GLOBAL STRATEGY AND OUTLOOK WITH 11 QUESTIONS FOR '11

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1 Ned Davis Research Group GLOBAL STRATEGY AND OUTLOOK WITH 11 QUESTIONS FOR '11 Kathrein & Co. Private Bankers Lunch January 11 Tim Hayes, CMT, Chief Investment Strategist

2 CURRENT POSITIONS AND OUTLOOK Overweight stocks, underweight bonds. Overweight U.S. and emerging markets for now. Mid-year peak likely, watch for:»» Divergences.»» Interest rate pressures.»» Worsening valuations. Cyclical bear to develop in second half. Secular trends to persist.»» Bears in western developed markets.»» Bulls in emerging markets, commodities. Objective models and rankings to drive allocation recommendations.

3 1 WILL GLOBAL EXPANSION PERSIST? Yes, moderating later JPMorgan Global Services PMI TM Seasonally Adjusted JPMorgan Global Services Business Activity Index Source: Haver Analytics/JPMorgan and Markit Monthly Point Change Year-to-Year Point Change Activity Contracting Monthly Data /1/1-1/1/ Activity Expanding 1/1/ =. 1/1/ =. 1/1/ = Goods Exports for Selected Countries I In $ Billions Goods Exports as of 11// Country Exports China 1. ( ) Germany 11.1 ( ) U.S. 11. ( ) Japan. ( ) France. ( ) Source: Haver Analytics Monthly Data 1/1/1-11// (Log Scale) global trade expanding Seasonally Adjusted (IE) 1 1 (IE)

4 RISK OF ' - ' RE-RUN? Low S&P, Volatility, & Credit Spread Standard & Poor's Stock Index Dashed lines = NDR-defined bear market bottoms after ten biggest DJIA percent declines. S&P Volatility Index -Day Average of Absolute Change in S&P Index (Monthly Average) Mean Equity Risk Premium Proxy (Moody Baa Bond minus Long-Term Treasury ) Mean Monthly Data //1-1/1/ (Log Scale) Shaded Areas Represent Secular Bear Markets (SA)

5 A MORE NORMAL '11? Yes Average Volatility Per Year DJIA Annual Standard Deviation of Daily Returns * Latest Bar Reflects Data as of 1/1/ Mean (dashed line) =.% Yearly Data 1/1/1-1/1/ (Log Scale) * S&P : Number of Days Without %, %, and % Corrections S&P Index past due now Number of Days Without a % Correction Mean Days Without Corrections % % % (Clip ) (Clip ) (Clip ) Secular Bulls 1 Secular Bears All Periods Current Case 1 past due in h Shaded Areas = Secular Bear Markets New Chart Daily Data //1-1/1/11 (Log Scale) 1/1/11 = Days Number of % DJIA Reversals per Year * Latest Bar Reflects Data as of 1/1/ Mean (dashed line) =. * Number of Days Without a % Correction Number of Days Without a % Correction 1/1/11 = 1 Days 1/1/11 = Days 1 1 (S) (S)

6 CYCLICAL BULL MARKET PEAK? Overdue (S) S&P vs. -Day Moving Average.. Daily Data 1/1/ - 1/1/11 (Log Scale) 1. S&P (Solid Line) = Day MA (Dashed Line) = Day MA is Rising S&P Gain/Annum When:. 11/11/1-1/1/ Cycle Composite -Day Moving Gain/ % Equally-Weighted: 1. Average: Annum of Time One-Year Seasonal Cycle * Is Rising.. 1. Four-Year Presidential Cycle Is Falling Year Decennial Cycle 11. Moving average direction based on reversals. Based On Daily Data of.% or greater.. 1//1-11/1/ Line represents cumulative percent gain. Trend is more important than level. cyclical Bull market F M A M J J A S O N D J F M A M J J A S O N D J 11 (SSF _11A_C) S&P Cycle Composite For 11 And 1 cyclical bear market? J 11 F M A M J J A S O N D 1 J F M A M J J A S O N D

7 GROWTH-DRIVEN ADVANCE LEADING TO RATE-DRIVEN DESCENT? Likely Year Government Bellwether Real Bond s Weekly Data 1//1-1/1/11 Real Bond s 1/1/11 Country s (%) U.S. 1. ( ) Germany 1. ( ) Canada 1. ( ) Japan 1. ( ) U.K..1 ( ) Stock/Bond Rolling One-Year Correlation S&P Index problem area? Rolling One-Year (-Day) Correlation Coefficient: S&P Daily % Change vs. -Year T-Note Daily % Change Stock Prices And Bond s Move In Opposite Directions -Year Treasury Note (%) Stock Prices And Bond s Move In Same Direction Daily Data 1//1-1/1/11 (Log Scale) 1/1/11 = (B) (S)

8 WILL BRICS WITHSTAND INFLATION? Cyclical threat, not secular. 1 1 CPI For BRIC Economies (Year-to-Year Changes) Hyperinflation From 1/1/11 to /1/1 Gain/Annum =.% Monthly Data 1/1/11-1/1/ Brazil 1/1/ =.% Russia 1/1/ =.% Chinese Economic Factors % Consumer Price Index Year-to-Year Change 11// =.1% ( ) Industrial Production Value Added Smoothed Year-to-Year Change 11// = 1.% ( ) Monthly Data 1/1/1-11// *Wholesale Price Index Source: Haver Analytics India* 1/1/ =.% China 11// =.1% Source: Haver Analytics Prime Lending Rate 11// =.% ( ) (IE) (IE1)

9 WHICH MARKETS WILL BE FIRST TO DIVERGE? Watch emerging markets. overweight underweight Region NDR Equity Allocation Model Ranking (% Internal, % External) Trough Date High Date NDR RANKS & BULL MARKET PERFORMANCE (AS OF JANUARY 1, 11) Bull Market % Gain Country NDR Global Market Ranking (Momentum-Based) Trough Date High Date Emerging Markets // 1// South Korea // 1/1/11 1. United States 1 // New High 1. Denmark 1 // 1/11/ United Kingdom // 1/1/11. Taiwan 1 11// 1//11. Pacific ex. Japan // 11// 1. Sweden 1 11/1/ 1// Europe ex. U.K. // /1/. Czech Republic 1 /1/ //. Japan /1/ /1/. Austria // 1//11.1 NDR Global Market Ranking Trough High Bull Market Venezuela 1/1/ 11//. Country (Momentum-Based) Date Date % Gain Greece // /1/.1 Sri Lanka 1 1// /1/. Germany 1 // New High.1 Argentina 11/1/ 1//11. Finland 1 // 1/1/11.1 Peru // 1//11 1. U.S. // New High 1. Indonesia // 1//. Malaysia 11 // 1/1/11. Thailand // 1//11 1. Italy // /1/. China N/A // 11// 1. South Africa 1 11// 1/1/11. India // 11// 1. Ireland 1 // //. Hungary /1/ // 1. Netherlands // 1/1/11 1. Russia N/A // 1/1/11 1. Canada // 1/1/11. Philippines // 11// 1. Belgium // /1/. Colombia // 11// 1. Spain // 1//. Norway 11/1/ 1/1/11 1. U.K. // 1/1/11. Brazil // 11// 1. Switzerland // /1/.1 Israel 1 11// 1/1/ Australia // /1/ 1. Mexico 1 // 1// France // /1/ 1. Singapore // 11// 1. Portugal N/A // 1//. Hong Kong 1 // 11// 1. Japan /1/ /1/. Chile // 1//11 1. New Zealand // 1/1/11. Poland /1/ 1//11 1. Regional and China, Russia, and Portugal indices are MSCI local price index. All other indices are priced in local currency and can be found in report ICS_1. N/A = not included in ranking. Bold = emerging market. Ned Davis Research, Inc. Bull Market % Gain T_STH11_1.1

10 WILL U.S. OUTPERFORM ALL YEAR? Not with secular bear persisting S&P Total Return Index vs. EAFE Total Return Index MSCI EAFE Total Return Index (U.S. Dollars) Log Scale Left ( ) Source: MSCI 1 S&P /EAFE Ratio ( ) -Day MA ( ) 1 Ratio moving up = S&P Relative Strength Ratio moving down = EAFE Relative Strength S&P Total Return Index Log Scale Right ( ) 1 Ratio of S&P to EAFE Gain/Annum When: Daily Data 1/1/1-1/1/11 -Day Moving Gain/ % Average: Annum of Time * Is Rising. 1. Is Falling -.. Moving average direction based on reversals of.% or greater Secular Comparison Monthly Data //1-1/1/ Bear Bull Bear Unemployment Rate Consumer Confidence Federal Budget Deficit/Surplus as a % of Nominal GDP Source: Conference Board (I 11A) Relative Strength -- Ratio of S&P to EAFE (STH11_1A_C)

11 IS EURO-ZONE CRISIS INEVITABLE? No Year Government Bond s in the Euro-Zone Italy ( ) Spain ( ) Greece ( ) Portugal ( ) Ireland ( ) Germany ( ) Monthly Data 1/1/1-1/1/ (Log Scale) divergences start STH11_1B_C (IE1B) 1 Euro-Zone Goods Exports 1 Euro-Zone Goods Exports Gain/Annum When: Gain/ % Euro Momentum Is: Annum of Time 11 Above Between - and... * - and Below Source: Haver Analytics Euro Strengthening vs Other Currencies Euro Weakening vs Other Currencies Broad Trade-Weighted Foreign Exchange Value of the Euro (Year-to-Year Change) Monthly Data 1/1/1-1/1/ (Log Scale) 11// = 1. Weakening starts 1/1/ = -.%

12 ARE SECULAR BEARS CLOSE TO BOTTOMS? Probably not. S S Percent GPA During Secular Bull Markets Dates Nominal DJIA Real DJIA /1/1-1/1/1.. //11 - //1..1 //1 - //1.. /1/1-1/1/ Percent GPA During Secular Bear Markets Dates Nominal DJIA Real DJIA 1/1/1 - // //1 - // //1 - /1/ /1/ - 1/1/11?. -. Nominal DJIA ( 1/1/11 = 111. ) Real DJIA ( 1/1/11 =. ) current Shaded Areas Indicate NDR-Defined Secular Bear Markets ,,,,11,1,,1, 1, 1, 1, Copyright 11 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at For data vendor disclaimers refer to S S Percent GPA During Secular Bull Markets Dates S&P Earnings Dividend /1/1-1/1/ //1-1/1/ current Shaded Areas Indicate NDR-Defined Secular Bear Markets Percent GPA During Secular Bear Markets Dates S&P Earnings Copyright 11 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at For data vendor disclaimers refer to Dividend //1 - /1/ /1/1 - // /1/1-1/1/? S&P Earnings ( 1/1/ =.% ) S&P Dividend ( 1/1/ = 1.% ) (%)

13 11 ARE SECULAR BULLS CLOSE TO TOPS? Probably not (I ) Global Reflation Theme (I) MSCI China Index / MSCI World Index Scale Right 1/1/11 =. MSCI Emerging Markets Index / MSCI World Index Scale Left 1/1/11 =. NDR Global Basic Resources Sector/ NDR Global Composite Scale Right 1/1/11 =. Reuters Continuous Commodity Index Scale Left Daily Data /1/1-1/1/11 (Log Scale) Source: Commodity Research Bureau S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D (INF_B_C) Relative Market Cap of Emerging Market & Developed Market Equity ETFs Watch for: overexposure overconfidence overvaluation Market Cap of Emerging Market Equity ETFs as a % of Market Cap of All ETFs Market Cap of Developed Market Equity ETFs as a % of Market Cap of All ETFs Monthly Data // - 1/1/ (Log Scale) 1/1/ = 1.% 1/1/ =.% J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D

14 World Market Cap as of 1/1/ World Market Cap as of 1/1/ Secular Bulls.% Secular Bears.% Secular Bulls.% Other 11.% Secular Bears.% Other 1.% Countries in Secular Bull Markets Countries in Secular Bear Markets Growing Market Cap as a % Market Cap as a % of World Market Cap of World Market Cap Point Country in in Change Canada... China... Brazil.. 1. Australia.. 1. South Korea Taiwan India Russia... Hong Kong Singapore... Mexico... Total.. 1. Market Cap as a % Market Cap as a % of World Market Cap of World Market Cap Point Country in in Change U.S U.K Italy France.. -. Japan... Germany. 1.. Total Shrinking INF C Numbers may not add to % due to rounding. Source: MSCI. 1

15 Market Start Date Nominal Price SECULAR BULL MARKETS Relative Strength Real Price Dividend Book Value Cash Flow Industrial Production Russia // India // Mexico /1/ Brazil // China // South Korea /1/ Singapore // Taiwan // Hong Kong /1/ Canada // Australia /1/ Market Start Date Nominal Price SECULAR BEAR MARKETS Relative Strength Real Price Dividend Book Value Cash Flow Industrial Production Italy // France // Japan 1/1/ U.K. 1// Germany // United States 1/1/ All data in the table represents annualized gain from the secular start date to present. Nominal and real price is daily and represents country index. (ICS_1) China stock data is MSCI price index, Russia data is Russian Trading System Exchange Index. Relative strength is monthly MSCI country index / MSCI World Index. Dividend, book value, and cash flow yields source: MSCI Ned Davis Research, Inc. ICS_.RPT 1

16 BOTTOM LINE Stay exposed to ongoing global bull market but recognize the risk of a peak as year progresses. Watch tape conditions, interest rates and valuations. Allocate defensively if cyclical bear develops in second half. Cyclical bear would occur within ongoing secular bears in western developed markets, secular bulls in emerging markets and commodities. 1

17 NDR EXPECTATIONS FOR 11 STOCK MARKET TREND 1H H ECONOMY TREND 1H H GLOBAL Uptrend to mid-year, then down Emerging markets outperform Broad-based weakness GDP Moderate growth.%.% S&P Uptrend to mid-year, then down Reward 1-1 Risk 11-1 INFLATION Low 1.% 1.% MARKET CAP Small to large as market turns down Small-caps Large-caps PROFITS Moderate Growth.% Y/Y four quarter total ending 1/1/11 STYLES Watch earnings and economy Growth Mixed FIXED INCOME -YEAR TREASURY Modest yield uptrend.% to.%.% to.% THEMES Dividend Payers reassert relative strength Neutral Payers & Growers SELECTION Spread product Corporates, CMBS Corporates, CMBS SECTORS Commodity Mostly cyclicals, then defensive Best: Coal & Metals Overweight Tech, Materials, Financials Overweight Coal & Metals Overweight Utilities, Energy, Staples Overweight Refiners & Gold Mining CURRENCIES & COMMODITIES CURRENCIES Rate differentials gain importance USD, commodity currency strength Trading ranges Consumer Employment sensitive, then Staples Overweight Auto Parts, Broadcasting & Cable TV, Advertising Overweight Restaurants, Tobacco, Food Products GOLD Short-term stalled, Long-term intact Range bound Neutral to higher Technology Combo of high beta/low beta, then defensive Overweight Semis Overweight Software & Services COMMODITIES Strong Higher but risks increasing Mostly lower NED DAVIS RESEARCH GROUP NED DAVIS RESEARCH GROUP 1

18 Ned Davis Research Inc. Biographical Sketch TIMOTHY W. HAYES, CMT Chief Investment Strategist Timothy W. Hayes, CMT, is NDR s Chief Investment Strategist and Managing Director, Global Asset Allocation. He has been with the firm since 1. Tim directs NDR s global and U.S. asset allocation services, develops strategy and major investment themes, and establishes NDR s weightings for domestic and global asset allocation, presenting his views on the cyclical and secular outlook globally. Tim oversees NDR s monthly Investment Strategy, covering global strategy and allocation, and his timely market commentaries and studies are featured in Chart of the Day publications. He also writes Stock Market Focus, which features top-down stock market perspective, and Global Focus, which focuses on global allocation and the most significant global developments. Tim has been featured many times on CNBC and Bloomberg TV, and his market views are often quoted in The Wall Street Journal and other financial media in the U.S. and internationally. He is author of The Research-Driven Investor, published in November, and he has contributed to several other books. His research articles have appeared in the Journal of Technical Analysis, Technical Analysis of Stocks and Commodities, and other publications. Tim received his Bachelor of Arts degree from Kenyon College and is a Chartered Market Technician. In, the Investorside Research Association honored Tim with its Research Excellence Award for Exiting Equities in. In 1, the Market Technicians Association awarded Tim the Charles H. Dow Award for groundbreaking research, recognizing an outstanding original work that best expounds on the principles of technical analysis.

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