Equity Market Monitor Q2 2013

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The price performance of the domestic equity market is generally measured by reference to stock indexes that aggregate the performance of multiple stocks. CME Group offers liquid futures contracts tied to a wide variety of frequently referenced “benchmark” stock indexes including the Standard & Poor’s® 500 (S&P 500®), the Dow Jones® Industrial Average (DJIA), the NASDAQ-100® and many more.

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Equity Market Monitor Q2 2013

  1. 1. STOCK INDEXES EquityMarketMonitor 2nd Quarter2013 JULY 3, 2013 John W. Labuszewski John E. Nyhoff Richard Co Managing Director Executive Director Executive Director Research & Product Development 312-466-7469 jlab@cmegroup.com Research & Product Development 312-930-2310 john.nyhoff@cmegroup.com Equity Products 312-930-3227 richard.co@cmegroup.com
  2. 2. 1 | Equity Market Monitor 2nd Quarter 2013 | July 3, 2013 | © CME GROUP The price performance of the domestic equity market is generally measured by reference to stock indexes that aggregate the performance of multiple stocks. CME Group offers liquid futures contracts tied to a wide variety of frequently referenced “benchmark” stock indexes including the Standard & Poor’s 500 (S&P 500), the Dow Jones Industrial Average (DJIA), the Nasdaq-100 and many more. Many fundamental factors, including general macroeconomic conditions, Fed monetary policy, fiscal policy, foreign investment interest, to name just a few, impact the price performance of these stock indexes. This document provides a review of these factors as they played out during the most recently completed calendar quarter. While we monitor activity in a broad spectrum of domestic stock indexes, the S&P 500 represents a central focus of this discussion. Stock Price Action Over the past decade, the domestic equity markets have fluctuated up and down within a very broad trading range. This range has been defined by the depths plumbed in the wake of the “dot-com” crisis and subsequent “sub-prime mortgage crisis” – with highs put in just prior to the point where those situations broke in 2000 and in 2008, respectively. But by late in the 1st quarter of 2013 and continuing in the 2nd quarter, we have seen domestic equity markets, as measured by the S&P 500, establish new all-time highs. The S&P 500 rallied to a new all-time high closing value of 1,669.16 on May 21st . Equities backed off their highs late in the 2nd quarter on concerns that he Fed will slow or discontinue its Quantitative Easing (QE) fixed income purchasing program on signs of economic growth. Treasury values declined rapidly as yields rose on this news. Other factors contributing to the late break included concerns regarding a developing credit crunch and growth slowdown in China and other emerging market economies. The Index closed the quarter at 1,606.28 and up from its March 28th value of 1,569.19. Thus, the S&P 500 has recorded a total return of 2.91% for the 2nd quarter and 13.82% for the year-to-date. 1 Meanwhile, the S&P 500 Volatility Index (VIX) advanced to 16.86% by the end of the 2nd quarter on late weakness after falling to interim lows of 12.45% in mid-May on an equity market surge. These movements are consistent with our long- standing observation of a strong inverse relationship between equity values and volatility. 2 Similarly, the DJIA posted a total return of 2.91% while the Nasdaq-100 generated a total return of 3.61% for the 2nd quarter of the year. (See “Summary Data” table below.) Breaking the S&P 500 into its major sectors, we find that the financial sector took the lead with a total return of 7.25% for the quarter. This was followed by the consumer discretionary (+6.81%), health 1 The total return associated with an index represents the combination of the return attributed to price fluctuations as well as the accumulation of dividend income. Thus, the total return associated with an index will generally exceed the price return. 2 Note that there is a consistent inverse relationship between equity values and the VIX. This may be explained by the observation that equities often break swiftly and suddenly as investors seek to liquidate positions quickly in response to troublesome economic news. Thus, volatilities tend to advance in bear markets. On the other hand, equities tend to rally slowly and steadily. The steady influx of funds into the equity markets as a result of retirement programs, implemented with automated payroll contributions, such as 401Ks contributes to this effect. Thus, equity markets tend to exhibit declining volatilities in bull markets. 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 1,250 1,300 1,350 1,400 1,450 1,500 1,550 1,600 1,650 1,700 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 VIX S&P500 S&P 500 Index & VIX S&P 500 VIX
  3. 3. 2 | Equity Market Monitor 2nd Quarter 2013 | July 3, 2013 | © CME GROUP care (+3.90%), industrial (+2.74%), technology (+1.55%) and consumer staples (+0.42%) sectors. On the negative side of the ledger, we see utilities falling 2.71% for the quarter with materials off 1.3% and energy down 0.70%. This price action may fundamentally be traced to macro-economic conditions. Thus, we review growth and employment prospects; inflation; monetary and fiscal policy; and, current and capital account flows. Growth and Employment Taking our cue from the Federal Reserve’s most recent observations on the economy, we find “that economic activity has been expanding at a moderate pace. Labor market conditions have shown further improvement in recent months, on balance, but the unemployment rate remains elevated.” 3 Indeed, 1st quarter 2013 growth was most recently reported at +1.8% - although that figure has been steadily revised downward from its advance estimate of 2.5% and the preliminary estimate of 2.4%. Unemployment has been generally declining in 2013 although we took a step back as the May 2013 figure up-ticked to 7.6% from April’s 7.5%. Labor force participation remains very low at only 63.4% in May although this represents an improvement from the trough of 63.3% recorded in March. 3 Federal Reserve Press Release dated June 19, 2013. The Fed further observes that “household spending and business fixed investment advanced.” 4 These developments are reflected in retail sales figures which advanced to $181.7 billion in May and up 2.9% on a year-on-year basis from the previous May. The Industrial Production Index has advanced 1.61% over the same year-on-year period. However, it has down-ticked a few notches from a recent peak of 99.0584 in March to May’s 98.6709. This is further reflected in a downtick in capacity utilization from a recent peak of 78.1% in March to 77.6% in May. 4 Ibid. 850 950 1,050 1,150 1,250 1,350 1,450 1,550 1,650 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Dec.31,2011=1,000.00 S&P 500 Sector Indexes IXY IXR IXE IXM IXV IXI IXB IXT IXU S&P 500 4% 5% 6% 7% 8% 9% 10% 11% -10% -8% -6% -4% -2% 0% 2% 4% 6% Q105 Q305 Q106 Q306 Q107 Q307 Q108 Q308 Q109 Q309 Q110 Q310 Q111 Q311 Q112 Q312 Q113 UnemploymentRate QtrlyChangeinGDP Growth and Employment Real GDP (SA) Unemployment Rate Source: Bureau of Economic Analysis (BEA) & Bureau of Labor Statistics (BLS) 63% 64% 65% 66% 67% 4% 5% 6% 7% 8% 9% 10% 11% Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 LaborForceParticipation UnemploymentRate Employment Statistics Unemployment Rate Labor Force Partcipation Source: Bureau of Labor Statistics (BLS)
  4. 4. 3 | Equity Market Monitor 2nd Quarter 2013 | July 3, 2013 | © CME GROUP While industrial sector activity remains below the pre-subprime crisis peak, corporate profitability has soared to new all-time highs by a wide margin. 1st quarter profitability increased some 4.7% although this represents a slow-down from the previous 4 quarters. The Fed goes on to suggest that the “housing sector has strengthened further.” 5 This is reinforced by an 11.58% advance in the S&P/Case-Shiller 10-City Composite Housing Index in April on a year-on-year basis from the previous April. This represents the strongest performance observed in this Index since early 2006 and prior to the onset of the subprime mortgage crisis which saw residential home values plummet beginning in mid-2006. 5 Ibid. Inflation The FOMC’s statement goes on to say “[p]artly reflecting transitory influences, inflation has been running below the Committee’s longer-run objective, but longer-term inflation expectations have remained stable … The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.” 6 The Consumer Price Index (CPI) was reported to have advanced 1.4% on a year-on-year basis in May 2013. Core inflation, excluding volatile food and energy prices, rose 1.7% over the same period. Thus, by any measure, inflation is relatively muted. 6 Ibid. 1.20 1.25 1.30 1.35 1.40 1.45 1.50 $150 $155 $160 $165 $170 $175 $180 $185 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Inventory:SalesRatio RetailSales(Bil$) Retail Sector Activity Real Retail Sales & Food Services SA Total Business Inventory:Sales Ratio Source: U.S. Census Bureau 66% 68% 70% 72% 74% 76% 78% 80% 82% 80 85 90 95 100 105 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 CapacityUtilization IndustrialProductionIndex Industrial Sector Activity Index of Industrial Production Capacity Utilization Source: St. Louis Federal Reserve FRED Database $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 $2,000 -60% -40% -20% 0% 20% 40% 60% 80% 100% 120% Q104 Q404 Q305 Q206 Q107 Q407 Q308 Q209 Q110 Q410 Q311 Q212 Q113 Pre-TaxProfits(Billions) AnnualizedChange U.S. Corporate Profitability Annual Change Corporate Profits (Bil) Source: Department of Commerce 80 120 160 200 240 280 320 Jan-00 Nov-00 Sep-01 Jul-02 May-03 Mar-04 Jan-05 Nov-05 Sep-06 Jul-07 May-08 Mar-09 Jan-10 Nov-10 Sep-11 Jul-12 May-13 S&P/Case-Shiller Housing Indexes Los Angeles San Diego San Francisco Denver Washington DC Miami Chicago Boston Las Vegas New York Comp-10 Source: Standard & Poor's
  5. 5. 4 | Equity Market Monitor 2nd Quarter 2013 | July 3, 2013 | © CME GROUP Monetary Policy To the extent that “[t]he Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate,” monetary policy remains virtually unchanged. 7 “In particular, the Committee decided to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that this exceptionally low range … will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.” 8 While the Committee restated its determination to stay this course, it significantly did not mention a period of time over which it expects to maintain Fed Funds at its current levels. While Fed Funds has served as the primary tool of monetary policy, the FOMC’s asset repurchase programs (aka Quantitative Easing or “QE”) have exerted a significant dampening effect on longer- term yields. Many analysts have suggested that the 7 Ibid. 8 Ibid. Fed may be preparing to discontinue or at least reduce the scale of this stimulus. This suggestion is based upon indications of Fed flexibility regarding these policies as Fed Chairman Bernanke has suggested that the Fed “is prepared to increase or reduce the pace of its asset purchases to ensure that the stance of monetary policy remains appropriate as the outlook for the labor market or inflation changes.” 9 As a result, we have seen 10- year Treasury rates rally from 1.85% at the conclusion of the 1st quarter to just over 2.5% as of this writing. Still, the Committee’s most recent statement suggests that will “continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month … maintaining its existing policy of reinvesting principal payments from its holdings … and rolling over maturity Treasury securities at auction.” 10 Fiscal Policy The fiscal stimulus implicit in the 2009, 2010 and 2011 Federal budget deficits of $1.4 trillion, $1.3 trillion and another $1.3 trillion, respectively, has shrunk to $1.1 trillion in 2012. Further restraint in 9 Testimony of Chairman Ben S. Bernanke on the Economic Outlook before the Joint Economic Committee, U.S. Congress, Washington D.C. (May 22, 2013). 10 Op cit, Federal Reserve Press Release dated June 19, 2013. -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% Jan-04 Sep-04 May-05 Jan-06 Sep-06 May-07 Jan-08 Sep-08 May-09 Jan-10 Sep-10 May-11 Jan-12 Sep-12 May-13 Year-on-YearChange Consumer Price Index (CPI) CPI - All Urban Consumers SA CPI ex-Food & Energy SA Source: Bureau of Labor Statistics (BLS) 0% 1% 2% 3% 4% 5% 6% 7% Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Benchmark U.S. Rates Target Fed Funds 2-Yr Treasury 5-Yr Treasury 10-Yr Treasury 30-Yr Treasury
  6. 6. 5 | Equity Market Monitor 2nd Quarter 2013 | July 3, 2013 | © CME GROUP early 2013 is also in evidence. As such, the FOMC concedes that “fiscal policy is restraining economic growth.” 11 Fed Chairman Bernanke elaborates on this point, suggesting that “the expiration of the payroll tax cut, the enactment of tax increases, the effects of the budget caps on discretionary spending, the onset of the sequestration, and the declines in defense spending for overseas military operations are expected, collectively, to exert a substantial drag on the economy … [that is estimated to] slow the pace of real GDP growth by about 1-1/2 percentage points during 2013, relative to what it would have been otherwise.” But the Congressional Budget Office (CBO) has indicated that “under current policies, the federal deficit and debt as a percentage of GDP will begin rising again in the latter part of this decade and move sharply upward thereafter, in large part reflecting the aging of our society and projected increases in health-care costs, along with mounting debt service payments.” 12 Still, we note that the CBO’s projections regarding fiscal policy, as of May 2013, are much rosier than they were a scant two years ago in 2011. The current CBO baseline forecast has the ratio of Federal debt to GDP rising from 2012’s 71.9% to only 73.6% by 2023. Their most pessimistic 11 Ibid. 12 Op. cit., Testimony of Chairman Ben S. Bernanke (May 22, 2013). alternative forecast released in 2011 had that ratio climbing to 109.0% by 2023. While the impact of restrained fiscal policies may represent a short-term drag on GDP, the longer-term benefits seem obvious. Current & Capital Account Flows The 1st quarter 2013 current account deficit increased to $106.1 billion or 2.7% of GDP. This represents a slight setback from the revised 4th quarter report of a $102.3 billion deficit, or 2.6% of GDP. While the current figure was a downtick, the situation nonetheless is much improved from the previous year or certainly from the pre-subprime crisis period. Another interesting source of flow of funds data may be found in the U.S. Treasury Department’s Treasury International Capital (or “TIC”) database. This database tracks flows into and out of the U.S. The data is broken into foreign stocks, foreign bonds, U.S. stocks, U.S. corporate bonds, U.S. government agencies and U.S. Treasuries. U.S. vs. overseas capital flows have generally been characterized over the past decade by substantial influx of funds into U.S. Treasuries. This phenomenon peaked in 2010 as overseas investors purchased some $704 billion in U.S. Treasuries on a net basis. The figure tailed off to $433 and $417 billion in 2010 and 2011, respectively, but that still represents sizable values. 0% 20% 40% 60% 80% 100% 120% 1940 1950 1960 1970 1980 1990 2000 2010 2012 Est14 Est16 Est18 Est20 Est22 US Gross Public Debt as % of GDP Debt as % GDP (NSA) CBO Forecast May-13 CBO Alt Forecast 2011 Source: Congressional Budget Office -$250 -$200 -$150 -$100 -$50 $0 Q104 Q304 Q105 Q305 Q106 Q306 Q107 Q307 Q108 Q308 Q109 Q309 Q110 Q310 Q111 Q311 Q112 Q312 Q113 U.S. Current Account Deficit (Billions USD) Source: Bureau of Economic Analysis (BEA)
  7. 7. 6 | Equity Market Monitor 2nd Quarter 2013 | July 3, 2013 | © CME GROUP But during the first four months of 2013, foreign investors sold some $14 billion of Treasuries on a net basis. Some $37 billion in capital has flowed out of the U.S. on a net basis through April 2013. While the U.S. current account deficit remains substantial, it appears that foreign investors are become reticent to increase U.S. capital market holdings. Certainly this is motivated by the prospects of rising rates and declining Treasury values in the face of at least modest economic recovery. Mutual Fund Flows Finally, we may examine the inflow and outflow of equity market investments. This investment may be sourced domestically or from overseas market participants. Actually, we find these indicators to be somewhat less than revealing to the extent that they are closely correlated with price action. Certainly, retail investors are known to “chase” the market by buying in response to a bull trend. Likewise, they are often known to exhibit a “herd mentality” by heading for the exits in response to significant market breaks. Despite the significant advance in equity values during the 2nd quarter 2013, mutual fund investors appear to be growing cautious. January saw a significant inflow of $18.6 billion into domestic equity funds. But domestic equity fund investment has essentially been flat in the subsequent months of February, March and April. Net cash flow into domestic equity mutual funds has totaled only $17.9 billion in the year-to-date through April. Rather, investors have generally favored investment in foreign equity, hybrid and bond funds instead. Some $52.8 billion, $38.0 billion and $81.3 billion in cash has been directed to these investments instead. Dividends It has become chic to pay close attention to corporate dividend policies in recent years. This focus represents a central tenet of the “fundamental indexing” movement that attempts to distinguish investment opportunity on the basis of a relatively narrow number of broad fundamental indicators of corporate value, including dividend policies. Dividends have further become a major focus of the equity trading community to the extent that interest rates have fallen to all-time or at least generational lows across most sectors of the yield curve. The current low interest rate environment is, of course, a function of Fed monetary policy in the wake of the subprime mortgage crisis. Thus, many investors have focused on equity dividends to the extent that they have become very competitive with fixed income instruments. A closely watched indicator of dividend value is a comparison of the dividend yield associated with the S&P 500 vs. the yield-to-maturity (YTM) of 10-year U.S. Treasury notes. -$800 -$300 $200 $700 $1,200 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Thru4/13 Net US/Foreign Capital Flows (Billions USD) US Treasuries US Gov't Agencies US Corporates US Stocks Foreign Bonds Foreign Stocks Source: U.S. Treasury TIC Database -$40 -$30 -$20 -$10 $0 $10 $20 $30 $40 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 Equity Mutual Fund Net Cash Flows (Billions USD) Domestic Equities Foreign Equities Source: Investment Company Institute (ICI)
  8. 8. 7 | Equity Market Monitor 2nd Quarter 2013 | July 3, 2013 | © CME GROUP Dividend yields have been consistently above 10- year U.S. Treasury yields for the past year. But the 2nd quarter saw a rather dramatic advance in Treasury yields with the 10-year note rallying to 2.52% on hints that the Fed’s QE programs may be scaled back or possibly discontinued. These suggestions were enough to drive yields up, which weighed on equity values a bit late in the 2nd quarter. Thus, fixed income investments appear to be becoming more competitive vis-à-vis equity investments. Value Investing Many investors trade on the basis of trends. But many others adopt a somewhat more “counter- cyclical” approach by paying close attention to equity values. The most common reference for equity values is found in the price to earnings or P/E ratio. P/E ratios are most heavily influenced by equity price action. Consider that the S&P 500 P/E ratio fell to near 10 as equities retreated at the height of the subprime mortgage crisis. The subsequent rebound in P/E ratios to near 24 was driven by aggressive easing, liberal fiscal stimulus and the prospects of economic recovery. Subsequently, P/E ratios retreated on equity weakness in response to a variety of exogenous shocks including the Japanese earthquake and tsunami, the U.S. fiscal debate and ongoing European debt crisis. By the end of the 2nd quarter 2013, the S&P 500 P/E ratio was measured at 15.69 and up slightly from the figure of 15.45 reported at the conclusion of the 1st quarter of the year. Still, these numbers remain reasonably close to historic standards which suggest that the ratio might typically be recorded in the vicinity of 15. Thus, despite the year-to-date rally of 12.63% in the S&P 500 index value, equities seem to remain reasonably priced. Conclusion CME Group offers a broad array of domestic stock index futures contracts that correspond to each of the indexes listed in our table below. These products provide facile and liquid vehicles with which one may express a view on prospective market movements. Or, to manage the risks associated with holding an equity portfolio in turbulent times. 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Dividend & Treasury Yields Dividend Yield 10-Yr Treasury Yield 8 10 12 14 16 18 20 22 24 26 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 P/ERatio DividendYield S&P 500 Dividend Yield & P/E Ratio Dividend Yield P/E Ratio
  9. 9. 8 | Equity Market Monitor 2nd Quarter 2013 | July 3, 2013 | © CME GROUP Summary Data (6/28/13) Index Ticker (Bloom- berg) Index Level Total Return (Q2) Price Appre- ciation (Q2) Total Return YTD 2013 Price Appre- ciation YTD 2013 Dividend Yield P/E Ratio Domestic Macro Indexes Standard & Poor’s 500 SPX 1,606.28 2.91% 2.36% 13.82% 12.63% 2.16% 15.69 Dow Jones Industrial Average INDU 14,909.60 2.91% 2.27% 15.19% 13.78% 2.53% 14.52 Nasdaq-100 NDX 2,909.60 3.61% 3.23% 10.09% 9.35% 1.56% 18.17 S&P MidCap 400 MID 1,160.82 1.01% 0.62% 14.59% 13.76% 1.48% 20.69 S&P SmallCap 600 SML 550.52 2.91% 3.60% 16.23% 15.52% 1.11% 23.19 S&P 500/Growth SGX 845.37 3.61% 2.01% 12.04% 11.04% 1.88% 17.66 S&P 500/Value SVX 751.54 3.38% 2.73% 15.74% 14.33% 2.47% 14.01 S&P Select Sector Indexes Consumer Discretionary IXY 567.03 6.81% 6.43% 19.78% 18.94% 1.49% 19.94 Consumer Staples IXR 397.87 0.42% -0.24% 15.18% 13.63% 3.01% 17.66 Energy IXE 786.97 -0.70% -1.21% 10.88% 9.78% 2.06% 12.66 Financial IXM 194.25 7.25% 6.78% 19.50% 18.45% 1.79% 13.99 Health Care IXV 477.82 3.90% 3.39% 20.31% 19.12% 1.92% 16.72 Industrial IXI 426.84 2.74% 2.17% 13.73% 12.52% 2.19% 15.87 Materials IXB 405.51 -1.30% -2.09% 3.58% 2.15% 2.43% 16.53 Technology IXT 306.70 1.55% 0.99% 6.81% 5.73% 2.13% 16.19 Utilities IXU 380.98 -2.71% -3.64% 9.95% 7.76% 4.05% 13.65 Copyright 2013 CME Group All Rights Reserved. Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. All examples in this brochure are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. Swaps trading is not suitable for all investors, involves the risk of loss and should only be undertaken by investors who are ECPs within the meaning of section 1(a)18 of the Commodity Exchange Act. Swaps are a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for a swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. CME Group is a trademark of CME Group Inc. The Globe logo, E-mini, Globex, CME and Chicago Mercantile Exchange are trademarks of Chicago Mercantile Exchange Inc. Chicago Board of Trade is a trademark of the Board of Trade of the City of Chicago, Inc. NYMEX is a trademark of the New York Mercantile Exchange, Inc. The information within this document has been compiled by CME Group for general purposes only and has not taken into account the specific situations of any recipients of the information. CME Group assumes no responsibility for any errors or omissions. Additionally, all examples contained herein are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME, NYMEX and CBOT rules. Current CME/CBOT/NYMEX rules should be consulted in all cases before taking any action.

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