Economic Outlook & Stock Market Strategy August 2011 The investment ideas developed herein are the intellectual property of Rochdale Investment Management. Any use of the investment ideas, portfolio allocations, or other ideas by persons other than Rochdale requires the execution of a solicitation agreement and a licensing fee. 2011 Rochdale Investment Management
Economic Outlook Risks rising, but Growth Still Appears Sustainable for Now Positive, but Slow Growth (SLOG) Ahead Monetary policy continues to be supportive Positive labor market, though still relatively weak Solid corporate profits and rising stock market Consumers still deleveraging but continue to spend Solid business spending Export strength on emerging market demand Low inflation Housing still weak, but now much smaller part of overall GDP Political decision making wild card These represent the opinions of Rochdale Investment Management and are subject to change without notice. 2
Economic and Financial Indicators August 2011 Global Economic Outlook US Economic Outlook Personal Consumption/ ECRI Leading Index Retail Sales Housing/Mortgages Monetary Policy Energy/Oil Costs Labor Market Credit Availability Volatility Levels Inflation Corporate Profits Business Surveys Trend Business Spending Fiscal Policy Interest Rates/ Fixed Income Equity Market Valuation Company Guidance Disposable Personal Income/Wages Political Environment FOR ILLUSTRATIVE PURPOSES ONLY Sources: Rochdale Investment Management 8/1/11 Indicators Reflect Forecasts of a 3 to 6 Month Time Horizon 3
Leading Indexes Slower Growth Ahead 18 15 6 Months Earlier 3 Months Earlier Latest Month 12 % Change in Growth Rate 9 6 3 0-3 -6 Long Leading Index Leading Employment Index Leading Home Price Index Leading Services Index Leading Manufacturing Index Leading Exports Index Economic growth prospects have dimmed further. Outlook is now sluggish but positive growth. Source: Economic Cycle Research Institute, August 2011 These represent the opinions of Rochdale Investment Management and are subject to change without notice. 4
SLOG vs. Recession Our Leading Indexes Show Uncertainty About Growth Trajectory(1) Persistent?: Following Recessionary Pattern Pronounced?: Too Soon to Determine Pervasive?: Too Soon to Determine Going forward, we expect at least two more months of data is needed before we can be objectively confident a slower period of growth will not turn into something worse. Source: Economic Cycle Research Institute, June 2011 (1) Leading indexes may not take certain factors into consideration that may change the outlook. These represent the opinions of Rochdale Investment Management and are subject to change without notice. 5
Economic Outlook Scenarios Next Two Months of Data Are Critical for Forecast Rochdale Economic Outlook Scenarios (2012) Probability SLOG (Slow Growth) 55% - 60% Recession 35% - 40% Strong trend or above growth 5% Recession Risk Rises to 35% to 40%: European sovereign debt crisis (High Risk to Outlook) U.S. budget deficits/debt/fiscal drag (High Risk to Outlook) Business/Consumer Confidence (Moderate Risk to Outlook) Slowing Global Growth (Low Risk to Outlook) These represent the opinions of Rochdale Investment Management and are subject to change without notice. 6
Indicator ECRI Leading Indicators Labor Market Consumer Spending Geopolitical Risks/Contagion Recession Monitor Status While it is still too soon to make a definite recession call, leading indexes remain in a cyclical downturn indicating slower growth ahead, at least. Below trend growth increases risk that macro shocks may trigger recession going forward, but more time/data is needed before it can be objectively clear whether window of vulnerability makes recession highly likely. Our most critical data series. The labor market remains positive, but leading indexes have come down with economic growth prospects. Slow but persistent hiring should support a subtrend rate of consumption although continued weakness casts further doubts on the strength of the economic expansion. U-shaped recovery. With slow income growth, high unemployment, household wealth moving higher but depressed by debt levels, and credit tight, consumption growth will likely be below trend thru 2012 at least. Confidence is main problem and will only really be cured by better labor market. Negative feedback loops to US exports/manufacturing from slowing global growth and emerging market policy tightening raise varying degrees of real concern, and we remain on high alert and ready to act quickly should they deteriorate to a level that threatens economic growth. Weakening domestic growth makes US economy particularly vulnerable to any geopolitical/economic shock. For now, our most significant concern exists over contagion risk for both the economy and the global financial system from European sovereign debt issues. Recession Risk Level Medium 45% Low 25% Medium 35% High 75% Global Economic Growth Monetary Policy Fiscal Policy Credit Availability/Demand Business Sentiment/Capital Spending Manufacturing Sector Service Sector Corporate Profits Housing Consumer Confidence Inflation Despite even odds of a recession in Europe, global recovery led by Emerging Markets appears sustainable. Though growth is likely to slow further in coming months, leading indicators are pointing towards a re-acceleration in the EM at least by in the first half of 2012. Feedback of slower growth to US exports and oversees revenues need to be watched. Fed to remain accommodative, keeping interest rates extraordinarily low for an extended period of time. Low inflation allows central bank to concentrate on unemployment, Bernanke's "number one" priority. Odds of QE3 still low, but building. Liquidity inelasticity limits power of policy to generate much upside demand. Federal fiscal stimulus is ramping down, and will act as a drag on GDP growth in 2012 though much of the fiscal consolidation bite comes in 2013. Potential policy mistakes, debt/deficits concerns, and uncertainty over tax and regulatory action also raise risks. Worry is the U.S. government beginning its own deleveraging process, while economy is still struggling with effects of massive consumer deleveraging. Willingness of banks to make loans and demand for loans has improved, but weaker outlook likely to put the brakes on any further significant relaxation in lending. Weakening consumers/businesses confidence is also depressing demand side. Liquidity inelasticity preventing usual transmission mechanism from monetary policy Outlook for solid capex recovery remains in place, as businesses continue to substitute technology for labor, but weakening demand outlook likely to cause business to put portion of planned capex on hold. Uncertainty also contributing to hiring hesitancy. Regional manufacturing is signaling contraction even while actual manufacturing production growth holds steady. The national ISM survey will offer a more complete indication on the direction of the sector, but even here, the trend isn t encouraging. Underlying details of recent surveys are stagnant, with the new orders index dropping 1.9 points to 51.7, the lowest reading there since August of 2009 and does little to support notions of a strong rebound in activity, or fresh demand, in the very near term. Strong growth outlook in 2011& 2012 on improved operating leverage and resumption in revenue growth, but forecasts under watch on slower domestic and global growth expectations. Sustainability of expansion is a must, but guidance is already coming down with economic growth prospects. Bumpy, L-shaped recovery with depressed home values weighing on consumer confidence. Outlook going forward will remain volatile and heavily dependent on jobs. New home construction will be slow, as builders try to avoid destabilizing prices by bringing new inventory to market. On the plus side, pent-up demand is building. Consumer confidence continues to be weighed down by higher prices, uncertainty over the strength of the labor market recovery, government policy, volatile equity markets and depressed home values. Immediate good news of falling gasoline prices should give some support going forward, but improved labor market/income expectations is a must if consumers are to begin spending again. Inflationary pressures from the spikes in energy and commodity prices are subsiding. Core inflation remains fairly restrained as idle productive capacity among businesses and relatively weaker demand should keep prices in check through 2011. US FIG is now at a 9 month low, with price pressure in a clear cyclical downturn. Medium 35% Low 15% High 65% Medium 30% Medium 40% Medium 40% Low 20% Low 10% Medium 35% Medium 50% Low 10% Energy Moderating global economic growth should keep energy prices in check. Low 20% Total 38% Source: Rochdale Investment Management, August 2011 High Recession Risk (65-100%) Medium Recession Risk (30-65%) Low Recession Risk (0-30%) 7
Economic Outlook Criteria Actual 2010 Rochdale Forecast 2011 1. GDP Growth 2.9% 2.0% 2.25% 2. Corporate Profits 32% 8% 10% 3. Disposable Personal Income 1.4% 1.5% 4. Personal Consumption Expenditures 1.7% 1.5% 1.7% 5. Capital Investment (Business & equipment) 15% 8% 10% 6. Inflation Total 1.6% 2.8% Core 0.7% 1.8% Fed Funds Rate 0% - 0.25% 0% 0.25% 7. Interest Rates Treasury Note, 5 Yr. 1.60% 2.0% 2.25% Treasury Note, 10 Yr. 3.0% 3.0% 3.25% 8. Productivity Growth 3.9% 1.75% 2.0% 9. Employment Unemployment Rate 9.4% 8.7% - 8.9% Total New Jobs 1 million 1.4 1.7 million 10. Capacity Utilization 75% 77% 78% 11. Oil $72 (Annual Avg.) $90 $95 (Annual Avg.) *Includes preliminary estimates that are subject to revision upon final data release. Sources: Rochdale Investment Management, August 2011 These reflect the opinions of Rochdale and are subject to change at any time. 8
Equity Market: Neutral Weight Fundamentals Remain Positive, But Rising Risks & Uncertainty Reduce Attractiveness Sustained U.S. and global economic recovery (60% Probability) U.S.: SLOG growth Europe: STAG growth Asia: STRONG growth Solid earnings growth Reasonable valuations Low inflation/low interest rates Despite solid fundamentals, the combination of rising macro risks, uncertainty, and volatility warrant a neutral weight to growth equities and an overweight to High Yield and Non-Equity Alternatives. These represent the opinions of Rochdale Investment Management and are subject to change without notice. 9
Equity Outlook: Positive, Neutral Weight Stocks Appear Oversold, But Downside Risks Remain S&P 500 Forecast Average Forward P/E Multiple Fair Value (2011 Earnings: $95) Fair Value (2012 Earnings: $103.50) Expected Return* 2012 13 1235 1346 17.1% 13.5 1283 1397 21.6% 14 1330 1449 26.1% 15 1425 1553 35.1% *Based on a S&P 500 index level of 1164 as of 8/25/11 Should a recession be avoided, expected equity returns are very attractive. However, rising macro risks, uncertainty and the impact of noninvestors on market trading, means clients in stocks should reset their expectations for annual price movements in the range of 25%, up from the historical 15%. Sources: Rochdale Investment Management, August 2011 10
Corporate Earnings & Market Valuation Earnings Outlook Still Solid, Market Attractively Valued 28 27 26 25 24 23 22 21 20 19 18 17 16 15 14 13 12 Month S&P 500 Forward P/E S&P 500 Operating Earnings Estimates 2011 2012* 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 $95 $103.50 $100 $80 $60 $Amt Year Earnings S&P 500 All Time Record Levels *Earnings on watch due to developing effects of emerging market policy tightening, slower U.S. and global growth and sovereign debt concerns. $40 2006 2007 2008 2009 2010 2011e 2012e FOR ILLUSTRATIVE PURPOSES ONLY Source: Rochdale, Thomson Financial, Baseline 8/1/11 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 12/31/1996 Excessive High Elevated Moderate 12/31/1997 12/31/1998 12/31/1999 12/31/2000 12/31/2001 12/31/2002 12/31/2003 Higher Volatility May Cause Clients to Exceed Risk Budgets 12/31/2004 12/31/2005 Moderate: 0% - 23% Elevated: 23% - 29% High: 29% - 36% Excessive: Over 36% 12/31/2006 12/31/2007 10/5/2008 3/31/2009 2/28/2010 3/31/2011 4/30/2011 5/31/2011 6/30/2011 7/30/2011 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. FOR ILLUSTRATIVE PURPOSES ONLY As of August 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. 12
Sector/Industry Outlook Weighting Overweight Equal Weight Underweight Industry Group Sector Factor Grade Value Growth Quality Technical Economic Capital Goods Industrials = + + + + Energy Energy + + = + + Media Consumer Discretionary = + + + = Automobiles & Components Consumer Discretionary + + - + + Consumer Durables & Apparel Consumer Discretionary = = = + + Software & Services Information Technology = + = = + Technology Hardware & Equipment Information Technology = + = = + Insurance Financials + = = = = Materials Materials = + - + = Consumer Services Consumer Discretionary - = + = - Transportation Industrials - + = = + Retailing Consumer Discretionary - - = + - Semiconductors & Semiconductor Equipment Information Technology + = - = - Pharmaceuticals Biotechnology & Life Sciences Health Care = = = = = Health Care Equipment & Services Health Care = = = = - 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 + - - - - Telecommunication Services Telecommunication Service + - = - = 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. Ranking is based on the opinions of Rochdale, based on its proprietary sector research. FOR ILLUSTRATIVE PURPOSES ONLY Rochdale Investment Management, July 2011 13
Rochdale Credit Market Scorecard Inflation Expectations Monetary Policy Government Credit Scorecard Score Indicator Satus Short-term Long-term Low capacity utilization, high unemployment and slow recovery in demand cap inflation expectations for now. Fed to remain accommodative, keeping interest rates extraordinary low for an extended period of time. 7 6 7 5 Political Environment Uncertainty over policy effectiveness, historical debt levels, sovereign risk, rising taxes and regulation. 4 3 Real Interest Rates/ Tips Spread Will remain low for now due to slow recovery in demand growth. 3 3 US Government Debt/GDP Gross debt now over 90% of GDP. Debt ceiling deal and external pressure from rating agencies may slow deterioration. 3 2 Total 5.1 4.2 Corporate Credit Scorecard Score Indicator Status Short-term Long-term Government All fixed income securities are priced relative to treasuries. 6 5 Companies have been actively taking advantage of low rates to refinance. M&A activities Corporate Balance Sheets/Default Risk/Cash have returned and companies are increasing dividends or/and share buybacks, indicating Levels that further balance sheet improvements may be limited. Corporate Profits/Earnings Growth Credit Spreads/Valuations Strong. Though growth is likely to decelerate as US economy slows and companies may be running out of costs to cut. Spreads have increased from recent lows due to fears of slow recovery and potential impacts from sovereign debt crisis. 6 5 7 5 4 2 Equity Risk Premium Will likely remain high due to uncertainty & volatility. 3 4 Total 5.5 4.2 Source: Rochdale Investment Management, August 2011 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 14
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 Positive 3-5 5 2-5 5 Low Volatility Alternative Strategy 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. Past performance is not indicative of future results. There can be no guarantee of future performance. January 2011 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. Rochdale Investment Management does not guarantee their accuracy or completeness, nor does Rochdale assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. 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
Important Disclosures Investing involves risk including the potential loss of principal. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice. The asset classes listed involve contrasting risk factors. Cash-equivalent investments have fluctuated the least and have been relatively stable. In general, the bond market is volatile as prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. The investor should note that vehicles that invest in lower-rated debt securities (commonly referred to as junk bonds) involve additional risks because of the lower credit quality of the securities in the portfolio. The investor should be aware of the possible higher level of volatility, and increased risk of default. Indexes are unmanaged and investors are not able to invest directly into any index. International investing involves special risks including greater economic and political instability, as well as currency fluctuation risks, which may be even greater in emerging markets. Investments in stocks of small companies involve additional risks. Smaller companies typically have a higher risk of failure, and are not as well established as larger blue-chip companies. Historically, smaller-company stocks have experienced a greater degree of market volatility than the overall market average. Certain information may be based on information received from sources Rochdale Investment Management considers reliable; Rochdale Investment Management does not represent that such information is accurate or complete. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements which do not reflect actual results and are based primarily upon applying retroactively a hypothetical set of assumptions to certain historical financial information. Any opinions, projections, forecasts and forward-looking statements presented herein are valid only as of the date of this document and are subject to change. 17
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