3 2 1 0 -1 -2 -3 -4 -5 -5 -3 -4 -1 -2 2 2 1 0 2 4
Employment
4
One Year Ago
Most Recent
-6
One Year Ago
Most Recent
Housing
8 6 6 4 4 2 2 0 0 -2 -2 -2 -4 -4 -6 -4 -2 -4 -4 -6 -6 -8 -8 -4 2 2 6 8 6
Inflation
6 4 4 2 0 0 0
-4 -6 -8
-4
-6 -8
One Year Ago
Most Recent
-10
One Year Ago
Most Recent
Consumer
8 6 6 4 4 2 2 0 0 -2 -4 -4 -6 -6 -8 -6 -4 -15 0 0 0 -5 -10 -6 2 5 10 6 15
Net Total of Economic Indicators (Ex Inflation)

\ 20
18
10 8 5 1 4
-5 -11
-6
-6
One Year Ago
Most Recent
-20
-16
One Year Ago
Most Recent
63

Economic Indicators
While the trend of economic indicators is important, their levels versus expectations are just as critical in determining the markets direction. Our Economic Indicator Diffusion Index, which measures the pace in which indicators are coming in ahead of (or below) expectations over a 50-day period, provides a nice snapshot of how economic data is coming in relative to expectations. In 2012, the Diffusion Index started off the year firmly in positive territory. Like 2011, though, the onset of Spring brought on a decline in the index, as it began a steady slide lower that lasted through July. From that point forward, though, expectations came down more than enough and we entered a stretch where the data consistently surprised to the upside through the election. After hitting its highest levels since February 2011, our Diffusion index has started to turn lower. At a level of +9, however, it is still firmly in positive territory. One now has to ask whether the slower pace of stronger than expected data is a precursor of a new leg lower as fiscal cliff worries put a damper on economic activity and sentiment.
Bespoke Economic Indicator Diffusion Index: 1999 - 2012
50-Day Rolling Net Total of Better Than Expected Reports
40 30 20 10 0 -10 -20 -30
Highest since February 2011 (23)
-19
-22 -20
-40 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08 1/09 1/10 1/11 1/12
Last 12 Months
25 20 15 10 5 0 -5 -10 -15 -20 1/12
23
4/12
-20
7/12
10/12
64

Economic Indicators
On the following pages, we highlight the long range charts of more than 25 economic indicators covering different aspects of the economy. For each chart we have also shaded periods when the economy was in a recession. One trend that is clear across most categories is that the economy is showing growth but losing some momentum. This is not to say that growth will not or cannot pick up again in the future, but as it stands now, the economy seems to have reached a plateau. In last years report we highlighted the fact that housing was beginning to show signs of finally emerging from the bust of 20072009. That certainly became obvious in 2012, and looking ahead to 2013, we think that housing could be one of the possible catalysts for a new leg higher in the US economy. If Congress is able to smoothly resolve the fiscal crisis, the US economy has the potential to surprise to the upside driven by housing and a renewed focus on domestic energy.
Economic Indicators Highlighted

Category Consumer Indicator Personal Income Personal Spending Consumer Confidence Michigan Confidence Non Farm Payrolls Unemployment Rate Average Workweek Average Hourly Earnings Jobless Claims Jobless Claims (4 Wk Avg) Nominal Real Price Index Start Date 1/31/47 1/31/60 2/28/69 1/31/79 1/31/47 1/31/47 1/31/64 1/31/65 1/6/67 1/27/67 3/31/47 6/30/47 3/31/47 Category Housing Indicator New Home Sales Housing Starts Building Permits Monthly Supply CPI Core CPI PPI Core PPI PCE Core PCE Start Date 1/31/64 1/31/60 1/31/61 1/31/64 1/31/48 1/31/58 4/30/48 1/31/75 1/31/60 1/31/60 1/31/48 1/31/45 1/31/68 2/28/59
Employment
Inflation
GDP
Manufacturing ISM Manufacturing Industrial Production Capacity Utilization Durable Goods Ex Trans.
65

Economic IndicatorsConsumer
Consumer - Personal Income (Y/Y Percent Change)
18
12
Was moving in the wrong direction but has been slowly rebounding.
-6 '47 '57 '67 '77 '87 '97 '07

Trending lower for several decades now with lower high after lower high since the late 1970s!
Consumer - Personal Spending (Y/Y Percent Change)

14 12 10 8 6 4 2 0 -2 -4 -6 '47 '57 '67 '77 '87 '97 '07
Consumer Confidence in recent years has looked like an EKG as good news gets offset by Washington gridlock.
Consumer - Consumer Confidence (Y/Y Percent Change)

150 125 100 75 50 25 0 -25 -50 -75 '47 '57 '67 '77 '87 '97 '07
Michigan Confidence recently saw a sharp pullback on fiscal cliff concerns, but it has been making higher highs.
Consumer - Michigan Confidence (Y/Y Percent Change)

50
25
-25
-50 '57 '67 '77 '87 '97 '07
66

Economic IndicatorsEmployment
Employment - Non Farm Payrolls (Y/Y Percent Change)
12 9 6 3 0 -3 -6 '47 '57 '67 '77 '87 '97 '07
Unemployment rate has seen a major pullback, but its still at its highest level since the mid-1980s. Growth in jobs is now positive but still anemic.
Employment - Unemployment Rate (Actual Level)

12 11 10 9 8 7 6 5 4 3 2 '47 '57 '67 '77 '87 '97 '07
The average workweek saw a nice sustained pick up off the recessionary lows, but it has leveled off since the start of 2012.
Employment - Average Workweek (Hours)

39 38 37 36 35 34 33
Growth in average hourly earnings is at record low levels.
32 '47 '57 '67 '77 '87 '97 '07
Employment - Average Hourly Earnings (Y/Y Percent Change)

10 8 6 4 2 0 '47 '57 '67 '77 '87 '97 '07
67

Economic IndicatorsEmployment
Employment - Initial Jobless Claims ('000s)
800 700 600 500 400 300 200 100 '47 '57 '67 '77 '87 '97 '07
Besides a big spike following Hurricane Sandy, claims in 2012 have primarily been at about average levels.
Employment - Continuing Claims ('000s)

7000 6000 5000 4000 3000 2000 1000 '47 '57 '67 '77 '87 '97 '07
Continuing claims finally below the peaks of prior recessions but still high by historical standards.
68

Economic IndicatorsGDP
GDP - Nominal (Y/Y Percent Change)
20 15 10 5 0 -5 '47 '57 '67 '77 '87 '97 '07
Pace of growth in Real GDP is slowly improving. GDP has been going nowhere (up or down) for the last several quarters.
GDP - Real (Y/Y Percent Change)

14 12 10 8 6 4 2 0 -2 -4 -6 '47 '57 '67 '77 '87 '97 '07
Price Index trending higher.
GDP - Price Index (Y/Y Percent Change)

16 12 8 4 0 -4 '47 '57 '67 '77 '87 '97 '07
69

Economic IndicatorsHousing
Housing - New Home Sales (Y/Y)
100 80 60 40 20 0 -20 -40 -60 '60 '70 '80 '90 '00 '10
Housing starts pull back from close to their highest levels since the early 1980s. New Home Sales have seen a sustained uptrend for the last few years.
Housing Starts (Y/Y)

100 80 60 40 20 0 -20 -40 -60 '60 '70 '80 '90 '00 '10
Ditto for permits.
Housing - Building Permits (Y/Y)

100 80 60 40 20 0 -20 -40 -60
Monthly supply is now back down to levels that we saw during the housing boom.
'60
'70
'80
'90
'00
'10
Housing - Monthly Supply (Actual Months of Supply)

15
12
3 '60 '70 '80 '90 '00 '10
70

Economic IndicatorsInflation
Inflation - CPI (Y/Y)
16 14 12 10 8 6 4 2 0 -2 -4 '48 '58 '68 '78 '88 '98 '08
Inflation, at least according to government metrics, is contained at 2%.
Inflation - PPI (Y/Y)

PPI also contained.
18 13 8 3 -2
Moving sideways.
-7 '48 '58 '68 '78 '88 '98 '08
Inflation - PCE (Y/Y)

12 9 6 3 0 -3 '48 '58 '68 '78 '88 '98 '08
71

Economic IndicatorsInflation
Inflation - Core CPI (Y/Y)
14 12 10 8 6 4 2 0 '48 '58 '68 '78 '88 '98 '08
Core CPI has been slowly declining since first quarter of 2012.
Inflation - Core PPI (Y/Y)

15 12 9 6 3 0 -3 '48 '58 '68 '78 '88 '98 '08
After a run-up in late 2011, core PPI slowly coming in since the first quarter.
Core PCE still low by historical standards.
Inflation - Core PCE (Y/Y)

12 10 8 6 4 2
0 '48 '58 '68 '78 '88 '98 '08
72

Economic IndicatorsManufacturing
Manufacturing/Output - ISM Manufacturing
85 75 65 55 45 35 25 '45 '55 '65 '75 '85 '95 '05
Industrial Production trending lower since early 2011. ISM Manufacturing trending lower since early 2011.
Manufacturing/Output - Industrial Production (Y/Y)

30 20 10 0 -10 -20 -30 -40 '45 '55 '65 '75 '85 '95 '05
After a strong surge in capacity utilization growth, current levels are barely positive.
Manufacturing/Output - Capacity Utilization (Y/Y)

15 10 5 0 -5 -10
Durable Goods Ex Transports went negative for the first time since the last recession, but they quickly reversed.
-15 '45 '55 '65 '75 '85 '95 '05
Manufacturing/Output - Durable Goods Ex Transportation (Y/Y)

30 20 10 0 -10 -20 -30 -40 '60 '70 '80 '90 '00 '10
73

Economic Cycles
As we did last year, we wanted to start off this section by looking to see how the current recovery compares to the average post WWII recovery. To do this we compared the rate of change in economic indicators and the market during the current expansion to the average Post WWII expansion. At 3.5 years and counting, the current expansion ranks as the seventh longest expansion in the post WWII period. In the table below, we highlight each economic expansion since the end of WWII. For those expansions that lasted 3.5 years or longer, we also included the performance of the S&P 500 during the first 42 months of the expansion, as well as the performance of the index in the following six and twelve months. Finally, for each of those expansions we also show the performance of the S&P 500 during the entire expansion. This allows us to compare the gains in the current period to other periods, and it gives us a blueprint on what to expect in the months and year ahead. Since the end of WWII, the average recovery in the United States has lasted five years. Of those expansions that have lasted 3.5 years or longer (six), the average S&P 500 return has been 88.6%. During the first 42 months of the recovery, the S&P 500 has historically averaged a gain of 35.32%, which makes the gain of 49.1% in the current recovery the third strongest. Looking out over the next six and twelve months, the S&P 500 has averaged gains of 3.2% and 13.0%, respectively. In the two expansions where the S&P 500 saw stronger returns in the first 42 months (shaded), the returns were weaker than average for the next six months (+/less than 1%), and stronger than average for the next year. Based on economic precedent of the post WWII period, this suggests that the first half of the year could be slow, with a pick up in gains during the second half.
US Economic Expansions: 1949 - 2012
Trough 10/31/49 5/31/54 4/30/58 2/28/61 11/30/70 3/31/75 7/31/80 11/30/82 3/31/91 11/30/01 6/30/09
Peak 7/31/53 8/31/57 4/30/60 12/31/69 11/30/73 1/31/80 7/31/81 7/31/90 3/31/01 12/31/07 12/31/12 Average
Duration S&P 500 Performance (%) (Years) First 42 Months Next Six Months Next Year Entire Expansion 3.8 53.49 -0.32 14.78 54.30 3.3 2.0 8.8 28.99 6.84 6.53 45.11 3.0 4.8 23.01 -0.93 6.61 36.95 1.0 7.7 78.54 0.76 17.28 157.07 10.0 23.32 8.21 26.30 209.24 6.1 4.57 4.87 6.60 28.87 3.5 49.13 49.13 5.0 35.32 3.24 13.02 88.59
74

Economic Cycles
Even as the equity market has seen one of its strongest performances during the current recovery compared to other post WWII expansions, it is in no way indicative of a stronger than expected rebound in the economy. In the chart and table below, we highlight the change in GDP in the fourteen quarters following the end of prior recessions since 1949. So far during this expansion (Q10 in Q4 2011), there has only been one quarter where GDP growth was above the average at that point in an expansion. The 4.1% growth in the US economy in Q4 2011 was also the quarter of peak growth in the US economy during this expansion. That represents the lowest peak quarter of growth in any expansion in the post WWII period. In every other expansion, the US economy saw at least one quarter where GDP grew by 5.6% or more. While the pace of recovery in this expansion has been weak, we would note that this isnt necessarily a new phenomenon. In the prior two economic expansions (91 & 01), growth during the first fourteen quarters of the recovery was also subpar. Including the current period, the last three expansions have all seen above median growth in less than 30% of all quarters.
Median GDP Growth Following Recessions vs Current Expansion
9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0.0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 1.4 0.1 3.3 2.3 2.2 2.6 2.4 4.5 4.0 3.9 3.3 2.5 1.3 4.0 3.0 2.0 1.3 1.4 4.1 4.2 3.1 3.1 2.9 7.3 6.0 8.3 6.8 Median Current 5.6
Quarter Following Recession End
GDP Following Recessions: 1949 - 2012

End of Recession 10/31/49 5/31/54 4/30/58 2/28/61 11/30/70 3/31/75 7/31/80 11/30/82 3/31/91 11/30/01 6/30/09 Average Annualized Quarterly Change (%) Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 17.2 12.7 16.6 7.2 5.1 6.8 8.2 0.7 0.5 4.6 8.3 12.0 6.8 5.5 2.2 -1.8 2.5 9.7 9.7 8.3 10.5 -0.5 1.4 9.3 2.4 7.7 6.6 8.4 7.4 4.5 3.7 1.0 11.5 2.3 3.2 1.1 7.3 9.8 3.9 6.8 3.1 6.9 5.3 9.4 3.0 2.0 2.9 4.7 7.6 8.6 -3.2 5.1 9.3 8.1 8.5 8.0 7.1 3.9 3.3 2.7 1.7 1.6 4.5 4.3 4.2 4.3 0.7 3.5 2.1 2.0 0.1 1.7 3.4 6.7 3.7 1.4 4.0 2.3 2.2 2.6 2.4 0.1 2.5 3.3 7.3 6.0 8.3 6.8 4.5 3.9 3.3 Q9 4.1 3.2 5.3 10.6 8.2 3.8 2.6 2.7 1.3 4.0 Q10 0.4 -0.5 5.1 4.7 7.4 3.4 2.1 2.6 4.1 3.0 Q11 Q12 2.7 13.9 6.7 2.5 7.7 -2.1 -0.1 6.4 5.4 3.0 2.0 4.2 3.1 1.4 3.1 4.0 3.3 1.3 3.1 Q13 7.7 -1.0 9.3 16.7 3.9 5.6 4.2 3.1 5.6 Q14 3.1
4.7 4.0 1.6 2.6 1.8 1.4 2.9
Estimated
Red font indicates quarter with weaker growth than median for all quarters.
75

Economic Cycles
Overall, the pace of economic recovery has been weak during this expansion, but the weakness hasnt been spread equally among sectors. As we have done in prior years, the table below summarizes the change in fifteen different economic indicators during this expansion and compares that change to the average change of the indicator over the same period following the end of a recession since 1960 (regardless of length of expansion). We would have looked further back, but the reality is that most economic data beyond fifty years is sparse. While most economic sectors have seen below average growth during this expansion, the manufacturing sector has been one bright spot as ISM Manufacturing is the only manufacturing indicator out of four that has seen below average growth. Following the strength in the housing sector this year, Housing Starts have now seen stronger than average growth since the end of the last recession. Also, monthly supply is down 45% versus an average of 3.3% growth. This is one indicator where a negative number is good. Employment indicators during this recovery have still been weaker than average. Outside the 2.1% growth in the average workweek, all of the other indicators highlighted have seen below average growth. Even the stronger than average growth in the average workweek in some ways is a sign of weakness rather than strength, as companies would prefer to lengthen the average workday than take on the cost of hiring additional workers in the face of continued uncertainty.
Change in Economic Indicators Since End of Recession
Change (%) Since End of Recession Indicator Current Average Current vs Average Employment Non Farm Payrolls 2.6 7.9 -5.3 Average Hourly Earnings 6.8 17.2 -10.4 Average Workweek 2.1 0.3 1.8 Growth in Hours Worked 4.7 8.2 -3.4 Housing Starts Housing Starts Monthly Supply Manufacturing Capacity Utilization Durable Goods Industrial Production ISM Manufacturing Consumer Consumer Confidence Personal Income Personal Spending Inflation CPI PPI PCE 47.2 -44.7 17.4 52.4 16.8 8.1 32.0 14.3 14.8 7.6 13.0 7.3 43.1 3.3 8.4 47.5 16.3 54.8 -6.8 30.6 32.6 16.6 13.9 16.1 4.1 -48.0 9.0 4.8 0.5 -46.8 38.9 -16.3 -17.8 -9.0 -0.9 -8.8
Please see the following pages for charts of each indicator.
Negative number for monthly supply is actually a positive as it shows less of a supply in the current period..
76

Economic Cycles
Employment
Change in Non Farm Payrolls: Current vs Average
Percent Change Since End of Recession
Average Hourly Earnings: Current vs Average

25 Current Expansion 20 15 Average Expansion
12 10 8 6 4 2 0 -2 0 6 12 18 24 30 36 42 48 54 Months Since Recession Ended Current Average Expansion
10 5
0 0 6 12 18 24 30 36 42 48 54 Months Since Recession Ended
Average Workweek: Current vs Average

Average Expansion
Average Total Hours Worked: Current vs Average

12.0 10.0 8.0 6.0 4.0 2.0 0.0 -2.0 0 6 12 18 24 30 36 42 48 54 Months Since Recession Ended
3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 0 6 12 18 24 30 36 42
Current Expansion
48
54
Months Since Recession Ended
Average workweek multiplied by change in non farm payrolls.
Housing
Housing Starts: Current vs Average
Percent Change Since End of Recession Percent Change Since End of Recession
60 30 20 10 0 -10 -20 -30 -40 -50 0 6 12 18 24 30 36 42 48 54 Months Since Recession Ended Current Expansion Average Expansion
Monthly Supply: Current vs Average
40
20
Current Expansion Average Expansion
-20 0 6 12 18 24 30 36 42 48 54 Months Since Recession Ended
77

Economic Cycles
Manufacturing
Capacity Utilization: Current vs Average
Durable Goods: Current vs Average

70 60 50 40 30 20 10 0 0 6 12 18 24 30 36 42 48 54 Months Since Recession Ended Current Expansion Average Expansion
20
16 12
8 4
Industrial Production: Current vs Average

18 16 14 12 10 8 6 4 2 0 0 6 12 18 24 30 36 42 48 54 Months Since Recession Ended Current Expansion Average Expansion
ISM Manufacturing: Current vs Average

60 50 40 30 20 10 0 0 6 12 18 24 30 36 42 48 54 Months Since Recession Ended Current Expansion Average Expansion
20
78

Economic Cycles
Consumer
Consumer Confidence: Current vs Average
Percent Change Since End of Recession Percent Change Since End of Recession
60 50 40 30 20 10 0 -10 -20 0 6 12 18 24 30 36 42 48 54 Months Since Recession Ended Current Expansion Average Expansion 30 25 20 15 10 5 0 -5 0 6 12 18 24 30 36 42 48 54 Months Since Recession Ended Current Expansion Average Expansion
Inflation
CPI: Current vs Average
Personal Income: Current vs Average

40 35 30 25 20 15 10 5 0 -5 0 6 12 18 24 30 36 42 48 54 Months Since Recession Ended Current Expansion Average Expansion
PPI: Current vs Average

25 20 15 10 5 0 -5 0 6 12 18 24 30 36 42 48 54 Months Since Recession Ended
45
Personal Spending: Current vs Average

45 40 35 30 25 20 15 10 5 0 0 6 12 18 24 30 36 42 48 54 Months Since Recession Ended Current Expansion Average Expansion
PCE: Current vs Average

25 Current Expansion 20 Average Expansion 15
50
10
79

Economic Cycles
The strength of the current economic expansion has by all accounts been weaker than average, but what many investors may not realize is that the duration of the recovery, no matter how anemic, is getting up there in terms of time. The chart below shows the duration of economic expansions for the US economy dating back to 1900. At 42 months and counting, the current expansion is now just three months below average and qualifies as the tenth longest overall. In other words, this recovery has been longer than more than half of economic expansions since 1900. Now that the current expansion (however weak) is approaching the average life-cycle of an economic expansion, and the fact that the fiscal cliff has the potential to restrain growth in 2013, it is important for investors to at least think about the potential implications of recession in the US economy. With that in mind, in the remaining part of this section, we analyzed market performance during recessions.
Duration of US Economic Expansions (Months): 1900 - 2012

120 100 Months 80 Average: 45 Months
Months
60 40 20 0
80

Economic Cycles
Looking at economic recessions dating back to 1900 shows that recessions can generally be divided into two distinct periods pre and post WWII. In the pre WWII period, recessions were frequent and extended in length. From 1900 through 1941 (when the US entered WWII), there were ten recessions with an average length of 19.1 months. That works out to a recession about once every four years. Or put another way, from 1900 through 1938, the US economy was in recession 38% of the time. Since the start of WWII, recessions have been a lot less frequent and much shorter in duration. From 1942 through 2012 (71 years), there were 12 recessions with an average length of just 10.8 months. That works out to a recession about once every six years. Comparing the post WWII period to the pre WWII period, where the US economy was in recession 38% of the time before WWII, after WWII the US economy was in recession just 15% of the time.
US Economic Recessions: 1900 - 2008
45 30 25 20
43
Pre WWII Post WWII

18
Months
15 10 5 0
Average: 15
Another way to illustrate the less volatile nature of the US economy post WWII is to look at the Y/Y change in Industrial Production going back to 1919. Pre WWII, this indicator routinely moved from negative 30% to positive 30% (or more). Post WWII though, the ebbs and flows have been a lot more muted. On the growth side, it is rare to see growth in excess of 10%. On the downside, even during the depths of the Financial crisis, the y/y decline only got as low as negative 15%.
Y/Y Industrial Production: 1919 - 2012

60 50 40 Pre WWII Post WWII
Percent Change (%)
30 20 10 0 -10 -20 -30 -40 '19 '29 '39 '49 '59 '69 '79 '89 '99 '09
81

Economic Cycles
The table below lists each of the 12 US economic recessions since WWII. For each recession we list the start and end date, when the index reached its low for the recession, how long the recession lasted, and finally the S&P 500s performance from the high to low point, the low to high as well as the S&P 500s performance during the entire recession. From the peak at the beginning of the recession to the low, the S&P 500 has seen declines ranging in the area of just 3.8% (1960) all the way to 54.3% (2007) for an average maximum decline of 18.7%. From the time the S&P 500 reaches its low to the high point of the recession, the S&P 500s return has ranged anywhere from 11.4% (1957) all the way up to 35.9% (2007). For the entire recession as a whole, the range of returns for the S&P 500 has spanned from a decline of 37.9% (2007) to a gain of 17.9%. Overall, the average S&P 500 change during recessions has been a gain of 1.3%.
S&P 500 Performance During Recessions: 1945 - 2012

Start 2/28/45 11/30/48 7/31/53 8/31/57 4/30/60 12/31/69 11/30/73 1/31/80 7/31/81 7/31/90 3/31/01 11/30/07 Low 3/26/45 6/13/49 9/14/53 10/22/57 10/25/60 5/26/70 10/3/74 3/27/80 8/12/82 10/11/90 9/21/01 3/9/09 End 10/31/45 10/31/49 5/31/54 4/30/58 2/28/61 11/30/70 3/31/75 7/31/80 11/30/82 3/31/91 11/30/01 6/30/09 S&P 500 Low (% Duration into Recession) 11 58 15 21 59 44 63 31 77 30 71 80 Average S&P 500 Performance (%) Peak to Trough Trough - Peak Entire Period -6.4 24.3 16.4 -8.1 18.4 8.7 -8.2 28.5 17.9 -13.8 11.4 -3.9 -3.8 21.3 16.7 -24.7 25.8 -5.3 -35.1 33.8 -13.1 -14.0 23.9 6.6 -21.8 35.3 5.8 -17.0 27.0 5.4 -16.8 18.0 -1.8 -54.3 35.9 -37.9 -18.7 25.3 1.3
82

Economic Cycles
On the following pages we provide composite charts of the S&P 500 and each sector (including Transports) during all economic recessions since 1945. For the S&P 500 and each sector, we also list the performance to date at each quartile interval during the recession. The table below summarizes the average performance of the S&P 500 and each sector throughout the recession. We have also included a column showing at what duration into the recession (on a percentage basis) that the index or sector typically bottoms. Overall, the S&P 500 reaches its low for the recession 62% of the way into the contraction. Of the sectors highlighted below, four typically bottom before the S&P 500, three bottom at the same time as the S&P 500, and four have historically bottomed after the S&P 500. Consumer Staples has historically bottomed just 10% of the way into the recession, indicating the defensive characteristics of the sector. Another surprising sector that bottoms ahead of the market is Utilities which hits its low of the recession 56% of the way in. The remaining two sectors that bottom ahead of the market are Energy and Materials. Interestingly, the four sectors that typically bottom after the S&P 500 are all cyclical (Consumer Discretionary, Financials, Technology, and Transports).
Average S&P 500 Sector Performance During Recessions: 1945 - 2012
Low Point of Recession (Duration) 71 10 55 72 62 62 57 63 62 77 56 62 Through 1st % of Time Quartile Positive -2.11 50.0 -1.74 41.7 -2.12 33.3 -3.00 41.7 -2.07 50.0 -3.19 25.0 -0.94 50.0 -3.69 41.7 -0.97 62.5 -3.62 33.3 0.72 66.7 -3.10 25.0 Average S&P 500 Return (%) Through 2nd % of Time Through 3rd % of Time Quartile Positive Quartile Positive -6.08 25.0 -8.93 25.0 -2.10 41.7 1.31 75.0 -7.93 25.0 -8.84 25.0 -7.03 33.3 -9.58 50.0 -2.38 41.7 -0.88 66.7 -8.45 25.0 -9.40 41.7 -3.82 41.7 -7.25 33.3 -6.68 41.7 -5.96 50.0 -6.43 25.0 -7.47 25.0 -9.76 25.0 -13.78 8.3 -2.32 50.0 -1.88 50.0 -7.44 33.3 -8.17 41.7 Entire % of Time Recession Positive 7.45 66.7 12.27 83.3 -2.56 50.0 -0.72 58.3 7.38 75.0 -0.17 50.0 1.60 66.7 7.46 66.7 -3.20 50.0 -3.16 50.0 4.20 75.0 1.29 58.3
Sector Consumer Discret. Consumer Staples Energy Financials Health Care Industrials Materials Technology Telecom Svcs Transports Utilities S&P 500
83

Economic Cycles
S&P 500 Performance During Recessions: 1945 - 2012
2 0 -2 -4 -6 -8 -10 -12
'53 '45
'57 '90 '80 '69 '07 '48 '73 '01 '81 '60 Average
0% Start 2/28/45 11/30/48 7/31/53 8/31/57 4/30/60 12/31/69 11/30/73 1/31/80 7/31/81 7/31/90 3/31/01 11/30/07
25% 25% 3.8 -0.1 -3.2 -9.3 3.1 -4.4 -2.1 -7.6 -4.5 -14.1 8.2 -7.1 -3.1 25.0
50% Duration in to Recession (%) 50% 4.0 1.4 0.0 -12.5 -3.2 -17.3 -17.4 -7.6 -14.5 -11.2 4.4 -15.5 -7.4 33.3
75% 75% 7.3 5.2 7.3 -9.7 4.5 -10.0 -27.1 1.4 -18.2 -5.7 -10.3 -42.9 -8.2 41.7
100% 100% 16.4 8.7 17.9 -3.9 16.7 -5.3 -13.1 6.6 5.8 5.4 -1.8 -37.9 1.3 58.3
Average % of Time Positive
They dont say markets are forward looking for nothing. On average, the S&P 500 has tended to bottom during the third quarter of recessions. Three quarters of the way into the recession, the S&P 500 has averaged a decline of 8.2%, but 42% of the time the index has already erased its entire decline since the start of the recession.
84

Economic Cycles
Cons. Discretionary Sector Performance During Recessions: 1945 - 2012
10 8 6 4 2 0 -2 -4 -6 -8 -10 -12
0% Start 2/28/45 11/30/48 7/31/53 8/31/57 4/30/60 12/31/69 11/30/73 1/31/80 7/31/81 7/31/90 3/31/01 11/30/07
25% 25% 0.7 3.4 2.1 -5.6 0.8 -0.5 5.4 -9.6 -4.6 -20.0 11.5 -9.0 -2.1 50.0
50% Duration in to Recession (%) 50% 4.3 -6.9 10.4 -8.0 -7.8 -20.7 -12.4 -12.8 -2.2 -16.5 10.1 -10.5 -6.1 25.0
75% 75% 5.1 -9.1 15.5 -2.6 -3.7 -11.0 -32.6 -2.7 0.5 -8.9 -14.1 -43.5 -8.9 25.0
100% 100% 16.2 6.7 32.0 3.2 3.7 -5.8 -7.0 7.9 60.6 5.5 -0.2 -33.3 7.5 66.7
The Consumer Discretionary sector typically holds up relatively well during the early stages of a recession, averaging a decline of just 2.1%. Three quarters of the way into the contraction, the average falls all the way down to a decline of 8.9% with positive returns only 25% of the time. As the market anticipates an end to the recession, however, the sector quickly recovers. By the end of the recession, the sector is actually up 7.5% with positive returns two-thirds of the time.
85

Economic Cycles
Energy Sector Performance During Recessions: 1945 - 2012
4 2 0 -2 -4 -6 -8 -10 -12 -14
0% Start 2/28/45 11/30/48 7/31/53 8/31/57 4/30/60 12/31/69 11/30/73 1/31/80 7/31/81 7/31/90 3/31/01 11/30/07
25% 25% 0.3 -5.5 -6.7 -12.0 -3.9 -11.5 -2.7 4.8 -6.1 -5.3 10.1 13.1 -2.1 33.3
50% Duration in to Recession (%) 50% 0.2 0.5 -0.8 -17.9 -4.2 -14.1 -17.3 -0.5 -26.5 -7.7 0.9 -7.8 -7.9 25.0
75% 75% -5.1 -0.6 12.9 -20.8 2.1 -0.5 -23.8 11.8 -30.7 -10.8 -9.6 -30.8 -8.8 25.0
100% 100% 2.2 8.6 24.1 -9.2 17.5 7.3 -17.0 9.9 -26.9 -2.9 -10.7 -33.5 -2.6 50.0
Although the Energy sector held up well in recessions from 1945 through 1980, the trend for the sector has changed over the last four recessions. Since the second dip of the double dip in 1981, the Energy sector has declined during every recession for an average decline of 18.5% (shaded box).
86

Economic Cycles
Financials Sector Performance During Recessions: 1945 - 2012
0 -2 -4 -6 -8 -10 -12
0% Start 2/28/45 11/30/48 7/31/53 8/31/57 4/30/60 12/31/69 11/30/73 1/31/80 7/31/81 7/31/90 3/31/01 11/30/07
25% 25% -1.4 1.4 5.7 -10.2 -1.1 9.0 -0.4 -11.6 5.9 -23.9 7.5 -16.9 -3.0 41.7
50% Duration in to Recession (%) 50% 7.1 2.7 5.0 -7.8 -3.4 -5.4 -29.0 -6.6 -0.5 -19.9 5.5 -32.0 -7.0 33.3
75% 75% 0.2 2.6 4.4 -1.5 1.0 4.8 -29.8 6.1 -13.8 -11.1 -7.0 -70.8 -9.6 50.0
100% 100% 10.2 12.5 6.9 0.0 14.9 -1.3 -21.9 2.2 24.3 7.5 -2.6 -61.3 -0.7 58.3
More so than any other sector, the most recent recession really skewed things for the Financial sector. From 2007 through 2009, the sector declined 61.3%, bringing the overall average decline during recessions down to 0.7%. Without the last recession, the sector has averaged a gain of 4.8%.
87

Economic Cycles
Health Care Sector Performance During Recessions: 1945 - 2012
8 6 4 2 0 -2 -4 -6
0% Start 2/28/45 11/30/48 7/31/53 8/31/57 4/30/60 12/31/69 11/30/73 1/31/80 7/31/81 7/31/90 3/31/01 11/30/07
25% 25% 4.2 6.9 3.6 -2.3 8.6 -8.9 -4.2 -11.0 0.4 -11.4 3.7 -14.6 -2.1 50.0
50% Duration in to Recession (%) 50% 4.6 14.6 9.9 3.0 -2.6 -18.1 -22.3 -5.3 -0.9 -4.1 4.1 -11.6 -2.4 41.7
75% 75% 7.8 15.4 14.4 7.8 4.7 -19.6 -22.0 3.7 -0.7 1.4 1.7 -25.3 -0.9 66.7
100% 100% 22.2 11.6 17.1 23.6 16.7 -9.6 -12.4 7.7 15.0 18.4 5.9 -27.5 7.4 75.0
Besides Consumer Staples and Utilities, no sector has seen better returns during a recession than the Health Care sector. Going back to 1945, the sector has averaged a gain of 7.4% with positive returns 75.0% of the time.
88

Economic Cycles
Industrials Sector Performance During Recessions: 1945 - 2012
2 0 -2 -4 -6 -8 -10 -12 -14
0% Start 2/28/45 11/30/48 7/31/53 8/31/57 4/30/60 12/31/69 11/30/73 1/31/80 7/31/81 7/31/90 3/31/01 11/30/07
25% 25% 3.2 -0.6 -4.0 -9.5 2.7 -5.1 -2.4 -7.4 -5.5 -19.9 15.4 -5.2 -3.2 25.0
50% Duration in to Recession (%) 50% 2.2 0.3 -0.4 -13.3 -3.7 -17.5 -17.0 -8.1 -15.8 -19.8 7.0 -15.3 -8.5 25.0
75% 75% 6.9 4.4 7.2 -11.0 4.3 -10.4 -27.4 0.9 -18.7 -9.2 -10.4 -49.4 -9.4 41.7
100% 100% 14.9 8.2 19.2 -5.4 16.0 -5.7 -13.1 6.8 4.9 -1.1 -0.2 -46.5 -0.2 50.0
Not surprisingly, the Industrials sector is one of the worst performing sectors early on in recessions, as well as throughout the entire recession. Since the end of WWII, the sector has averaged a decline of 3.2% during the first quartile of the recession. Three quarters of the way into the contraction, the sector averages a decline of 9.4%. Once the recession is finally over, the S&P 500 has averaged a decline of 0.2% with positive returns just 50% of the time.
89

Economic Cycles
Materials Sector Performance During Recessions: 1945 - 2012
4 2 0 -2 -4 -6 -8 -10
0% Start 2/28/45 11/30/48 7/31/53 8/31/57 4/30/60 12/31/69 11/30/73 1/31/80 7/31/81 7/31/90 3/31/01 11/30/07
25% 25% 3.0 4.0 3.2 -7.8 -0.5 -3.7 14.2 -13.3 -13.4 -18.0 15.2 5.9 -0.9 50.0
50% Duration in to Recession (%) 50% 1.8 7.2 10.4 -7.6 -11.8 -3.1 7.2 -11.9 -21.8 -17.0 10.3 -9.5 -3.8 41.7
75% 75% 4.9 8.7 11.8 -8.0 -7.3 8.4 -12.8 -4.0 -28.6 -8.7 -3.3 -48.2 -7.3 33.3
100% 100% 12.7 21.3 26.6 -8.0 0.8 2.7 4.6 1.0 -10.3 -2.5 10.5 -40.0 1.6 66.7
The Materials sector has tended to hold up relatively well during the first part of recessions averaging just a minor decline (-0.9%). The sector typically sees its low for the period early on during the third quarter of the recession, making it one of the leading sectors for the overall market.
90

Economic Cycles
Technology Sector Performance During Recessions: 1945 - 2012
10
-5
-10
-15
0% Start 2/28/45 11/30/48 7/31/53 8/31/57 4/30/60 12/31/69 11/30/73 1/31/80 7/31/81 7/31/90 3/31/01 11/30/07
25% 25% 0.3 3.1 0.4 -5.0 11.5 -12.9 -9.2 -12.4 -6.3 -16.2 11.1 -8.7 -3.7 41.7
50% Duration in to Recession (%) 50% 5.8 8.4 3.8 -5.0 10.0 -29.1 -25.4 -20.9 -3.7 -12.8 5.7 -16.9 -6.7 41.7
75% 75% 6.4 14.7 24.5 6.5 27.5 -29.5 -37.6 -15.9 -1.8 0.8 -25.8 -41.3 -6.0 50.0
100% 100% 16.3 23.1 43.8 12.8 40.4 -21.7 -26.2 -6.7 30.5 4.6 1.9 -29.1 7.5 66.7
Technology has historically seen a strong rebound during the final quarter of the recession, finishing the contraction with a gain of 7.5% and positive returns two-thirds of the time. That being said, rather than being a leading indicator for the market, the sectors bottom is typically coincident with the broader market.
91

Economic Cycles
Telecom Svcs Sector Performance During Recessions: 1945 - 2012
2 0 -2 -4 -6 -8 -10 -12
0% Start 2/28/45 11/30/48 7/31/53 8/31/57 4/30/60 12/31/69 11/30/73 1/31/80 7/31/81 7/31/90 3/31/01 11/30/07
25% 25%
0.3 6.1 4.0 -7.6 6.2 -6.2 2.2 -12.6 -1.0 62.5
50% Duration in to Recession (%) 50% n/a n/a n/a n/a -1.6 -14.7 -13.5 3.4 -0.4 -4.9 1.8 -21.6 -6.4 25.0
75% 75%
100% 100%
6.0 -5.2 -12.2 6.0 -7.5 -6.8 -2.4 -37.6 -7.5 25.0
26.9 -10.5 0.2 2.8 6.2 -0.9 -14.1 -36.2 -3.2 50.0
With price data only going back as far as 1960, it is difficult to compare Telecom Services to other sectors and the broader market where we looked at data going back to 1945. Interestingly, even though the sector is considered defensive by nature, its has not been a very good performer during recessions.
92

Economic Cycles
Transports Sector Performance During Recessions: 1945 - 2012
2 0 -2 -4 -6 -8 -10 -12 -14 -16
0% Start 2/28/45 11/30/48 7/31/53 8/31/57 4/30/60 12/31/69 11/30/73 1/31/80 7/31/81 7/31/90 3/31/01 11/30/07
25% 25% 10.7 -6.2 -9.3 -18.8 -0.7 -3.4 5.7 -7.0 -4.2 -23.1 6.3 6.5 -3.6 33.3
50% Duration in to Recession (%) 50% 16.7 -7.3 -10.8 -30.1 -11.8 -21.2 -9.8 -14.0 -18.1 -24.3 4.9 8.9 -9.8 25.0
75% 75% 6.7 -9.3 -4.6 -25.1 -9.1 -21.9 -15.4 -1.4 -24.1 -5.8 -20.8 -34.4 -13.8 8.3
100% 100% 16.6 -7.8 4.5 -18.6 4.4 -13.0 -5.5 10.8 9.3 1.5 -9.4 -30.6 -3.2 50.0
Transports are often referred to as a leading indicator for the broader market, but in terms of leading the market out of recessions, the sector has lagged the broader market. While the S&P 500 has typically reached its low for the recession 62% of the way in, the low for the Transports typically doesnt come until the recession is more than 75% over (77%).
93

Economic Cycles
Utilities Sector Performance During Recessions: 1945 - 2012
5 4 3 2 1 0 -1 -2 -3 -4 -5
0% Start 2/28/45 11/30/48 7/31/53 8/31/57 4/30/60 12/31/69 11/30/73 1/31/80 7/31/81 7/31/90 3/31/01 11/30/07
25% 25% 6.0 6.6 3.3 -3.7 6.6 3.7 2.0 -7.7 2.9 -7.2 2.0 -5.7 0.7 66.7
50% Duration in to Recession (%) 50% 12.8 12.7 6.7 1.8 2.5 -13.2 -23.4 0.5 -2.0 -0.4 -10.7 -15.1 -2.3 50.0
75% 75% 12.5 16.1 12.3 9.1 9.1 -2.1 -26.0 6.7 -5.6 -0.7 -23.7 -30.2 -1.9 50.0
100% 100% 28.8 20.8 16.3 16.1 24.6 2.9 -14.9 4.6 9.9 4.2 -28.5 -34.3 4.2 75.0
While Transports have historically lagged the overall market in terms of when they reach their bottom, Utilities actually lead the market! Going back to 1945, the Utilities sector has reached its low of the recession an average of 56% of the way into the recession. The only two sectors that typically bottom earlier are Consumer Staples and Energy.
94

Housing
In our Economic Indicators section, we highlighted the strength that economic indicators related to the housing market have shown in 2012, and at right and below we highlight just how well housing stocks did in 2012. Towards the end of 2011, homebuilder stocks made a nice double bottom, and we made note of it in our 2012 outlook piece. After rallying in Q4 2011, homebuilder stocks took off in early 2012 and they havent looked back. In fact, the S&P 1500 Homebuilder group had its second best year on record since 1995 with a gain of 79.91% this year! At right we highlight the performance of the individual stocks that make up the S&P 1500 Homebuilder group. As shown, six of the eleven stocks in the group were up more than 100% in 2012, with PulteGroup (PHM) leading the way at +178.92%. NVR was the worst performer but it still gained 35.93%.
S&P 1500 Homebuilders

Year 1995 1996 1997 1998 1999 2000 2001 2002 2003
Stock PHM MHO KBH RYL SPF MDC LEN MTH TOL DHI NVR
% Chg 52.89 -2.73 43.78 5.25 -37.19 53.56 36.63 -4.32 97.00
Company PulteGroup Inc M/I Homes Inc KB Home Ryland Group Inc Standard Pacific Corp MDC Holdings Inc Lennar Corp Meritage Homes Corp Toll Brothers Inc DR Horton Inc NVR Inc
Year 2004 2005 2006 2007 2008 2009 2010 2011 2012
% Chg 36.31 15.01 -20.23 -55.51 -31.88 18.10 2.33 -6.05 79.91
S&P 1500 Homebuilder Stocks

Price YTD % Chg 17.60 178.92 25.33 163.85 15.37 128.72 35.72 126.65 7.11 123.58 35.33 100.40 37.62 91.45 36.63 57.96 31.27 53.13 19.24 52.58 932.50 35.93
Below is a chart of the S&P 1500 Homebuilder group going back to 2000. As shown, the group broke out of a multi-year post-bubble sideways trading range in mid2012, and it has continued to rise with no significant resistance in the way. The technicals continue to look positive for the homebuilders.
S&P 1500 Homebuilders Group: 2000-Present

1200
1000 800 600 400 200 0 +80% in 2012
95

Housing
Just when consumers thought mortgage rates couldnt get any lower, the 30-year dropped another 50+ basis points in 2012 from 3.94% down to 3.38%! Extremely low rates certainly act as a tailwind for the housing market and housing stocks, and with rates set to stay low for the foreseeable future, we expect this area of the economy to remain an area of strength.
Bankrate.com National Average 30-Year Fixed Mortgage Rate
9 8 7 6 5 4 3 Fell from 3.94% to 3.38% in 2012.
Below and on the following pages we take a look at home prices around the country using the S&P/Case-Shiller home price indices. Below is a chart of the 10-city nationwide home price index going all the way back to 1987. As shown, while prices have stabilized and headed higher this year, theyre still stuck in a rut and are well below their highs reached back in 2006. In fact, theyre still not even at post-recession highs, so well look for this new high to be made in 2013. S&P/Case-Shiller 10-City Composite Home Price Index: 1987-Present
250 230 210 190 170 150 130 110 90 70 50
Oct-90
Oct-95
Oct-00
Oct-05
Oct-10
Jan-87
Jan-92
Jan-97
Jan-02
Jan-07
Apr-88
Apr-93
Apr-98
96
Apr-03
Apr-08
Jan-12
Jul-89
Jul-94
Jul-99
Jul-04
Jul-09

Housing
In the first chart below, we highlight how far each city tracked by S&P/Case-Shiller remains below its all-time highs seen at the peak of the housing boom in the mid-2000s. As shown, the two composite indices are still down 30% from their highs. Las Vegas is the only city that remains more than 50% below its all-time high, while Miami, Phoenix and Tampa are all still down more than 40%. On the positive side, Denver and Dallas are both within 5% of their highs.
% Change from Bubble Highs in S&P/Case-Shiller Home Prices
0 -10 -20
-5 -18 -29 -32 -30 -30 -27 -26 -24 -24 -23 -15 -15 -4
% Change
-30 -40 -50 -60 -70

-57 -47 -46 -44 -34 -37 -36 -35
We also looked at how far each city is now above its post-recession lows. As shown, the two composite indices are up 8-9% off their lows, while Detroit is up the most at +24%. San Francisco and Phoenix are the other two cities up more than 20%. The northeast corridor of the country has struggled to bounce, however. Boston is up just 6% from its lows, while New York is up even less at 5%, but these two regions also held up relatively well during the downturn.
% Change from Post-Bubble Lows in S&P/Case-Shiller Home Prices
30
24 22 22 18 15 16
25
% Change
20 15 10
5 6 7 8 8 8 8 9 9 10 10 10 11 11 12 12
5 0
97

Housing
On the following pages we provide historical charts of the year-over-year percentage change for each of the 20 Case-Shiller cities on a monthly basis.
60 40 20 0 -20 -40 -60 92 40 30 20 10 0 -10 -20 -30 92 20 15 10 5 94 96 98 00 02 04 06 08 10 12 94 96 98 00 02 04 06 08 10 12 40 30 20 10 0 -10 -20 -30 -40 92 94 96 98 00 02 04 06 08 10 12
Phoenix
50 40 30 20 10 0 -10 -20 -30 -40 92 94 96
Los Angeles
98
00
02
04
06
08
10
12
San Diego
San Francisco
Denver
40 30 20 10 0
Washington DC
0 -5 -10
-10 -20 -30

92 94 96 98 00 02 04 06 08 10 12
92 40 30 20 10 0 -10 -20 -30
94
96
98
00
02
04
06
08
10
12
40 30 20 10 0 -10 -20 -30 -40 92 94 96 98
Miami
Tampa
00
02
04
06
08
10
12
92
94
96
98
00
02
04
06
08
10
12
98

Housing
10 5 0 -5 -10 -15 -20 92 94 96 98 00 02 04 06 08 10 12
Atlanta
15 10 5 0 -5 -10 -15 -20 -25 92 94 96 98
Chicago
00
02
04
06
08
10
12
25 20 15 10 5 0 -5 -10 92 18 13 8 3 -2 -7 -12 -17 -22 -27 92 60 94 96 94 96 98
Boston
15 10 5 0 -5 -10 -15 -20 -25 -30 06 08 10 12 10 5 0 -5 -10 -15 92 94 96 98
Detroit
00
02
04
00
02
04
06
08
10
12
Minneapolis
Charlotte
98
00
02
04
06
08
10
12 25 20 15 10 5 0 -5 -10 -15
92
94
96
98
00
02
04
06
08
10
12
Las Vegas
New York
40 20 0 -20 -40 92 94 96 98 00 02 04 06 08 10 12
92
94
96
98
00
02
04
06
08
10
12
99

Housing
10 5 0 -5 -10 -15 92 25 20 15 10 5 0 -5 -10 -15 -20 92 30 20 10 0 -10 -20 -30 92 94 96 98 00 02 04 06 08 10 12 -5 -15 -25 01 02 03 04 05 06 07 08 09 10 11 12 13 94 96 98 94 96 98 00 02 04 06 08 10 12 8 6 4 2 0 -2 -4 -6 -8 00 02 04 06 08 10 12 01 25 15 5 02 03 04 05 06 07 08 09 10 11 12 13
Cleveland
25 20 15 10 5 0 -5 -10 -15 -20 92 94 96 98
Portland
00
02
04
06
08
10
12
Seattle
Dallas
Composite 10 City
Composite 20 City
100

Yield Curve
If 2013 is anything like 2012, or for that matter just about any other year, there will be an inordinate amount of debate over the trajectory of the US economy. People on both sides of the debate will spend countless hours building and tweaking models based on both public and proprietary data to either develop or confirm a view. While the evidence these economists will provide will sound reasonable and convincing, the reality is that anyone with access to the yields on short and long-term US Treasuries can use a model that has historically been more reliable than just about any other known model. That model is the yield curve. Dont take our word for it, though. Take the words of the Federal Reserve Bank of New York. According to the NY Fed: The yield curvespecifically, the spread between the interest rates on the tenyear Treasury note and the three-month Treasury billis a valuable forecasting tool. It is simple to use and significantly outperforms other financial and macroeconomic indicators in predicting recessions two to six quarters ahead. Federal Reserve Bank of New York, June 1996 The NY Fed defines the yield curve as the difference between the yield on the 10-Year and 3Month US Treasuries, and based on their research the yield curve is an effective predictor of future economic activity. The chart below shows a long term chart of the US Treasury yield curve going back to 1962. In the chart we have also highlighted recessions with gray shading. As shown in the chart, every time the curve has drifted into negative territory, a recession followed, and every time there has been a recession, it was preceded by a negative yield curve. You cant get a record much better than that. So, next time someone starts talking about the prospects for a recession, ask them where the yield curve is.
Yield Curve (bps): 1962 - 2012
600
400
200
-200
-400 '62 '72 Recessions '82 '92 Yield Curve '02 '12
101

Yield Curve
As outlined on page 101, the yield curve is comprised of the yields on the 10-year and 3-month US Treasury. To see how those two securities have traded in 2012, below we highlight the long-term charts of the yield on the 10-year and 3-month US Treasuries going back to 1962 with a focus on 2012. For long-term US Treasuries, the secular bull market continued in 2012, as the yield fell to a record low level of 1.3875% back on July 24th. Since then, yields have been quietly drifting higher to around 1.8%, even after the Fed announced plans for further asset purchases in December. Still, after the recent increase off the Summer lows, long term interest rates are low from both a historical perspective as well as versus 2012s high of 2.38%.
US Ten Year Treasury Yield: 1962 - 2012
15 13 11 9 7 5 3 1 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07 '12 2.4 2.2 2.0 1.8 1.6 1.4 1/12 4/12 7/12 10/12
There is not much to say about short term interest rates given the Feds intention to keep the Fed Funds rate at zero until the unemployment rate drops to 6.5%. For much of 2012, the yield on the 3-month T-Bill was just under 0.1%. Following the Feds December meeting, however, where they outlined their long-term policy objectives, the yield plummeted all the way down to 0.02%.
US Three Month Treasury Yield: 1962 - 2012
18 16 14 12 10 8 6 4 2 0 -2 '62 '67 '72 '77 '82 '87 '92
0.15 0.10 0.05 0.00 1/12 4/12 7/12 10/12
'97
'02
'07
'12
102

Yield Curve
The chart to the right shows how the yield 240 curve has traded throughout 2012. Given the 220 fact that short-term rates are for all intents and 200 purposes at zero, the yield curve has primarily 180 been driven by the movements in the 10-year 160 Treasury. So just like the 10-year, the yield 140 curve hit its highs of the year early on in the 120 1/12 year and drifted lower through the early Summer, before drifting higher at the end of July though now.
Basis Points
Yield Curve (bps): 2012
4/12
7/12
10/12
At the beginning of this section, we highlighted the yield curves impeccable record at predicting recessions. That being said, one could make the argument that with short term rates being held artificially lower by the Federal Reserve, that the predictive power of the yield curve will not be as effective. Thats certainly a possibility, but investors should bet against the yield curve at their own risk. Just as the Fed holding interest rates artificially low may hurt the predictive ability of the yield curve, the Feds actions may also be having an adverse impact on the economy. Since the steepness of the yield curve helps to signal economic growth, the Feds actions of holding rates low on the long end of the curve through its asset purchase program has the effect of artificially flattening the curve. Relative to its historical average, the steepness of the yield curve is currently (174 bps) only slightly above its long-term average of 145 bps.
Yield Curve (10-Year Minus Three Month Treasury Yield): 1962 - 2012
600 500 400 300
2.0 St Dev 1.5 St Dev 1.0 St Dev Average -1.0 St Dev -1.5 St Dev -2.0 St Dev
200 100 0 -100 -200 -300 -400 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07 '12
103

Yield Curve
Taking a broader look at how the yield curve impacts equity prices, we calculated the average six month forward return of the S&P 500 when the curve was in each of the regions in the chart on the prior page. We further filtered the performance for periods when the yield curve had risen or fallen over the last six months. As shown below, the current level is within a range that has historically produced positive returns (2.73%) for equities with gains 62% of the time. If equities rally in 2013, the driving force behind the rally is unlikely to be the yield curve. Conversely, the current level of the yield curve is also unlikely to act as a weight on equity prices either.
S&P 500 Average Six Month Return Following Various Yield Curve Levels
Range 2 Above Above Average 1.5+ Above 1.0+ Above Positive Negative Below Average 1.0+ Below 1.5+ Below 2.0 Below Overall Direction Six Month S&P 500 Return Percent of Time Positive Rising 32.38 100.0 Falling n/a Rising Falling Rising Falling Rising Falling Rising Falling Rising Falling Rising Falling Rising Falling 3.13 4.03 2.43 6.33 2.73 6.38 4.42 5.77 -2.99 0.91 -14.94 -4.83 -4.54 2.13 3.69 68.0 86.1 66.4 73.6 61.8 79.2 61.6 78.3 37.8 55.7 3.6 33.5 10.5 49.8 66.4 Current Level
S&P 500 Average Forward Six Month Return Based on Yield Curve Spread
35 30 25 20 15 10 5 0 Curve Rising -5 Curve Falling -10 -15 2 Above 1.5+ Above 1.0+ Above Positive Negative 1.0+ Below 1.5+ Below 2.0 Below
Current Level
104

Yield Curve
We also looked at sector performance following periods when the yield curve is at levels similar to where it is right now. The table is sorted by the average overall six month change regardless of whether or not the curve is rising for falling. Based on prior history, when the yield curve is at similar levels, Technology, Transports, Consumer Discretionary, Consumer Staples, and Health Care have all averaged gains of 6% or more. On the downside, defensive sectors like Telecom Services and Utilities have tended to underperform the S&P 500 in the six months following periods when the yield curve was at similar levels.
Sector Performance When Yield Curve is Less Than 1 Standard Deviation Above Average
Rising Change Percent of Time Positive 4.0 57.4 4.5 58.0 4.4 59.0 4.9 70.7 5.0 62.9 3.0 60.8 2.7 61.8 3.0 60.5 2.4 59.4 0.8 55.1 -1.7 44.5 -1.6 48.1 Falling Change Percent of Time Positive 9.6 74.3 7.8 73.0 7.8 67.2 7.2 78.3 7.0 75.3 6.6 73.6 6.4 79.2 6.1 64.6 6.5 72.7 7.2 64.7 5.2 67.8 4.3 73.4 Overall Change Percent of Time Positive 7.0 66.3 6.2 65.9 6.2 63.3 6.1 74.7 6.0 69.4 4.9 67.5 4.6 71.0 4.6 62.6 4.6 66.4 4.2 60.1 2.0 56.7 1.5 61.4
Technology Transports Cons Discret. Cons Staples Health Care Energy S&P 500 Materials Industrials Financials Telecom Svcs Utilities
Sector Performance When Yield Curve is Less Than 1 St. Dev. Above Average
10.0 8.0 6.0 Rising Falling Overall
4.0 2.0 0.0 -2.0
105

Dollar and Stocks
Outside of a 7% pop that was immediately followed by a 6% drop in the summer, the US Dollar Index traded in a relatively narrow range during 2012. After starting out the year at 80.2, the index finished off the year down less than half of one percent. In the volatile world of currencies, 2012 was a snoozer for the greenback, which was partially a reflection of the return to normalcy within financial markets.
US Dollar Index: 2012
84 83 82 81 80 79 78 1/2 2/2 3/2 4/2 5/2 6/2 7/2 8/2 9/2 10/2 11/2 12/2
+7%
-6%
Longer term, the US dollar remains in a bull market after bottoming nearly five years ago in April 2008. While it hasnt exactly been In full bull mode since then, prior bottoms in the dollar have been slow to develop, and for now the US Dollar Index is still up more than 10% from its record lows in 2008.
US Dollar Index: 1971 - 2012

180 160 140 120 100 80 60 '71 '76 '81 '86 '91 '96 '01 '06 Bear Markets Bull Markets
Longest Dollar Bear Market Ever
Range-bound
'11
106

Dollar and Stocks
Towards the end of 2011, we were optimistic that the inverse correlation between the US Dollar and equities was beginning to breakdown. As shown in the chart below, the two assets actually both rallied in the later months of 2011. In fact, by early 2012, the two assets had a rolling six-month correlation that actually moved into positive territory. That was the first time we saw such an occurrence since 2009. The positive correlation did not last long, however. As quickly as the correlation between the two assets turned positive, it reversed and reverted back to an inverse relationship. During 2012, every time the dollar rallied, equities declined and vice versa. In fact, with a rolling correlation over the last six months of 0.83, the two assets are more inversely correlated than at any time since November 2010.
US Dollar Index vs S&P 500: 2010 - 2011
1475 1375 1275 81 1175 78 1075 975 1/10 75 72 5/10 2010 9/10 1/11 5/11 9/11 1/12 5/12 9/12 S&P 500 (Left Axis) US Dollar Index (Right Axis)
2010
2011
2012
90 87 84
S&P 500 vs Dollar: Rolling Six Month Correlation

1.0
0.5
0.0
-0.5
-1.0 '02 '04 '06 '08 '10
-0.83
'12
107

Dollar and Stocks
While the US Dollar and the S&P 500 have had an inverse relationship for much of the last decade, from a longer term perspective, US equities have tended to do better when the dollar has rallied. The table below highlights the different performances of the S&P 500 during US Dollar bull and bear markets. The average return of the S&P 500 during the five Dollar bull markets has been a gain of 69.7%. In Dollar bear markets, the average return for stocks is considerably lower (15.61%). If we look at returns on a median basis, during Dollar bull markets the S&P 500 gains 31.1% compared to 13.3% during dollar bear markets.
S&P 500 Performance During Dollar Bull and Bear Markets
Bull/Bear Bull Bear Bull Bear Bull Bear Bull Bear Bull
1
Begin 7/6/1973 1/23/1974 10/30/1978 2/25/1985 12/31/1987 6/14/1989 2/11/1991 7/5/2001
End % Change 1/23/1974 20.9% 10/30/1978 -25.1% 2/25/1985 100.7% 12/31/1987 -48.2% 6/14/1989 23.7% 2/11/1991 -23.8% 7/5/2001 50.2% 4/22/2008 -41.0% 11.9%
Days 201 1,741 2,310 1,039 531 607 3,797 2,483 1,714
S&P 500 Performance (%) -4.16 -2.07 88.54 37.86 31.06 13.82 230.79 12.85 2.24 69.70 15.61 31.06 13.34
4/22/2008 12/31/2012
Average - Dollar Bull Markets Average - Dollar Bear Markets Median - Dollar Bull Markets Median - Dollar Bear Markets
1
Current rally peaked in March 2009 at 24%.
108

Dollar and Stocks
In 2013, our view is that the US Dollar will break free of the short-term pressure of the fiscal cliff and benefit once again from slower global growth (or worse) and rally. That being the case, the charts below summarize the average performance of sectors during dollar bull and bear markets. If you are of the view that the Dollar will rally during 2013, sectors to overweight include Financials, Consumer Discretionary, Technology, and Health Care. On the underweight side of the ledger, sectors to avoid include Energy, Telecom Services, Utilities, and Materials.
Average Sector Performance During Dollar Bulls
120 100 80 60 40 20 0 110.1 107.0 93.3 89.9 75.1 69.7 64.7 52.0 37.8 31.9 23.9
Investors who are looking for the US Dollar to make new lows in 2013 should overweight the commodity related sectors that dollar bulls will be selling along with Consumer Staples, and Health Care. At the same time, sectors to underweight would include Telecom Services, Utilities, and Financials.
Average Sector Performance During Dollar Bears
60 50 40 30
55.2 50.7 48.3 40.1
20.4 20 10 0
20.3
18.6
15.9 4.4 4.4
2.2
109

Dollar and Stocks
One final way to illustrate why investors should focus on US equities when the Dollar is rallying is by comparing a long term chart of the US Dollar to the relative strength of the US versus the rest of the world. The red line in the chart below shows the relative strength of the United States compared to the MSCI All Country (Ex US) equity index. When the line is rising, it indicates that US stocks are outperforming their global peers, while a falling line indicates international stocks are outperforming the United States. The decade of the 1990s was essentially the decade of the United States. In 1992, the US Dollar Index was trading below 90 and ran all the way up to 120 (green line) when it peaked in the third quarter of 2001. As the dollar rallied, the S&P 500 outperformed its global peers until Q4 of 2001. Just as the Dollar and US equities peaked simultaneously, they both declined in tandem. From late 2001 through early 2008, US equities underperformed the rest of the world as the US Dollar saw its longest bear market since the index began in the early 1970s. The two then bottomed in tandem and have started to trend higher. While the rebound has been anything but steady, we expect the Dollar to continue to trend higher, and therefore would prefer US over international equities. Broadly speaking, the 1990s was the decade of the US, the naughts were the decade of international stocks, and now the teens will once again be a period where US stocks resume a leadership role. Over the last few months, we have seen the US Dollar decline on worries related to the fiscal cliff, which has in turn hurt the relative performance of US stocks. While we could foresee this weakness continuing into the debt ceiling debate in early 2013, our base case assumption is that this will be a temporary rather than a more lasting trend.
US Dollar Index vs S&P 500 Relative Strength: 1992 - 2012
130 US Dollar Index (left axis) Relative Strength of US vs ROW (right axis) 2.25 2.05 1.85 110 1.65 100 1.45 90 1.25 80 70 '92 '96 '00 '04 '08 '12 1.05 0.85
120
110

Dollar and Stocks
The dollars performance does not just impact performance of US versus international equities, it is also a clear driver of performance in US stocks based on their sales reach. Using our International Revenues Database, the chart below compares the cumulative YTD average performance of S&P 500 stocks that generate all of their sales in the United States (Domestics) versus those that generate more than half of their sales outside of the United States (Internationals). Underneath that chart we show the spread in performance between the two groups of stocks. In the first four months of 2012, both baskets of stocks performed roughly inline with each other. However, once the European debt crisis bubbled up in the spring, the Domestics took the lead and sharply outperformed the Internationals. That outperformance lasted up until the US Presidential Election, when Domestics started to underperform as the investment community began focusing on the fiscal cliff and Washingtons inability to reach a consensus agreement. The drop-off in the performance of the Domestics is clearly evident in the second chart as the gap between the two baskets performance has narrowed considerably.
S&P 500 Domestics vs Internationals: Last 12 Months (% Change)
20 Domestics 15 Internationals
10
-5 1/3 2/3 3/3 4/3 5/3 6/3 7/3 8/3 9/3 10/3 11/3 12/3
15 10 5 0 -5 1/3
Spread Between Performance of Domestics vs Internationals
3/3
5/3
7/3
9/3
11/3
111

Dollar and Stocks
The results of Novembers election and its impact on the stalemate regarding the fiscal cliff sticks out like a sore thumb in the charts below. From the start of 2012 through Election Day, the average S&P 500 stock in the Domestics basket was up 16.3% on the year, or nearly twice the return of the average stock in the Internationals basket. Since Election Day, the results are the complete opposite. While the average stock in the Internationals basket is up 0.24% since Election Day, the average stock in the Domestics basket is down 2.18%. There were numerous article written in 2012 that analyzed the impeccable timing of members of Congress and some of their trading activity. One would think that if these people were so market savvy, they would have sense to reach a deal. Wouldnt they?
Performance of Domestics vs Internationals: YTD Thru Election Day
Percent Change (%)
18 16 14 12 10 8 6 4 2 0 Internationals Domestics
16.33
8.47
Performance of Domestics vs Internationals: Election Day Thru Year End

Percent Change (%)
1 0 Internationals -1 Domestics
0.24
-1 -2 -2 -3
-2.18
112

Credit Markets
The theme of the credit markets in 2012 was one of continued healing as most measures of health for the sector showed steady improvement. Granted, the credit markets were buoyed by the continued assistance of the Fed, but even during periods of the year when equity markets ran into turmoil, credit markets generally held up considerably better. The charts below show the spreads on high yield and corporate bonds relative to US Treasuries over the last ten years. For both high yield and corporate, spreads opened the year at their highs and trended lower all year. When looking at fixed income spreads, higher spreads equals higher risk, while low spreads indicate that investors are more open to taking risk. Closing out the year, both high yield and corporate spreads finished right near their long-term averages and also near their lows for the year. One encouraging aspect of the final weeks of 2012 was that even as equity prices tumbled, high yield and corporate spreads remained contained, so maybe there is hope for equity bulls heading into 2013.
Corporate Bond Spreads (Merrill Lynch Corporate Master Index): 2003 - 2012
750
Spread Over Treasuries (bps)
250 210 170 130 1/12 154
500
4/12
7/12
10/12
250
Average: 183 154
0 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
High Yield Spreads (Merrill Lynch High Yield Master Index): 2003 - 2012
Spread Over Treasuries (bps)
750 700 650 1500 600 550 500 1/12 Average: 608 500 528 4/12 7/12 10/12 528
2000
1000
0 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12
113

Credit Markets
Just like high yield spreads, credit default swaps for both corporate and sovereign debt declined throughout 2012 as well. Below is a chart of our Bank and Broker CDS (credit default swaps) index, which measures the default risk for the major financial firms around the world. For the entire year, our Bank and Broker index fell a whopping 50%, which coincided with a move higher of nearly 25% for the S&P 500 Financial sector. Our CDS Index shows that default risk for the financial sector is now at its lowest level since early 2011, which is certainly a good sign. Based on these CDS levels, we believe the S&P 500 Financial sector should already be at new bull market highs, but the only thing that has held it back is the stalemate in Washington.
Bespoke's Bank and Broker CDS Index vs S&P 500 Financial Sector
3250
Bespoke CDS Index S&P 500 Financials
240 230 220
Bespoke Financial CDS Index
2750
S&P 500 Financials
210 2250 200 190 1750 180 170 1250 160 150 750 140
Bespoke Financial % Change CDS Index One Year One Month One Week -50.24 -13.01 2.61
S&P 500 Financial Sector 24.53 3.51 -1.31
114

Credit Markets
Below are 5-year credit default swap price charts for the six US financial firms that are included in our Bank and Broker CDS index. All six firms have seen a tremendous drop in default risk in 2012, with Wells Fargo and JP Morgan ending the year as the least risky. All six firms now have 5-year CDS prices below 200 bps as well.
Bank of America (BAC) CDS (BPS)

590 490 390 290 190 90
12/31 12/31 3/31 6/30 9/30 3/31 6/30 9/30
132
Citigroup CDS
410 360 310 260 210 160 110
12/31 12/31 3/31 6/30 9/30 3/31 6/30 9/30
91 132
Goldman Sachs (GS) CDS

480 430 380 330 280 230 180 130 80
12/31 12/31 3/31 6/30 9/30 3/31 6/30 9/30
JP Morgan (JPM) CDS

200 180 160 140 120 100 80 60 40
12/31 12/31 3/31 6/30 9/30 3/31 6/30 9/30
80
149
Morgan Stanley (MS) CDS
Wells Fargo (WFC) CDS

190 170 150 130
187
680 580 480 380 280 180 80

12/31 12/31 3/31 6/30 9/30 3/31 6/30 9/30
110 90 70
12/31 12/31 3/31 6/30 9/30 3/31 6/30 9/30
115

Credit Markets
Sovereign debt credit default swaps also declined significantly nearly across the board in 2012. At right we highlight the 5-year CDS prices for 42 countries around the world, and we also show where each countrys CDS ended 2011. As shown, all but one country saw default risk decline in 2012, with Argentina being the only country that rose. Six countries saw default risk fall by more than 70%, and they were all European countries. While things got dicey for Europe in the middle of 2012, European countries saw the biggest declines in default risk by the end of the year as the continent got on much firmer footing. (We take a closer look at sovereign default risk in our Internationals section.)
Default Risk As Measured By CDS Prices*

Country Denmark Bulgaria Austria Belgium Poland Sweden Ireland Finland South Korea Netherlands Germany Portugal France Norway Hungary United Kingdom China Russia Hong Kong Thailand Philippines Vietnam Malaysia Saudi Arabia Australia New Zealand Chile Japan Italy Qatar Abu Dhabi Indonesia Mexico Brazil Switzerland Israel South Africa Spain USA Egypt Iceland Argentina Current 33.24 101.28 47.11 86.92 79.16 22.12 224.86 32.37 67.48 50.11 43.89 471.64 96.17 19.72 284.32 44.16 66.93 132.70 48.17 98.27 105.00 223.80 81.75 72.54 47.00 53.05 75.27 82.33 290.50 81.61 83.43 137.15 100.79 111.43 47.53 139.68 148.79 302.01 40.67 552.02 284.32 1502.12 12/31/2011 135.49 412.17 186.04 310.66 280.54 77.50 724.37 77.50 160.83 118.50 102.17 1081.87 219.85 44.85 635.00 97.50 147.17 278.42 89.25 182.00 192.08 409.40 146.29 128.55 83.00 93.50 132.39 143.22 484.35 127.43 127.50 208.30 152.59 160.75 67.81 198.10 203.27 380.35 48.97 639.72 316.63 922.96 YTD % Chg -75.47 -75.43 -74.68 -72.02 -71.78 -71.45 -68.96 -58.23 -58.04 -57.71 -57.04 -56.41 -56.26 -56.03 -55.23 -54.71 -54.52 -52.34 -46.03 -46.01 -45.34 -45.33 -44.12 -43.57 -43.37 -43.27 -43.15 -42.52 -40.02 -35.96 -34.56 -34.16 -33.94 -30.68 -29.91 -29.49 -26.80 -20.60 -16.95 -13.71 -10.20 62.75
116

Commodities
Commodities had a year of small gains once again, similar to what we saw in 2011. Last year, corn was the best performing commodity of the ten shown in the chart below, and it was the best performer in 2012 as well with a gain of 15.12%. The big standout this year was natural gas, which finally had an up year after plummeting for what seemed like an eternity. Natural gas gained 11.24% in 2012, ranking it second best of the ten commodities listed below. Gold, platinum and silver had relatively lackluster years, but they still all posted gains between 5% and 10%. Oil was a disappointment for traders long the commodity, but it was a bit of welcome relief to consumers with a decline of 8.23% in 2012. Coffee saw the biggest declines in 2012 of the commodities listed at 34.80%. In the bottom chart, we highlight what commodity strategists think each of the commodities will do in 2013 based on their average year-end price targets. As shown, coffee is expected to see the biggest gains at 24.32%, followed by silver (15.49%), gold (11.40%) and natural gas (11.21%). Oil is only expected to rise by 6.21%.
Major Commodities % Change 2012 (thru 12/27)
30 20 10 0 -10 -20 -30 -40 -50
-34.80 -22.51 -8.23 4.28 4.46 5.71 7.57 9.59 11.24 15.12
Expected 2013 % Change Based on Consensus Analyst Price Targets
30 25 20
15.49 24.32
15
10.65 11.21
11.40
10
6.21
5
0.48
1.69
2.18
3.05
117

Commodities
120 110
Oil
Price
100 90 80 70 12/28 4.5 4.0 3.5
2/11
3/27
5/11
6/25
8/9
9/23
11/7
12/22
Oil was pretty much in a downtrend for 2012. The commodity has moved to the top of its range over the last few weeks, but this puts it right at the top of its downtrend channel, which will need to break for the techncials to turn positive. After trending downward for multiple years, natural gas has actually been in an uptrend for the last eight months. Nat. gas moved to the bottom of its range in December, but if it can hold here, it still looks bullish.
Natural Gas
Price
3.0 2.5 2.0 1.5 12/28
2/11
3/27
5/11
6/25
8/9
9/23
11/7
12/22
950 850 750
Corn
650 550 450 350 12/28
2/11
3/27
5/11
6/25
8/9
9/23
11/7
12/22
Corn experienced a parabolic move in July that pushed it up nearly 40%. Since then it has been drifting lower, but it still saw the biggest gain of any commodity in 2012 due to its July move. The technicals dont look particularly strong heading into 2013. Like corn, wheat also surged in July, but it has given up more than half of those gains after seeing a big drop in December. Wheat is due for a bounce off of oversold levels, but its longterm technicals are negative.
Price
1100
Wheat
1000 900
Price
800 700 600 500 12/28
2/11
3/27
5/11
6/25
8/9
9/23
11/7
12/22
118

Commodities
1950 1850
Gold
Price
1750 1650 1550 1450 12/28
Gold had a lot of ups and downs in 2012, and it ended the year on a down note. We could see a bounce off of oversold levels in early 2013, but it is still in a multi-month downtrend.
8/9 9/23 11/7 12/22
2/11
3/27
5/11
6/25
40 35
Silver
30 25 20 12/28
Silver has moved to extreme oversold territory after performing very poorly in December. Like gold, silver is due for a bounce, but its long-term technicals are negative.
2/11 3/27 5/11 6/25 8/9 9/23 11/7 12/22
Price
1900 1800 1700
Platinum
Price
1600 1500 1400 1300 1200 12/28 2/11 3/27 5/11 6/25 8/9 9/23 11/7 12/22
Platinum is stuck in a downtrend as well even though it gained just under 10% in 2012. Its due for a bounce off of oversold levels, but it will need to break its downtrend before the technicals look positive again. Copper has held up better than the precious metals in December, putting it right in the middle of its trading range as 2012 ends. While copper is in a short -term downtrend, it did make a higher low recently, which puts it on firmer footing than other metals.
Copper
415 395 375
Price
355 335 315 295 275 12/27 2/10 3/26 5/10 6/24 8/8 9/22 11/6 12/21
119

Commodities
240 220 200 180 160 140 120 100 80 12/28 2/11 3/27 5/11 6/25 8/9 9/23 11/7 12/22
Orange Juice
Orange juice struggled throughout the first half of 2012, but it formed a nice base in the second half of the year and is ending the year close to the top of its trading range. If it can just break above this range, technicals will look very positive. Coffee was the worst performing commodity in 2012, and its technicals dont suggest that its nasty downtrend will come to an end any time soon.
Price
260 240 220
Coffee
Price
200 180 160 140 120 12/28 2/11 3/27 5/11 6/25 8/9 9/23 11/7 12/22
120

Commodities
As we do each year, below we highlight the ratios of gold to silver and gold to platinum. In early 2011, the gold to silver ratio hit a 20-year low, but as silver has outperformed gold over the last year and a half, the ratio has moved up to 55.2. By historical standards, the gold/silver ratio is still below its average of 59 going back to 1975, so in theory silver is still slightly undervalued compared to gold heading into 2013.
Gold/Silver Ratio: 1975-Present
120 100 80
55.2
60 40 20 0
Jan-75
Jan-77
Jan-79
Jan-81
Jan-83
Jan-85
Jan-87
Jan-89
Jan-91
Jan-93
Jan-95
Jan-97
Jan-99
Jan-01
Jan-03
Jan-05
Jan-07
Jan-09
Jan-11
The gold to platinum ratio skyrocketed from 2008 to early 2012, putting gold above the price of platinum for the first time in two decades. The ratio is out of line in our opinion, and we expect platinum to outperform gold in 2013 as the ratio moves back inline with the norm.
Gold/Platinum Ratio: 1986-Present
1.4 1.2
1.08
1.0 0.8 0.6 0.4 0.2
121
Jan-13

Commodities
From early 2009 through early 2012, the oil to natural gas price ratio went straight up as oil rose and natural gas fell. At the start of 2012, the ratio got over 50 when it had averaged a level of just under 10 from 1990 through 2008! Something had to give. Finally in the back half of 2012, the oil to natural gas ratio fell back to earth, moving down to a level of 27.2 as natural gas rose and oil declined. But even at 27.2, the ratio is extremely high compared to its average level over the last two decades. We expect natural gas to continue to outperform oil in 2013, which will push the ratio lower and back inline with levels seen during the 90s and early 2000s.
Oil/Natural Gas Ratio: 1990-Present
60 50 40 30 20 10 0
27.2
122

International
On the following pages we analyze international equity markets and economic expectations for countries around the world. At right is a table showing the 2012 stock market performance for the major equity market indices of 77 different countries. In 2011, just 10 of the 77 countries listed saw stock market gains. In 2012, just 12 saw YTD declines. While there was a sovereign debt crisis that centered around Europe in the middle of the year, most of the world managed to post solid gains for the full year. The average country on the list gained just over 11% in 2012, with Turkey up the most at 53.28%.
Country Stock Market YTD Performance

Country Turkey Pakistan Estonia Thailand Nigeria Philippines Greece Germany Kenya Denmark India New Zealand South Africa Hong Kong Japan Austria Singapore Poland Dubai UAE Lithuania Romania Belgium Mexico Vietnam Namibia Iceland Colombia Ireland Argentina Australia Switzerland Norway France Czech Republic Indonesia Sweden United States Russia Malaysia Q4 % Chg YTD % Chg 18.35 53.28 9.70 49.31 9.88 38.22 7.17 35.76 7.13 34.42 8.73 32.95 21.95 32.47 5.49 29.06 3.78 28.62 0.60 27.24 3.64 25.82 6.29 24.45 10.14 23.13 8.76 22.96 17.19 22.94 11.97 21.42 4.30 20.61 8.92 20.45 3.18 20.37 3.28 18.84 8.98 18.74 3.92 18.38 6.99 17.92 5.39 17.69 10.71 17.63 4.94 16.77 4.69 16.19 2.68 16.00 16.42 15.90 6.48 15.15 5.03 14.93 -1.23 14.74 7.91 14.57 8.95 14.01 1.27 12.94 3.01 11.83 -2.65 11.52 3.71 10.75 2.73 9.84 Country Q4 % Chg YTD % Chg Netherlands 5.82 9.45 South Korea 0.04 9.38 Abu Dhabi (UAE) 0.83 9.35 Luxembourg 2.59 8.89 Taiwan -0.20 8.87 Finland 6.14 8.33 Italy 7.80 7.84 Botswana 1.64 7.74 Portugal 8.09 7.52 Brazil 3.00 7.40 Israel -0.37 7.38 Bulgaria 6.63 7.25 Hungary -2.23 7.06 Latvia 2.81 6.67 Britain 3.19 6.34 Saudi Arabia -0.23 6.33 Ecuador -0.93 5.56 Peru -5.20 5.52 Malta 2.43 3.78 Bermuda 1.14 3.28 Canada -0.01 3.02 Chile 1.68 2.96 Kuwait -0.59 2.29 Serbia 16.13 2.01 China 7.05 1.54 Oman 3.54 0.61 Croatia 1.38 -0.08 Lebanon 4.80 -0.64 Jamaica 6.20 -2.83 Spain 5.48 -5.08 Qatar -2.47 -5.45 Bahrain -1.21 -6.08 Sri Lanka -6.11 -7.69 Mauritius 1.49 -8.46 Slovakia 0.96 -10.91 Morocco -1.14 -15.22 Bangladesh -9.89 -19.75 Ukraine -11.04 -38.50
Of the G7 countries, Germany was up the most with a solid 29% gain. Canada was up the least of the G7 at +3.02%.
The US finished the year just G7 Countries BRICs a notch above the world average, while India was the best performing BRIC with a gain of 25.82%. China struggled for most of the year, but a December rally pushed it back into the green at +1.54%.
123

International
At right we highlight the percentage of world market cap that the largest countries in the world (by stock market size) make up. We also highlight the change in the share of market cap that each country saw in 2012. The US continues to make up the lions share of the worlds stock market capitalization, but while it saw the biggest gain in market cap of any country in 2011, it saw the second biggest decline in market cap in 2012. Even though the US stock market gained in 2012, the rest of the world outperformed, causing it to lose market share. Through the third quarter of 2012, the US was outperforming, but the election and ensuing Fiscal Cliff debacle caused significant underperformance in the fourth quarter, allowing the rest of the world to catch up and then pass the US. China saw the biggest decline in market cap share in 2012 with a loss of 1.14 percentage points. Chinese stocks struggled for most of the year, causing China to drop from the 3rd biggest by market cap to the 5th biggest. Japan, the UK and Hong Kong now rank 2nd, 3rd and 4th in terms of stock market size. Hong Kong saw the biggest gain in market cap in 2012 at +1.80 percentage points, giving it a 6.43% share of the worlds stock market value.
% of World Stock Market Cap by Country

Country United States Japan United Kingdom Hong Kong China Canada France Germany Australia India Switzerland Brazil South Korea Taiwan Russia Singapore Sweden Spain South Africa Mexico Italy Malaysia Indonesia Thailand Saudi Arabia Chile Turkey Belgium Netherlands Norway Denmark Finland Israel Austria Kuwait Greece Argentina G7 Countries Current 31.80 7.04 6.55 6.43 5.68 3.85 3.18 3.01 2.62 2.41 2.36 2.30 2.22 1.56 1.53 1.16 1.11 1.09 0.99 0.98 0.98 0.89 0.82 0.73 0.72 0.60 0.58 0.57 0.57 0.55 0.47 0.31 0.26 0.22 0.19 0.08 0.06 Start of 2012 Change 32.68 -0.88 7.63 -0.59 6.61 -0.06 4.63 1.80 6.82 -1.14 4.12 -0.28 3.08 0.10 2.70 0.31 2.58 0.03 2.19 0.22 2.34 0.02 2.60 -0.30 2.11 0.11 1.52 0.04 1.67 -0.14 1.01 0.15 1.05 0.06 1.18 -0.10 0.97 0.02 0.90 0.08 1.00 -0.02 0.86 0.03 0.83 -0.01 0.58 0.15 0.74 -0.02 0.59 0.00 0.43 0.15 0.46 0.11 0.53 0.04 0.56 -0.01 0.42 0.05 0.32 0.00 0.29 -0.03 0.20 0.01 0.21 -0.02 0.07 0.01 0.09 -0.03 BRICs
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With stocks gaining around the world by double digit percentage points in 2012, investors became much more comfortable with sovereign debt. At right is a snapshot showing credit default swap (CDS) prices for the sovereign debt of 42 countries around the world. As shown, only one country saw its default risk increase in 2012 -- Argentina. Six countries saw default risk fall by more than 70%, and they are all European countries. Denmark and Bulgaria saw their CDS drop a whopping 75%! While Europe still has problems, investors are mostly as comfortable with Europes debt as they are with the US. While the US still has low default risk compared to the rest of the world, it only fell 16% in 2012, which ranks it fourth worst on the list. The Fiscal Cliff looms large.

Country Denmark Bulgaria Austria Belgium Poland Sweden Ireland Finland South Korea Netherlands Germany Portugal France Norway Hungary United Kingdom China Russia Hong Kong Thailand Philippines Vietnam Malaysia Saudi Arabia Australia New Zealand Chile Japan Italy Qatar Abu Dhabi Indonesia Mexico Brazil Switzerland Israel South Africa Spain USA Egypt Iceland Argentina Current 33.24 101.28 47.11 86.92 79.16 22.12 224.86 32.37 67.48 50.11 43.89 471.64 96.17 19.72 284.32 44.16 66.93 132.70 48.17 98.27 105.00 223.80 81.75 72.54 47.00 53.05 75.27 82.33 290.50 81.61 83.43 137.15 100.79 111.43 47.53 139.68 148.79 302.01 40.67 552.02 284.32 1502.12 12/31/2011 135.49 412.17 186.04 310.66 280.54 77.50 724.37 77.50 160.83 118.50 102.17 1081.87 219.85 44.85 635.00 97.50 147.17 278.42 89.25 182.00 192.08 409.40 146.29 128.55 83.00 93.50 132.39 143.22 484.35 127.43 127.50 208.30 152.59 160.75 67.81 198.10 203.27 380.35 48.97 639.72 316.63 922.96 YTD % Chg -75.47 -75.43 -74.68 -72.02 -71.78 -71.45 -68.96 -58.23 -58.04 -57.71 -57.04 -56.41 -56.26 -56.03 -55.23 -54.71 -54.52 -52.34 -46.03 -46.01 -45.34 -45.33 -44.12 -43.57 -43.37 -43.27 -43.15 -42.52 -40.02 -35.96 -34.56 -34.16 -33.94 -30.68 -29.91 -29.49 -26.80 -20.60 -16.95 -13.71 -10.20 62.75
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At right we highlight the same table as the prior page, except we have sorted it by CDS price from least risky to most risky instead of sorting it by 2012 percentage change. As shown, Norway is currently viewed as the least risky country in the world with a CDS price of just 19.72 basis points. Sweden, Finland and Denmark rank 2nd, 3rd and 4th, and theyre all viewed as less risky than the US, which ranks 5th.

Country Norway Sweden Finland Denmark USA Germany United Kingdom Australia Austria Switzerland Hong Kong Netherlands New Zealand China South Korea Saudi Arabia Chile Poland Qatar Malaysia Japan Abu Dhabi Belgium France Thailand Mexico Bulgaria Philippines Brazil Russia Indonesia Israel South Africa Vietnam Ireland Hungary Iceland Italy Spain Portugal Egypt Argentina Current 19.72 22.12 32.37 33.24 40.67 43.89 44.16 47.00 47.11 47.53 48.17 50.11 53.05 66.93 67.48 72.54 75.27 79.16 81.61 81.75 82.33 83.43 86.92 96.17 98.27 100.79 101.28 105.00 111.43 132.70 137.15 139.68 148.79 223.80 224.86 284.32 284.32 290.50 302.01 471.64 552.02 1502.12 12/31/2011 44.85 77.50 77.50 135.49 48.97 102.17 97.50 83.00 186.04 67.81 89.25 118.50 93.50 147.17 160.83 128.55 132.39 280.54 127.43 146.29 143.22 127.50 310.66 219.85 182.00 152.59 412.17 192.08 160.75 278.42 208.30 198.10 203.27 409.40 724.37 635.00 316.63 484.35 380.35 1081.87 639.72 922.96 YTD % Chg -56.03 -71.45 -58.23 -75.47 -16.95 -57.04 -54.71 -43.37 -74.68 -29.91 -46.03 -57.71 -43.27 -54.52 -58.04 -43.57 -43.15 -71.78 -35.96 -44.12 -42.52 -34.56 -72.02 -56.26 -46.01 -33.94 -75.43 -45.34 -30.68 -52.34 -34.16 -29.49 -26.80 -45.33 -68.96 -55.23 -10.20 -40.02 -20.60 -56.41 -13.71 62.75
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International
Below is the matrix that we have done in each of our yearly Bespoke Reports since 2008. The matrix highlights key statistics for 22 of the biggest countries in the world. In the matrix, we highlight 2012 stock market change, current valuations and dividend yields, 2013 GDP, CPI and Unemployment Rate expectations, and 2013 Central Bank and 10-Year yield estimates. The color coding helps identify which countries have the best and worst stats compared to the other countries. We focus on the individual categories on the next few pages.
Key Country and Equity Market Statistics

Current Div Country 2012 % Chg Current P/E Yield (%) Australia 15.15 17.99 4.52 Brazil 7.40 21.00 4.23 Canada 3.02 15.18 3.00 China 1.54 12.36 2.55 France 14.57 12.39 3.89 Germany 29.06 14.72 3.39 Hong Kong 22.96 11.64 3.12 India 25.82 16.36 1.60 Italy 7.84 Neg. 3.67 Japan 22.94 26.99 1.93 Malaysia 9.84 15.40 3.54 Mexico 17.92 18.68 1.38 Russia 10.75 5.87 3.80 Singapore 20.61 12.12 2.91 South Africa 22.69 14.68 3.05 South Korea 9.38 19.44 1.23 Spain -5.08 24.25 6.43 Sweden 11.83 14.04 3.88 Switzerland 14.93 20.29 3.30 Taiwan 8.87 25.04 3.48 UK 6.34 15.27 3.94 United States 11.52 14.26 2.28 2013 GDP Estimate (YoY%) 2.70 3.50 1.80 8.10 0.20 0.80 3.70 5.60 -0.80 0.65 4.80 3.50 3.40 3.00 2.70 3.40 -1.50 1.60 1.10 3.40 1.10 2.00 2013 CPI Est. 2.80 5.55 1.80 3.10 1.70 1.90 3.70 8.60 2.00 0.00 2.45 3.90 6.50 3.90 5.60 2.70 2.30 1.20 0.50 1.65 2.50 1.90 2013 2013 Central 2013 10-Year Unemp. Bank Rate Yield Rate Est. Estimate (%) Estimate (%) 5.6 2.75 3.36 5.6 7.25 7.25 7.2 1.13 2.44 4.2 6.00 3.73 10.6 0.63 2.67 7.0 0.63 2.06 3.5 1.01 6.50 7.77 11.4 0.63 4.40 4.2 0.10 0.99 3.0 3.13 3.66 4.8 4.63 5.72 5.9 8.00 4.46 2.0 1.62 25.5 4.88 7.00 3.2 2.75 3.48 26.2 0.63 5.25 8.0 1.00 2.01 3.1 1.07 4.3 2.00 1.32 8.1 0.50 2.38 7.7 0.25 2.17
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International
Below we highlight the ratio of P/E to GDP for each country, which is similar to a PEG ratio for individual stocks. The lower the ratio, the better. As shown, China has the lowest country PEG ratio at 1.53, with a current P/E ratio of 12.36 and GDP growth estimates of 8.1%. Russia ranks second at 1.73. Russia has lower GDP growth estimates than many other countries, but its P/E ratio is the lowest of all countries, which keeps its PEG low. India ranks 3rd, while Hong Kong ranks 4th. Even with big stock market gains in 2012, both India and Hong Kong still look attractive based on valuation and growth prospects. Even with GDP growth expectations of just 2%, the US ranks in the middle of the pack due to its relatively low valuation compared to the rest of the world. Just five other countries have a lower P/E than the US.
Country PEG Ratios

Country China Russia India Hong Kong Malaysia Singapore Mexico South Africa South Korea Brazil Australia United States Taiwan Canada Sweden UK Germany Switzerland Japan France Italy Spain Index Shanghai Comp Russian Trading Sensex Hang Seng Kuala Lumpur Straits Times Mexican Bolsa FTSE/JSE Top 40 Kospi Bovespa S&P/ASX 200 S&P 500 TWSE S&P/TSX OMX 30 FTSE 100 DAX Swiss Market Nikkei 225 CAC-40 FTSE MIB IBEX 35 Current P/E 12.36 5.87 16.36 11.64 15.40 12.12 18.68 14.68 19.44 21.00 17.99 14.26 25.04 15.18 14.04 15.27 14.72 20.29 26.99 12.39 Neg. 24.25 Est. 2013 GDP Growth 8.10 3.40 5.60 3.70 4.80 3.00 3.50 2.70 3.40 3.50 2.70 2.00 3.40 1.80 1.60 1.10 0.80 1.10 0.65 0.20 -0.80 -1.50 P/E to GDP Growth 1.53 1.73 2.92 3.15 3.21 4.04 5.34 5.44 5.72 6.00 6.66 7.13 7.36 8.43 8.78 13.88 18.40 18.45 41.52 61.96 Neg. Neg.
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International
Below we highlight the consensus GDP and CPI estimates for each country in 2013. As usual, China has the highest expected GDP growth at 8.1%, and then India ranks 2nd at 5.6%. Malaysia and Hong Kong rank 3rd and 4th at 4.8% and 3.7%, respectively. The US finds itself in the group of countries expected to grow by 2% or less. Italy and Spain are both expected to see GDP decline once again in 2013. India has the highest inflation expectation at 8.6%, followed by Russia (6.5%) and South Africa (5.6%). Inflation in Japan is expected to remain flat, while the US and most of Europe is at 2% or less.
2013 GDP Estimates (YoY%)

China India Malaysia Hong Kong Mexico Brazil Taiwan South Korea Russia Singapore South Africa Australia United States Canada Sweden UK Switzerland Germany Japan France Italy Spain
8.10 5.60 4.80 3.70 3.50 3.50 3.40 3.40 3.40 3.00 2.70 2.70 2.00 1.80 1.60 1.10 1.10 0.80 0.65 0.20 -0.80 -1.50
2013 CPI Estimates (YoY%)

India Russia South Africa Brazil Singapore Mexico Hong Kong China Australia South Korea UK Malaysia Spain Italy United States Germany Canada France Taiwan Sweden Switzerland Japan 0
8.60 6.50 5.60 5.55 3.90 3.90 3.70 3.10 2.80 2.70 2.50 2.45 2.30 2.00 1.90 1.90 1.80 1.70 1.65 1.20 0.50 0.00
-5
0 5 10 '13 GDP Estimate (YoY%)
5 10 '13 CPI Estimate (YoY%)
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International
Below and on the following page we provide our trading range charts for 20 key country indices. For each chart, the blue shading represents the countrys normal trading range, while the red zone indicates overbought territory and the green zone represents oversold territory. Youll easily notice that nearly all countries are trading in nice uptrends and in overbought territory as we enter 2013, something that investors cant say for US stock markets.
4800 4600
Australia - AS51
13250 12750
Canada - S&P/TSX
Price
4200 4000 3800 Dec-11
Price
Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12
4400
12250 11750 11250 10750 Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
75000 70000 65000
Brazil - IBOV
2800 2600
China - Shanghai Comp
Price
60000 55000 50000 45000 Dec-11
Price
2400 2200 2000 1800 Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
24000 23000 22000 20000 19000 18000 17000 16000 Dec-11 Feb-12 21000
Hong Kong - HSI
3900 3700 3500
France - CAC
Price
Apr-12 Jun-12 Aug-12 Oct-12 Dec-12
Price
3300 3100 2900 2700 Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
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International
8000 7500 7000 6500 6000 5500 5000 Dec-11
9000 8500 8000
Germany - DAX
20500 19500 18500
India - Sensex
Price
Price
17500 16500 15500 14500 Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
Taiwan - TWSE
1750 1700 1650
Malaysia - Kuala Lumpur
Price
7500 7000 6500 6000 Dec-11
Price
1600 1550 1500 1450 1400 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12
10750 10250 9750
Japan - Nikkei 225
6200 6000 5800
UK - FTSE 100
Price
Price
9250 8750 8250 7750 Dec-11
5600 5400 5200 5000 Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
46000 44000 42000
Mexico - Bolsa
2000 1800
Russia - Russian Trading System
Price
Price
1600 1400 1200 1000 Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
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International
3400 3200
Singapore - Straits Times
1200 1150 1100
Sweden - OMX
Price
Price
3000 2800 2600 2400 Dec-11
1050 1000 950 900
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
850 Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
36000 34000
South Africa - Top 40
10000 9000
Spain - IBEX
Price
Price
32000 30000 28000 26000 Dec-11
8000 7000 6000 5000 Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
2200 2100 2000
South Korea - KOSPI
7200 6700
Switzerland - SMI
Price
Price
6200 5700 5200 Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Dec-12
132

The Year in Headlines
With the pace at which news events are flashed in front of our eyes each day, it is hard enough to remember what happened this morning, let alone what happened a few weeks or months ago. As each headline piles up, they become increasingly scrambled in our heads. In order to help refresh the memories of investors and traders, each month we publish our Headlines report, which summarizes the major events of the last several months as well as the daily drivers of each days events. In this section, we provide readers with a refresher of 2012 and the major events of the year along with a recap of the major event of each market day in 2012. On the following pages, we provide a daily chart of the S&P 500 in 2012, along with notations showing major news events of the year as they occurred. Similarly, following the daily chart of the S&P 500, we have provided an intraday chart of each month in 2012 along with the major daily drivers for each day. Over the years, clients have found these Headlines reports to be an invaluable reference tool.
Syr Fa ian ceb Upr o e i Ob r sing ok Se Wi e h am t t Rich Inte s to nH eD n o sou w aM R s o isto n rce B sifim Tw o Lo ce evie oom L Ra ric a e c a s k u w e k w d t e o Spur i n I osw I IPO es N n e a s s D k B e C Po ad H e at m ilg ie ee Ca o S D T i e p l f a a M f bl uli isca Gains Traction rol s FB a am ina Labor Market s O US T F il a IdSw Setlks D y Bu G Ra htens t Piltorid ing eeF sM n ce oe F ch wn Tig d rg ricpeT o D n m n I e o o e p h La Se ets w t y g o R o i r M n R u B t Big ea e to E om s k arh k e n i dsin n r Fu n W i B t W ney W e L h P t i re t e r s o n g ilr ds ae ow y n A o e e e sF n n th k T a M d il it J o m R a i ry K ob Faces Histo a ght eA Ro ric t sP S tta ift Int eh Fresh Results ow st Google Hit By Weak c en Wa D kll S A r G U O a e m f sifi S r b o g a t r e a reet P h Europe Hit By Downgrades B e in G m a c ua M 2 n e es l O k R S r H S P e s a 0 h e p a R a U a t s n r a r s r 1 e c d e s For p p ke e A t Romney Races to Winu Michigan a o e I u 4 t v r n s a e s S t t n r o e harp Pon T n C P r D Re o Rivals Attack Romney Bain il C n t ey f e n eP ay o n bo R tl Ca n s r a o P uo e ing a n i Is tn c l r un e e a O p d p nt io e G F e nd r r o w F S esh ge d s n E ai s e Romney Dr Lashes on Bain lifU gBack f's as S am fts A Afg P C han hire ts i ce e a h e e e ssi n pM S in e p a d c s Tal R s s n Gr m e G i dr va iban a ng ou O r l a n H s m o P Ta l L G E a C w s e y ks Ra t Ne pe e A S a m c h s p eri s in can s U Re g W h k n A c ir y ric c ki lin Pine ng e Tra Slo w i i y es m ng Gro G on o m w h t R o h S P t i r i n s R e co v o e 's e ry Fe a Ec rs o gl o S G U
133
Ch in a' s
ro w
th
En gi ne
ec lin
es

Label 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 Date 1/7 1/14 1/28 2/10 2/14 2/21 3/10 3/17 4/3 4/7 4/19 4/28 5/7 5/11 5/15 5/16 5/19 5/25 6/4 6/15 6/21 6/29 7/6 7/12 7/26 8/4 8/8 8/23 9/6 9/13 9/21 9/25 10/5 10/20 10/22 10/31 11/7 11/9 11/19 11/29 12/1 12/13 12/15 12/21 12/31 WSJ Lead Headline Labor Market Gains Traction. Europe Hit By Downgrades. US Economy Picks Up Steam. Greece Sets Austerity Plan. Obama Seeks New Levies on Rich. Europe Reaches a Greek Deal. Jobs Recovery Gains Momentum. No Relief in Sight at Pump. Obama Warns Supreme Court. US Labor Market Slows Its Stride. Europe's Rescue Plan Falters. Slowing Growth Stirs Recovery Fears. Voter Anger Sweeps Europe. JP Morgan's $2 Billion Blunder. Contagion Fears Hit Markets. Greece Teeters as Talks Fail. Facebook's Launch Sputters. New Signs of a Global Slowdown. Investors Brace For Slowdown. Europe on Edge Over Crisis. Fed Warns of Risk to Economy. Court Backs Obama on Health Law. Central Banks Take Action. Fed Weighs More Stimulus. Europe's Crisis Hits Profits. Job Gains Spark Stock Rally. House Prices Climb As Supplies Dwindle. Fed Moving Closer to Action. Clinton Makes Case for Obama. Libya Attacks Spark Crisis. Miscues Before Libya Assault. Race Focuses on Foreign Policy. Romney Presses Edge After Obama Stumble. Falling Revenue Dings Stocks. Dead Heat For Romney, Obama. Sandy Cuts Wide Swath of Damage. Obama Wins. Pressure Rises on Fiscal Crisis. Investment Falls Off a Cliff. Fed Stimulus Likely in 2013. GOP Takes Aim at Entitlements. Fed Ties Rates to Joblessness. School Gunman Kills 27. Boehner's Budget 'Plan B' Collapses. Congress Meets Cliff's Edge.
134
S&P 500: 2012

31 33 32 34 36 37 38 35 40 41 39
1,500
1,450
30 9 8 26 10 11 25 24 22 23 13 28 27 5 4 6 7 12 29
1,400
135
1,350
1,300
1,250
14 20 15 18 16 21 17 19
1,200 3/3 4/3 5/3 6/3 7/3 8/3 9/3 10/3 11/3 12/3
1/3
2/3

S&P 500 Intraday: January 2012
1340 1330 1320 1310 1300 1290 1280
19 18 14 20 13 7 1 4 5 6 8 10 9 11 12 15 16 17 21 22
1270
2
1260 1/3
Date 1/3 1/4 1/5 1/6 1/9 1/9 1/10 1/11 1/12 1/13 1/17 1/17 1/18 1/19 1/20 1/23 1/24 1/25 1/26 1/27 1/30 1/31
3
1/5 1/9 1/11 1/13 1/18 1/20 1/24 1/26 1/30
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Event Manufacturing in US Grows by Most in 6 Months; Global Manufacturing Displays Resilience. Euro-Area Manufacturing, Services Contract Less Than Estimated. Jobless Claims in U.S. Dropped 15,000 Last Week to 372K; Services ISM Grows Less Than Forecast. US Payrolls Beat Forecasts as Unemployment Falls. German Industrial Output Drops in Sign Growth Stalling. Alcoa Posts First Quarterly Loss Since 2009 After Aluminum Prices Drop. Stocks, Commodities Advance on China Policy as Dollar Weakens. Goldman Sachs Trading Co-Heads to Leave Firm. Retail Sales in US Increase Less Than Forecast; Jobless Claims Rise More Than Forecast. Lacker Says Theres No Compelling Case for More Fed Stimulus. Manufacturing in New York Fed Region Expands at Faster Pace. Chinas Growth Is Far From Hard Landing, Goldmans ONeill Says. Confidence Among U.S. Homebuilders Climbs to Highest Since 2007. Jobless Claims in U.S. Fall to Lowest Since 2008. Greece Moves Closer to Debt-Swap Accord With Private Investors. Goldman Says U.S. Data Looks Better Than They Are. IMF Says Europe Crisis Threatens to Derail Global Economy. Fed Weighing More Bond Buying as Rate Pledge Extended Through 2014. Index of U.S. Leading Economic Indicators Rises for Third Month. Feds Dudley Sees Significant Impediments to Economic Growth. Fed Says Business-Loan Demand Climbs as Economy Accelerates. Facebook Is Said to Pick Morgan Stanley to Lead Share Sale.
136

S&P 500 Intraday: February 2012
1380 1370
20 21 17 18 19
22
1360 1350 1340 1330 1320 2/1

Date 2/1 2/1 2/2 2/3 2/3 2/6 2/7 2/8 2/9 2/9 2/10 2/13 2/14 2/15 2/16 2/17 2/21 2/22 2/23 2/24 2/27 2/28 2/29
23 7 6 8 9 11 3
2/3 2/7 2/9 2/13 2/15 2/17 2/22 2/24 2/28
10 12
14 15 13
16
5 4 2 1
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Event US Manufacturing Grows at Fastest Pace in Seven Months. Facebook Files to Raise $5 Billion in Biggest Internet IPO. Bernanke Says He Wont Trade Inflation Goal for More Job Growth. Non Farm Payrolls Rise At Fastest Rate in Nine Months. Feds Bullard Says Surprising U.S. Strength Weakens QE Case. Time Running Out for Greece as Leaders Haggle, Merkel Says. Bernanke Says 8.3% Unemployment Understates Labor Weakness. Chinas Central Bank Pledges Support for Housing Market. Euro Decision on Greek Bailout Deferred to Pressure Athens. Gross Raises Holdings of Treasuries to Highest Since 2010. Consumer Sentiment in U.S. Falls More Than Forecast. European Leaders Confident Greece Meeting Bailout Demands. Retail Sales in U.S. Trail Forecasts as Auto Purchases Drop. New York Area Factories Expand at Fastest Pace Since June 2010. Initial Jobless Claims Drop to Lowest Level Since 2008. Leading Indicators Point to Sustained U.S. Growth. Australia Central Bank Sees Scope for Further Rate Cuts. Euro-Area Manufacturing, Services Unexpectedly Contract. Jobless Claims in U.S. Hold at Four-Year Low. Oil Jumps to Almost $110 as S&P 500 Closes at Highest Since 2008. BP Said to Weigh $14 Billion Settlement of Spill Claims. Consumer Sentiment in U.S. Moves Toward Pre-Recession Levels; Dow Closes Above 13K. Gold Falls 5% as Bernanke Affirms Low-Rate Pledge Without Offering Easing Options.
137

S&P 500 Intraday: March 2012
1420
19 12 13 14 16 15 17 18 20 21 22
1405 1390
9 1 7 2 6 3 4
3/1 3/5 3/7 3/9 3/13
10
11
1375 1360 1345 1330
8 5
3/15
3/19
3/21
3/23
3/27
3/29
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Date 3/1 3/2 3/5 3/6 3/7 3/8 3/9 3/12 3/13 3/14 3/15 3/16 3/19 3/20 3/21 3/22 3/23 3/26 3/27 3/28 3/29 3/30
Event US Manufacturing PMI Slows, But Auto Sales Pace Hits Four-Year High. US Housing Lays Foundation for Recovery as Buyers Coaxed Back. Service Industries in US Expand by Most in Year, But Stocks Fall on China Growth Concerns. EU Economy Contracts Sending US Stocks to Their Largest One-Day Loss of 2012. ADP Estimates US Companies Added 216,000 Jobs in February. Private Investors Agree to Swap 85% of Greek Debt; US Consumer Confidence Hits 4-Yr High. Payroll Gain in US Caps Best Six Months Since 06. Euro Ministers Head Toward Final Approval of Second Greek Rescue. Fed Says 15 of 19 Banks Have Adequate Capital in Stress Scenario; Retail Sales Hit 5 Month High. Bernanke Keeps Easing Option While Signaling Economy Improving. S&P 500 Dividends Rise to Record After JPMorgans Boost. Consumer Sentiment in US Drops on Rising Gasoline Prices. AAPL Announces Dividend and Stock Buyback; Feds Dudley Says U.S. Isnt Out of the Woods.' US Housing Heals as Starts Near Three-Year High. Bernanke Sees Threat to U.S. Growth From Higher Fuel Prices. Optimism for US Outlook Reaches Eight-Year High. Bats Withdraws IPO After Errors Pummel Its Stock, Halt Apple. Bernanke Says Accommodative Policy Needed to Cut Joblessness. Improving US Job Market Bolsters Confidence; Bernanke Says Too Early to 'Declare Victory'. Unemployment May Drop to 6% by Mid-2013, NY Fed Study Finds. Unemployment Claims in US Fall to Four-Year Low. Consumer Sentiment in U.S. Climbed in March to One-Year High; S&P 500 Finishes Q1 Up 12%.
138

S&P 500 Intraday: April 2012
1425
1 2 19 4 18 8 9 11 12 13 14 16 17
1400
20
1375
5 6 7 10
15
4/19 4/23 4/25 4/27
1350 4/2
Date 4/2 4/3 4/4 4/5 4/9 4/10 4/11 4/12 4/13 4/16 4/17 4/18 4/19 4/20 4/23 4/24 4/25 4/26 4/27 4/30
4/4
4/9
4/11
4/13
4/17
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Event Manufacturing in U.S. Grew at Faster Pace in March; Euro Area Contracts for 8th Straight Month. Factory Orders Rose 1.3% in February on Capital Goods. Service Industries in U.S. Kept Expanding in March. Jobless Claims in U.S. Fell to Lowest Level in Four Years; Consumer Confidence Improves. Stocks Drop as Treasury Yields Slip Following Weaker Than Expected Payrolls Report. Stocks, Spanish Bonds Drop as Treasuries Rise on Europe Concern. Stocks Rise on Alcoa Results as Spanish Bonds Advance With Euro. Unemployment Claims in U.S. Rise to Two-Month High. Consumer Sentiment Declines; Stocks Tumble as Copper Falls, Treasuries Rise. Retail Sales Climb More Than Forecast on Jobs; Homebuilder Sentiment Falls to 3-Month Low. Factories Cool for First Time in Four Months. Stocks Fall as Intel, IBM Slump; EBAY Soars. Stocks Retreat on Economic Data as French, Spain Bonds Decline. Treasury 10-Year Yield Falls for Fifth Week Amid European Crisis. Euro-Region Debt Rises to Highest in Single Currency History. Apple Profit Rises 94% on Growing Global Demand for iPhones. Bernanke Says Prepared to Do More After Fed Leaves Policy Unchanged. Spains Ratings Cut by S&P on Deficit, Bank Bailout Concern. Stocks Climb as Earnings Overshadow GDP Data; Euro Rallies. US Equities Drop as Manufacturing Cools and Spain Enters Recession.
139

S&P 500 Intraday: May 2012
1425 1400 1375 1350 1325 1300 1275 5/1
Date 5/1 5/2 5/3 5/4 5/7 5/8 5/9 5/10 5/11 5/14 5/15 5/16 5/17 5/18 5/21 5/22 5/23 5/24 5/25 5/29 5/30 5/31
1 2 3 5 7 6 8 9 10 11 12 13 15 14 17
5/21 5/23 5/25 5/30
16
20 18 19 21 22
5/3
5/7
5/9
5/11
5/15
5/17
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Event US and Chinese Manufacturing Grows at Fastest Pace in a Year. Payroll Survey Signals US Jobs Slowing as Orders Drop. Services Slowdown Signals US Growth May Cool. Job Gain Trails Forecasts on US Slowdown Concern; EU Manufacturing and Svcs Shrink. German Manufacturing Orders Increase More Than Forecast. Factories in US Grew Less Optimistic About Sales, ISM Says. Greek Euro-Exit Talk Goes Public as Officials Air Doubts. Jobless Claims Allay Concern on US Labor Market. Consumer Sentiment in US Climbs to Four-Year High. Euro-Area Industrial Output Unexpectedly Fell in March. Euro-Area Economy Avoids Recession on German Growth. Several on FOMC Said Easing May Be Needed If Recovery Slows. ECB Stops Lending to Some Greek Banks Amid Draghi Exit Talk. Fed May Favor Another Twist If Growth Diminishes. EU to Accelerate Aid Payments to Spain on Development Projects. OECD Says Spiraling Euro-Area Crisis May Hurt World Economy. UK Retail Sales Fall Most in 2 Years as Rain Hits Demand. Europe Manufacturing Shrinks, German Confidence Drops. Merkel Considers Debt-Sharing Plan as Monti Sees Euro Bonds. Consumer Confidence in US Falls to Four-Month Low. Feds Rosengren Calls for Easing to Boost Economy, Create Jobs. Labor Market in US Cools as Jobless Claims Increase.
140

S&P 500 Intraday: June 2012
1370
13
1350
21 14 15 16 18 17 20 19
12 11 5 4 1 3 2
6/1 6/5 6/7 6/11 6/13 6/15 6/19
1330 1310 1290 1270 1250
7 6
9 10 8
6/21
6/25
6/27
6/29
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Date 6/1 6/4 6/5 6/6 6/7 6/8 6/11 6/12 6/13 6/14 6/15 6/18 6/19 6/20 6/21 6/22 6/25 6/26 6/27 6/28 6/29
Event Treasuries Surge as Dow Erases 2012 Gain After U.S Jobs Report. Factory Orders in U.S. Unexpectedly Dropped in April. Spain Minister Urges EU Aid for Banks in First Plea for Help. Draghi Says ECB Stands Ready to Act' Lockhart Says Extending Operation Twist 'On the Table.' China Rate Cut Counters Slowdown as PBOC Eases Loan Restrictions. Chinas Consumer Prices Rise at Slowest Pace in Two Years. Fed Says U.S. Wealth Fell 38.8% in 2007-2010 on Home Values. Euro-Area Crisis Threatens Emerging Markets, World Bank Says. Drop in Retail Sales Points to Slower Growth; EU Industrial Output Falls For 2nd Straight Month. OPEC Maintains Oil Quota as Price Decline Brings Compromise. Signs of U.S. Weakness Mount on Confidence, Output. Euro Crisis Shifts to Spain as Merkel Faces G-20 Pressure. Job Openings in U.S. Decrease by Most in Almost Four Years. Fed Officials Sees Lower U.S. Growth; Expands Operation Twist Through Year End. Manufacturing Slump Deepens From Euro Area to China. German Business Confidence Drops to a Two-Year Low. Home Sales Reach Two-Year High as U.S. Rates Fall. Home Prices in U.S. Decline at Slowest Pace Since 2010. Slowdown Concern Ebbs on Durables, U.S. Home Sales. Euro-Area Confidence Slumps, German Unemployment Rises. Consumer Sentiment in U.S. Falls to Lowest Since December.
141

S&P 500 Intraday: July 2012
1400
21
1380
13 2 3 10 11 15 16 8 17
7/17 7/19 7/23 7/25 7/27
12 9 7
19 14
20
1360
1 4
1340
6 5
18
1320 7/2
Date 7/2 7/3 7/5 7/6 7/9 7/10 7/11 7/12 7/13 7/16 7/17 7/18 7/19 7/20 7/23 7/24 7/25 7/26 7/27 7/30 7/31
7/5
7/9
7/11
7/13
7/31
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Event Manufacturing in US Unexpectedly Shrank in June. Barclays Three Top Leaders Quit Amid Bank of England Dispute. Euro, Stocks Retreat With Italy, Spain Bonds as ECB Disappoints. US Payroll Gain Trails Forecast as Outlook Dims. Spanish 10-Year Bond Yield Tops 7%; Lacker Says US May Be Close to Full Employment. US Stocks Fall on Earnings as Commodities Slump, Euro Weakens. Some on FOMC Said More Stimulus Probably Will Be Needed. Stocks Fall With Euro on Growth Concern; Confidence in US Stagnates as Employment Slows. Stocks Surge as JPMorgan Jumps; Visa & MasterCard Settle Antitrust Swipe-Fee Suit. Yahoo Names Googles Marissa Mayer Chief Executive Officer. Intels Sales Forecast Misses Some Analysts Estimates. Bernanke Says Fed Can Remove Punch Bowl to Limit Inflation. Google Revenue Surges on Motorola Deal, Growth in Ad Clicks; S&P 500 Hits Two-Month High. Euro Bailout Bid Gets Vote of No-Confidence as Markets Drop. Bond Yields Fall to Records as Stocks, Euro Slide on Debt Crisis; German Debt Outlook Cut. Apple Falls Short of Analysts Expectations Amid iPhone Slump. Stocks Surge Toward Close as WSJ reports that Fed May Announce Further Accommodation. US Stocks, Commodities Gain on Draghi Pledge as Euro Advances. Growth Slows as US Consumers Restrain Spending. Euro-Area Economic Confidence Drops More Than Forecast. US Consumer Confidence Index Unexpectedly Rose in July.
142

S&P 500 Intraday: August 2012
1430 1420 1410 1400 1390 1380 1370 1360 1350 8/1
Date 8/1 8/2 8/3 8/6 8/7 8/8 8/9 8/10 8/13 8/14 8/15 8/16 8/17 8/20 8/21 8/22 8/23 8/24 8/27 8/28 8/29 8/30 8/31
5 4 3 1
6 7
10 11 8 9
12
13 14
15 19 20 21 17 16 18 22 23
2
8/3 8/7 8/9 8/13 8/15 8/17 8/21 8/23 8/27 8/29 8/31
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Event Fed Says Economy Slowed, Foreshadows Steps to Boost Growth. Stocks and Spanish Bonds Decline After Draghi Fails to Reassure Investors. US Jobs Gains Topping Forecasts Ease Concern; Services Sector Grows. Fed Says Banks Easing Standards on Business, Consumer Loans. S&P Revises Greece Outlook to Negative. Productivity Rebounds as US Employers Curb Costs. Jobless Claims Fall in Sign US Job Market Mending. China Export Growth Collapses as World Economic Recovery Slows. Homebuilders Surge With US New-House Sales 50% Below Average. Retail Sales in US Jumped More Than Forecast. Homebuilder Confidence in US Increases to Five-Year High. Building Permits in US Increase to Four-Year High. Consumer Sentiment in US Unexpectedly Rose in August. EU Leaders Plan Talks as Report Says ECB Mulling Bond Targets. Dell Revenue Forecast Misses Estimates as PCs Continue Slump. Many on FOMC Favored Easing Soon If No Sustained Growth Gain. Jobless Claims in US Climb While Confidence Sours. Bernanke Sees Further Scope for Easing to Spur US Economy. Feds Evans Urges Open Ended Purchases to Boost Economy. Consumer Confidence in US Declines by Most Since October. US Second-Quarter Growth Exceeds Prior Estimate. Stocks Drop With Euro as Spain Delays Decision on Bailout Funds. Bernanke Says Bond Purchases an Option to Cut Unemployment.
143

S&P 500 Intraday: September 2012
1480 1470 1460 1450 1440
12 9 10 11 4 3 5 6 7 8 13
14
16
15
18 17 19
1430 1420 1410 1400 1390
2 1
9/4
Date 9/4 9/5 9/6 9/7 9/10 9/11 9/12 9/13 9/14 9/17 9/18 9/19 9/20 9/21 9/24 9/25 9/26 9/27 9/28
9/6
9/10
9/12
9/14
9/18
9/20
9/24
9/26
9/28
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19
Event Manufacturing in U.S. Shrinks for Third Straight Month. Draghis Plan Said to Pledge Unlimited, Sterilized Bond Buys. US Svcs Industries Expand at Faster Pace Than Forecast; Jobless Claims Fall; S&P 500 at 4-Yr High. Payrolls Trailing Forecasts Spur U.S. Stimulus Talk. Stocks Fall With Euro on Greece Concern While Commodities Gain. Trade Gap in U.S. Widens as Exports Start to Wane. German Court Gives Merkel Win Backing Permanent Rescue Fund; AAPL Unveils iPhone 5. Fed Undertakes QE3 With $40 Billion MBS Purchases Per Month. Surprise US Factory Drop Highlights Outlook Risk. Manufacturing in New York Region Shrinks More Than Forecast. Feds Evans Says QE3 Can Make Economy More Resilient to Risk. Housing Market Recovery Helping Bolster U.S. Expansion. Oracle Revenue Falls Short of Estimates as Hardware Sales Drop. Greek Leaders Struggle With Spending Cuts as Troika Set to Leave. Caterpillar Cuts 2015 Earnings Outlook as Mining Spending Falls. Stocks Drop on Global Growth Concern; Consumer Confidence Hits 7-Month High. Feds Evans Defends QE3 While Warning of U.S. Lost Decade. Plunge in Goods Orders May Restrain U.S. Expansion; US Economy Expands Less Than Forecast. Chicago PMI Declines to 49.7; Lowest Reading Since September 2009.
144

S&P 500 Intraday: October 2012
1480
5
1465
4 1 3 6 7 2 8 10 9 11 12
13
14
1450 1435 1420
15 16 21 17 18 19 20 22
1405 1390 10/1

Date 10/1 10/2 10/3 10/4 10/5 10/8 10/9 10/10 10/11 10/12 10/15 10/16 10/17 10/18 10/19 10/22 10/23 10/24 10/25 10/26 10/29 10/31
10/3
10/5
10/9
10/11 10/15 10/17 10/19 10/23 10/25 10/29 10/31
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Event Manufacturing in US Unexpectedly Grows on Orders; EU Unemployment Rises to Record 11.4%. Bernanke Seeks Gains for Equities in Push for Jobs. US Service Industries Expand At Fastest Pace In Six Months. Draghi Says ECB is Ready to Start Buying Government Bonds. Surprise Decline in Unemployment Gives Obama Boost. IMF Sees Alarmingly High Risk of Deeper Global Growth Slump. Alcoa Earnings Exceed Estimates After Productivity Improves. Fed Says Economy Grows Modestly as Housing, Autos Improve. Jobless Claims in US Decrease to Four-Year Low. Consumer Sentiment in US Unexpectedly Climbed in October. Retail Sales Beating Forecasts Support US Growth. Industrial Output Rises in Sign US Is Stabilizing. Housing Starts Jump 15% to Four-Year US High. Google Reports Earnings Ahead of Schedule, Sales That Miss Analysts Estimates Stocks Drop Most Since June on Weak Earnings as Metals, Oil Retreat. Texas Instruments Forecasts Earnings That May Miss Estimates. Facebook Sales Exceed Estimates; AAPL Launches iPad Mini. As Expected, Fed Calls Growth Moderate While Maintaining Bond Purchases. Apple Forecasts Profit Shy of Estimates as Product Costs Rise. US Growth Exceeds Forecasts on Consumer and Government Spending. US Equity Markets Closed Monday and Tuesday Due to Hurricane Sandy. US Equity Markets Reopen As Workers in Mid Atlantic Region Struggle to Get Back to Work.
145

S&P 500 Intraday: November 2012
1450
1425
2 1 3
4 16 5 6 7 8 12 9 10 13 14 15 17 18 20 21 19
1400
1375
1350
11
1325 11/1
Date 11/1 11/2 11/5 11/6 11/7 11/8 11/9 11/12 11/13 11/14 11/15 11/16 11/19 11/20 11/21 11/23 11/26 11/27 11/28 11/29 11/30
11/5
11/7
11/9
11/13
11/15
11/19
11/21
11/26
11/28
11/30
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Event Factories to Shoppers Show US Weathers World Slowdown. Payroll Gains Aid US Expansion Before Election. US Service Industries Show Expansions Resilience. German Manufacturing Orders Slump the Most in a Year. Obama Re-Elected, Dow Tumbles Most in Year, Treasuries Rally on Budget Showdown. Draghi Says ECB Stands Ready to Buy Bonds as Economy Weakens. Consumer Sentiment in US Rises to Five-Year High. Jefferies Agrees to Sell Itself to Leucadia in $2.8 Billion Deal. Geithner Says Higher US Income Tax Rates Cant Be Avoided. Dow Sinks to Lowest Since June on Budget, Israel and Decline in Retail Sales. Jobless Claims Jump as Sandy Hurts US Factories. Equities Stage Intraday Rebound on Optimism Regarding Fiscal Cliff Resolution. France Loses AAA Rating at Moodys; US Stocks Rally on Budget Optimism. HP Takes $8.8 Billion Charge Citing Autonomy Falsifications. Stocks Rise While Treasuries Fall as Israel, Hamas Reach Truce. Germanys Business Confidence Unexpectedly Increases. Stocks Decline as US Budget, Greek Aid Loom. Consumer Confidence Gains as US Home Prices Climb. Builders in US Sell Fewer New Homes Than Forecast. Jobless Claims in US Decrease as Sandy Effect Dissipates. US Business Activity Grows for First Time in Three Months; S&P 500 Ekes Out Gain For The Month.
146

S&P 500 Intraday: December 2012
1460 1450 1440
13 12 7 9 11 14 15 10 18 20 16 17 19
1430 1420 1410
1 3 2 4 5
1400 1390 12/3

Date 12/3 12/4 12/5 12/6 12/7 12/10 12/11 12/12 12/13 12/14 12/17 12/18 12/19 12/20 12/21 12/24 12/26 12/27 12/28 12/31
12/5
12/7
12/11
12/13
12/17
12/19
12/21
12/26
12/28
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Event Manufacturing Contracts in US on Fiscal Concern; Rosengren Sees Case For Asset Purchases. Obama Sets Higher Top Tax Rate as Precursor to Fiscal Deal. Services in U.S. Unexpectedly Expand at Faster Pace; ADP Employment Rises By 118K. Household Net Worth in U.S. Increases by $1.72 Trillion. Job Growth Beats Forecasts as Unemployment Falls. Treasury Announces Plan to Exit AIG Stake. Dow Erases Post-Election Drop as US Treasuries Retreat. Fed Officials Forecast Main Rate to Stay Near Zero Until 2015; Announces Further Asset Purchases. Retail Sales Rebound as Jobless Claims Fall in U.S. Industrial Production Jumps Most in Two Years as Factories Recover From Sandy. US Stocks Advance While Treasuries Retreat Amid Perceived Progress in Budget Talks. DJIA Posts Back to Back Triple Digit Gains on Perceived Progress in Fiscal Cliff Talks. US Stocks Drop on Budget Concern While Euro, Treasuries Gain. Equities Rally on Boehner Comments; IntercontinentalExchange to Acquire NYSE for $8.2 Billion. Stocks Tumble on U.S. Budget Concerns As Boehner Pulls House Plan B Bill Due to Lack of Votes. Yen Weakens to 20-Month Low on Abes BOJ Pledge. Geithner Warns Lawmakers Deficit Standoff Risks U.S. Default. Equities Stage Late Rally After House Plans to Convene on Sunday at 6:30 PM. US Stocks Fall for Fifth Day, Treasuries Gain as Cliff Looms. Budget Talks Making Progress on Tax Increase as Deadline Looms.
147

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THE BESPOKE REPORT

Bespoke Investment Group LLC

The Bespoke Report2013

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The Bespoke Report

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The Bespoke Report2013

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Page 4 6 11 16 26 30 41 53 62 74 95 101 106 113 117 123 133

The Bespoke Report2013 About Bespoke

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S&P 500 in 2012

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Average Day of Week % Chg by Month

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Key ETF Performance (%)

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Analyst Ratings (Best to Worst)

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S&P 500 Bull Markets

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1931: -52.6 -50%+

1974: -27.5 1903: -23.6 1932: -23.0 1917: -21.7 -20%+

Average DJIA Return in the Following Year (%)

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The Bespoke Report2013

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2013 Wall Street Strategist S&P 500 Year-End Price Targets

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2013 S&P 500 Consensus EPS YoY % Growth Estimates

2013 S&P 500 Sector Consensus EPS Growth Estimates

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15 10 5 1.4 0 4.8 5.2 7.7 7.8

The Bespoke Report2013

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4.0 GDP 3.0 2.0 1.0

CPI YoY% Economist Estimates 5.0 4.0

3.0 2.0 1.0 0.0

3.0 2.0 1.0

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Unemployment Rate % Economist Estimates 10.0

8.0 6.0 4.0 2.0

8.5 8.0 7.5 7.0

The Bespoke Report2013