War Room 31 May2012 Euro Zone Troubles and the World Unraveling

War Room Monthly macro discussion Using tools in context Update on HiddenLevers Features Your feedback welcome

Euro Zone Troubles and the World Unraveling Europe Update US Decoupling Update Around the World

WORLD UNRAVELING: EUROPE UPDATE HiddenLevers

Euro + S&P move inverse to USD Note - Euro and S&P slide approaching 10% since April Fools Day

Euro + USD – projections USD/Euro = Inverse correlation USD/S&P = Inverse correlation 1.40

Scenario Modeling – How the big boys do it HiddenLevers value – We can help answer: 1.How do other economic levers react to movements in Euro?How do other economic levers react to movements in Euro? 2. How do portfolios react to movements in Euro + other levers?

Spain Bond Yields – another lever to watch Significance Spain bond yields approaching last fall’s danger zone near 7% Yields breach 7% = Spain will likely default before Greece Spain default = Euro Zone over, too big to rescue

EU Leadership – Bumbling Fools EU leaders efforts so far Merkel suggests Greek referendum on Euro during election  cluelessclueless ECB gives low cost loans to EU banks to buy own government bonds  backfiredbackfired EU bails out Greece  doesn’t work for TBTF PIIGSdoesn’t work for TBTF PIIGS Austerity programs  brutal + not workingbrutal not working Euro Bonds  no agreement + 7 year timeframeno agreement7 year timeframe

Guidance 1.Spain default or other PIIGS follow Greece out 2.Poorly handled, with no plan of action = bloodbath 3.At risk – anything priced in US Dollars 4.Defending Euro/Swiss Peg will be difficult 5.Think Lehman Market reaction depends on EU leadership Guidance 1.Greek default + Euro exit almost fully priced in 3.Well handled, with guidance and action = rally 4.Proof - Gold is a commodity, not a reserve currency 5.Think GM, Bear Stearns

WORLD UNRAVELING: US DECOUPLING HiddenLevers

US Decoupling: Not in Markets US markets have joined Europe heading lower, though not yet at the same rate. The inversion between the USD and world equity markets continues.

US Decoupling: Could Housing Be A Plus? Bad RE loans at banks continue to drop, with commercial leading the way. New home sales and housing starts point to improvements in construction sector.

Sources: US DOT, American Gas Association, HiddenLevers US Decoupling: Oil + Nat Gas to the Rescue? $10 oil price drop = $40B direct annual savings for American consumers Natural gas almost 50% cheaper than last year = $30B savings for US economy

WORLD UNRAVELING: AROUND THE WORLD HiddenLevers

BRICs = Horror Stories China Hard Landing China Hard Landing = below 7% growth, will hurt world economy China Recession China Recession = negative growth, now a possibility, much more than hurt CHINA

BRICs = Horror Stories India growth weakest in Nine Years as Rupee SlidesIndia growth weakest in Nine Years as Rupee Slides – 20% down in last year India hard landing = below 6%, and no exports bounce expectedand no exports bounce expected INDIA

BRICs = Horror Stories Brazil is the worst performing major currency in the past yearworst performing major currency Brazilian competitiveness should improve, but funds moving with Realcompetitiveness should improve BRAZIL

Commodity Land: Russia, Canada, Australia, ME YTD market moves have tracked oil as well. AUD and CAD currencies followed oil prices over the last decade.

Commodity Land: Energy Ties Saudi Arabia #1, Russia #2, Canada #10 in total oil exports Australia is world's #1 coal exporter As go energy prices, so go currencies and economies of these nations

Long Term: China + EM Demand Drive Commodity Land China became #1 auto market in 2009, but still has only 1 cars per 25 people (US almost 1:1) Source: E2AF.com (Nikkei Business Publications)

Non-BRICS Emerging Market: Asia Philippines GDP up at 6.2% rate in Q1 Turkey GDP growth over 8% in 2010 and 2011 Both economies have large, young populations and good access to major markets nearby Philippines and Turkey both outperformed the S&P and Asia index in 2012 YTD.

HiddenLevers – Product Update Multiple Portfolios in Scenario Modeling Scenario Hedging Wizard Portfolio Macro Profile – improved Integrations Coming soon: Custom Asset Upload Fidelity Integration