1. Eye on Europe June 2012 Daryl Montgomery June 22, 2012 Copyright 2012, All Rights Reserved The contents of this presentation are not intended as a recommendation to buy or sell any security.

4. Europe on the Verge Debt/Banking Crisis will continue to grow this summer /fall and probably into next year. Crisis now centered in Spain; Italy will be next. Some rates in Germany, Denmark negative. IMF says Ireland will need a new bailout. Greece on hold, but expect trouble again soon. Socialists win in France. 5 month decline in PMI (data imply 0.6% decline in GDP for Q2). UK and 8 other EU countries in recession (Chinas PMI negative for 8 months).

5. Greek Election Greece has a parliamentary system. The govt can fall on a no confidence vote. Party Vote in last 3 elections: New Democracy 34% 19% 30% Syriza (far left) 5% 17% 27% Pasok 44% 13% 12% Golden Dawn (fascist) 0% 7% 7% Coalition formed with ND and Pasok (rivals). Could have been done after last election. First act was to ask for another bailout.

6. The Pain in Spain Spanish 10-years bonds highest yield: - May meeting: 6.35% - June meeting: 7.25% 1-year bill auction: 5.07% vs. 2.99% previous 100 billion bank bailout results in country downgrade from rating agencies (structured as debt to Spain): Moodys 1 notch above junk, Egan-Jones well into junk. Spain has $3 trillion in bank debt, 1 trillion GDP ESM & EFSF will buy 750 billion (in theory) in PIIGS bonds (decided at G20 meeting).

7. Spanish 10-year Bond Yields

8. Italy 10-year Bond Yield

9. Greek 10-year Bond Yields

10. Spain, Italy Yields Compared to Germany, US

11. How Future Problems Will be Handled

12. Monetary Policy Worldwide Central Bank Interest Rates: - U.S. and Japan close to 0.0% - UK at 0.5% - ECB at 1.0% Fed announces Operation Twist until December. Central bank balance sheets not growing that fast, dollar swaps have calmed down. BOE: more QE2 voted down yesterday! ECB balance sheet choppy. Fed balance sheet flat. U.S. Monetary Base pauses, money supply rising.

13. ECB Balance Sheet

14. BOE Balance Sheet

15. Fed Balance Sheet

16. Fed & ECB Balance Sheets vs S&P 500

17. Dollar Swap Lines Demand coming from EU and Japan.

18. U.S. Monetary Base (Indication of Future Inflation)

19. Money Supply M1

20. U.S. Economic Numbers U.S. Q3 GDP forecast 2.0% (vs. 1.9% in Q1) Employment: - May Jobs up 69,000, previous months revised downward; seasonal adjustments created better numbers in the winter. - Unemployment 8.2% (11/12% more reasonable). Retail Sales down 0.2% in May (with inflation). Industrial production down 0.1% in May Consumer Confidence: 64.9 ( > 90 is good)

21. This Years GDP Revisions Compared to Last Year Blue line original numbers. Red line revised numbers.

22. Consumer Confidence vs. Spending

23. National Debt: $15.8 trillion State and Local Debt $2.8 trillion Unfunded liabilities $119 trillion. Debt to GDP ratio >104% (actually much greater). Debt doesnt include Federal Reserve or Fannie Mae, Freddie Mac and FHA obligations. Debt Ceiling at $16.4 trillion. Will be hit before the election and become an issue. Federal budget deficit for 2012 at least $1.3 trillion. California at $17 billion. 2012 Trade Deficit could reach $700 billion. U.S. Fiscal State