In Our View: U.S. Equity Outlook: S&P consolidates mid-12, then ~1,400 year-end, ~1,600 2013/14 then a correction mid-decade leaving the S&P flat point-to-point 1998 to 2015. It is difficult to break out of the sideways large-cap trading range (i.e., the secular bear market). Fiscal & Monetary Policy: Deficits and negative real rates “create” low-quality profits by pulling demand from the future and creating an artificially competitive currency. Low quality profits lead to a lower market P/E ratio. Bank credit de-leveraging math doesn’t add up. Europe & China: Germany pursued a solely deflationary solution for peripherals and is seeing an EU rebellion, and China may find that consumption is not “top-down” the way construction, export industry capital spending & government spending are state-directed. Labor & Housing: Increasing construction (There are signs non-residential is more attractive than residential) lifts GDP and employment, but soft inflation-adjusted house prices prolong the U.S. balance sheet adjustment. Wages should rise with the dollar.

Dollar/Commodities: The U.S.$ has bottomed, commodities & U.S.$ are opposites. U.S. rebalancing is 3 years ahead of the Eurozone (past the lender of last resort stage/entering contagion) and 4 years ahead of China (post-tightening “we can handle slowdown” stage).

Stifel Nicolaus 2Q12 Macro Overview for the Financial Sense Newshour May 9, 2012

Bears capitulated in 1Q12, while wise bulls have taken a step back in 2Q12

April 30, 2012 S&P 500 1,403 10-Yr. 1.92% WTI Oil $104/Brent-WTI $15.24 DXY 78.92 / EURUSD 1.32

Barry B. Bannister, CFA Managing Director, Equity Research - Macro & Sector Strategy, Stifel Nicolaus & Co. bbbannister@stifel.com 443-224-1317

Stifel Nicolaus does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm

may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. All relevant disclosures and certifications appear on pages 20 & 21 of this report.

1

10

100

1,000

10,000

100,000

1896 1901 1906 1911 1916 1921 1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

Dow Jones Industrial Average, 1896 to 2012YTD

Secular bear market = 14 to 20 range-bound, flat years

1907-2114 years

1929-4920 years

1966-8216 years

2000-

1.00

10.00

100.00

1896

1901

1906

1911

1916

1921

1926

1931

1936

1941

1946

1951

1956

1961

1966

1971

1976

1981

1986

1991

1996

2001

2006

2011

1907-2114 years

Commodity Price Index, Log ScaleData 1896 to 2012YTD

1929-4920 years

1966-8214 years

2000-201212 years

Source: Dow Jones, U.S. Census, 1896 to 1913 is the WPI for Commodities from the BLS and other agencies. 1914-56 is the PPI All Commodities, and 1957-present is the CRB Continuous Commodity Index, now an equal-weighted, front-month index of 17 commodities including most high-use energy & agricultural commodities.

(1) Equity bull market blow-offs can occur in the late stages of private credit creation, when added dollar supply via credit may debase the currency at the same time. But generally a weak dollar environment is not conducive to S&P 500 bull markets.

The defining trade the past 12 years has been Paper vs. Hard Assets (example, stocks versus commodities). Secular bull markets for commodities (left) align with secular bear markets for large cap U.S. equity (right), and vice versa. U.S. equity strength corresponds to flat commodities and a strong dollar, and generally not strong commodities or a debased(1) dollar.

2

Source: Commodities 1913 to 1956 is the PPI for All Commodities, and 1957 to present is the CRB Continuous Commodity Index, currently an equal-weighted index of 17 commodities including energy and agricultural. Annual values are the average of CRB CCI values for each month, except for the latest decade, which considers all individual trading days of the year. For M3 1897-1958 we use M1 + vault cash + monetary gold stock + bank time deposits + mutual savings bank deposits + S&L deposits. From 1959-2005 the Fed reported M3 (SA). For 2006-Current we use: M2 + large time deposits + institutional money market + Fed Funds & Reverse repos with non-banks + interbank loans + eurodollars (regression-derived). We also add excess reserves at the Fed to M3, which takes into account funds in surplus over those mandated by reserve requirements. We add them to M3 to better reflect high powered money, but realize the Fed could remove those reserves by selling its liquid assets. (1) Under a gold standard, for example, Chinese growth such as that seen the past 20 years would not have been possible because RMB currency appreciation would have slowed Chinese GDP and U.S. credit would not have been available to recycle Chinese savings. Only by having the ability to “store” super-normal growth under a fiat dollar standard was China able to grow at that pace.

What fiat dollar critics do not understand is that fiat money was an effective tool in a century of conflict in which the elastic dollar gave birth to secular, capitalist democracy via W.W. I & II, the Cold War, and by opening China using reserve-enabled(1) growth while dealing with the MidEast.

3

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

1913

1920

1927

1934

1941

1948

1955

1962

1969

1976

1983

1990

1997

2004

2011

U.S. Commodity Price Index, 10-Yr. Average Annual Growth RateU.S. M3 Money + Excess Reserves 10-Yr. Average Annual Growth Rate

W.W. 1Colonial Powers

Cold War (1980 peak)

Communism

Westernize the EM via

reserve growth,

post-9/11 conflicts,

anti-Secular states

Commodity Prices (Left Axis) vs. U.S. M3 Money Supply +Excess Reserves at the Fed(1) (Right Axis)

Did funding the proliferation of Secular, Capitalist Democracy, a "Pax Americana," create the illusion of commodities as an asset class?

1913 Fed creation to 2012YTD shown below

World War 2,Fascism

1.00

10.00

100.00

1805

1815

1825

1835

1845

1855

1865

1875

1885

1895

1905

1915

1925

1935

1945

1955

1965

1975

1985

1995

2005

2015

E20

25E

U.S. Commodity Prices, Annual Averages, Linked Indices

War of 1812 &

Napoleonic Wars (1814

peak)U.S.Civil War (1864 peak)

World War 1 (1920 peak)

Cold War

(1980 peak)

Commodity Price Index, Log ScaleData 1805 to Mar-2012

World War 2, Korean Conflict

1897 (low)

China stores excess savings as U.S. dollars, pegs

currency - artificially boosts gross fixed capital formation

(commodity intensive)

-7.0%-6.0%-5.0%-4.0%-3.0%-2.0%-1.0%0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%10.0%11.0%12.0%13.0%14.0%15.0%16.0%0X

2X

4X

6X

8X

10X

12X

14X

16X

18X

20X

22X

24X

26X

28X

1911

1916

1921

1926

1931

1936

1941

1946

1951

1956

1961

1966

1971

1976

1981

1986

1991

1996

2001

2006

2011

P/E of the S&P 500, 5-Yr. Moving Avg. (Left)U.S. CPI Inflation, Y/Y % Chng., 5-Yr. Moving Avg. (Right, INVERTED)

U.S. Consumer Price Inflation (Inverted, Right Axis) vs. S&P 500 P/E Ratio (Left Axis), 100 Years

An S&P 500 P/E of 16x is applicable to +3% annual inflation.

4

Source: Standard & Poor’s price and EPS, U.S. Census and BLS inflation.

(1) S&P 500 trailing 5-year EPS from 2008 to 2012E is $82.30 ($102.12 in 2012E, $97.82 in 2011, $85.28 in 2010, $60.80 in 2009, $65.47 in 2008). But dropping 2008 and 2009 and adding two years around $100 brings the 5-year average to $100 (multiplied by a P/E 16x per the chart above equals 1,600 S&P 500).

Hard to exceed 1,600 S&P 500: Inflation lowers P/E ratios, and deflation hits EPS; ~3% inflation = P/E of 16x applied to 5-year trailing S&P EPS cresting at ~$100(2) by 2014 is 1,600 S&P.

We see slowing China fixed investment and the U.S.$ flat/up, lowering commodities and expanding U.S. “growth”(2) stock P/E ratios with a bounce for “value” (i.e., banks).

Source: Standard & Poor’s, U.S. PPI All Commodities joined to CRB futures (rebased).

(1) “Growth” stocks typically have low or no dividends, high unit growth with minimal use of pricing power and differentiated, “moat” protected products in growth markets.

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

-5%-4%-3%-2%-1%0%1%2%3%4%5%6%7%8%9%

10%11%12%13%

1948

1953

1958

1963

1968

1973

1978

1983

1988

1993

1998

2003

2008

2013

E

When commodities lead, the S&P 500 lags (the growth stocks mostly)

10-yr. Growth Rates

U.S. Commodity Price Growth (%), Left Axis

U.S. Large Cap Stock Market Total Return (Price + Dividend), Right Axis

600

700

800

900

1000

1100

1200

1300

1400

1500

1600

6/1/9810/7/982/17/996/25/9911/2/993/13/007/20/0011/27/004/6/018/15/0112/28/015/9/029/17/021/27/036/05/0310/13/032/23/047/01/0411/08/043/18/057/27/0512/02/054/13/068/22/0612/29/065/11/079/19/071/29/086/06/0810/14/082/24/097/02/0911/09/093/22/107/29/1012/6/104/13/118/19/1112/28/11

Multiple 200dmacrosses

Phases of a Secular Bear Market - The S&P 500 (1,370 intraday 04/16/12)

Bear MarketMature BullEarly

Bull

LateBull Bear

MarketEarly Bull Mature Bull

Defensive OversoldStocks

Multiple 200dmacrosses

Momentum Defensive OversoldStocks

Late BullMomentum

LateBull?

5

Secular bear markets feature cyclical bull & bear stages. We expect this one to cross over to “Late Bull” if we stay above the 200 day moving average (dma) for the S&P 500. But after that point, we see the S&P meeting resistance at 1,600 e.g., the secular flat market continues.

Source: Stifel Nicolaus chart, Factset prices.

Est.

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

21%

22%

23%

1Q1985

1Q1987

1Q1989

1Q1991

1Q1993

1Q1995

1Q1997

1Q1999

1Q2001

1Q2003

1Q2005

1Q2007

1Q2009

1Q2011

1Q2013

Real Fed Funds Rate (FFR), Advanced 5 Qtrs (Red, Right) vs. Corporate Profit Margins (Blue, Left)

1985 - Current

Corporate Profit Margins (Left)

Real Fed Funds Rate (Inverted, Right)

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1Q1985

1Q1987

1Q1989

1Q1991

1Q1993

1Q1995

1Q1997

1Q1999

1Q2001

1Q2003

1Q2005

1Q2007

1Q2009

1Q2011

Kalecki Profit Equation

Net Investment

Foreign Saving

Gov'tSaving

Household Saving

Dividends

% GDP

6 Source: BEA, BLS, NIPA Flow of Funds, U.S. Federal Reserve. Corporate profits margins are defined in this case as pretax corporate profits (adj. for IVA & CCA) as % of gross value added by corporations.

One reason 1,600 may be difficult to exceed is that fiscal deficits and negative real short interest rates “create” low quality “policy-driven” EPS deserving a lower P/E.

We think margins are ~500bps elevated.

Profits are the sum of the items below, called the Kalecki Profits Equation. The deficiency of Investment (housing, et al.) is being met with a federal deficit that is “minus a minus Government Surplus” in the equation, so deficits, in effect, create “false” profits.

We see the Fed Funds Rate (FFR) minus inflation (called the “real FFR”) going from ~(3)% to 0% whether we have deflation (i.e., 0% FFR – 0% deflator) or Fed success (2% FFR – 2% price deflator). Both scenarios reduce margins at 0% real FFR.

INVER

TED AXIS

8%

9%

10%

11%

12%

13%

14%

15%

16%

1976Q1

1979Q1

1982Q1

1985Q1

1988Q1

1991Q1

1994Q1

1997Q1

2000Q1

2003Q1

2006Q1

2009Q1

2012Q1

2015Q1

2018Q1

2021Q1

Government Social Benefits(2) Paid to Persons% of U.S. GDP

Here's the $679 billion added transfer payments (i.e., insulating citizens from economic depression)

1Q2000 10.4% of

GDP

4Q2011 14.9% of

GDP

14.9% of GDP now- 10.4% of GDP in 1Q00= 4.5% of GDP payments

x $15.1 trillion GDP 2011= $679 bil. payments/yr.

Parabolic policy prescriptions have underpinned the recovery in assets and stability of the electorate. Transfer payments are about $679 billion higher than 10 years ago (left chart) and the Fed balance sheet has expanded to just under $3,000 billion (right chart).

Source: CBO, BEA, U.S. Federal Reserve.

(1) Excess reserves of banks at the Fed “available” for loans. (2) The “Other” government social benefits category in the box includes SNAP (i.e. food stamps), FEMA response, the earned income tax credits, pension benefit

guarantees, railroad retirement benefits, black lung benefits, workers’ compensation, direct relief benefits, and others.

7

Government Social Benefits + Social Security +Medicare +Medicaid +Unemployment Insurance +Veteran Support +Other (See Footnote 2)

-$3,000-$2,800-$2,600-$2,400-$2,200-$2,000-$1,800-$1,600-$1,400-$1,200-$1,000

-$800-$600-$400-$200

$0$200$400$600$800

$1,000$1,200$1,400$1,600$1,800$2,000$2,200$2,400$2,600$2,800$3,000

Sep-07D

ec-07M

ar-08Jun-08Sep-08D

ec-08M

ar-09Jun-09Sep-09D

ec-09M

ar-10Jun-10Sep-10D

ec-10M

ar-11Jun-11Sep-11D

ec-11

U.S. Federal Reserve Bank Weekly Assets & Liabilities Sep-5, 2007 to Dec-21, 2011

Liquidity Facilities

Other

Repurchase Agreements

Term Auction Credit

Other Securities Held Outright

Reserve Balances at Fed

Treasury SFP

Other

Currency in Circulation

Assets

Liabilities

$ Billion

Excess reserves. See Footnote (1) below.

QE1

QE2

Source: Dow Jones prices, Bloomberg.

(1) The comparable market in terms of speculation to the 1920s-30s Dow (left) is the NASDAQ (right) today. Just as 1932-37 was supported by federal debt, 2002-07 benefited from housing debt. In both cases, 1938 and 2008, removal of support was detrimental, leading to unilateral actions by struggling states in 1939-40.

To escape deflation the U.S. inflated surplus countries (China, even Europe) post-2009, forcing them to tighten (and re-balance). Just as the 1930s-40s equity(1) pattern was: (a) cheap money boom, (b) speculative asset & investment bubble bursts, (c) credit remedy is applied, (d) credit is removed some years later, and (e) debt deflation that leads to conflict, we believe 2000-11 has followed that pattern, with China’s peg and the U.S. QE response. A weak dollar has helped, since 35% of U.S. corporate profits come from abroad. But this is still Depression Economics.

8

(e) Debt deflation (e) Debt

deflation

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

30 mos.

35 mos.

40 mos.

45 mos.

50 mos.

55 mos.

60 mos.

65 mos.

70 mos.

75 mos.

1970

Q1

1972

Q1

1974

Q1

1976

Q1

1978

Q1

1980

Q1

1982

Q1

1984

Q1

1986

Q1

1988

Q1

1990

Q1

1992

Q1

1994

Q1

1996

Q1

1998

Q1

2000

Q1

2002

Q1

2004

Q1

2006

Q1

2008

Q1

2010

Q1

2012

Q1

2014

Q1

2016

Q1

2018

Q1

2020

Q1

Avg. Maturity of Federal Debt Outstanding (Months, Left)Versus Interest on Federal Debt* as a Percent of GDP (Right)

Avg. Maturity of Total Marketable Federal Debt Outstanding (Left Axis)Federal Gov't Interest Payments % of GDP (Right axis)

* Interest forecast assumes the average rate of interest is 4.5% on Federal debt of $24.5B in 2021 with a 5-7 year maturity.

Source: Fed, BEA.

(1) We see a de facto public for private debt swap that back-fills domestic demand leading to marketable federal debt/GDP that peaks >100% of GDP by the early 2020s. This is a choice available solely to the reserve currency country that can borrow large amounts at an interest rate below nominal GDP growth, in our view.

(2) According to the Social Security and Medicare Boards of Trustees, the Medicare Trust Fund will be exhausted in 2024, Social Security in 2033 and Disability in 2016.

Federal leveraging concurrent with private de-leveraging is a Keynesian(1) solution made possible only by reserve currency status.

9

The prior era of Bond Market Vigilantes, 1985-1992

The next era of Bond Market

Vigilantes

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

130%

1945

Q1

1948

Q1

1951

Q1

1954

Q1

1957

Q1

1960

Q1

1963

Q1

1966

Q1

1969

Q1

1972

Q1

1975

Q1

1978

Q1

1981

Q1

1984

Q1

1987

Q1

1990

Q1

1993

Q1

1996

Q1

1999

Q1

2002

Q1

2005

Q1

2008

Q1

2011

Q1

2014

Q1

2017

Q1

2020

Q1

Debt as a Percentage of U.S. GDP: Federal Debt Held by the Public vs. Household

1945 to 4Q11 Actual, with 1Q12 to 4Q21 Ests.

Federal Debt (Held by the Public)

Household Debt

Change in debt since 2Q08 as a % of GDP (bps)Household 2Q08 to 4Q11 change: -1,012 bps Federal Public 2Q08 to 4Q11 change: +3,133 bps

Around 2017 we expect Federal interest to double to ~4% of GDP, resurrecting the “Bond Market Vigilantes” to enforce fiscal discipline(2).

U.S. fiscal isn’t a problem…yet.

Quarterly Data 3/31/1947 - 12/31/2011

(E300)

Government Spending as a % of GDP

(65-Year Average = 19.6% of GDP)

12/31/2011 = 24.2% ( )

Taxes as a % of GDP

(65-Year Average = 18.0% of GDP)

12/31/2011 = 17.1% ( )

Data Subject To Revisions By

The Federal Reserve Board Source: All data from Department of Commerce

13

14

15

16

17

18

19

20

21

22

23

24

25

13

14

15

16

17

18

19

20

21

22

23

24

25

Surplus as a % of GDP

Deficit as a % of GDP

12/31/2011 = -7.1%

(65-Year Average = -1.6% of GDP)-9-8-7-6-5-4-3-2-10 1 2 3 4 5

-9-8-7-6-5-4-3-2-10 1 2 3 4 5

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Taxes and Government Spending

Copyright 2012 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.

. www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at

Tax revenue (blue line) is mean-reverting and bottoming, while spending (green line) is counter-cyclical and peaking, so the deficit % GDP (red bars) will fall from (7.1)% of GDP in 4Q11 to (4.0)% by 2015, a level still near the post-1971 decade highs (also red bars) and sufficient to provoke the Bond Vigilantes.

Note: In the book “This Time Is Different, Eight Centuries of Financial Folly” by Carmen M. Reinhart & Kenneth S. Rogoff, the authors found that Advanced Economy real central government revenue growth recovers sharply the third year [e.g., 2011 in the current period] following major banking crises per Figure (10.8) of the book. U.S. tax revenue began to recover on schedule as spending decelerated in fiscal 2011. This is timely since real public debt rises an average 86% in the three years after a financial crisis per Figure (10.10) of the book, which closely matches the publicly held U.S. Federal debt increase of +82.6% the three years 1Q08 through 1Q11. Because the U.S. has a reserve currency, debt can (and we think should) rise.

10

X

X

X 22%

18%

4% (i.e., Not enough)

4% 4% 4% 4%

32%

34%

36%

38%

40%

42%

44%

46%

48%

50%

52%

54%

56%

58%

60%

62%

64%

66%

68%

Jan-

47Ja

n-50

Jan-

53Ja

n-56

Jan-

59Ja

n-62

Jan-

65Ja

n-68

Jan-

71Ja

n-74

Jan-

77Ja

n-80

Jan-

83Ja

n-86

Jan-

89Ja

n-92

Jan-

95Ja

n-98

Jan-

01Ja

n-04

Jan-

07Ja

n-10

U.S. Commercial Bank Credit relative to U.S. Nominal GDP, Jan-1947 to present

Post-WW II inflation followed by real growth led to de-

leveraging.

46.5%

33.7%

45.8%

40.2%

1970s inflation helped de-leveraging.

?

11

Source: FDIC, St. Louis Fed data, Stifel Nicolaus format.

(1) We see Commercial & Industrial ~7% growth, Real Estate ~2%, and Consumer ~3% growth for about 3-4% loan growth over time. Actual 4/04/12 y/y Commercial Bank loans were +13.6% C&I (possibly skewed by tax incentives to invest), +0.1% Real Estate (Home Equity + Residential + CRE), and +1.6% Consumer & other.

Mission Impossible? The difficult task is de-leveraging the U.S. private sector. If loans start growing faster than nominal GDP (real GDP + Inflation), as shown in the left chart, then it will not be possible to bring down bank credit as a percentage of GDP, shown in the right chart.

61%

51%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Dec

-48

Dec

-50

Dec

-52

Dec

-54

Dec

-56

Dec

-58

Dec

-60

Dec

-62

Dec

-64

Dec

-66

Dec

-68

Dec

-70

Dec

-72

Dec

-74

Dec

-76

Dec

-78

Dec

-80

Dec

-82

Dec

-84

Dec

-86

Dec

-88

Dec

-90

Dec

-92

Dec

-94

Dec

-96

Dec

-98

Dec

-00

Dec

-02

Dec

-04

Dec

-06

Dec

-08

Dec

-10

Total Loans & Leases at Commercial Banks y/y%MINUS Nominal GDP Growth y/y%

i.e, loan growth above/(below) 0% in the chart is above/(below) U.S. nominal output growth

Source: World Bank, OECD, People’s Bank of China, China Bureau of Statistics

(1) GDP = Consumption “C” + Investment “I” + Government “G” + Net Exports “Nx” but “C” consumption is bottom-up, and can’t be directed top-down the way I, G and Nx may be molded by top-down political authority. In that way, China must relinquish political control to rebalance toward consumption, in our view.

(2) Productivity is output per hour. Unit labor costs are hourly labor costs divided by productivity, or the labor cost per unit of production. 12

China faces the daunting problem that real estate and capital spending booms end badly. Fixed capital formation may fall faster than Bottom-up(1) consumption can rise to offset.

30%

32%

34%

36%

38%

40%

42%

44%

46%

48%

50%

52%

54%

56%

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

China: Consumption (Private + Public) vs. Gross Fixed Capital Formation, as % GDP

90

100

110

120

130

140

150

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Unit Labor Costs in Europe: A gap we see closing by inflating the best

(leaving the U.S. well positioned) and deflating the rest 1Q2000 = 100, Seasonally Adj.

GreecePortugal

Ireland

France

Italy

Spain

U.S.

GermanyU.S. and Germany are in-line, but

periphery + France are un-competitive.

Europe faces a rebellion. Germany wants the euro periphery + France to deflate wages (Unit Labor Costs1) and refuses to inflate German wages, the making of a conflict.

Source: BEA, U.S. Federal Reserve, Stifel Nicolaus.

13

Weighing on jobs are high productivity, the lingering effect of debt deflation and the diminished role of labor-intensive construction, all of which we see improving, albeit only allowing payrolls to rise barely above the 2007 high of 137.6mm by 2014 (left chart). Note also we only see unemployment reaching the post-W.W. II average of 5.7% by 2015 (right chart).

40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

120,000

130,000

140,000

Jan-48Jan-51Jan-54Jan-57Jan-60Jan-63Jan-66Jan-69Jan-72Jan-75Jan-78Jan-81Jan-84Jan-87Jan-90Jan-93Jan-96Jan-99Jan-02Jan-05Jan-08Jan-11Jan-14

U.S. Non-farm Payrolls, Jan-1948 to present, with Stifel Nicolaus forecast to 2015

The picture of a moderate depression

Total Non-farm Payrolls, ThousandsStifel Projections

7.6%

6.8%

6.0%

5.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Jan-48Jan-51Jan-54Jan-57Jan-60Jan-63Jan-66Jan-69Jan-72Jan-75Jan-78Jan-81Jan-84Jan-87Jan-90Jan-93Jan-96Jan-99Jan-02Jan-05Jan-08Jan-11Jan-14

We the the unemployment rate at year-end 2012 7.6%, with more significant imporvement in 2013-15 eventually

reaching the post-W.W. II average of 5.7% by 2015

$700

$800

$900

$1,000

$1,100

$1,200

$1,300

$1,400

$1,500

$1,600

$1,700

$1,800

$1,900

$2,000

$2,100

$2,200

$2,300

1970197219741976197819801982198419861988199019921994199619982000200220042006200820102012

Real Residential Construction per Capita($ 2005/capita)

Source: U.S. Census, linked indices to account for changes in classification in 1993.

Both residential and non-residential construction have bottomed and should add to GDP and employment in the coming years. Non-residential (left chart) looks to us like the more cyclically attractive category of construction. We see residential construction (right) slowly rebounding.

14

Average $1,291

per capita until 1997

Bubble

Post-Bubble

$400

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

$1,300

$1,400

$1,500

$1,600

$1,700

1970197219741976197819801982198419861988199019921994199619982000200220042006200820102012

Private (Blue) & Public (Orange) Real Non-Res. Construction per Capita ($ 2005/capita)

We think U.S. non-residential adds a combined $500 per capita

the next few years…

…and that non-residential adds a combined $500 per capita faster

than post-bubble residential can do.

100

150

200

250

300

350

400

450

500

550

600

650

700

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Commodity Prices (CRB Futures Continuous Commodity Index)

Daily prices 01/01/1995 to present

15 15

Source: U.S. Federal Reserve. For M3 1981 to 2005 the Fed reported M3 (SA). For 2006 forward we use: M2 + large time deposits + institutional money market balances + Fed Funds & Reverse repos with non-banks + interbank loans + eurodollars (regress historical levels versus levels of M3 excluding Eurodollars). We also add excess reserves at the Fed to M3, which takes into account funds in surplus over those mandated by reserve requirements. We add them to M3 to better reflect high powered money, but realize the Fed could remove those reserves by selling its liquid assets.

(1) Foreign purchases of U.S. Treasuries & Agencies kept U.S. rates low and recycled the trade deficit. As for money creation, when a bank makes a loan and the recipient re-deposits the loan, the bank holds back a ~10% reserve at the Fed and makes another loan. In that way $1 of reserves creates $10 of money supply.

If you triple the unit of account (i.e., U.S. $), you triple commodities denominated in that unit. Asian savings facilitated U.S. credit(1), tripling U.S. money supply since the 1990s Asia Crisis (left), causing dollar commodity prices to triple (right). Fed QE + Chinese stimulus boosted commodities 1Q09-2Q11, but have recently sputtered and we see commodities only tracking M3 money in the future.

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

$11,000

$12,000

$13,000

$14,000

$15,000

$16,000

Jan-

81Ja

n-82

Jan-

83Ja

n-84

Jan-

85Ja

n-86

Jan-

87Ja

n-88

Jan-

89Ja

n-90

Jan-

91Ja

n-92

Jan-

93Ja

n-94

Jan-

95Ja

n-96

Jan-

97Ja

n-98

Jan-

99Ja

n-00

Jan-

01Ja

n-02

Jan-

03Ja

n-04

Jan-

05Ja

n-06

Jan-

07Ja

n-08

Jan-

09Ja

n-10

Jan-

11Ja

n-12

M3 money + Excess Reserves at the Fed ($ bil.)

Excess Reserves

Institutional Money Funds

Eurodollars

Repos

Large-Time Deposits

Retail Money Funds

Small Denom. Time Deposits

Savings Deposits

Demand & Other Check Deposits

Currency & Travelers Checks

M2 = Below

Sum = M3

M1 = Below

Deng currency reforms in China, Mexican Peso &

Asian debt crises.

~+300%

~+300%

2008

16

The S&P relative to commodity prices has followed a cyclical pattern that facilitated capital investment (and depletion) cycles for commodity production, but this cycle appears to us to be over.

Source: S&P (Cowles Study), 1870 to 1913 is the WPI for Commodities from the BLS and other agencies. 1914-56 is the PPI All Commodities, and 1957-present is the CRB Continuous Commodity Index, now an equal-weighted index of 17 commodities including most high-use energy & agricultural commodities.

Source: Factset price history, intraday as of Mar-15, 2012.

“Got Oil?” Commodity producing or serving equities follow commodity prices, and as this seasonal rally ends we see them as value traps facing P/E compression. We compare Freeport McMoRan (left), Caterpillar + Deere (middle) and Oil Service OSX (right) to Brent crude oil.

17

$0

$50

$100

$150

$200

$250

$300

$350

$400

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$110

$120

$130

$140

$150

$160

19992000200120022003200420052006200720082009201020112012

PHLX OSX Oil Service Stock Index (Right)vs. Brent Crude Oil (Left)

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

$200

$220

$240

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$110

$120

$130

$140

$150

$160

19992000200120022003200420052006200720082009201020112012

CAT + Deere Stock price (Right)vs. Brent Crude Oil (Left)

$0

$10

$20

$30

$40

$50

$60

$70

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$110

$120

$130

$140

$150

$160

19992000200120022003200420052006200720082009201020112012

Freeport-McMoRan Copper & Gold Stock Price (Right) vs. Brent Crude Oil (Left)

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

G7 (U.S., U.K., Ger, Fr, It, Jap, Can)Oil Demand, 1970-2010 (000s bbl.)

38% of world oil demand growingat an average 0.0% y/y growth rate

bbl. 000s/day

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

55,000

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

Non-G7 Country Oil Demand, 1970-2010 (000s bbl.)

62% of world oil demand growingat an average 3.0% growth rate

bbl. 000s/day

G7 country(1) oil demand, which is 38% of the world total, is likely to remain weak (left chart), having experienced an oil shock similar to 1979-81. In contrast, non-G7 country oil demand has grown is 62% of world oil demand, and is precariously above trend and dependent on subsidies in many cases.

Source: EIA, BP Statistical Review, United Nations, IEA, Stifel Nicolaus. (1) G7 is the U.S., U.K., Germany, Japan, France, Italy and Canada. Non-G7 is the remainder of the world.

To flatten 2012-15E,

in our view

18

19

Important Disclosures and Certifications

I , Barry Bannister, certify that the views expressed in this research report accurately reflect my personal views about the subject securities or issuers; and I, Barry Bannister, certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report. For our European Conflicts Management Policy go to the research page at www.stifel.com.

Stifel, Nicolaus & Company, Inc.'s research analysts receive compensation that is based upon (among other factors) Stifel Nicolaus' overall investment banking revenues. Our investment rating system is three tiered, defined as follows: BUY -For U.S. securities we expect the stock to outperform the S&P 500 by more than 10% over the next 12 months. For Canadian securities we expect the stock to outperform the S&P/TSX Composite Index by more than 10% over the next 12 months. For other non-U.S. securities we expect the stock to outperform the MSCI World Index by more than 10% over the next 12 months. For yield-sensitive securities, we expect a total return in excess of 12% over the next 12 months for U.S. securities as compared to the S&P 500, for Canadian securities as compared to the S&P/TSX Composite Index, and for other non-U.S. securities as compared to the MSCI World Index. HOLD -For U.S. securities we expect the stock to perform within 10% (plus or minus) of the S&P 500 over the next 12 months. For Canadian securities we expect the stock to perform within 10% (plus or minus) of the S&P/TSX Composite Index. For other non-U.S. securities we expect the stock to perform within 10% (plus or minus) of the MSCI World Index. A Hold rating is also used for yield-sensitive securities where we are comfortable with the safety of the dividend, but believe that upside in the share price is limited. SELL -For U.S. securities we expect the stock to underperform the S&P 500 by more than 10% over the next 12 months and believe the stock could decline in value. For Canadian securities we expect the stock to underperform the S&P/TSX Composite Index by more than 10% over the next 12 months and believe the stock could decline in value. For other non-U.S. securities we expect the stock to underperform the MSCI World Index by more than 10% over the next 12 months and believe the stock could decline in value. Of the securities we rate, 48% are rated Buy, 49% are rated Hold, and 3% are rated Sell. Within the last 12 months, Stifel, Nicolaus & Company, Inc. or an affiliate has provided investment banking services for 22%, 12% and 3% of the companies whose shares are rated Buy, Hold and Sell, respectively.

20

Additional Disclosures

Please visit the Research Page at www.stifel.com for the current research disclosures applicable to the companies mentioned in this publication that are within Stifel Nicolaus’ coverage universe. For a discussion of risks to target price please see our stand-alone company reports and notes for all Buy-rated stocks. The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of Stifel, Nicolaus & Company, Inc. or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within. Past performance should not and cannot be viewed as an indicator of future performance. Stifel, Nicolaus & Company, Inc. is a multi-disciplined financial services firm that regularly seeks investment banking assignments and compensation from issuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving as a placement agent in private transactions. Moreover, Stifel Nicolaus and its affiliates and their respective shareholders, directors, officers and/or employees, may from time to time have long or short positions in such securities or in options or other derivative instruments based thereon. These materials have been approved by Stifel Nicolaus Europe Limited, authorized and regulated by the Financial Services Authority (UK), in connection with its distribution to professional clients and eligible counterparties in the European Economic Area. (Stifel Nicolaus Europe Limited home office: London +44 20 7557 6030.) No investments or services mentioned are available in the European Economic Area to retail clients or to anyone in Canada other than a Designated Institution. This investment research report is classified as objective for the purposes of the FSA rules. Please contact a Stifel Nicolaus entity in your jurisdiction if you require additional information. The use of information or data in this research report provided by or derived from Standard & Poor’s Financial Services, LLC is © 2012, Standard & Poor’s Financial Services, LLC (“S&P”). Reproduction of Compustat data and/or information in any form is prohibited except with the prior written permission of S&P. Because of the possibility of human or mechanical error by S&P’s sources, S&P or others, S&P does not guarantee the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. S&P GIVES NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall S&P be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of Compustat data and/or information. For recipient’s internal use only.

Additional information is available upon request

© 2012 Stifel, Nicolaus & Company, Incorporated, One South Street, Baltimore, MD 21202. All rights reserved.