2011 U.S.

Outlook: A Return to Trend Growth

Ron Wexler, Macro Analyst

Last year, our 2010 year-ahead outlook piece was entitled, “A Glimmer of Sunshine With a Chance of Rain”. This year,
the outlook is more optimistic. As we head into the New Year, we expect stronger growth and less uncertainty as the year
progresses. Although there is no shortage of things to worry about, in comparison to last year, there appears to be less
downside risk. That is the good news. The not-so-good news is that even if this view of the world comes to fruition, it
will do little to meaningfully lower the unemployment rate or dramatically increase capacity utilization rates.

SUMMARY Chart 1: We expect stronger growth in 2011

 The macro outlook has improved. We

expect approximately 3.5% real GDP 2011 U.S. Real GDP Outlook
growth in the U.S. next year. 70%

 The combination of strengthening labor 60%

market conditions, improved household 50%
Probability

balance sheets and greater clarity on the

tax policy should trigger an 40%
improvement in consumer spending. 30%

 Business spending should be robust as 20%

well. Profits continue to grow at a
10%
healthy pace and the capital stock has
not grown in over two years. 0%
Less than 2.5% 3.5% +/-.5% >3.5%
 The not-so-good news is that there are
Growth Scenarios
still several structural headwinds
weighing on the economy. Home prices
are still deflating, households are still
deleveraging and state and local
governments are set to implement
austere measures next year.
Chart 2: With less downside risk than in 2010
 For now, these headwinds are slowing
the pace of the recovery rather than
reversing the trend. 2010 U.S. Real GDP Outlook
70%
 Downside risks include a policy mistake
(e.g. higher taxes at the state level 60%
without entitlement reform), a financial 50%
shock (e.g. sovereign defaults in
Probability

peripheral Europe) or a supply shock 40%

(e.g. spike in oil). 30%

 Upside opportunities include a material 20%

improvement in business confidence
10%
triggering more hiring than expected and
a turn around in housing activity which 0%
remains extremely depressed. Less than 2% 2.5% +/-.5% >3%

CONTACT Growth Scenarios

Ron Wexler
Citadel Asset Management
131 South Dearborn Street
Chicago, Illinois 60603
312-395-3948
ron.wexler@citadelgroup.com
CITADEL CONFIDENTIAL INFORMATION
 2011 U.S. Outlook: A Return to Trend Growth

So What Has Changed?

1. Household balance sheets have improved. Earlier this year, the Bureau of Economic Analysis conducted their
annual benchmark revisions and revealed that the household savings rate was indeed much higher than initially reported
(charts 3 & 4). In fact, it appears that households were de-leveraging more quickly than originally believed and were able
to reduce their debt service ratios to more manageable levels (chart 5). As a result, the risk of a material up-tick in the
savings rate (which hurts consumer spending) has diminished (chart 6). With the labor market gradually improving,
assets reflating, consumer confidence on the mend, labor income rising and greater clarity on the tax policy front, the
outlook for consumer spending (70% of the economy) has materially improved.

Chart 3: The savings rate was higher than originally thought Chart 4: After revisions, savings were ~$200B higher per year

Personal Saving Rate (After the Revision) Personal Saving (After the Revision)
SAAR, % SAAR, Bil.$
Personal Saving Rate (Before the Revision) Personal Saving (Before the Revision)
SAAR, % SAAR, Bil.$
10 10 1000 1000

8 8 800 800

6 6 600 600

4 4 400 400

2 2 200 200

0 0 0 0
06 07 08 09 10
12/19/10
06 07 08 09 10
12/19/10
Sources: Bureau of Economic Analysis /Haver Analytics Sources: Bureau of Economic Analysis /Haver Analytics

Chart 6: Higher asset values = less need to increase the savings

Chart 5: Households spent 2010 paying down debt
rate

Personal Saving Rate (LHS)

Household Debt Service Ratio SA, %
SA, % Households: Net Worth as a % of Disposable Income (RHS)
Scale Inverted
14.25 14.25 12.5 400

13.50 13.50 10.0

450

12.75 12.75 7.5

500

12.00 12.00 5.0

550

11.25 11.25 2.5 600

10.50 10.50 0.0 650

95 00 05 10 70 75 80 85 90 95 00 05 10
12/19/10 12/19/10
Source: Federal Reserve Board /Haver Analytics Sources: BEA, FRB /Haver

CITADEL CONFIDENTIAL INFORMATION 2

 2011 U.S. Outlook: A Return to Trend Growth

2. Personal income growth has accelerated. The most important driver of consumer spending is labor income. Labor
income can increase because individuals receive pay raises, work longer hours or because more people are employed. In
2010, we actually observed an improvement on all three fronts (chart 7). Through November, 1.2 million private sector
jobs were created in 2010, the work week lengthened from 33.8 hours to 34.3 hours and average hourly earnings increased
by $0.37 / hour. Private sector labor income (number of bodies, multiplied by hours worked, multiplied by wages) is
currently growing at a respectable 4% annualized pace and should continue to improve as we head into next year.
Additionally, with announced layoffs at lower levels, jobless claims should decline in 2011 (chart 8). The combination of
better labor income and fewer layoffs should trigger both improved confidence and an improvement in spending patterns.

Chart 7: Labor Income is improving Chart 8: Announced layoffs are down. Jobless claims to follow.

Challenger, Gray & Christmas: Announced Job Cuts, Total

Income Proxy = Total Private Payrolls * Avg Weekly Earnings [Mil - LHS]
(Billions) Unemployment Insurance: Initial Claims, State Programs
SA, Thous [RHS]
70 70 250 675

600
69 69 200

525
68 68 150
450
67 67 100
375

66 66 50
300

65 65 0 225
07 08 09 10 11
12/19/10
95 00 05 10
12/19/10
Source: Haver Analytics Sources: CGCI, DOL /Haver

3. Corporations had a great year and are on pace to make $1.6 trillion in 2010 (chart 9 & 10 on the next page).
Although capex improved this year, the increase was modest relative to profits (chart 11 on the next page). As a result,
we saw a material build up in cash balances, now totaling $1.9 trillion1. From a corporate finance perspective, one would
expect resources to be more efficiently deployed (cash balances are earning close to 0% while return on equity is close to
8%). With uncertainty slowly subsiding, CEO sentiment picking up again, bank credit standards easing and profits
continuing to grow at a healthy pace, corporations are likely to start deploying their excess cash balances more efficiently
next year. Historically, this combination of constructive corporate fundamentals has been associated with strong capex
recoveries and solid hiring growth (chart 14 on the next page).

1
Through Q3:2010 corporate cash balances were approximately 7% of assets. The historical norm, according to our calculations, is in the 4-5% range.

CITADEL CONFIDENTIAL INFORMATION 3

 2011 U.S. Outlook: A Return to Trend Growth

Chart 9: Strong net cash flow + tentative spending = … Chart 10: … very high cash balances

Corporate Net Cash Flow with IVA Nonfinancial Corp Business: Liquid Assets/Short-term Liabilities
SAAR, Bil.$ %
1600 1600 60.0 60.0

52.5 52.5
1400 1400

45.0 45.0
1200 1200
37.5 37.5
1000 1000
30.0 30.0

800 800
22.5 22.5

600 600 15.0 15.0

95 00 05 10 70 75 80 85 90 95 00 05 10
12/19/10 12/19/10
Source: Bureau of Economic Analysis /Haver Analytics Source: Federal Reserve Board/Haver Analytics

Chart 11: Profits have grown a lot faster than capex Chart 12: ROE now north of 8%

Before Tax Profits / Fixed Investment ROE: Before Tax Profits / Net Worth
US Nonfinancial Corporations
1.2 1.2 0.12 0.12

1.0 1.0 0.10 0.10

0.8 0.8 0.08 0.08

0.6 0.6 0.06 0.06

0.4 0.4 0.04 0.04

0.2 0.2 0.02 0.02

70 75 80 85 90 95 00 05 10 70 75 80 85 90 95 00 05 10
12/19/10 12/19/10
Source: Haver Analytics Source: Haver Analytics

Chart 13: The capital stock has not grown in 2 years Chart 14: Capex has picked up, will payrolls follow?

Nonfarm Nonfinancial Corporate Assets: Equip & Software [Hist Cost] Real Private Nonresidential Investment: Equipment & Software (LHS)
NSA, Bil $ % Change - Year to Year SAAR,Bil.Chn.2005$
Industrial Capacity All Employees: Total Private Industries (RHS)
SA, Percent of 2007 Output % Change - Year to Year SA, Thous
3750 140 30 7.5

120 20 5.0
3000

100 10 2.5
2250
80 0 0.0
1500
60 -10 -2.5

750
40 -20 -5.0

0 20 -30 -7.5
70 75 80 85 90 95 00 05 10 70 75 80 85 90 95 00 05 10
12/19/10 12/19/10
Sources: Federal Reserve Board /Haver Analytics Sources: BEA, BLS /Haver

CITADEL CONFIDENTIAL INFORMATION 4

 2011 U.S. Outlook: A Return to Trend Growth

4. Credit conditions have eased. 2010 was a very solid year for the financial sector. Profits roared back and returned to
2004 levels. Moreover, both delinquencies and charge-off rates started to decline (charts 15 & 16). By year-end, banks
were actually easing lending standards for the first time in three years, and in the past, more lenient credit standards have
preceded a pick-up in economic activity by approximately one year (charts 17-19). The implied magnitude of the
improvement (in economic activity) should not be taken too literally, but it is worth noting that credit conditions should
change from a headwind to a tailwind next year. While the demand for credit is currently anemic, when the labor market
has recovered following a recession, the demand for credit typically follows suit (chart 20 on the next page). After two
years of de-leveraging, if there is a gradual increase in credit demand, final demand could end up surprising to the upside
in 2011.

Chart 15: Profits in the financial sector surged this year Chart 16: Charge-offs and delinquencies declined

Loan Charge-Off Rate: All Insured Commercial Banks (LHS)

Corporate Profits with IVA & CCAdj: Financial SAAR,%
SAAR, Bil.$ Loan Delinquency Rate: All Insured Commercial Banks (RHS)
SA,%
500 500 3.0 8

400 400 2.5

6
300 300 2.0

200 200 1.5 4

100 100 1.0

2
0 0 0.5

-100 -100 0.0 0

75 80 85 90 95 00 05 10 15 90 95 00 05 10
12/19/10 12/19/10
Source: Bureau of Economic Analysis /Haver Analytics Sources: Federal Reserve Board /Haver Analytics

Chart 17: Lending standards eased pointing to more

Chart 18: … more commercial real estate investment
inventory investment…

Banks Tightening C&I Loans to Large Firms [1 Year Lead - LHS] Banks Tightening Standards for Commercial Real Estate [1 Year Lead - LHS]
Scale Inverted %
Manufacturers' Inventories: Durable Goods (RHS) Real Private Nonresidential Investment: Structures [RHS]
% Change - Year to Year EOP, SA, Mil.$ % Change - Year to Year SAAR, Bil.Chn.2005$
-25 15 -25 20

10
0 0 10

5
25 25 0
0
50 50 -10
-5

75 75 -20
-10

100 -15 100 -30

85 90 95 00 05 10 85 90 95 00 05 10
12/19/10 12/19/10
Sources: FRB, CENSUS /Haver Sources: FRB, BEA /Haver

CITADEL CONFIDENTIAL INFORMATION 5

 2011 U.S. Outlook: A Return to Trend Growth

Chart 20: If job growth improves so will the demand for

Chart 19: … more consumer spending
credit

Banks Willingness to Lend to Consumers [2 Qtr Lead -LHS] Change in Total Private Employment (1 Yr Lead - LHS]
% SA, Thous
Real Personal Consumption Expenditures [RHS] Consumer Credit Outstanding (RHS)
% Change - Year to Year % Change - Year to Year EOP, SA, Bil.$
50 7.5 1200 20

800
15
25 5.0
400
10
0 2.5 0
5
-400
-25 0.0
0
-800

-50 -2.5 -1200 -5

85 90 95 00 05 10 80 85 90 95 00 05 10 12/19/10
12/19/10
Sources: FRB, BEA /Haver Sources: BLS, FRB /Haver

5. Less uncertainty. At the beginning of 2010, many investors were concerned that the economy would roll over due to
a litany of structural headwinds. Household balance sheets were damaged and the expectation was that the savings rate
(then at 3.7%) would increase to 8-10%. The banking system was impaired and not lending, the housing market was still
deflating, there were concerns that overly burdensome regulations were looming, and no one had any visibility on whether
the Bush tax cuts would be allowed to expire. Fast forward 12 months and the list of concerns have decreased. A tax deal
has been reached and was more stimulative than anyone initially expected. The savings rate is no longer rising, the
financial sector continues to grow at a robust pace, credit standards are in the process of being relaxed, and although there
is still some uncertainty about the contents of the health care and financial bills, both could have been more punitive. At
the margin, there is greater visibility than last year, and this should lead to higher confidence and faster growth.

6. President Obama appears to be moving to the middle. Since the mid-term elections, President Obama has proposed
a two-year Federal worker pay freeze and organized a summit with CEO’s to see how government and the private sector
can better work together. The President also met with Wal-Mart’s CEO to discuss the economy, signed a free trade
agreement with Korea (similar trade deals with Panama and Columbia are pending) and recently agreed to allow the
extension of the Bush tax cuts for all levels of income along with a cut in the payroll tax (an idea espoused by many
supply-siders). President Obama also enlisted former President Bill Clinton to offer advice and counsel. A move to the
middle should lead to higher confidence and more risk taking by the business community.

7. Fiscal policy will be less of a headwind than originally feared. In our 2010 piece, we argued that fiscal stimulus
would actually become a drag on the economy in 2H:2010 and detract more than 1% from growth in 2011. However,
Congress recently passed a bipartisan agreement which not only extends the expiring tax cuts and unemployment benefits,
but is also more stimulative than originally anticipated. The combination of the payroll tax holiday and extended
unemployment benefits will boost household income by roughly $175 billion per year ($120 billion from the tax holiday
and $55 billion from the unemployment benefits). The fiscal deficit could end up being $150-$200 billion wider per year
than was expected just a few weeks ago.

CITADEL CONFIDENTIAL INFORMATION 6

 2011 U.S. Outlook: A Return to Trend Growth

8. Quantitative Easing (“QE2”) seems to be working better than expected. Although bond yields have risen faster
than expected, equities are up over 20% since Chairman Bernanke’s Jackson Hole speech on August 27, 2010 (chart 21).
Both business and consumer confidence have improved (chart 22), triggering an uptick in economic activity. A slightly
weaker U.S. Dollar (“USD”) has also contributed to the improved trend in exports (chart 23 & 24). Most economists and
strategists did not expect this outcome a mere three months ago. Today, many sell-side economists are now actually
upgrading their GDP forecasts to reflect the improvement in economic activity2.

Chart 21: Since August 27, stocks are up… Chart 22: … CEO sentiment is up

Standard & Poor's 500 Stock Price Index CEO Economic Outlook Survey Diffusion Index
1941-43=10 50+=Expansion
1250 1250 125 125

1200 1200 100 100

1150 1150 75 75

1100 1100 50 50

1050 1050 25 25

1000 1000 0 0

950 950 -25 -25

00 01 02 03 04 05 06 07 08 09 10
10
Source: New York Times /Haver Analytics 12/19/10
Source: Business Roundtable /Haver Analytics 12/19/10

Chart 23: … the USD is down Chart 24: … and exports are improving

Nominal Broad Trade-Weighted Exchange Value of the US$ Port of Long Beach: Outbound Loaded Containers
1/97=100 SA TEUs
107.5 107.5 160000 16000

140000 14000
105.0 105.0
120000 12000

102.5 102.5 100000 10000

80000 80000
100.0 100.0
60000 60000

97.5 97.5 40000 40000

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC 99 00 01 02 03 04 05 06 07 08 09 10 11 12 12/19/10
13
Source: Federal Reserve Board 10
/Haver Analytics 12/19/10
Source: Port of Long Beach /Haver Analytics

2
According to Bloomberg, over the last two months the consensus 2011 real GDP growth forecast has climbed to 2.6% from 2.4%. Similarly, the consensus 2012 real GDP growth forecast
has climbed to 3.2% from 3%

CITADEL CONFIDENTIAL INFORMATION 7

 2011 U.S. Outlook: A Return to Trend Growth

2011 U.S. Economic Forecast

 ~3.5% real GDP growth in 2011.
 As uncertainty subsides, we expect hiring to pick up (about 150,000 jobs created per month, with 125,000-
150,000 created in the first half and 150,000-175,000 created in the second half), triggering an improvement in
confidence and spending. The unemployment rate finishes the year at approximately 9%.
 The demand for autos and homes begins to show meaningful signs of improvement by year-end (driven by an
improvement in the labor market and less uncertainty).
 The “use-it-or-lose-it” accelerated depreciated tax credit incentivizes corporations to pull forward capex spending
that might have otherwise taken place in 2012.
 On the supply side, we expect a deceleration in productivity (which is par for the course mid-cycle). At the
margin, we expect companies to step up hiring and lengthen the work week to meet end demand rather than
continuing to sell out of inventories and/or making existing staff work harder. This should translate into higher
unit labor costs and should dampen corporate profit margins.
 Corporate profits should rise about 5%, which is a material deceleration from the ~50% increase in 2010.
Although sales continue to grow 7%-10%, margins contract due to higher input costs. Note that aggregate sales
for the S&P 500 tends to grow faster than U.S. GDP because of its sizable exposure to emerging markets and its
relatively small exposure to the U.S. consumer.
 Core inflation stops falling and inflation expectations inch higher.
 Manufacturing capacity utilization rate climbs to approximately 75% (from 73%).
 The household savings rate inches lower to 5% (from 5.7%).
 Long-term interest rates rise ~50 basis points on the back of better macro data and rising inflation expectations.
 Stocks rise ~10%, driven largely by multiple expansion (tail risks fade as year progresses, binary views on
inflation subside). The bulk of the gains occur early in the first half of the year. In the second half of the year, as
the recovery begins to look sustainable, we suspect investors will start to contemplate how much longer the Fed’s
policies will remain extremely stimulative. Financial stress in Europe and fears of contagion also remain a key
risk.

CITADEL CONFIDENTIAL INFORMATION 8

 2011 U.S. Outlook: A Return to Trend Growth

Components / Parts / Drivers % GDP Historical Growth Rate +/- 1 SD 2011 Growth Forecast
Real GDP 3.3% +/- 2% ~3.5% growth +/- 0.5%
1. Consumption 71% 3.5% +/- 2% ~3.5% growth
Key Drivers
Wages Slowly improving; Should be up 4-5% next year
Employment Slowly improving. Expect ~150k jobs created per month
Wealth Housing wealth down, but positive savings rate + rising stocks will more than offset that
Private interest rates Favorable
Access to credit Slowly improving
Consumer Expectations Slowly improving
Prices Favorable
HH Leverage Still high. Deleveraging continuing. But Smaller Headwind than in 2010

2. Business Investment 9% 4.3% +/- 7% Fixed Investment to grow ~10%

Capex 6% Up ~15%
Inventories mean = 0% slight drag
Commercial Real Estate 3% Up 0-5%

Key Drivers Strong fundamentals for business spending

Corp Profits Strong
Borrowing Rates Cost of capital quite low
Business Sentiment Rising after the elections
Access to credit Decent for large firms; tough for small; at the margin, conditions improving
Cash on balance sheet Sizable, and growing
Capacity Utilization Very low, but off the bottom
p gp p
3. Residential Investment 2% 2.6% +/- 14% ~5%.
Key Drivers Affordability quite high, but ltd reason to build more supply
Housing Starts very weak
Home Sales Declining after the expiration of the housing tax credit
Home prices Incihing lower; risks to the downside
Access to financing Mortgage aps are plummeting post-tax credit expiration; lending standards remain tight
Inventory very high

Higher oil prices + weak Europe/Japan + US consumer recovery

4. Net Exports -3% = modest negative contribution from trade
Key Drivers Becoming less supportive
Global growth US growth is accelerating while Japan and Europe to remain quite weak
USD Declining again
Oil prices Up sharply since 2008

5. Government Spending 21% 2% +/- 3% Should add about 0-0.5% to GDP Growth
State and Local 13% New tax bill suggests Federal spending could grow in excess of 3% in 2011
Federal 8% Running sizable deficits. We could see higher taxes and less spending in 2011.

CITADEL CONFIDENTIAL INFORMATION 9

 2011 U.S. Outlook: A Return to Trend Growth

Downside Risks to the Base Case

Although cyclically the economy is in an upswing, there are still a number of significant structural headwinds hindering
the U.S. economy. These headwinds should slow growth, rather than reverse the trend. However, should the economy
face a policy mistake (e.g. Fed hikes rates too soon, state and local governments raise taxes too aggressively), a financial
shock (e.g. an unraveling in peripheral Europe), or a supply shock (e.g. an oil spike in the absence of an improvement in
economic fundamentals), we would likely alter our view to the downside.

1. European sovereign debt concerns are mounting. Yield spreads over German Bunds for Greece, Ireland, Portugal
and Spain have blown out to significant levels, and ultimately, these financing costs are unsustainable. To make matters
worse, peripheral Europe will face a surge in issuance next year (chart 25). Given that German, French and British banks
have sizable exposure to peripheral Europe, investors are starting to worry that contagion could spread (chart 26).

Chart 25: Government debt due (Principal + Chart 26: German, French and U.K. banks are highly
Interest)/GDP exposed to peripheral Europe (billions $)

25.00% 600
2010 2011 2012 Spain Portugal Irela nd Greece
500
20.00%

400
15.00%

300
10.00%
200

5.00%
100

0.00% 0
Italy Portugal Spain Ireland Greece Germany France Germany France UK

Source: HedgeEye. Source: Bank for International Settlements.

The good news is that unlike April of this year, the EU is more capable of dealing with sovereign stress. The European
Financial Stability Facility (EFSF) is now operational, the European Central Bank is purchasing distressed sovereign debt
through the Securities Market Program (~€70bn since May 2010), and there appears to be the political will to fix the
problem. The critical question that remains is whether policy makers can insulate Spain from the crisis. The Euro zone's
emergency bailout program, in our opinion, is large enough to cope with Greece, Ireland and Portugal’s needs, but might
not be substantial enough to also bail out Spain. Ultimately the key call is not the macro impact (Ireland, Portugal and
Greece are not a large share of the Euro zone’s GDP), but whether financial contagion spreads into the interbank funding
markets. For now, there is limited evidence of spillover, but to the extent that contagion spreads and financial conditions
tighten (higher rates, tighter credit standards, lower equity prices), a loss in confidence could trigger slower consumer and
business spending. Given that balance sheets have improved over the last two years (leverage has been decreased,
inventories have been depleted, unproductive assets have been written down and cash balances have been built up), we
believe that it would take a sizable shock (e.g. Spain defaults) to trigger a material tightening in financial conditions.

CITADEL CONFIDENTIAL INFORMATION 10

 2011 U.S. Outlook: A Return to Trend Growth

2. The long-term U.S. fiscal outlook remains worrying. About one month ago, President Obama’s Fiscal Commission
published a sobering report detailing the country’s longer-term finances. On the first page of the report, Alan Simpson
and Erskine Bowles said:
Together, we have reached these unavoidable conclusions: The problem is real. The solution will be painful. There is no
easy way out. Everything must be on the table. And Washington must lead… After all the talk about debt and deficits, it is
long past time for America’s leaders to put up or shut up. The era of debt denial is over, and there can be no turning
back.3
The Commission’s proposal was to broaden the tax base, slow the growth rate of discretionary spending, cap tax revenues
at 21% of GDP and put Social Security on a more sustainable path by reducing benefits to higher income earners and
increasing their payroll taxes, and have middle-income earners work longer. Not surprisingly, the Commissioners were
unable to amass the necessary 14 votes needed to debate the proposal in the Senate. What was surprising though, was
several weeks later, President Obama struck a deal with Congressional Republicans to extend the Bush tax cuts and
provide additional stimulus which exacerbates fiscal deficits by $150-200 billion per year. Rather than following a path
of long-term fiscal sustainability, the U.S. appears to be headed in the opposite direction.
As we are quickly discovering from watching developments in peripheral Europe, there are limits to how high
government deficits (and debt ratios) can rise before investors begin to worry about the sustainability of fiscal policy.
Rates have risen sharply across peripheral Europe, funding markets have dried up and the affected countries have been
forced to implement painful austerity measures. While the likelihood of a comparable spike in U.S. Treasury yields is
low, it would not be completely unexpected for borrowing rates to trend higher next year. Higher real yields have
historically been a headwind for both economic prospects and financial assets. A slow and steady rise in yields
accompanied by improving fundamentals is part of our base case. However, a sharp increase in interest rates would likely
dampen both economic activity and financial conditions. Charts 27 and 28 demonstrate how fragile the fiscal situation is.
A material backup in rates would have a profound effect on the budget deficit.
The uncertain fiscal outlook also creates economic uncertainty for business executives. The worse the fiscal situation
gets, the greater the risk that CEOs remain risk averse for a prolonged period of time. Not only would heightened risk
aversion translate into a weaker jobs outlook, but it would also have knock-on effects on consumer confidence and
subsequently consumer spending as well.

Chart 27: Government borrowing rates have been very Chart 28: One reason for that is because a lot of debt
low by historical standards issuance has been short term and the fed funds rate is ~0%

Public Debt: Pvt Held, Interest-Bearing: Mat Within 1 Yr

Public Debt Average Interest Rate: Interest-Bearing Debt EOP, Bil.$
% Public Debt: Pvt Held, Interest-Bearing: Maturity 1-5 Yrs
EOP, Bil.$
12 12 3000 3000

2500 2500
10 10

2000 2000
8 8
1500 1500
6 6
1000 1000

4 4 500 500

2 2 0 0
80 85 90 95 00 05 10 12/19/10
80 85 90 95 00 05 10 12/19/10
Source: U.S. Treasury /Haver Analytics Sources: U.S. Treasury /Haver Analytics

3
The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform.

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 2011 U.S. Outlook: A Return to Trend Growth

3. Home prices are likely to decline another 5-10% next year. When coupled with healthy job growth, the decline in
home prices should only be a modest headwind. However, if home prices decline by more than 10% and the impact spills
over into the financial system, a negative feedback loop could ensue. Moreover, if job growth is modest (less than 50,000
jobs created per month), a 5-10% decline in home prices could lead to a renewed loss of confidence and a higher savings
rate. In both cases, consumer spending would be much weaker than expected, and the effects would ripple through to
business spending and inventory accumulation decisions.

4. Quantitative easing (QE) negatively impacts a sizable portion of the population whose wages are fixed and who
cannot afford a material increase in commodity prices. Determining exactly how high food and energy prices need to
rise before demand destruction kicks in is difficult. In 2008, for example, consumer spending did not start to contract
until oil prices exceeded $100 / barrel. Should food and energy prices collectively climb 20% or more in 2011, consumer
spending would likely grow at a slower-than-expected pace next year (especially if prices sharply in a short period of
time).

Chart 30: Fast increases in oil have historically triggered

Chart 29: Higher food and energy prices tax the poor
recessions

Spot Oil Price: West Texas Intermediate [Prior'82=Posted Price]

$/Barrel
150 150
125 125
100 100
75 75
50 50

25 25

13 13

6 6

2 2
65 70 75 80 85 90 95 00 05 10
12/19/10
Source: Wall Street Journal /Haver Analytics

5. QE2 should also lift inflation expectations. As inflation expectations rise, bond yields tend to follow suit. While the
pass through to private market interest rates is not one-for-one, there has also been a meaningful uptick in private sector
borrowing rates over the last couple of months (chart 32 on the next page). For now, rates remain exceptionally low, and
the run-up has not been a major issue. After all, the rise has been accompanied by a commensurate improvement in macro
fundamentals. However, if long-term inflation expectations were to rise above 4% and do so in an abrupt manner, this
could become problematic and put the Fed in a very difficult situation. While the FOMC’s goal is to stimulate the
economy and lower the unemployment rate, the Fed also wants to ensure that inflation expectations remain contained. If
inflation expectations become unhinged, this could trigger concerns that the Fed might not want to complete QE2. Given
how well financial assets have reacted to QE2, there is a reasonable chance that equities and commodities could come
under pressure in such a scenario. Second, if rates rise, the USD would likely appreciate relative to the Euro and Yen,
which would dampen the competitiveness of U.S. exporters and would make imported goods more attractive (which
would have a negative impact on the trade balance). Third, although higher interest rates would initially induce “fence-
sitters” to buy a home (for fear that rates will continue to rise) or car, ultimately higher rates would have a negative long-
term effect on consumer spending. Simply put, materially higher inflation expectations would be problematic. A
disruptive surge in interest rates is a low probability event, in our opinion, but should it materialize, it could become a
sizable headwind.

CITADEL CONFIDENTIAL INFORMATION 12

 2011 U.S. Outlook: A Return to Trend Growth

Chart 31: As inflation expectations rise, bond yields tend

Chart 32: Private market interest rates are also climbing
to follow suit

10-Year Treasury Note Yield at Constant Maturity (LHS) Moody's Seasoned Baa Corporate Bond Yield (LHS)
Avg, % p.a. % p.a.
10-Year Inflation Expectations (RHS) 30-Year Fixed Mortgage Rate (RHS)
10-Year Nominal minus 10-Year TIP Rate %
4.4 2.50 9.00 6.0

2.25
4.0 8.25 5.6

2.00
3.6 7.50 5.2
1.75
3.2 6.75 4.8
1.50

2.8 Bernanke 6.00 4.4

1.25
Speech Bernanke Speech
2.4 1.00 5.25 4.0
Sources:09FRB /Haver 10 12/19/10
Sources:09FRB, WSJ /Haver 10 12/19/10

6. Meaningful fiscal retrenchment at the state and local government level. The 2009 stimulus legislation provided
$144 billion of federal funding over two years. Federal support for states is set to decline next year. In general, the fiscal
conditions for many states remain extremely weak. According to the Center on Budget and Priorities, “48 states have
started to address shortfalls in their budgets this year (some have cut services and some have raised taxes), but given the
size of the deficit ($191 billion, 29% of state budgets, the largest gap on record), more cuts are likely.4” By law, almost
all states are required to balance their budgets. This could be achieved with either sizable spending cuts or large tax
increases. An improvement in labor market conditions will partially mitigate this headwind, but risks are clearly to the
downside. As charts 33 & 34 demonstrate, the imbalances are sizable. Any decision to quickly close these gaps would
trim an additional 1% from real GDP relative to the baseline forecast.

Chart 33: There are sizable deficits at the state level Chart 34: The deficits would be higher without Federal aid

State Shortfalls After Use of Recovery Act Funds Largest State Budget Shortfalls on Record
Budget shortfalls in billions Total state budget shortfall in each fiscal year, in billions

2002 2003 2004 2005 2009 2010 2011 2012

$0 $0
FY 2009 FY 2010 FY 2011 FY 2012
-$40 -$45
-$75 -$80
-$79 -$50 -$110 -$112*
-$50 -$101 -$125*
-$123
-$134
-$100 -$191
Last Recession
-$100
-$150 -$140
-$31
-$160
-$150
-$200
-$6
*Reported to date Estimate
-$59

-$200
-$250
-$68
Source: Center on Budget and Policy Priorities
Remaining budget gaps after Recovery Act and extension

-$250 Budget gaps offset by Recovery Act and Extension

Source: Center on Budget and Policy Priorities

4
For more please see States Continue to Feel Recession’s Impact at http://www.cbpp.org/cms/?fa=view&id=711

CITADEL CONFIDENTIAL INFORMATION 13

 2011 U.S. Outlook: A Return to Trend Growth

Upside Risks to the Base Case

There are a number of positive forces that could have a “tailwind” effect, propelling the economy to grow in excess of
3.5%.
1. Housing activity and the demand for durable goods could surprise to the upside. Early in a recovery, housing
activity and the demand for durable goods tend to recover quickly. This time, however, spending in many cases has
remained below replacement (charts 35 & 36). Any material increase in confidence could trigger a sizable improvement
in the cyclical parts of the economy. Although the deleveraging process probably limits the upside in the coming year, to
the extent that hiring takes off and asset prices continue to rise quickly, these two segments of the economy could surprise
to the upside and easily contribute a couple of percentage points to real GDP.

Chart 35: The U.S. auto scrappage rate is between 12- Chart 36: About 1 million new households were formed in
14M units. For a second straight year, auto sales have 2010 and we estimate ~350k homes were torn down. Only
been less than 12 million 500k homes were built

Auto Scrappage Rate Housing Starts

(millions) SAAR, Thous.Units
18 18 2800 2800

2400 2400
16 16

2000 2000
14 14
1600 1600
12 12
1200 1200

10 10
800 800

8 8 400 400
85 90 95 00 05 60 65 70 75 80 85 90 95 00 05 1012/19/10
12/19/10
Source: Haver Analytics Source: Census Bureau /Haver Analytics

Chart 37: Very weak recovery in auto sales Chart 38: Very weak recovery in residential investment

Auto Sales After a Recession Residential Investment After a Recession

130 130

125 125

120 120
Index = 100 End of Recession
Index = 100 End of Recession

Average Average
115 115
Current Current

110 110

105 105

100 100

95 95

90 90
1 2 3 4 5 6 7 8 9 1 2 3 4 5 6 7 8 9
Qtrs After Recession Ends Qtrs After Recession Ends
Source: Haver, Citadel Source: Haver, Citadel

CITADEL CONFIDENTIAL INFORMATION 14

 2011 U.S. Outlook: A Return to Trend Growth

2. A meaningful increase in business spending. Business spending has been weak over the last two years. The capital
stock has shrunk and the average age of the capital stock is now above average. With profits as a percent of GDP
approaching all-time highs and CEO sentiment beginning to rise again, it is entirely possible that capex could grow in
excess of 20% next year.

Chart 39: Capex makes up a below average share of GDP Chart 40: The capital stock is now older than average

Nonresidential Investment Average Age: Private Equipment & Software

% GDP Years
15 15 7.4 7.4

14 14 7.2 7.2

13 13 7.0 7.0

12 12 6.8 6.8

11 11 6.6 6.6

10 10 6.4 6.4

9 9 6.2 6.2
75 80 85 90 95 00 05 10 70 75 80 85 90 95 00 05 10
12/19/10 12/19/10
Source: Haver Analytics Source: Bureau of Economic Analysis /Haver Analytics

Chart 41: However profits as % GDP near all-time highs

Before Tax Profits

% GDP
14 14

12 12

10 10

8 8

6 6
75 80 85 90 95 00 05 10
12/19/10
Source: Haver Analytics

CITADEL CONFIDENTIAL INFORMATION 15

 2011 U.S. Outlook: A Return to Trend Growth

3. Small business conditions stage a turn-around in 2011. Small businesses account for about half of the economic
activity in the U.S. Performance in this sector has dramatically lagged conditions at larger corporations since the recovery
began. This can be seen by comparing S&P profits to proprietor’s income or comparing the ISM index to the NFIB
report. Both tell the same story. The new tax legislation should help turn this trend around. It provides clarity in terms of
the tax structure for the next two years, creates a financial incentive to invest in the business (100% depreciation
allowance in 2011), and adds a significant injection to disposable income (which should help underpin final demand).
With credit conditions loosening and final demand set to accelerate, this could provide the financial incentive for small
businesses to accelerate expansion plans. Bottom line - a material improvement in small business conditions could
provide meaningful upside.

Chart 42: Large companies with international exposure Chart 43: If final demand continues to pick up, small
have bounced back faster than small companies that only businesses should start to see an improvement in conditions
have domestic exposure

ISM Mfg: PMI Composite Index Final Sales to Private Domestic Purchases
SA, 50+ = Econ Expand % Change - Year to Year SAAR, Bil.Chn.2005$
NFIB: Small Business Optimism Index NFIB: Small Business Optimism Index
SA, 1986=100 SA, 1986=100
67.5 110 7.5 110

105 5.0 105

60.0

100 2.5 100

52.5
95 0.0 95
45.0
90 -2.5 90

37.5
85 -5.0 85

30.0 80 -7.5 80
95 00 05 10 90 95 00 05 10
12/19/10 12/19/10
Sources: ISM, NFIB /Haver Sources: BEA/H, NFIB /Haver

4. Increased inventory investment. From 2007 to mid-2009, we saw the sharpest inventory draw-down on record. In
2010, we started to see a bounce-back. A look at the historical trajectory of inventory investment suggests that the pace of
inventory investment will slow next year, modestly detracting from growth. However, if job growth is stronger than
expected in 2011, there is a possibility that inventory investment could also be stronger than expected. Inventory to sales
ratios are still quite low across most sectors, and there is anecdotal evidence of stockpiling in anticipation of higher input
costs.

Chart 44: Rare for inventories to meaningfully add to

Chart 45: However, the inventory to sales ratio is very low
GDP in back-to-back years

Real Change in Private Inventories:Contrib to Real GDP Change Mfrs' Inventory/Sales Ratio: All Manufacturing Industries
% SA
3 3 2.2 2.2

2 2 2.0 2.0

1 1 1.8 1.8

0 0 1.6 1.6

-1 -1 1.4 1.4

-2 -2 1.2 1.2

-3 -3 1.0 1.0
40 45 50 55 60 65 70 75 80 85 90 95 00 05 10 65 70 75 80 85 90 95 00 05 10
12/19/10 12/19/10
Source: Bureau of Economic Analysis /Haver Analytics Source: Census Bureau/Haver Analytics

CITADEL CONFIDENTIAL INFORMATION 16

 2011 U.S. Outlook: A Return to Trend Growth

5. Improvement in job growth. Over eight million jobs were lost in the last recession. Since then, over one million
private sector jobs have been recouped. To meet end-demand, companies have benefited from strong productivity and
sizable inventory stockpiles. In a nutshell, companies have not had to meaningfully add to their payrolls. How much
longer will this persist? The answer is a function of final demand and CEO confidence, but our sense is that before there
is a material increase in the pace of job growth, companies will opt to convert part-time employees to full-time and/or
lengthen the work week. To the extent that corporations decide to hire in excess of 200,000 workers per month next year,
this would create upside risks to our consumer spending forecast.

How will we know if our macro views are incorrect?

As a general matter, we do not rely on any one particular data release. Rather, we consider a mosaic of information. To
determine whether growth is coming in stronger or weaker than expected, we will pay close attention to the data releases
in the table below. This is by no means an exhaustive list, but it is broad and timely enough to provide an early warning
system should economic prospects materially deviate substantially from base case.

Table 1: A Check List of Macro Data to Help Gauge the Vigor of the Recovery

Double Dip V-Shaped Recovery

High Frequency Indicators

Initial jobless claims >500K <350k

Bloomberg Financial Conditions Index less than -3 greater than 1

ISI weekly company surveys <45 >55

Corporate spreads (Moody’s Baa Yield – 10 year yield) >400bps <200bps

Velocity of money (Monetary base/ bank lending) Declines Rises sharply

Consumer Staples/Consumer Discretionary Outperforms by > 10% Underperforms by > 10%

Baltic Freight Index <1000 >6000

Monthly Data Points

ISM <45 >60

Leading Indicators (LEI) 3+ sequential declines Yr/Yr > 10%

Retail sales 3+ sequential declines Yr/Yr > 7%

Home prices Another 10% decline Rising 5%+

Employment 3+ sequential declines 200k+ per month

CITADEL CONFIDENTIAL INFORMATION 17

 2011 U.S. Outlook: A Return to Trend Growth

Interesting story lines to watch in 2011

1. Macro policy – Who is right, the Keynesians or the Austrians?
Since the Great Depression, economists have debated how policy makers should respond to severe recessions emanating
from stretched balance sheets. At one extreme is the Austrian school of thought, whose core tenet is that recessions are
necessary and healthy reactions to distortions created in the previous boom.

To deal with recessions, the Austrian school of thought suggests:

 The proper reaction is to curtail consumption, save more, replenish balance sheets and ultimately re-deploy capital
to more profitable ventures. Policies that encourage consumption or prop-up wages only delay and obstruct the
adjustment process. The less the government interferes, the faster the economy can recover.
 The government should avoid propping up unsound business situations - doing so simply prolongs the malaise.
 Although the near-term cost of retrenchment is a painful recession, as consumers save more, banks can replenish
their balance sheets (funds are deposited into banks and re-invested in higher yielding instruments) and before
long are in a better position to extend credit to worthy business ventures.
 Because businesses make long-term investment decisions, short-term fiscal stimulus clouds the longer-term
outlook. Ultimately the bill has to get paid - Governments should look for ways to reduce, not increase,
uncertainty.
At the other end of the spectrum is the Keynesian school of thought, which argues that not only is “doing nothing”
politically infeasible, it is not economically efficient either. According to the Keynesian school of thought, following a
balance sheet recession, government spending is justified on the grounds that confidence is artificially low. In the lead-up
to the bursting of the bubble, spending tends to be above “trend”. The bursting of the bubble awakens the private sector to
the reality that they have over-spent, triggering a material curtailment in spending. It is argued that if the government
does not step-in, the economy is at risk of heading into a debt-deflation spiral, deteriorating faster and more severely than
would have otherwise been the case. Keynesians believe that government spending can offset the decline in private sector
spending. The hope is that if fiscal expansion leads to an improvement in confidence, a self-reinforcing expansion could
ensue, and in the long-run, raise more revenues than a scenario where the government does nothing or tries to raise taxes
to balance the budget.
Who is right? Given that the U.S. and Europe have instituted very different macro policies following the Great
Recession, we may soon find out5. Europe is set to undergo meaningful fiscal austerity in the coming years, while the
U.S. appears to be moving in the opposite direction.
Ironically, the Sovereigns undergoing the most severe fiscal retrenchment have experienced the largest increases in
borrowing costs and have received rating warnings and/or downgrades. The U.S., on the other hand, has seen the USD
appreciate and rates rise by much less than peripheral Europe. As we head into 2011, we wonder how much longer
peripheral Europe will continue with austerity measures if rates continue to stay elevated and there is continued financial
stress. We also wonder whether the latest round of fiscal stimulus in the U.S. will trigger a meaningful improvement in
business confidence. After all, the most recent tax compromise was temporary, not permanent6. If not, will the U.S.
government try to implement more stimulus, or will they try to get their fiscal house in order? And if they do implement
more stimulus, will the U.S. bond market continue to give Washington a pass without a long-term fiscal plan? How much
longer can the U.S. run $1.5 trillion deficits before foreigners balk or rating agencies take notice? These open-ended
questions cloud the longer-term economic outlook and create a financial disincentive for CEO’s to expand in the U.S.
With U.S. budget deficits near record-highs and interest rates near record-lows, there is a risk that policy uncertainty
hinders risk-taking activity for a long while to come.

5 Admittedly, it is unlikely that the Europeans chose the Austrian school of thought. The Euro periphery did not have a choice in the matter. Peripheral Europe probably would have preferred
the U.S. approach.
6
According to Bank of America, the word “temporary” was repeated 22 times in the table of contents of the latest tax compromise. A growing share of the tax code is becoming temporary in
nature. Many of these tax credits are subject to annual renewals, which could exacerbate the uncertainty overhang. Moreover, based on the current tax code, the U.S. will face sizable fiscal
tightening beginning in 2012. While the fiscal bargain has removed some near-term fiscal uncertainty it has increased medium and long-term uncertainty.

CITADEL CONFIDENTIAL INFORMATION 18

 2011 U.S. Outlook: A Return to Trend Growth

2. With the economy mending and inflation expectations rising, will money flow back into equities? Charts 48-49
are quite informative. Historically, as the labor market improves, investors tend to gain confidence and deploy their assets
into the equity market. Conversely, when the economy weakens, money flows out of equities and into bonds. Given that
our base case calls for continued improvement in payroll growth and a gradual increase in both inflation and inflation
expectations, we expect to see a rotation out of bonds and into equities.

Chart 46: Massive bond inflows over the last 2 years Chart 47: Flows out of U.S. equities and into EM equities

ICI: Equity Fund Net Inflows ICI: World Equity Funds: Net Cash Inflow (LHS)
12-month MovingTotal Bil.$ 12-month MovingTotal Bil.$
ICI: All Bond Funds: Net Cash Inflow ICI: US Equity Funds: Net Cash Inflow (RHS)
12-month MovingTotal Bil.$ 12-month MovingTotal Bil.$
600 600 225 300
In mid 2003 recovery gains
traction and money flows into
equities and out of bonds
400 400 150 200

200 200 75 100

0 0 0 0

-200 -200 -75 -100

-400 -400 -150 -200

00 01 02 03 04 05 06 07 08 09 10 11
12/19/10
00 01 02 03 04 05 06 07 08 09 10 11
12/19/10
Sources: ICI /Haver Source: Haver Analytics

Chart 48: Equity flows are positively correlated with Chart 49: Payrolls are negatively correlated with bond
payrolls flows

Change in Total Private Employment (LHS) ICI: Taxable Bond Funds: Net Cash Inflow (RHS - Scale Inverted)
SA, Thous 12-month MovingTotal Bil.$
ICI: Equity Fund Net Inflows (RHS) Change in Total Private Employment (15 month lead - LHS)
12-month MovingTotal Bil.$ SA, Thous
500 400 -75 500

250 0 250
200
0 75 0

-250 0 150 -250

-500 225 -500

-200
-750 300 -750

-1000 -400 375 -1000

90 95 00 05 10
12/19/10
90 95 00 05 10
12/19/10
Sources: BLS, ICI /Haver Sources: ICI, BLS /Haver

CITADEL CONFIDENTIAL INFORMATION 19

 2011 U.S. Outlook: A Return to Trend Growth

3. While traditional stock picking strategies have not worked well over the last year, we believe that fundamental
stock picking will make a strong comeback in 2011. Broadly speaking, dispersion between high quality and low
quality companies has been quite low for the past two years, creating numerous valuation dislocations. To illustrate this
point, consider charts 50-51. Although intra-sector correlations between stocks in the consumer discretionary sector
remain elevated by historical standards, note that the dispersion in growth estimates for this sector is actually higher than
average (we had similar findings for the other GICS sectors as well). One of the reasons for this phenomenon is the
proliferation of futures and ETF trading relative to single stock flows. There are many theories as to why this has
occurred, but we believe that it largely reflects heightened uncertainty, risk aversion and a desire to hedge against tail risk.
If our view of the economy proves to be correct, then fears of tail risk should gradually subside and money should start to
flow into the equity markets. These trends mirror what occurred in 2002 and 2003. During that particular period, the
recovery was off to a slow start, and investors feared that the economy would roll over after fiscal stimulus subsided.
Once the recovery looked sustainable, money flowed back into equities and correlations declined (charts 46-47 on the
prior page).
Stock pickers will also benefit from QE2. As a result of this policy, commodity prices have risen. Companies operating
at the final stages of production often have far less “wiggle room” to pass on higher costs compared to those at the early
stages of production. Some companies will end up with margin compression (e.g. retailers), while others will have a
much easier time passing along higher costs (e.g. E&P companies). In addition, QE is also triggering a material boom in
emerging markets, and companies with exposure to emerging markets have benefited. In effect, QE is creating winners
and losers. The combination of rising flows into equities and an increase in dispersion of operational performance should
be good news for stock pickers.

Chart 50: The correlation of returns in the consumer Chart 51: … but there has been dispersion in operational
discretionary sector has been high … performance and future earnings prospects

Consumer Discretionary Standard Deviation in Expected Growth Rates

Average Pairwise Correlation Consumer Discretionary
80
120
70
100
60

80
50

40 60

30
40
20
20
10

0 0
10/18/2000 6/18/2002 2/18/2004 10/18/2005 6/18/2007 2/18/2009 10/18/2010 1/04 11/04 9/05 7/06 5/07 3/08 1/09 11/09 9/10
Source: FactSet, Citadel Source: FactSet, Citadel

CITADEL CONFIDENTIAL INFORMATION 20

 2011 U.S. Outlook: A Return to Trend Growth

4. Finally, the one theme which is well worth watching is how emerging markets will perform in the face of rising
inflation, increasing policy rates, appreciating currencies, capital controls and continued weakness in both Japan
and Europe. While there is no doubt that growth differentials favor the emerging markets, the question is what happens
if growth surprises to the downside in emerging markets (EM) and to the upside in the developed world? Flows into EM
have been significant this year, sentiment is extremely optimistic7, and valuation is no longer as compelling as it was
several years back. At the margin, the short-term risk-reward is not as compelling as it’s been in the past.

Chart 52: There is a large interest rate gap between Chart 53: … And there is also large growth rate
developed markets and emerging markets… differential as well.

Real GDP Growing Much Faster in EM

Brazil Selic Rate - US Fed Funds Rate

28 28 12.0%

24 24 9.0%

DM
20 20 6.0% EM

16 16 3.0%

12 12 0.0%

8 8 -3.0%

4 4 -6.0%
Jun-05 Mar-06 Dec-06 Sep-07 Jun-08 Mar-09 Dec-09
02 03 04 05 06 07 08 09 10 1112/19/10 Source: Morgan Stanley
Source: Haver Analytics

Chart 54: This is triggering sizable inflows into emerging Chart 55: The flows have gone hand in hand with relative
markets performance

Index = 100, The outperformance of EM

Dec 2007 is backed by long term investors
800 130 115
Cumulative Flows to DM Funds ($ Bil)
700
Cumulative Flows to EM Funds ($ Bil) 120 110
600
Total Bond Flows ($ Bil)
500
110 105
400
300 100 100

200
90 MSCI EM relative to MSCI World, LHS 95
100
EM cumulative flows, RHS
0
80 90
-100
-200 70 85
Jan-09 Apr-09 Aug-09 Nov-09 Mar-10 Jun-10 Sept-10 12/21/2007 5/21/2008 10/21/2008 3/21/2009 8/21/2009 1/21/2010 6/21/2010 11/21/2010
Source: EPFR Global Source: State Street

7
According to a recent MS survey, 86% of investors were bullish on EM equities, the highest reading ever for any asset class. The ML fund manager survey points to the same conclusion.

CITADEL CONFIDENTIAL INFORMATION 21

 2011 U.S. Outlook: A Return to Trend Growth

Chart 56: Because of the sizable EM outperformance Chart 57: … And implied vols are now on par with those
over the last couple of years, EM is no longer cheap… in the developed markets

Price/Book By Region Comparison of 3 month ATM implied volatility

EM - DM
5.00 30%

4.50 Latin America Eurozone Asia Pacific x Japan United States

25%
4.00
20%
3.50
15%
3.00

2.50 10%

2.00 5%
1.50
0%
1.00
-5%
0.50
-10%
0.00
1/29/1999 1/29/2001 1/29/2003 1/29/2005 1/29/2007 1/29/2009
10/8/2007 5/8/2008 12/8/2008 7/8/2009 2/8/2010 9/8/2010
Source: FactSet Source: Morgan Stanley

CITADEL CONFIDENTIAL INFORMATION 22

 2011 U.S. Outlook: A Return to Trend Growth

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CITADEL CONFIDENTIAL INFORMATION 23