Market & Economic Update

Private Banking Investment Management Personal Trust Insurance Services Financial Planning Market & Economic Update CURRENT ECONOMIC EVENTS Macro-economic data was quiet last week as attention focused on geopolitical issues. The debate over sufficient austerity for Greece to receive the next tranche of funding from the European Union (EU), European Central Bank (ECB) and International Monetary Fund (IMF) continued as the Greek government worked to approve three billion euros in government spending cuts. This issue within the eurozone crisis continues to plague the financial markets and remains a significant risk for dislocation to global economies. In our view, an acceptable outcome is likely to be reached, but the scale of possible outcomes if risks are realized seems to be so large as to require us to constrain our expectations for global growth. Data in the U.S. was limited last week and included the release of the weekly Initial Unemployment Claims report. Weekly initial unemployment claims fell to 358,000 and the four-week average fell to 366,250 which is the lowest level since April 2008. The data is consistent with expectations for modest improvement in the jobs market. Data on global inflationary pressures, along with January Retail Sales and Industrial Production reports for the U.S., are expected to be released this week. In our view, inflation should continue to ease and data is likely to point toward modest U.S. growth and slower growth in Europe. Contributed by: Robert L. Haworth, CFA Head of Economic Strategy MARKETS AT A GLANCE Fed Funds Target Rate 10 yr Treasury Yield S&P 500 Close DJIA Close LAST WEEK (2/10/12 close) 0.00 0.25% 1.97% 1,342.64 12,801.23 Prior Week (2/03/12 close) 0.00 0.25% 1.95% 1,344.90 12,862.23 Last Month (1/31/12 close) 0.00 0.25% 1.80% 1,312.41 12,632.91 2011 Year End (12/30/11 close) 0.00 0.25% 1.87% 1,257.60 12,217.56 Data Source: FactSet Please refer to important disclosures on page 5. Page 1

EQUITY MARKETs The global and domestic equity markets finished modestly lower last week as EU and Greek authorities discussed details of plans for funding a second bailout and bond discounts. The modest declines in the domestic markets broke a five-week winning streak with the S&P 500 Index easing 0.7% and many of the more cyclical and economic sectors trading lower. Accordingly, given the nature of the market decline, large-cap domestic equities (as measured by the S&P 500) outperformed small-cap domestic names (as measured by the Russell 2000 Index) for the week. At this time, in our view, global central banks are now likely positioned in a pro-growth mode that may favor equities relative to other asset classes. Momentum for equities has been strong, as evidenced by the fact the S&P 500 was 11% higher in 4Q 2011 and has added 6.8% on a year-to-date basis so far during 2012. Accordingly, individual investor sentiment, as gauged by the American Association of Individual Investors (AAII), is now elevated and has reached a level historically associated with equity market pullbacks. Fixed Income Markets Last week the Treasury market, while moderately lower in price, showed some recovery on Friday. The domestic market was aided by a flight to quality trade after Standard & Poor s downgraded several Italian banks and the Greece austerity package was met with trepidation. Demand at the U.S. Treasury auction was mediocre. The three-year, ten-year and 30-year auctions attracted subpar to average levels of interest and coverage ratios. The outlook for dividends amongst S&P 500 equities appears bright for 2012. S&P 500 companies paid out $241 billion in 2011, which is just shy of the $247.9 billion record payout amount in 2008. We believe that a figure in the $255 billion to $265 billion range is likely for 2012 given the combination of cash balances, low payout ratios, and the potential ability of both Technology and Financial sector companies to lift dividends. Financials provided 31% of the S&P 500 s dividend flow in 2007, with the run rate for 2011 at 11.8%. We expect higher payouts from many banks in the mid-march timeframe after the results of the Federal Reserve s stress tests (confirming Basel III capital standards) are completed. Currently, the companies within the S&P 500 are yielding 2.09%, but if non-dividend paying equities are taken out of the computation, the dividend yield of the 396 companies that pay a dividend is 2.46%. This compares to a historical average (since the 1930s) of 3.76%. Year to date, 61 companies have increased their dividend while an additional two companies have initiated a dividend. We believe enhanced dividend flows remain a strong element of the constructive case for equities in 2012. Contributed by: James E. Russell, Jr., CFA Head of Equity Strategy For the week, Treasury prices were slightly negative and yields moderately changed. Bond prices moved inversely to yields. The threeyear yield was 0.38% while the ten-year was 1.98% and the 30-year was at 3.14%. The ten-year was 0.06% higher on the week and 0.01% for the month. Until February 10th, Treasury prices had fallen every day as economic releases showed a stronger U.S. economy and improving global faith in European economic reform. A Greek debt deal materialized by February 9th, however, a series of further austerity requirements from eurozone Please refer to important disclosures on page 5. Page 2

finance ministers temporarily refocused fixed income investor interest to safe harbor investments like Treasuries and the German Bund. On February 12th, the Greek Parliament legally approved the sweeping spending and wage cuts. Based on that news, the fixed income market retreated as the week of February 13th opened, with the ten-year bond yield back above 2%. Judging from the $1.9 billion in inflows to high yield mutual funds last week (the sixth largest in modern history), many investors appear to be easing their risk profiles and venturing into riskier, but higher yielding, fixed income products. Mirroring the action in the Treasury market, the tax exempt market was higher on February 10th, reversing five consecutive days of losses, according to the Municipal Market Data scale. For the week, yields inside four years were steady while yields outside five years fell as much as four basis points across the curve. We maintain our recommendation of waiting for municipal bond yields to rise before aggressively committing new money to the market. According to The Bond Buyer, when it comes to municipal bonds with longer maturities, most institutional investors still regard 5% coupons as the structure of choice. It is widely regarded that a 5% coupon will grant investors more price protection as interest rates rise. Fixed rate bonds fall in value as interest rates rise and increase in value as interest rates decline. Currently, bonds with 5% coupons represent approximately 43% of the outstanding market in the 15- to 25-year range, and 36% in the 25-year plus range. Contributed by: Paul B. Anderson Senior Portfolio Manager Real Estate Markets Residential real estate data was non-existent last week with the exception of mortgage applications data. It showed an increase of 7.5%, led by a 9.4% increase in refinance applications. Purchase applications were flat. The Obama Administration has announced another housing plan, which rehashes many previous plans that have not worked to help stem the foreclosure crisis. The new proposal looks to possibly be dead on arrival in Congress, but most of the proposals would have little impact on the market. The one interesting aspect of the proposal would allow for bulk sales of foreclosed houses and non-performing loans from the governmentsponsored enterprises (GSEs). This proposal could go a long way to solving the shadow inventory problem, but the initial market reaction may possibly be lower house prices as a glut of new supply, either as rentals or resales, should pressure pricing. Public REITs (Real Estate Investment Trusts), as measured by the MSCI U.S. REIT Index (at 0.2%), underperformed the S&P 500 (at 2.0%) by 180 basis points last week through February 9th. Annual outperformance is now 20 basis points (with the MSCI U.S. REIT Index at 7.9% versus the S&P 500 at 7.7%). The REIT market is now in the middle of earnings season and results have been in line with expectations. However, forward guidance is becoming more conservative, which probably led to some of the underperformance versus the broader market last week. Companies that have not met expectations have traded sharply lower. Contributed by: Kevin T. Weigel, CFA Senior Real Estate Strategist Please refer to important disclosures on page 5. Page 3

Commodities Markets Commodity prices ticked up modestly last week as the S&P GSCI Index rose 0.7%, bringing its year-to-date gain to 3.8%. Gains over the past week were driven solely by increases in energy prices, particularly Brent Crude and unleaded gas as the market appears to be adjusting to sanctions against Iran. Both Brent Crude Oil and unleaded gas gained 2.2% on the week, while U.S.-based West Texas Intermediate (WTI) Crude Oil gained just 0.8%. Brent Crude Oil prices have started to rise as the impending embargo of Iranian crude oil has led to refiners seeking other sources of oil, mostly seaborne Brent Crude Oil, as opposed to the land-based, Cushing, Oklahoma WTI Crude Oil. Higher demand for Brent Crude Oil has also been pusthing up unleaded gas, which has gained 11.9% year to date. We currently recommend an overweight position to commodities as appropriate. In our view, traders are just beginning to price in the appropriate risk premium given the potential for conflict in the Middle East. Contributed by: Robert L. Haworth, CFA Head of Commodities Strategy Please refer to important disclosures on page 5. Page 4

If you have questions regarding this information or wish to receive definitions of any of the terms used in this commentary, please contact your Relationship Manager or Portfolio Manager. usbank.com This information represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. U.S. Bank is not responsible for and does not guarantee the products, services or performance of third party providers. FactSet, American Association of Individual Investors, The Bond Buyer, and any organizations mentioned in this publication are not affiliates or associated with U.S. Bank in any way. Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for investment. The S&P 500 Index is an unmanaged, capitalization-weighted index of 500 widely traded stocks that are considered to represent the performance of the stock market in general. The Dow Jones Industrial Average (DJIA) is the price-weighted average of 30 actively traded blue chip stocks. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index and is representative of the U.S. small capitalization securities market. The S&P GSCI Index is a composite index of commodity sector returns that is broadly diversified cross the spectrum of commodities. The MSCI U.S. REIT Index represents approximately 85% of the U.S. equity REIT universe. Equity securities are subject to stock market fluctuations that occur in response to economic and business developments. The value of large-cap stocks will rise and fall in response to the activities of the company that issued them, general market conditions, and/or economic conditions. Stocks of small-capitalization companies involve substantial risk. These stocks historically have experienced greater price volatility than stocks or larger companies and may be expected to do so in the future. International investing involves special risks, including foreign taxation, currency risks, risks associated with possible difference in financial standards and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility. Investing in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications, and other factors. Investment in debt securities typically decrease in value when interest rates rise. The risk is usually greater for longer term debt securities. Investments in lower rated and non rated securities present a greater risk of loss to principal and interest than higher rated securities. Investments in high-yield bonds offer the potential for high current income and attractive total return, but involve certain risks. Changes in economic conditions or other circumstances may adversely affect a bond issuer s ability to make principal and interest payments. The municipal bond market is volatile and can be significantly affected by adverse tax, legislative or political changes and the financial condition of the issuers of municipal securities. Interest rate increases can cause the price of a bond to decrease. Income on municipal bonds is free from federal taxes, but may be subject to the federal alternative minimum tax (AMT), state and local taxes. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes, and the impact of adverse political or financial factors. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates and risks related to renting properties, such as rental defaults. 2012 U.S. Bancorp (2/12) Page 5