1. July 9, 2012
Market Strategy
Macro & Portfolio Strategy
Market Commentary/Strategy
Stifel 3Q12 Macro: 1,600 S&P 500 in 2012 on 2H GDP Traction & Policy Moves
We see 2H12 U.S. GDP recovery lifting the S&P 500 to 1,600 in 2H12 (P/E ~16x). Late secular bear
markets move quickly and discourage trend following. The U.S. rebalancing borne of crisis is 3-4
years ahead of the eurozone and China, enforcing a U.S. playbook. We believe self-preservation
instincts should soon take hold for overseas political & monetary institutions under rising duress,
leading to a eurozone bank liability guarantee (collapsing spreads, ending capital flight) that is a back
door to fiscal control (i.e., control of sovereign issuance via bank asset oversight), China
stimulus/acceleration of the 5-year plan (bridging fixed investment vs. consumption, social spending),
coordinated central bank monetary ease to offset fiscal austerity (if real), and political calculus that
forces fiscal cliff negotiation into Nov/Dec-12. We like Tech/Growth in a P/E expansion market, but
expect Financials to lead the S&P in 2012, ringing the late cycle bell at the top.
S&P 500 as of 07/06/12: $1,354.68
In Our View
U.S. Equity Outlook [See pages 2-14]
Rapid S&P lift to 1,600 by year-end, Tech & Financials lead, inevitable policy moves.
Fiscal & Monetary Policy [See pages 15-22]
Fed/Treasury “create” S&P EPS (hurting EPS quality), but policy outlasts skeptics.
EU & China Transition Risk [See pages 23-26]
ECB crisis blanket guarantee with supervision; China fiscal stimulus “Hail Mary” pass in 2H12.
Housing & Labor Outlook [See pages 27-31]
Payrolls to improve 2H12 as productivity cyclically peaked, construction up in 2H12/2013.
Paper vs. Hard Assets [See pages 32-41]
Policy-driven bounce later in 2012, but commodity economic profit tailwind has ended.
Long-term Equity Outlook [See pages 42-47]
Choppy 7%-9% equity return (price + dividends) 2012-2022E, too late to be a super-bear.
Barry B. Bannister, CFA bbbannister@stifel.com (443) 224-1317
Stifel Nicolaus Equity Trading Desk US: (800) 424-8870 Canada: (866) 752-4446
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 48 - 49 of this report.

2. Market Strategy
Macro & Portfolio Strategy July 9, 2012
U.S. Equity Outlook
In our view:
• We see 2H12 confidence in reflation (avoidance of deflation) lifting the S&P 500 to 1,600 in 2H12 led by Financials
as well as Tech “duration” growth equity(1) at the expense of bond equivalent equities (Utilities, Communications).
• The U.S. wrote the playbook for addressing the eurozone crisis, and overcoming their resistance to the U.S.
prescription of coordinated fiscal and monetary policy response has been the challenge.
• Inflation lowers P/E ratios, and deflation dims EPS, but navigating the extremes of inflation and deflation, which we
see in 2H12, as well as loose monetary policy as the offset to fiscal tightening, is the sweet spot for equity we see.
• We realize S&P EPS supported by the Treasury and Federal Reserve are of lower quality, but investor confidence
that policy will be sustained could lift stocks and lower the Equity Risk premium, which is near 40-year highs.
• We believe the top will be evident when Financials (note lending is late cycle in de-leveraging) beat the worst
performing sector (probably Utilities, a bond proxy) by the “normal” ~45% gap between the best and worst groups.
• If we are wrong in 2H12 it may be due to the Fed being out-gunned by deflation – a liquidity trap, or recession. We
see that as a mid-decade, but secular bear markets require that we view the future as a series of short-term trades.
• Commodity stocks may bounce on European euro-crisis confidence (stronger euro, weaker dollar) and Chinese
stimulus, late 2012 events we expect, but we think commodity-related economic profit has peaked, so we are wary.
• There is precedent for weakness overseas, domestic GDP traction, capital flows to the U.S., a surging dollar, U.S.
P/E expansion, Europe struggling with currency union and cheaper fuel - it was the equity-friendly “late 1990s.”
(1) Duration is a bond concept that applies to equities, measuring the sensitivity of price to a change in interest rates (in the case of equity, inflation/deflation as it affects the
earnings yield, which is the inverse P/E ratio). Duration “Growth” stocks are low dividend payout, high unit growing (minimal reliance on pricing power), low asset intensity,
high /well-protected margin (network effects, patents/copyrights) companies with above-average return on generally un-levered equity.
Page 2

3. Market Strategy
Macro & Portfolio Strategy July 9, 2012
Recapping our views at the end of each quarter in 2012:
Our 1Q12 Outlook click favored the U.S., and targeted S&P 500 1,400 with mid-year deflation concerns.
Jan-3, 2012
S&P 500 1,277.06
Our 2Q12 Outlook click harbored mid-2012 growth concerns, and noted the S&P 500 had little upside.
Apr-2, 2012
S&P 500 1,419.04
On May 29 click we raised our 2012 S&P 500 view to 1,600 and a spring-loaded market remains our view.
May 29, 2012
S&P 500 1,332.42
Page 3

4. Market Strategy
Macro & Portfolio Strategy July 9, 2012
Some confidence in reflation (i.e., avoidance of deflation) is our 2H12 view, and much like 1Q12
(left table) we see this as a catalyst for Financials as well as Tech “duration(1)” growth equity to rise
while bond equivalent equities (Utilities, Communications) lag. Alternatively, deflation produces
the opposite outcome, as occurred in 2Q12 (right table), but we see a reversal of that in 3Q12.
"Risk On" Reflation Confidence "Risk Off" Deflation Fear
1Q12 Relative Total Return 2Q12 Relative Total Return
Relative Relative
Total Return Total Return
Electronics (Semis, aero/def., computing, telco eq.)……………………………………………………………………..
10.9% Communications…..…………………………………………………. 15.2%
Banks & Financial Services………………………………………………….………………………………………………….
10.4% Utilities………………..…………………………………………………. 8.6%
Consumer Durables……………………………………………………. 7.8% Health Technology………………………………………………….…………………………………………………. 6.8%
Technology Services (Software, internet)……………………………………………………………………..
3.4% Retail Trade…………………………………………………………………….. 5.6%
Consumer Services (Media, restaurants, lodging)………………………………………………………………….
3.1% Consumer Non-Durables…………………………………………………………………. 5.6%
Producer Manufacturing…………………………………………………………………….. 2.9% Transportation……………………………………………………………………………. 5.4%
Process Industries (Chemical, ag, paper)………………………………………… Consumer Services (Media, restaurants, lodging)………………………………………………………………….
2.9% 3.2%
Health Services………………………..…………………………………………………. 2.6% Health Services………………………..…………………………………………………. -0.5% 3Q12
Retail Trade…………………………………………………………………….. 0.6% Process Industries (Chemical, ag, paper)………………………………………… -0.8%
Distribution Services…………………………………………………………………….. -1.8% Distribution Services……………………………………………………………………..
Commercial Svcs (Fin'l. pub., personnel, advertising)……………………………………………………………………..
-2.4% Energy Minerals……………………..………………………………………………….
-0.9%
-1.4%
view
Health Technology………………………………………………….………………………………………………….pub., personnel, advertising)……………………………………………………………………..
-3.0% Commercial Svcs (Fin'l. -2.5%
Consumer Non-Durables…………………………………………………………………. -5.4% Producer Manufacturing…………………………………………………………………….. -2.9%
Transportation……………………………………………………………………………. -5.6% Technology Services (Software, internet)……………………………………………………………………..
-3.3%
Non-Energy Minerals…………………………………………………… -7.4% Industrial Services (Oil svc./equip., E&C, pipelines)……….. -5.0%
Industrial Services (Oil svc./equip., E&C, pipelines)………………………………..
-7.6% Electronics (Semis, aero/def., computing, telco eq.)……………………………………………………………………..
-5.6%
Communications…..…………………………………………………………. -9.1% Non-Energy Minerals…………………………………………………… -5.9%
Energy Minerals……………………..…………………………………………………. Banks & Financial Services………………………………………………….………………………………………………….
-9.6% -7.0%
Utilities………………..………………………………………………………….. -13.9% Consumer Durables……………………………………………………. -8.6%
---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
KEY:
CORE GROUPS TRADING GROUPS
Core favored groups in "sweet spot" that avoids both the "Value" trade for alternating reflation/deflation sentiment
deflation and inflation extremes, i.e. long duration equity Bond equivalents, representing "Deflation" and "Risk-Off"
Source: Factset, Stifel annotations. Relative returns are measured against S&P 500, including dividends.
(1) Duration is a bond concept that applies to equities, measuring the sensitivity of price to a change in interest rates (in the case of equity, inflation/deflation as it
affects the earnings yield, which is the inverse P/E ratio). Duration “Growth” stocks are low dividend payout, high unit growing (minimal reliance on pricing power),
low asset intensity, high /well-protected margin (network effects, patents/copyrights) companies with above-average return on generally un-levered equity.
Page 4

5. Market Strategy
Macro & Portfolio Strategy July 9, 2012
This is the 4th “Secular Bear Market” the past century (left chart), each of which de-capitalized equity
as a percentage of GDP from elevated starting points (1907, 1929, 1968, 2000). Within secular bear
markets there are rough “stages” of investor psychology (right chart), and we see a “Late Bull”
momentum phase and rally to 1,600 (only slightly higher than the 2007 and 2000 peaks).
Phases of a Secular Bear Market - The S&P 500 (1,362 as of 06/29/12) Late
Bull
Early Late Bear Early
Nominal S&P 500 (S&P Composite before the existence of the Late Bull Bear Market Bull Mature Bull Bull Market Bull Mature Bull
10,000
S&P 500) - Chart is through June 2012 Momentum Defensive Oversold Multiple Momentum Defensive Oversold
Stocks 200dma Stocks
crosses
Est.
1600
1500
1,000
1400
2000 to
Present 1300
Nominal S&P 500
1200
100
1100
1968 to
1982 1000
900
10
800
1907 to
1921 1929 to
1949 700
1 600
06/01/98
12/01/98
06/01/99
12/01/99
06/01/00
12/01/00
06/01/01
12/01/01
06/01/02
12/01/02
06/01/03
12/01/03
06/01/04
12/01/04
06/01/05
12/01/05
06/01/06
12/01/06
06/01/07
12/01/07
06/01/08
12/01/08
06/01/09
12/01/09
06/01/10
12/01/10
06/01/11
12/01/11
06/01/12
1895
1900
1905
1910
1915
1920
1925
1930
1935
1940
1945
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: Stifel Nicolaus estimates, Standard & Poors, Factset
prices.
Page 5

6. Market Strategy
Macro & Portfolio Strategy July 9, 2012
We believe slowing S&P 500 EPS is embedded in economic data (left chart), and the Equity Risk
Premium falling from 5.2% to 3.5% achieves our 1,600 S&P 500 in 2012 price target (right chart).
S&P 500 forward EPS consensus ~$109 (the A 2012E S&P 500 P/E ~16X (6.25%
avg. of 2012-13E) already embeds a sharply Earnings Yield) and 10Y ~2.75% would
slowing Durable Goods y/y percent change. narrow the Equity Risk Premium to 3.5%.
S&P 500 Operating Earnings (Left Axis) vs. S&P 500 Earnings Yield minus 10-Yr. Risk Free U.S. Government
Durable Goods New Orders (Right Axis), 16.0%
Bond Yield...
Y/Y % Changes, Jan-93 to Present 15.0%
14.0%
50% 40% 13.0%
12.0%
Truncated 11.0%
40% at 50% 30% 10.0%
earnings 9.0%
growth 8.0%
30% 7.0%
20% X
6.0%
5.0%
20% 4.0%
10%
3.0% X
2.0%
10%
1.0%
0% 0.0%
0% 7.0%
...Equals the Equity Risk Premium
-10% 6.0%
-10% S&P 5.0%
Consensus 4.0%
Ests. -20%
-20% $103.75 '12E
3.0%
$114.28 '13E 2.0%
-30% 1.0%
-30%
0.0%
S&P 500 Operating Earnings
-40% -40% -1.0%
Durable Goods: New Orders, y/y % 3 -2.0%
-50% mo. avg. -50%
-3.0%
-4.0%
Jan-93
Jan-94
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
Jan-13
Jan-14
-5.0%
Jan-62
Jan-64
Jan-66
Jan-68
Jan-70
Jan-72
Jan-74
Jan-76
Jan-78
Jan-80
Jan-82
Jan-84
Jan-86
Jan-88
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Source: FactSet Prices, Moody’s Economy.com data, Stifel Nicolaus format
Page 6

7. Market Strategy
Macro & Portfolio Strategy July 9, 2012
Inflation lowers P/E ratios, and deflation dims EPS, but navigating the extremes of inflation and
deflation, which we see in 2H12, may be a sweet spot for equity at ~2% CPI inflation. We see
~2% inflation and a P/E ~17x applied to 2012 quality-adjusted EPS view of ~$95, or 1,600 for the
S&P. Note this is a P/E of only ~14.7x the (albeit falling) consensus ~$109 avg. EPS in 2012-13E.
U.S. Consumer Price Inflation (Inverted, Right Median % of months
S&P P/E ratio since Jan-1870
Axis) vs. S&P 500 P/E Ratio (Left Axis), 100 Years at that level in that range of
An S&P 500 5-year average P/E of 17x is applicable (Deflation)/ of deflation/ (Deflation)/
28X to ~2% annual inflation. -7.0%
Inflation inflation Inflation
27X -6.0%
26X -5.0%
25X Post-war deflation is (10.0)% + 14.1x 3.5%
24X destructive to EPS, leading -4.0%
(9.0)%-(9.9)% 14.0x 1.5%
23X to higher P/E ratios -3.0%
22X (8.0)%-(8.9)% 16.6x 1.1%
-2.0%
21X -1.0% (7.0)%-(7.9)% 13.1x 1.3%
20X (6.0)%-(6.9)% 12.8x 1.6%
0.0%
19X (5.0)%-(5.9)% 13.8x 2.6%
18X 1.0%
17X 2.0% (4.0)%-(4.9)% 15.6x 2.2%
16X 3.0% (3.0)%-(3.9)% 14.7x 1.4%
15X 4.0% (2.0)%-(2.9)% 14.8x 2.9%
14X (1.0)%-(1.9)% 14.8x 3.6%
13X 5.0%
12X 6.0% (0.1)%-(0.9)% 12.5x 2.6%
11X 7.0% 0.0% 14.9x 3.6%
10X 8.0% 0.1%-0.9% 12.6x 3.3%
9X W.W. II
Cold 9.0% 1.0%-1.9% 17.1x 13.0% Optimal P/E at
8X
7X
War 10.0% 2.0%-2.9% 17.2x 13.0% inflation ~2%
6X 11.0% 3.0%-3.9% 15.9x 12.2%
5X 12.0%
4X 4.0%-4.9% 15.1x 6.5%
Wartime inflation is destructive to P/E ratios 13.0%
3X 5.0%-5.9% 15.0x 4.3%
(but not EPS), leading to lower P/E ratios. 14.0%
2X 6.0%-6.9% 11.3x 4.0%
1X W.W. I 15.0%
7.0%-7.9% 12.0x 2.7%
0X 16.0%
8.0%-8.9% 11.8x 1.7%
1911
1916
1921
1926
1931
1936
1941
1946
1951
1956
1961
1966
1971
1976
1981
1986
1991
1996
2001
2006
2011
9.0%-9.9% 9.2x 2.2%
>10.0% 9.0x 9.1%
P/E of the S&P 500, 5-Yr. Moving Avg. (Left)
100.0%
U.S. CPI Inflation, Y/Y % Chng., 5-Yr. Moving Avg. (Right, INVERTED)
Source: Robert J. Shiller data www.econ.yale.edu and Standard & Poor’s price and EPS data. U.S. Census and BLS inflation data. The chart above, left is the
period 1911 to 2011 expressed as annual averages, rolling 5 year basis, and the table above, right is the period since January 1870 based on monthly data.
Page 7

8. Market Strategy
Macro & Portfolio Strategy July 9, 2012
We realize S&P 500 EPS supported by the Treasury (left chart) and Federal Reserve (right chart) are
of lower quality, but investor confidence that policy will be sustained could lift stocks, in our view.
Weak housing (a part of “Net Investment” below) has Fed commitment to a negative real Fed Funds (Fed
been offset by deficits that “prop-up” GDP. Funds minus y/y inflation) has boosted margins(1).
Reduced "Investment" spending (i.e., housing) Real Fed Funds Rate (FFR), Advanced 5 Qtrs (Red,
led to large deficits to support GDP Right) vs. Corporate Profit Margins (Blue, Left)
14% 23% -4%
1985 - Current
22%
12% We think margins are -3%
~500bps elevated, but
21%
10% margins and S&P returns -2%
are not well correlated.
20%
8% -1%
INVERTED AXIS
19%
6% 0%
18%
% of GDP
4% 17% 1%
2% 16% 2%
0% 15%
3%
-2% 14%
4%
13%
-4%
5%
12%
-6% Corporate Profit Margins (Left)
6%
1Q1947
1Q1951
1Q1955
1Q1959
1Q1963
1Q1967
1Q1971
1Q1975
1Q1979
1Q1983
1Q1987
1Q1991
1Q1995
1Q1999
1Q2003
1Q2007
1Q2011
11%
Real Fed Funds Rate (Inverted, Right)
10% 7%
1Q1985
1Q1987
1Q1989
1Q1991
1Q1993
1Q1995
1Q1997
1Q1999
1Q2001
1Q2003
1Q2005
1Q2007
1Q2009
1Q2011
1Q2013
Net Private Investment Net Gov't Saving/(Deficits if >0%)
Source: BEA, BLS, NIPA Flow of Funds, U.S. Fed. Corporate margin is pretax corporate profits (adj. for IVA & CCA) as % of gross value added by corporations.
(1) A negative real FFR boosts export competitiveness, translation gains, margins (if U.S. firms don’t pass through currency gains) and shifting wealth from creditors to debtors.
Page 8

9. Market Strategy
Macro & Portfolio Strategy July 9, 2012
Our Financial stock rally call is really just hurdling low market expectations. Lagging bank stocks
and the falling 10Y yield (left chart) have been the same trade – deflation worries. Since lending is
“late cycle” in a private sector de-leveraging we believe Financials may bring up the rear for the
S&P 500 (right chart). Longer term, we agree that banks face over-capacity, private sector de-
leveraging (deflation), over-regulation, lower leveraged returns, derivatives exposure to overseas
and tighter spreads due to Fed policy. But that is the long term, and we are just looking at a trade.
US Major and Regional Banks Relative to S&P500, Total
Return (Black, Left) vs. US Constant Maturity 10-Yr
S&P 500 vs. S&P 500 Ex-Financials (Rebased),
Treasury Yields (Red, Right), Jan-06 to present
Jan-2007 to Present $2,000
100.0 5.40%
$1,900
95.0
Banks Relative to $1,800
S&P500 (Left) 4.90%
90.0
U.S. 10-Yr. Treasury $1,700
Yield (Right)
85.0 4.40% $1,600
80.0 QE1 $1,500
QE2 3.90%
75.0 $1,400
$1,300
70.0 3.40%
GDP
traction $1,200
65.0
+ Fed
policy
2.90% $1,100
60.0 ~2.75% X
$1,000
10Y?
55.0 2.40%
$900
50.0
Nov. 25, 2008 Fed Aug. 26,2010
$800
1.90%
announces asset Jackson Hole S&P 500
45.0 purchase plans, $700
Fed QE2 hint.
doubles up Mar-09. S&P Ex-Financials (Rebased)
40.0 1.40% $600
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
May-07
May-08
May-09
May-10
May-11
May-12
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Source: Bloomberg, Factset data, Stifel Nicolaus format.
Page 9

10. Market Strategy
Macro & Portfolio Strategy July 9, 2012
We think the S&P 500 “top” at ~1,600 will occur when Financials beat the worst performing sector
(probably Utilities, a bond proxy) by the “standard” 40%-50% gap (left chart). S&P 500 profits have
shifted from Financials to Technology since the secular bear market began in 2000, accelerated by
the 2008-09 crisis (right chart). Our expectation is that Technology-as-growth will be re-rated
upward concurrent with Financials bouncing in relief due to the avoidance (for now) of deflation.
Annual gap: best minus worst S&P sector % of S&P 500 Income from Continuing
prof it Operations by Sector
Other than crisis years, the gap is usually ~40%-50% 100%
Utilities
150%
140% 90%
Telecom.
Tech
Services
130%
80% larger
Materials
120%
110% 70%
Info. Tech.
100%
60%
90% Industrials
80% 50%
Health Care
70%
Finance
60% 40% smaller Financials
50%
30%
Energy
40%
30% 20%
Consumer
20% Staples
10%
10% Consumer
Discretionary
0% 0%
2011
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
1Q00
4Q00
3Q01
2Q02
1Q03
4Q03
3Q04
2Q05
1Q06
4Q06
3Q07
2Q08
1Q09
4Q09
3Q10
2Q11
1Q12
Source: Stifel Nicolaus chart, Factset prices. Dip in the right chart is due to Finance sector sustaining large operating losses in the aggregate 2008-09.
Page 10