Economic Outlook & Stock Market Strategy by Rochdale Investment Management May 2011 The investment ideas developed herein are intellectual property of Rochdale Investment Management. Any use of the investment ideas, portfolio allocations or other ideas contained herein requires written authorization from Rochdale. 2011 Rochdale Investment Management 1
2011 Economic Outlook: Solid, Sustained Expansion Stay Focused on Real Factors Influencing Growth Economic strength is resilient and broad based: 3% GDP growth Monetary and fiscal policy remains very supportive Improving labor market, though still relatively weak Solid corporate profits and rising stock market Consumers still deleveraging but keep spending Strong business spending Export growth strengthens on emerging market demand Obama Administration policy turns more business friendly and job focused Uncertainty slowly abating and improving sentiment Low inflation Housing still weak (prices flat by year end), but now smaller percentage of overall GDP Issues we continue to monitor*: Oil Prices/Mideast political unrest (Moderate Risk to Outlook) EM policy tightening, China, India (Low Risk to Outlook) Fallout from Japanese tragedy (Low risk to outlook) European sovereign debt crisis (Low Risk to Outlook) US budget deficits/debt/fiscal drag (Low Risk to Outlook) *Each issue raises varying degrees of real concern, and we remain on high alert and ready to act quickly should any deteriorate to a level that threatens economic growth. These represent the opinions of Rochdale Investment Management and are subject to change without notice.
Economic and Financial Indicators May 2011 Global Economic Outlook US Economic Outlook ECRI Leading Index Personal Consumption/ Retail Sales Energy/Oil Costs Business Surveys Trend Monetary Policy Fiscal Policy Labor Market Credit Availability Inflation Corporate Profits Business Spending Disposable Personal Income/Wages Housing/Mortgages Interest Rates/ Fixed Income Equity Market Valuation Company Guidance Volatility Levels Political Environment Indicators Reflect Forecasts of a 3-6 Month Time Horizon Source: Rochdale Investment Management 5/1/11 FOR ILLUSTRATIVE PURPOSES ONLY 3 CA052609
Leading Indexes Still Signaling Broad-Based Economic Strength 16 14 6 Months Earlier 3 Months Earlier Latest Month 12 10 % Change in Growth Rate 8 6 4 2 0-2 Long Leading Index Leading Employment Index Leading Home Price Index Leading Services Index Leading Manufacturing Index Leading Exports Index Despite signs of moderating growth ahead, economic strength remains broad based and resilient Source: Economic Cycle Research Institute, May 2011 These represent the opinions of Rochdale Investment Management and are subject to change without notice. 4
Economic Outlook Criteria Actual 2010 Rochdale Forecast 2011 1. GDP Growth 2.9% 3% 2. Corporate Profits 32% 8% 10% 3. Disposable Personal Income 1.4% 2.5% 4. Personal Consumption Expenditures 1.7% 2.75% 5. Capital Investment 15% 9% 10% 6. Inflation Total 1.6% 2.5% Core 0.7% 1.6% Fed Funds Rate 0% - 0.25% 0% 0.25% 7. Interest Rates Treasury Note, 5 Yr. 1.60% 2.5% 2.75% Treasury Bond, 10 Yr. 3.0% 3.75% 4.0% 8. Productivity Growth 3.9% 1.75% 2.0% 9. Employment Unemployment Rate 9.4% 8.25% - 8.5% Total New Jobs 1 million 1.6 1.9 million 10. Capacity Utilization 75% 77% 78% 11. Oil $72 (Annual Avg.) $100-$110 (Annual Avg.) *Includes preliminary estimates that are subject to revision upon final data release. These reflect the opinions of Rochdale and are subject to change at any time. Sources: Rochdale Investment Management, May 2011 5
Equity Outlook Remains Positive Keep it Simple & Stay Focused Sustained U.S. and global economic recovery Strong earnings growth Supportive monetary and fiscal policy Reasonable valuations Low inflation Clients should be fully invested at the upper ends of their allowable equity ranges! CA071910 6
Rochdale Stock Market Multi-Factor Model Equity Outlook: Positive Equity Market Scorecard Indicator Status Outlook Score Economic Outlook Solid, sustained expansion thru 2011. Early expansion phase of business cycle is generally very positive for equities. Positive 7 Corporate Profitability Corporate profits are set to reach record levels in 2011/ 2012. Rising input/labor costs will eventually squeeze earnings & profit margins, but not significantly until later in the business cycle. Positive 7 Monetary Conditions/Liquidity Monetary conditions remain strongly accommodative and liquidity is rising. Positive 8 Valuation Market remains reasonably/attractively valued relative to historical averages and fixed income. Positive 8 Technical Indicators Momentum remains strong, prices above key averages, and sentiment is not over exuberant. Positive 8 Score 8 Score Equity Allocation 0 to 1 At or below minimum of equity allocation range 2 to 4 Underweight 5 Neutral Weight 6 to 7 Overweight 8 to 10 Fully invested to maximum equity allocation range Source: Rochdale Investment Management, April 2011 7
Equity Market Scorecard Indicator Status Outlook Score Economic Outlook Solid, sustained expansion thru 2011. Early expansion phase of business cycle is generally very positive for equities. Positive 7 US Leading Indexes Stock price upturns typically occur concurrently with upturns in the growth rates of our leading indexes. Leading indexes are now signaling a reacceleration in U.S. economic growth is near. Positive 8 Global Leading Indexes A slowdown in global growth is likely to arrive by summer. Positive 7 Uncertainty/Geopolitical Risk Corporate Profitability Concerns of varying degrees over higher oil prices & Mideast turmoil, EM policy tightening, European and US fiscal debt/deficits issues. Need to avoid policy mistakes on interest rates, taxes and deficits. Corporate profits are set to reach record levels in 2011/ 2012. Rising input/labor costs will eventually squeeze earnings & profit margins, but not significantly until later in the business cycle. Neutral 5 Positive 7 Earnings Growth Improving demand/economic growth will help offset rising costs and slowing productivity. Positive 8 Margins Revenue growth and continued productivity enhancement measures drive further improvement in profit margins Positive 7 Revenue Growth Revenue growth from top line sales as economy improves should continue to be a strong driver of increasing profit margins and S&P 500 earnings growth. Positive 7 Regulatory/Tax Outlook Sentiment/confidence increase, but uncertainty over taxes and regulation with Health Care, Energy and Financial reform remains high. Neutral 5 Monetary Conditions/Liquidity Monetary conditions remain strongly accommodative and liquidity is rising. Positive 8 Yield Curve Steep yield curve favorable for equities. Outlook is for slowly increasing but still low interest rates supportive of economic growth. Early stages of interest rate increases often coincide with an improving economy & stock market. Positive 9 Interest Rates Real short rates remain significantly in negative territory and a bear market has never started at such a level. Positive 9 Money Growth Continued upturn in growth suggests increasing liquidity available for financial assets. Positive 6 Valuation Market remains reasonably/attractively valued relative to historical averages and fixed income. Positive 8 P/E At 13x forward earnings, market remains reasonably to attractively valued on a historical basis. Positive 8 Bond/Equity Earnings Yield Given the current spread between the earnings yield of the S&P 500 and Baa corporate bonds, stocks continue to appear inexpensive. Positive 8 Technical Indicators Momentum remains strong, prices above key averages, and sentiment is not over exuberant. Positive 8 Investor Sentiment/Money Flow Sentiment not indicating market top. Money flows still remain light into stock funds, but it is reasonable to assume the current reallocation from bonds will flow into equities. Positive 8 Volatility Based on historical performance, VIX is at a level that provides a significant chance of upward stock price movement. Positive 7 Moving Averages/Momentum The Advance/Decline lines on the NYSE Composite and other major averages recently made new highs, which is positive for the intermediate term trend. Positive 8 Market Strength/Breadth S&P 500 remains well above its 40 week moving average. When the index drops by at least 2.5% below this key level then, more often than not, further major declines are in prospect. Positive 8 Score 8 Score Equity Allocation 0 to 1 At or below minimum of equity allocation range 2 to 4 Underweight 5 Neutral Weight 6 to 7 Overweight 8 to 10 Fully invested to maximum equity allocation range Source: Rochdale Investment Management, April 2011 8
Corporate Earnings & Market Valuation Earnings Outlook Remains Strong 28 27 26 25 24 23 22 21 20 19 18 17 16 15 14 12 Month S&P 500 Forward P/E S&P 500 Operating Earnings Estimates 2011 2012 13 12 11 10 Attractively Valued Fairly Valued Overvalued 9 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 $94.50 $103.50 $120 $100 $80 $60 $40 $20 $Amt Year Earnings S&P 500 $0 2006 2007 2008 2009 2010 2011e 2012e FOR ILLUSTRATIVE PURPOSES ONLY Source: Rochdale, Thomson Financial, Baseline 5/1/11 CA052609 9
Equity Outlook: 2011 S&P 500 Forecast Average Forward P/E Multiple Fair Value (2011 Earnings: $94.50) Fair Value (2012 Earnings: $103.50) Expected Return* (12 Months) 13.5 1276 1397 5% 14 1323 1449 9% 15 1418 1553 17% *Based on a S&P 500 index level of 1330 as of 5/17/11 An improving economic growth outlook, rising confidence, low interest rates, and reduced risk may warrant a modest multiple expansion. Sources: Rochdale Investment Management, May 2011 10
Sector/Industry Outlook Weighting Overweight Equal Weight Underweight Industry Group Sector Value Factor Grade Growth Quality Technical Economic Capital Goods Industrials = + + + + Energy Energy = + = + + Media Consumer Discretionary = + + = + Automobiles & Components Consumer Discretionary + + - + + Insurance Financials + = = = + Consumer Durables & Apparel Consumer Discretionary = = = + + Software & Services Information Technology - + = = + Technology Hardware & Equipment Information Technology = + = = + Materials Materials = + - + = Consumer Services Consumer Discretionary - + + = = Retailing Consumer Discretionary - = = + = Transportation Industrials - + = = = Semiconductors & Semiconductor Equipment Information Technology + = - = = Diversified Financials & Int'l Banks Financials = = - - = Commercial & Professional Services Industrials = - = = = Food & Staples Retailing Consumer Staples = - + - = Real Estate Financials - = - + - Food Beverage & Tobacco Consumer Staples = - + = = Household & Personal Products Consumer Staples = - + = - Domestic Banks Financials = = - = - Pharmaceuticals Biotechnology & Life Sciences Health Care + - + - = Health Care Equipment & Services Health Care + = = - - Telecommunication Services Telecommunication Services = - = - = Utilities Utilities - - = = - Industry Group weightings are driven by a combination of proprietary model ranking and fundamental analysis. Weightings pertain to Rochdale s target portfolio and do not necessarily reflect the current allocation of any actual portfolio. Rochdale Investment Management, April 2011 FOR ILLUSTRATIVE PURPOSES ONLY Ranking is based on the opinions of Rochdale, based on its proprietary sector research. CA052609 11
S&P 500 Volatility Zones - 1995 to 2011 Heightened Risk Environment Continues Market Capitalization Weighted Percent in Category (Excludes Utilities) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 12/31/1995 Excessive High Elevated Moderate 12/31/1996 12/31/1997 12/31/1998 12/31/1999 12/31/2000 12/31/2001 12/31/2002 12/31/2003 12/31/2004 Higher Volatility May Cause Clients to Exceed Risk Budgets 12/31/2005 12/31/2006 12/31/2007 10/5/2008 3/31/2009 2/28/2010 3/31/2011 4/30/2011 Moderate: 0% - 23% Elevated: 23% - 29% High: 29% - 36% Excessive: Over 36% Persistent, heightened volatility requires investors to revisit portfolio allocations and rethink approach to equity investing. An adjustment to the portfolio s equity allocation may be necessary to meet risk tolerance. As of April 30, 2011. Rochdale Investment Management uses Barra Inc.'s Aegis System 'Total Risk' data as a measure of volatility. Barra Inc.'s Aegis System is a third party equity risk management software package used to help assess risk/return trade offs. FOR ILLUSTRATIVE PURPOSES ONLY CA052609 12
Rochdale Credit Market Scorecard Government Credit Scorecard Score Indicator Status Short-Term Long-Term Inflation Expectations Low capacity utilization, high unemployment and slow recovery in demand cap inflation expectations for now. 6 5 Monetary Policy Political Environment Fed to remain accommodative, keeping interest rates extraordinarily low for an extended period of time. Uncertainty over policy effectiveness, historical debt levels, sovereign risk, rising taxes and regulation. 6 2 5 2 Real Interest Rate/Tips Spread Will remain low for now due to lack of signs for inflation and lack of demand due to low ROI. 3 2 US Government Debt/GDP Gross debt now over 90% of GDP. No improvement forthcoming due to budget deficit. 2 1 Total 4.6 2.7 Indicator Corporate Credit Scorecard Status Score Short-Term Long-Term Government All fixed income securities are priced relative treasuries 5 3 Corporate Balance Sheets/Default Risk/Cash Levels Corporate Profits/Earnings Growth Credit Spreads/Valuations Reduction of debt issuance. Companies have been actively building up cash reserves and taking advantage of low rates to refinance. Strong. Growth though like to decelerate as US economy slows and companies may be running out of costs to cut. Spreads have rebounded from recent highs due to easing fears of a double dip recession. Further improvement depends on the strength of economic recovery. 7 6 8 7 4 2 Equity Risk Premium Will likely remain high due to uncertainty & volatility. 3 4 Score Fixed Income Allocation 0 to 1 At or below minimum of fixed income allocation range 2 to 4 Underweight 5 Neutral Weight 6 to 7 Overweight 8 to 10 Fully invested to maximum fixed income allocation range Total 5.5 4.2 Source: Rochdale Investment Management, February 2010 13
Capital Market Assumptions Average Normalized Expectations Asset Class Near Term Trend Intermediate Term Expectations* Historical Longer Term Average Annualized Risk (%) (1) Downside Exposure (%) (2) Large Cap Positive 8-10 9-10 15-17 25-35 Small/Mid Cap Positive 10-12 11-12 21 35-45 International Positive 11-15 10-13 23 30-45 Dividend and Income Positive 8-10 8 15 20-30 Fixed Income (Investment Grade) Neutral 4 5.5 6.5 5-7 5-10 High Yield Fixed Income Positive 8-9 8-9 12-15 25 International Trade Finance Low Volatility Alternative Strategy Positive 3-5 5 2-5 5 Positive 7-9 7-8 5-10 10-15 Cash Neutral 1 2.5-3 0 0 (1) Expect 1 out of every 4-5 years (2) Expect 1 out of every 10-15 years *Subject to oil, interest rates and housing staying within forecasted ranges Annualized Return is the average expected annual change of an asset class value estimated over a long-term period. Annualized Risk is defined as an annual standard deviation of return or a degree of uncertainty of annual return estimated over a long-term period. Downside Exposure represents the longest continuous decline in an asset class extending one or more years. January 2011 Past performance is not indicative of future results. There can be no guarantee of future performance. 14
Portfolio Strategy Asset Class Short Term Long Term BUY (Neutral Weight) BUY US Stocks Slow & Sub-trend Economic Recovery Reasonable Valuations V-shaped Earnings Recovery Slower Economic Growth Than in Prior Recoveries (Square Root Recovery) Volatility Likely to Remain Elevated BUY (Overweight) BUY Attractive Valuations Attractive Cash Flow Yields HDI Stocks Yields Attractive in Current Low Inflation Environment Higher Current Cash Flow than Common Stocks and Fixed Income Profitable in Slow Growth Environment Growing Dividend Income Mitigates Effects of Inflation & Rising Interest Rates Potential for Moderate Capital Appreciation BUY (Overweight) BUY Long Leading Indexes: Positive Growth (Non-Japan Asia/Latin America) Emerging Markets in Better Fiscal Condition & Better Secular Growth vs. US International Stocks Eurozone & Japan Expected to Lag US & Asia Productive Stimulus Impact Focus on Select Emerging Markets Stronger Demographics vs. US Reasonable Valuations BUY (Under Weight) HOLD Fixed Income Treasuries: Overvalued (Possible Short Sale) Inflation & Interest Rate Risk (Investment Grade) Investment Grade: Interest Rates Reasonable, Stay Short/Intermediate Term Stay Short to Intermediate Return of the risk premium Fixed Income (High Yield & Bonds Loans) Private Trade Financed Fixed Income (Senior Secured Loans) Structured Legal Claims Settlements Alternative Low Volatility Strategies AI: High Volatility, High Leverage BUY (Neutral Weight) Attractive Yields when Compared to Traditional Fixed Income Opportunity For Capital Appreciation Senior Bank Loan Market Opportunities Price Discounts In Place to Compensate for Expected Defaults BUY Attractive Yield Spreads Floating Yields Spreads Offer Inflation Mitigation Hard Asset Collateralized Loans Principal and Interest Cash Flow Generation Short Term Maturities BUY Safety of Principal Known Principal & Interest Payments High Yield-Attractive Returns when Compared to Traditional Fixed Income & Annuities Strong Reinvestable Cash Flow Opportunity to Capture Distressed Pricing BUY (Overweight) Good Quality/Lower Volatility/ Diversifier for Equities Brings Low Correlation Portfolio Benefits Diversification Benefits/ Return Enhancer For Fixed Income AVOID Risky & Illiquid Forced Deleveraging BUY Higher in Capital Structure Than Common and Preferred Capital appreciation potential Some Floating Rate Offers Inflation Risk Mitigation BUY (Intermediate Term) Well Collateralized, Low Default Risk Floating Rate Offers Inflation Risk Mitigation Dislocation in Market Creates Attractive Opportunities Rigorous Underwriting of Pricing & Structure BUY Can Bring Stability and Diversification to Overall Client Portfolios. Greater Cash Flows Allow Reinvestment in Higher Return Generating Asset Classes Self-liquidating Pool Subjects Portfolio to Lower Capital Fluctuations (Interest Rate Risk) BUY Hedged Strategies Generate Favorable Upside vs. Downside Over Equities Low Correlation with Equities Takes Advantage of Volatility Across Markets HOLD Lower Returns Due to Lingering Credit Tightness Liquidity Issues FOR ILLUSTRATIVE PURPOSES ONLY Sources: Rochdale Investment Management, January 2011 These represent the opinions of Rochdale Investment Management and are subject to change without notice. 15
Important Disclosures The Standard & Poor s (S&P) 500 Index represents 500 large U.S. Companies. The ECRI s U.S. Long Leading Index (USLLI) is a composite index designed to lead cyclical swings of the U.S. economy. It is a comprehensive summary measure of U.S. economic conditions made up of leading indicators of the U.S. economy including measures of production, employment, income, and sales. U.S. Leading Employment Index (USLEI) is designed to lead cycles in U.S. employment activity. It is a summary measure of the best leading indicators of U.S. employment activity. U.S. Leading Home Price Index (USLHPI) is designed to lead cyclical swings in real median home prices. It is a summary measure of the best leading indicators of U.S. home prices. U.S. Leading Services Index (USLSI) is designed to lead the service sector activity. It is a summary measure of the best leading indicators of U.S. service sector activity. U.S. Leading Manufacturing Index (USLMI) is designed to lead the manufacturing sector activity. It is a summary measure of the best leading indicators of U.S. manufacturing sector activity. U.S. Leading Exports Index (USLEI) is designed to lead cycles in exports. It is a summary measure of the best leading indicators of U.S. export activity. This presentation is for informational purposes only and is not intended to be a solicitation, offering, or recommendation by Rochdale Investment Management or its affiliates or subsidiaries of any product, security, transaction, or service, including securities transactions, investment management or advisory services. The views expressed herein represent the opinions of Rochdale Investment Management and are subject to change without notice at anytime. This information should not in any way be construed to be investment, financial, tax, or legal advice or other professional advice or service, and should not be relied on in making any investment or other decisions. 16
For more information, please contact Rochdale Investment Management 570 Lexington Avenue New York, NY 10022 1-800-245-9888 info@rochdale.com www.rochdale.com 17