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Microsoft Volatility Cheap vs. Semiconductor Stocks

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Stock market, volatility, Ryan Renicker, Ryan Nolan Renicker, options, investments, active investing, active investment management, portfolio management, portfolio manager, trading, option overlays, …

Stock market, volatility, Ryan Renicker, Ryan Nolan Renicker, options, investments, active investing, active investment management, portfolio management, portfolio manager, trading, option overlays, gamma, delta, vega, theta, rho, VIX, S&P 500, China, top-down, bottom-up, top down, bottom up, event driven, event-driven, geopolitics, geopolitical, global, ETFs, exchange traded funds, FX, currency, stock market, alternative investments, economy, economics, Ryan N. Renicker, CFA, Ryan Nolan Renicker, CFA

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  • 1. February 7, 2006 Equity Volatility Snapshot Ryan Renicker, CFA • Implied and realized volatility on the SMH have increased steadily in comparison with SWH 1.212.526.9425 implied and realized volatility.ryan.renicker@lehman.com Devapriya Mallick • Within the SWH, MSFT implied volatility is trading cheap relative to realized, as well as versus 1.212.526.5429 dmallik@lehman.com S&P 500 implied volatility. • We believe demand for downside protection on MSFT has recently decreased, as its put skew has declined. In addition, volume in MSFT calls has been relatively high versus its puts (YTD), possibly signaling greater demand for upside participation in MSFT. • Investors bullish on MSFT on a longer term basis should consider expressing their view by purchasing the January 2007 calls, as the term structure of MSFT implied volatility is relatively flat. • We update our Volatility Screen to identify stocks possibly having rich or cheap options. We also update our Earnings Watch to estimate the expected stock price reaction the options market is pricing in for upcoming earnings releases.Lehman Brothers 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 ofinterest that could affect the objectivity of this report.Customers of Lehman Brothers in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them,where such research is available. Customers can access this independent research at www.lehmanlive.com or can call 1-800-2LEHMAN to request a copy of this research.Investors should consider this report as only a single factor in making their investment decision.PLEASE SEE ANALYST(S) CERTIFICATION AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 7.
  • 2. Equity Derivatives Strategy | Equity Volatility Snapshot Market Weakens as Volatility Inches Higher Equity markets remained under pressure during the past week, on concerns that the lower than anticipated unemployment rate and rising wage inflation would prompt the Federal Reserve to continue hiking interest rates. In addition, other factors such as disappointing earnings releases/forecasts (e.g. TYC, AMZN) weighed on the market, offsetting the positive impact of declining crude oil prices. S&P 500 implied volatility (VIX) increased throughout the week, peaking above 13 last Thursday. Semiconductor Vols Increasing Relative to Software Vols During the past couple of months, implied and realized volatility on the Semiconductor HOLDRs Trust (SMH) have steadily increased relative to the Software HOLDRs Trust (SWH), due to several factors such as weaker than expected earnings announcements/2006 outlooks by some key constituents in the SMH (Figure 1). This is not surprising, since the correlation1 between SMH and SWH returns have steadily declined during the past couple of years (Figure 2).Figure 1: SMH Implied Vol Rises, SWH Vols Relatively Stable Figure 2: SWH vs. SMH Returns Have Become Less Correlated 30% 160 90% 28% SMH 3-month Implied Vol SWH 3-month Implied Vol 140 85% Correlation SWH and SMH Prices (Scaled) 26% Decreasing Steadily 80% 24% 120 Rolling Correlation 75% 22% 100 70% 20% 80 18% 65% 60 16% 60% SMH 14% 40 SWH 55% SMH-SWH Correlation 12% 20 50% 5 5 5 5 5 5 5 5 6 6 05 5 -0 -0 r-0 -0 0 -0 -0 l-0 0 0 -0 01 02 03 04 05 06 g- n- n- p- ay ar ct ov b ec Ju Ap Au n- n- n- n- n- n- Ju Ja Fe Se O M M N D Ja Ja Ja Ja Ja JaSource: Lehman Brothers, OptionMetrics Source: Lehman Brothers, OptionMetrics 1 We calculate rolling 252 trading-day (1 year) correlations using the daily log returns for the SMH and SWH. February 7, 2006 2
  • 3. Equity Derivatives Strategy | Equity Volatility Snapshot MSFT Options Trading Cheap We believe one factor that has contributed to SWH’s relatively stable (and low) implied volatility is the low level of risk expectations that have recently been priced into MSFT options. For example, after the company released strong Q2 results and raised the lower end of revenue guidance, MSFT shares rallied nearly 5%, its 3-month at-the-money (ATM) implied volatility continued to decline and -- despite increasing yesterday to slightly below16% - remains near its lowest level in at least 10 years. In addition, MSFT 3-month ATM implied – 66-trading day realized volatility spread remains near its 1- year low and is close to zero (Figure 3), compared to its average implied-realized volatility spread of above 2% since January 2005. Moreover, MSFT ATM 3-month implied volatility has recently traded at the lower end of its range relative to S&P 500 3-month implied volatility (volatility information based on yesterday’s close). In addition, a recent decline in MSFT’s 3-month put skew leads us to believe that investors are beginning to decrease their downside protection against their holdings in MSFT shares (Figure 4). This inference might also be supported by the relatively high volume of MSFT calls traded (average daily volume of ~ 70,000 contracts YTD) versus the number of puts traded (average daily volume of ~ 27,000 contracts YTD).Figure 3: MSFT Implied Cheap vs. Realized & SPX Implied Figure 4: Decreasing Downside Protection Against MSFT? 12% 7% MSFT Implied - Realized Spread MSFT Put Skew 10% 6% MSFT Implied - S&P 500 Implied MSFT Call Skew 5% 8% 4% 6% 3% 4% 2% 2% 1% 0% 0% -1% -2% -2% -4% -3% 05 5 05 05 06 05 5 05 5 5 06 5 05 05 l-0 -0 -0 -0 -0 5 5 05 5 5 5 5 5 5 06 5 5 5 p- - n- n- n- b- b- -0 g- -0 -0 -0 r- -0 -0 l-0 0 0 ov ec ay 0 -0 ar ct Ju g- Ja Ju Ja n- n- n- Fe Ap Se Fe p- ay Au ar r ct ov O b M ec N D M Ju Ap Au Ja Ju Ja Fe Se O M M N DSource: Lehman Brothers, OptionMetrics Source: Lehman Brothers, OptionMetrics Option Strategy Moreover, the term structure of MSFT implied volatility is relatively flat, since its longer-dated implied volatility (January 2007 expiration) is trading less than one vol point above it’s at-the-money March 2006 contract (based on last night’s close). We believe investors bullish on MSFT on a longer term basis should consider expressing their view by purchasing the January 2007 calls. February 7, 2006 3
  • 4. Equity Derivatives Strategy | Equity Volatility Snapshot Lehman Brothers Volatility Screen We update the list of stocks identified by the Lehman Brothers Volatility Screen as possibly having rich or cheap options. This screen allows investors to identify potentially rich or cheap one or three month options to efficiently express directional views on the underlying stock or identify attractive long or short volatility trading candidates. In Figure 5, we present the current list of stocks having relatively rich options according to the Lehman Brothers Volatility Screen.Figure 5: Stocks Displaying “Rich” Volatility Characteristics Std Devs from Std Devs from Std Devs from Lehman Expected 3-Month Lehman Mean (3-Month Mean (3-Month Mean (3-Month Ticker Name GICS Sector Company Price Earnings Implied Rich/Cheap Sector View Implied vs Implied vs Implied vs S&P Rating Date Volatility Realized) Sector) 500)AAPL APPLE COMPUTER INC Information Technology 2-Equal weight 2-Neutral 67.30 4/13/2006 48% 1.7 1.2 1.6 RichAG AGCO CORP Industrials 3-Underweight 2-Neutral 19.00 2/9/2006 37% 1.6 2.0 2.4 RichALEX ALEXANDER & BALDWIN INC Industrials 0-Unrated 0-Unrated 49.30 4/27/2006 29% 1.5 1.5 1.7 RichAT ALLTEL CORP Telecommunication Servic1-Overweight 1-Positive 59.74 4/21/2006 20% 1.3 1.2 1.7 RichBCR BARD (C.R.) INC Health Care 0-Unrated 0-Unrated 61.00 4/19/2006 25% 1.7 1.3 2.1 RichBEC BECKMAN COULTER INC Health Care 0-Unrated 0-Unrated 58.23 2/17/2006 30% 1.1 2.0 2.3 RichBEN FRANKLIN RESOURCES INC Financials 1-Overweight 1-Positive 96.90 4/28/2006 23% 1.1 1.1 1.8 RichBER WR BERKLEY CORP Financials 0-Unrated 0-Unrated 48.36 2/13/2006 24% 1.1 1.4 1.9 RichBHI BAKER HUGHES INC Energy 2-Equal weight 1-Positive 75.92 2/16/2006 37% 1.5 1.6 4.3 RichBKH BLACK HILLS CORP Utilities RS-Rating Suspe2-Neutral 35.40 2/7/2006 23% 2.2 2.0 1.7 RichBLI BIG LOTS INC Consumer Discretionary 0-Unrated 0-Unrated 13.33 2/23/2006 40% 1.9 1.7 1.7 RichBMY BRISTOL-MYERS SQUIBB CO Health Care 3-Underweight 1-Positive 22.37 4/28/2006 27% 1.6 2.6 3.0 RichBSX BOSTON SCIENTIFIC CORP Health Care 1-Overweight 1-Positive 21.62 2/7/2006 45% 2.3 3.3 3.6 RichCAT CATERPILLAR INC Industrials 2-Equal weight 2-Neutral 68.70 4/24/2006 28% 1.8 2.2 2.3 RichDLX DELUXE CORP Industrials 0-Unrated 0-Unrated 26.27 4/28/2006 26% 1.1 2.6 2.6 RichEAS ENERGY EAST CORPORATION Utilities 0-Unrated 0-Unrated 24.44 2/10/2006 21% 1.2 1.4 1.6 RichESRX EXPRESS SCRIPTS INC Health Care 2-Equal weight 2-Neutral 89.76 2/22/2006 35% 1.1 1.4 1.7 RichEXC EXELON CORP Utilities 1-Overweight 3-Negative 56.05 4/25/2006 24% 2.2 1.4 1.3 RichFITB FIFTH THIRD BANCORP Financials 2-Equal weight 1-Positive 36.53 4/13/2006 23% 1.1 1.3 1.5 RichFLR FLUOR CORP Industrials 2-Equal weight 2-Neutral 87.55 3/1/2006 29% 1.7 1.2 1.4 RichFPL FPL GROUP INC Utilities RS-Rating Suspe3-Negative 40.91 4/26/2006 20% 1.4 1.7 1.4 RichGPC GENUINE PARTS CO Consumer Discretionary 2-Equal weight 3-Negative 42.24 2/21/2006 20% 2.1 1.5 1.9 RichGRMN GARMIN LTD Consumer Discretionary 2-Equal weight 2-Neutral 62.68 2/22/2006 47% 1.2 1.7 2.2 RichHNZ HJ HEINZ CO Consumer Staples 2-Equal weight 3-Negative 33.70 2/28/2006 19% 3.7 2.5 2.3 RichHP HELMERICH & PAYNE Energy 0-Unrated 0-Unrated 78.70 4/27/2006 37% 1.0 1.2 2.1 RichHPQ HEWLETT-PACKARD CO Information Technology 1-Overweight 2-Neutral 30.27 2/15/2006 31% 1.9 1.6 1.9 RichHSY HERSHEY CO/THE Consumer Staples 2-Equal weight 3-Negative 51.06 4/21/2006 21% 1.6 2.3 2.1 RichISRG INTUITIVE SURGICAL INC Health Care 0-Unrated 0-Unrated 106.69 4/21/2006 59% 1.4 2.1 2.2 RichJKHY JACK HENRY & ASSOCIATES INC Information Technology 0-Unrated 0-Unrated 21.89 4/20/2006 30% 2.3 1.8 2.0 RichJP JEFFERSON-PILOT CORP Financials RS-Rating Suspe2-Neutral 56.89 4/27/2006 25% 4.0 3.5 3.7 RichLEA LEAR CORP Consumer Discretionary 3-Underweight 3-Negative 24.65 4/21/2006 49% 1.2 2.3 2.2 RichLRY LIBERTY PROPERTY TRUST Financials 2-Equal weight 2-Neutral 44.40 4/25/2006 34% 4.5 4.0 4.1 RichMI MARSHALL & ILSLEY CORP Financials 2-Equal weight 2-Neutral 41.76 4/12/2006 21% 3.8 3.0 2.9 RichMRBK MERCANTILE BANKSHARES CORPFinancials 1-Overweight 2-Neutral 37.44 4/26/2006 21% 2.4 2.0 2.3 RichMYG MAYTAG CORP Consumer Discretionary 0-Unrated 0-Unrated 17.46 4/21/2006 60% 1.9 2.6 2.7 RichNAV NAVISTAR INTERNATIONAL Industrials 0-Unrated 0-Unrated 27.06 2/28/2006 39% 1.2 1.6 1.8 RichNEM NEWMONT MINING CORP Materials 3-Underweight 1-Positive 60.48 2/27/2006 38% 1.5 1.8 2.8 RichOKE ONEOK INC Utilities 1-Overweight 2-Neutral 26.89 2/22/2006 23% 1.4 1.1 1.3 RichPGL PEOPLES ENERGY CORP Utilities 2-Equal weight 2-Neutral 36.81 4/28/2006 20% 2.2 1.1 1.3 RichRDN RADIAN GROUP INC Financials 1-Overweight 1-Positive 55.55 4/20/2006 27% 1.4 1.6 2.2 RichRE EVEREST RE GROUP LTD Financials 1-Overweight 1-Positive 97.45 4/18/2006 25% 1.1 2.3 2.5 RichRL POLO RALPH LAUREN CORP Consumer Discretionary 0-Unrated 0-Unrated 57.47 2/7/2006 30% 1.4 1.5 1.8 RichRYN RAYONIER INC Financials 0-Unrated 0-Unrated 42.21 4/26/2006 22% 1.4 1.2 1.8 RichSAFC SAFECO CORP Financials 1-Overweight 1-Positive 50.67 4/19/2006 23% 2.2 2.3 2.5 RichSFG STANCORP FINANCIAL GROUP Financials 3-Underweight 2-Neutral 51.01 4/26/2006 39% 4.2 5.6 5.3 RichSHW SHERWIN-WILLIAMS CO/THE Consumer Discretionary 0-Unrated 0-Unrated 52.57 4/21/2006 25% 2.0 2.8 2.5 RichSNA SNAP-ON INC Consumer Discretionary 3-Underweight 3-Negative 38.40 4/21/2006 24% 1.7 1.9 2.6 RichTBL TIMBERLAND CO-CL A Consumer Discretionary 0-Unrated 0-Unrated 35.08 2/9/2006 30% 2.4 1.2 1.9 RichUVN UNIVISION COMMUNICATIONS-A Consumer Discretionary 1-Overweight 3-Negative 31.23 3/2/2006 34% 1.7 1.1 2.1 RichVRX VALEANT PHARMACEUTICALS INTHealth Care 0-Unrated 0-Unrated 17.26 2/24/2006 77% 2.7 3.1 3.2 RichWDR WADDELL & REED FINANCIAL-A Financials 2-Equal weight 1-Positive 22.28 4/26/2006 38% 3.0 3.6 4.2 RichWFMI WHOLE FOODS MARKET INC Consumer Staples 2-Equal weight 2-Neutral 71.95 2/8/2006 33% 1.6 1.6 1.6 RichX UNITED STATES STEEL CORP Materials 2-Equal weight 1-Positive 61.57 4/26/2006 49% 1.9 1.5 2.5 RichSource: Lehman Brothers, OptionMetrics, Bloomberg, FAMENote: This screen does not exclude stocks with illiquid options. Investors should consider liquidity before entering into an options position. Stocks that appear as unrated are eithernot covered by Lehman Brothers fundamental analysts or are currently subject to research restrictions. Our universe includes stocks included in either the S&P 500 or the NDX. In Figure 6, we provide the current list of stocks having relatively cheap options according to the Lehman Brothers Volatility Screen.Figure 6: Stocks Displaying “Cheap” Volatility Characteristics Std Devs from Std Devs from Std Devs from Lehman Expected 3-Month Lehman Mean (3-Month Mean (3-Month Mean (3-Month Ticker Name GICS Sector Company Price Earnings Implied Rich/Cheap Sector View Implied vs Implied vs Implied vs S&P Rating Date Volatility Realized) Sector) 500)ACS AFFILIATED COMPUTER SVCS-A Information Technology 1-Overweight 2-Neutral 62.72 4/21/2006 23% -2.5 -1.9 -1.0 CheapCBE COOPER INDUSTRIES LTD-CL A Industrials 1-Overweight 1-Positive 82.76 4/20/2006 18% -1.3 -1.7 -1.1 CheapCMS CMS ENERGY CORP Utilities 2-Equal weight 3-Negative 14.17 2/23/2006 22% -1.2 -1.6 -1.4 CheapCOL ROCKWELL COLLINS INC. Industrials 1-Overweight 1-Positive 50.00 4/27/2006 19% -3.5 -2.1 -1.6 CheapMCRL MICREL INC Information Technology 3-Underweight 1-Positive 14.30 4/28/2006 40% -2.1 -1.6 -1.2 CheapMNST MONSTER WORLDWIDE INC Industrials 0-Unrated 0-Unrated 46.77 4/26/2006 37% -1.2 -1.2 -1.1 CheapPLCM POLYCOM INC Information Technology 1-Overweight 2-Neutral 19.30 4/20/2006 34% -2.5 -2.2 -1.3 CheapPOS CATALINA MARKETING CORP Consumer Discretionary 0-Unrated 0-Unrated 22.40 5/18/2006 19% -5.3 -3.9 -4.0 CheapRSAS RSA SECURITY INC Information Technology 2-Equal weight 1-Positive 14.68 4/27/2006 36% -1.1 -2.0 -1.8 CheapSBL SYMBOL TECHNOLOGIES INC Information Technology 1-Overweight 2-Neutral 12.62 3/1/2006 35% -1.7 -1.7 -1.8 CheapSMTC SEMTECH CORP Information Technology 2-Equal weight 1-Positive 19.54 3/1/2006 34% -2.6 -2.1 -1.4 CheapSource: Lehman Brothers, OptionMetrics, Bloomberg, FAMENote: Acquisition targets with very low volatility have been removed from this list. Stocks that appear as unrated are either not covered by Lehman Brothers fundamental analysts orare currently subject to research restrictions. Our universe includes stocks included in either the S&P 500 or the NDX. February 7, 2006 4
  • 5. Equity Derivatives Strategy | Equity Volatility Snapshot Earnings Watch: Companies Reporting 1/24 – 1/30 We incorporate implied volatility information to ascertain the expected stock price reaction priced in by the options market for upcoming earnings announcements. Please see Options Strategy Monthly: th Low Volatility in the 7 Inning? (January 10, 2006) for further details. In Figure 7, we present this week’s edition of the Earnings Watch.Figure 7: Expected Absolute Stock Price Reactions to Upcoming Earnings Announcements Average Absolute Stock Price Average Stock Price Move Expected Implied 1-day Stock Ticker Name Price (1/23/06) Move Following Earnings Following Earnings Earnings Date Price Move Announcements AnnouncementsBMC BMC SOFTWARE INC 07-Feb-06 21.39 6.1% 5.9% -5.0%CD CENDANT CORP 07-Feb-06 16.00 3.4% 1.7% -1.3%CSC COMPUTER SCIENCES CORP 07-Feb-06 50.14 5.1% 4.7% -0.2%CSCO CISCO SYSTEMS INC 07-Feb-06 17.83 4.6% 5.4% -4.9%WWY WRIGLEY WM JR CO 07-Feb-06 64.70 0.7% 1.8% 0.6%CI CIGNA CORP 08-Feb-06 119.27 3.1% 4.0% -0.6%CINF CINCINNATI FINANCIAL CORP 08-Feb-06 44.23 0.0% 1.3% 0.7%EDS ELECTRONIC DATA SYSTEMS CORP 08-Feb-06 24.99 3.1% 4.0% 0.5%PEP PEPSICO INC 08-Feb-06 56.77 1.8% 1.7% 0.9%PRU PRUDENTIAL FINANCIAL INC 08-Feb-06 75.25 1.8% 2.2% 1.0%RAI REYNOLDS AMERICAN INC 08-Feb-06 101.78 2.9% 2.3% 0.1%TMK TORCHMARK CORP 08-Feb-06 55.34 0.3% 2.2% -1.1%VFC VF CORP 08-Feb-06 55.17 0.8% 2.1% 1.0%ADI ANALOG DEVICES 09-Feb-06 40.18 3.5% 1.9% 0.4%AET AETNA INC 09-Feb-06 97.60 2.1% 4.1% 2.6%AIV APARTMENT INVT & MGMT CO -A 09-Feb-06 42.70 0.9% 2.1% -1.1%AN AUTONATION INC 09-Feb-06 22.35 2.4% 2.1% 1.6%AOC AON CORP 09-Feb-06 33.54 4.3% 6.8% 4.1%AW ALLIED WASTE INDUSTRIES INC 09-Feb-06 9.49 1.6% 7.2% -1.3%AYE ALLEGHENY ENERGY INC 09-Feb-06 34.60 1.0% 3.8% 1.2%CCE COCA-COLA ENTERPRISES 09-Feb-06 19.34 1.1% 5.9% -0.2%MAR MARRIOTT INTERNATIONAL-CL A 09-Feb-06 66.80 1.2% 2.4% 0.2%MBI MBIA INC 09-Feb-06 60.17 2.5% 1.9% 0.7%MET METLIFE INC 09-Feb-06 49.11 0.1% 3.2% 1.6%TAP MOLSON COORS BREWING CO -B 09-Feb-06 62.57 3.1% 5.3% -1.2%XL XL CAPITAL LTD -CLASS A 09-Feb-06 67.20 1.5% 1.9% 0.3%ECL ECOLAB INC 10-Feb-06 35.30 1.0% 2.1% 1.2%ODP OFFICE DEPOT INC 10-Feb-06 33.11 2.9% 3.4% 1.2%WPI WATSON PHARMACEUTICALS INC 10-Feb-06 31.75 3.9% 5.7% 0.4%A AGILENT TECHNOLOGIES INC 13-Feb-06 34.74 3.8% 5.8% 1.7%LNC LINCOLN NATIONAL CORP 13-Feb-06 52.67 1.5% 3.0% 1.7%OMX OFFICEMAX INC 13-Feb-06 28.02 1.2% 3.2% -1.4%Source: Source: Lehman Brothers, BloombergNote: This list does not exclude illiquid options. Investors should consider liquidity of options before entering a trade. For details on the methodology we use to calculate the impliedstock price move, please see “Earnings Impact on Implied and Realized Volatility”, included in the Options Strategy Monthly, January 10, 2006. February 7, 2006 5
  • 6. Equity Derivatives Strategy | Equity Volatility Snapshot Volatility Screen User Interface Obtain Implied Volatility Analytics for an Individual Stock Screen Universe for Rich/Cheap Volatility, By Sector, Analyst Rating, Earnings Period Implied and Realized Volatility Implied and Realized Rich/Cheap Indicators for for Individual Stock Screened Individual Stock ScreenedNote: Stocks that appear as unrated are either not covered by Lehman Brothers fundamental analysts or are currently subject to research restrictions. Volatility Screen Summary Output Number of Standard Deviations Above or Below Spreads’ 2-Year Average Current 1-Month If > 1 then “Rich”. If < -1 then “Cheap” Implied Volatility Rich/Cheap Metrics: Rich/Cheap Metrics: Company Details 1-Month 3-Month Implied Volatility Implied Volatility February 7, 2006 6
  • 7. Equity Derivatives Strategy | Equity Volatility SnapshotAnalyst Certification:The respective research analysts responsible for the fundamental ratings hereby certify (1) that the views expressed in this research email accurately reflect ourpersonal views about any or all of the subject securities or issuers referred to in this email and (2) no part of our compensation was, is or will be directly or indirectlyrelated to the specific recommendations or views expressed in this email.I, Ryan Renicker, hereby certify (1) that the views expressed in this research email accurately reflect my personal views about any or all of the subject securities orissuers referred to in this email and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressedin this email.To the extent that any of the conclusions are based on a quantitative model, Lehman Brothers hereby certifies (1) that the views expressed in this research emailaccurately reflect the firms quantitative research model (2) no part of the firms compensation was, is or will be directly or indirectly related to the specificrecommendations or views expressed in this research report.Important DisclosuresLehman Brothers 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 aconflict of interest that could affect the objectivity of this email communication.Customers of Lehman Brothers in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost tothem, where such research is available. Customers can access this independent research at www.lehmanlive.com or can call 1-800-2-LEHMAN to request a copy ofthis research.Investors should consider this communication as only a single factor in making their investment decision.The analysts responsible for preparing this report have received compensation based upon various factors including the Firm’s total revenues, a portion of which isgenerated by investment banking activities.Stock price and ratings history charts along with other important disclosures are available on our disclosure website at www.lehman.com/disclosuresAnd may also be obtained by sending a written request to: LEHMAN BROTHERS CONTROL ROOM , 745 SEVENTH AVENUE, 19TH FLOOR NEW YORK, NY10019Options are not suitable for all investors and the risks of option trading should be weighed against the potential rewards.Supporting documents that form the basis of the recommendations are available on request. Please note that the trade ideas withinthis report in no way relate to the fundamental ratings applied to European stocks by Lehman Brothers Equity Research.Guide to Lehman Brothers Equity Research Rating SystemOur coverage analysts use a relative rating system in which they rate stocks as 1-Overweight, 2- Equal weight or 3-Underweight (see definitions below) relative to othercompanies covered by the analyst or a team of analysts that are deemed to be in the same industry sector (“the sector coverage universe”). To see a list of companies thatcomprise a particular sector coverage universe, please go to www.lehman.com/disclosures.In addition to the stock rating, we provide sector views which rate the outlook for the sector coverage universe as 1-Positive, 2-Neutral or 3-Negative (see definitions below).A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including thedefinitions of all ratings and not infer its contents from ratings alone.Stock Rating1-Overweight - The stock is expected to outperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.2-Equal weight - The stock is expected to perform in line with the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.3-Underweight - The stock is expected to underperform the unweighted expected total return of the sector coverage universe over a 12-month investment horizon.RS-Rating Suspended - The rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstancesincluding when Lehman Brothers is acting in an advisory capacity on a merger or strategic transaction involving the company.Sector View1-Positive - sector coverage universe fundamentals are improving.2-Neutral - sector coverage universe fundamentals are steady, neither improving nor deteriorating.3-Negative - sector coverage universe fundamentals are deteriorating. February 7, 2006 7
  • 8. Equity Derivatives Strategy | Equity Volatility SnapshotDistribution of Ratings:Lehman Brothers Equity Research has 1845 companies under coverage.42% have been assigned a 1-Overweight rating which, for purposes of mandatory disclosures, is classified as a Buy rating, 35% of companies with this rating are investmentbanking clients of the Firm.41% have been assigned a 2-Equal weight rating which, for purposes of mandatory disclosures, is classified as a Hold rating, 6% of companies with this rating areinvestment banking clients of the Firm.17% have been assigned a 3-Underweight rating which, for purposes of mandatory disclosures, is classified as a Sell rating, 75% of companies with this rating areinvestment banking clients of the Firm.This material has been prepared and/or issued by Lehman Brothers Inc., member SIPC, and/or one of its affiliates (“Lehman Brothers”) and has been approved byLehman Brothers International (Europe), authorized and regulated by the Financial Services Authority, in connection with its distribution in the European EconomicArea. This material is distributed in Japan by Lehman Brothers Japan Inc., and in Hong Kong by Lehman Brothers Asia Limited. This material is distributed in Australiaby Lehman Brothers Australia Pty Limited, and in Singapore by Lehman Brothers Inc., Singapore Branch. (“LBIS”). Where this material is distributed by LBIS, pleasenote that it is intended for general circulation only and the recommendations contained herein does not take into account the specific investment objectives, financialsituation or particular needs of any particular person. An investor should consult his Lehman Brothers’ representative regarding the suitability of the product and takeinto account his specific investment objectives, financial situation or particular needs before he makes a commitment to purchase the investment product. This materialis distributed in Korea by Lehman Brothers International (Europe) Seoul Branch. This document is for information purposes only and it should not be regarded as anoffer to sell or as a solicitation of an offer to buy the securities or other instruments mentioned in it. No part of this document may be reproduced in any mannerwithout the written permission of Lehman Brothers. With the exception of disclosures relating to Lehman Brothers, this research report is based on current publicinformation that Lehman Brothers considers reliable, but we make no representation that it is accurate or complete, and it should not be relied on as such. In the caseof any disclosure to the effect that Lehman Brothers Inc. or its affiliates beneficially own 1% or more of any class of common equity securities of the subject company,the computation of beneficial ownership of securities is based upon the methodology used to compute ownership under Section 13(d) of the United States SecuritiesExchange Act of 1934. In the case of any disclosure to the effect that Lehman Brothers Inc. and/or its affiliates hold a short position of at least 1% of the outstandingshare capital of a particular company, such disclosure relates solely to the ordinary share capital of the company. Accordingly, while such calculation representsLehman Brothers’ holdings net of any long position in the ordinary share capital of the company, such calculation excludes any rights or obligations that LehmanBrothers may otherwise have, or which may accrue in the future, with respect to such ordinary share capital. Similarly such calculation does not include any sharesheld or owned by Lehman Brothers where such shares are held under a wider agreement or arrangement (be it with a client or a counterparty) concerning the sharesof such company (e.g. prime broking and/or stock lending activity). 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If a product is income producing, part of the capital invested may beused to pay that income. © 2006 Lehman Brothers. All rights reserved. Additional information is available on request. Please contact a Lehman Brothers entity in yourhome jurisdiction.Lehman Brothers policy for managing conflicts of interest in connection with investment research is available at www.lehman.com/researchconflictspolicy. Ratings,earnings per share forecasts and price targets contained in the Firms equity research reports covering U.S. companies are available atwww.lehman.com/disclosures.Complete disclosure information on companies covered by Lehman Brothers Equity Research is available at www.lehman.com/disclosures. February 7, 2006 8

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