Commentary on Economics, Markets and Politics to Help Business Leaders Make Good Decisions May 15, 2009 – Update Sean Lannan www.linkedin/in/SeanLannan

Commentary on Economics, Markets and Politics for Good Decision Making Purpose of this commentary: Use readily available and understandable economic, markets and political news and information to help business leaders make good decisions. Operational thoughts for business leaders Access credit and raise equity when it is available to you in this environment. The cost of credit and equity is important but secondary now. Watch corporate cash flow closely. Cash flow is a very big deal. Watch suppliers closely for delivery performance and financial health. Ask suppliers for financials on a quarterly basis. Watch customers carefully for payment activity and financial health. Ask customer for financials on a quarterly basis. Expect to share your own financials with vendors, customers and bankers more often. This is a good time to pursue acquisitions with good values available. Only motivated sellers are in the market now and there is less competition on the buys-side. About the author: Sean Lannan is a CFO for a high technology company. He has a background in corporate finance, treasury, investor relations, mergers & acquisitions and fixed-income securities trading, an MBA in finance and BA in economics and political science.

Purpose of this commentary: Use readily available and understandable economic, markets and political news and information to help business leaders make good decisions.

Operational thoughts for business leaders

Access credit and raise equity when it is available to you in this environment. The cost of credit and equity is important but secondary now.

Watch corporate cash flow closely. Cash flow is a very big deal.

Watch suppliers closely for delivery performance and financial health. Ask suppliers for financials on a quarterly basis.

Watch customers carefully for payment activity and financial health. Ask customer for financials on a quarterly basis.

Expect to share your own financials with vendors, customers and bankers more often.

This is a good time to pursue acquisitions with good values available. Only motivated sellers are in the market now and there is less competition on the buys-side.

About the author: Sean Lannan is a CFO for a high technology company. He has a background in corporate finance, treasury, investor relations, mergers & acquisitions and fixed-income securities trading, an MBA in finance and BA in economics and political science.

Politics and the Economy Washington is inserting itself more aggressively in the corporate realm. The Obama administration removed the CEO of GM. FDIC says CEOs at banks that received TARP money may be replaced. Politicians are favoring labor unions and retirees vs. the bond holders at GM and Chrysler. The administration has put its efforts behind providing a better deal to the UAW over the contract law rights of secured lenders in the Chrysler bankruptcy. The administration wants to give the auto workers retirement fund a greater ownership of GM in its probable bankruptcy than the unsecured lenders who have an equal call on assets in bankruptcy. Moves by the administration threaten to overturn contract law and long-established bankruptcy practices.

Washington is inserting itself more aggressively in the corporate realm.

The Obama administration removed the CEO of GM.

FDIC says CEOs at banks that received TARP money may be replaced.

Politicians are favoring labor unions and retirees vs. the bond holders at GM and Chrysler.

The administration has put its efforts behind providing a better deal to the UAW over the contract law rights of secured lenders in the Chrysler bankruptcy.

The administration wants to give the auto workers retirement fund a greater ownership of GM in its probable bankruptcy than the unsecured lenders who have an equal call on assets in bankruptcy.

Moves by the administration threaten to overturn contract law and long-established bankruptcy practices.

Four Bad Bear Markets – ‘29-’32, ‘73-’74, ‘00-’02, ‘07-’09 The current bear market looked Depression-like through losses as of 3/6/09 (57% decline). The market has rebound 14% since the March low on the largest injection of liquidity is U.S. economic history (equivalent to 29% of GDP). Bear market rally of beginning of a new bull market? Doug Short at http://dshort.com/charts/bear-markets.html?four-bears , 5/14/09 Lehman Brothers collapse and AIG bailout 8-week rally: bear or bull mkt rally?

The current bear market looked Depression-like through losses as of 3/6/09 (57% decline).

The market has rebound 14% since the March low on the largest injection of liquidity is U.S. economic history (equivalent to 29% of GDP).

Bear market rally of beginning of a new bull market?

Investors Developing New Taste for Risk in Emerging Markets Investors have been aggressively piling into emerging markets stock as conditions in the U.S. appear to stabilize. MSCI Emerging Markets index is up 50% since the beginning of March. Brazil’s Bovespa is up 75% since the lows of October 2008 . 5/8/09 +50%

Investors have been aggressively piling into emerging markets stock as conditions in the U.S. appear to stabilize.

MSCI Emerging Markets index is up 50% since the beginning of March.

Brazil’s Bovespa is up 75% since the lows of October 2008 .

Revival of IPOs in March and April March and April have shown two months of improvement in the global IPO market. April was the best month for IPOs since June of 2008. The U.S. market has been more anemic. Four companies initiated IPOs in Q1 2009. Few registrations are following. 5/1/09

March and April have shown two months of improvement in the global IPO market. April was the best month for IPOs since June of 2008.

The U.S. market has been more anemic. Four companies initiated IPOs in Q1 2009. Few registrations are following.

High-Yield Debt Markets Have Re-Opened as a Source of Capital for Companies in 2009 The high-yield bond market has come back to life in first five months of 2009. High-yield risk premiums declined to 13% over Treasurys from 18% over at the beginning of the year. Risk premiums are still twice what they were a year ago but capital is again. Investors are taking more risk in their search for yields. This means some companies now have access to credit for the first time in half a year or have an alternative to the bank loan market. 5/5/09

The high-yield bond market has come back to life in first five months of 2009.

High-yield risk premiums declined to 13% over Treasurys from 18% over at the beginning of the year. Risk premiums are still twice what they were a year ago but capital is again.

Investors are taking more risk in their search for yields.

This means some companies now have access to credit for the first time in half a year or have an alternative to the bank loan market.

The U.S. Recession is in Its 18 th Month Q1: -6.1% Worst actual GDP decline since 1957-8

Labor Markets are Deteriorating Badly – May Prolong and Deepen the Recession The U.S. economy is shedding jobs very rapidly and could extend the length and depth of the recession via negative feedback loops since consumers drive 70% of U.S. GDP. In March unemployment hit 8.9%, the highest since November 1983. The comprehensive unemployment rate of marginally attached and involuntary part-time workers (called U-6 by the Dept. of Labor) hit 15.8% in April, 6% higher than a year ago. Look for consumer spending to drop in Q2 2009. Loss of incomes will increase rate of home foreclosures, stifle consumer spending, raise loss rates on credit cards and keep a lid on growth opportunities for the economy. April: 8.9%

The U.S. economy is shedding jobs very rapidly and could extend the length and depth of the recession via negative feedback loops since consumers drive 70% of U.S. GDP.

In March unemployment hit 8.9%, the highest since November 1983.

The comprehensive unemployment rate of marginally attached and involuntary part-time workers (called U-6 by the Dept. of Labor) hit 15.8% in April, 6% higher than a year ago.

Look for consumer spending to drop in Q2 2009.

Loss of incomes will increase rate of home foreclosures, stifle consumer spending, raise loss rates on credit cards and keep a lid on growth opportunities for the economy.

Initial Claims for Unemployment May Point to a Bottom Some economists believe the four-week moving average of initial claims for unemployment and continuing claims for unemployment are a good indicator for a turning point in an economy in recession. Initial claims for unemployment peaked in March 2009. This is an indication that the U.S. economy may be close to the end of the shrinking of the economy. Unemployment may continue to rise for another six to nine months while economic decline has bottomed. Look for confirmation. 5/7/09

Some economists believe the four-week moving average of initial claims for unemployment and continuing claims for unemployment are a good indicator for a turning point in an economy in recession.

Initial claims for unemployment peaked in March 2009.

This is an indication that the U.S. economy may be close to the end of the shrinking of the economy.

Unemployment may continue to rise for another six to nine months while economic decline has bottomed. Look for confirmation.

Consumer Spending Declined Badly at the End of 2008 But Has Stabilized Around 0% Growth April: $337.7 billion March: -0.2%

Housing Transactions and Supply Appear to Be Stabilizing But It Is Unclear if This is a Pause in Declines are the Beginning of Stabilization March: 510,000 March: 4.57 million

Manufacturing Continues to Contract – 18 Months and Counting April: -0.5% Still contracting but at a slower rate than late 2008 April: 40.1 Still contracting but at a slower rate than the end of 2008

Inflation Pressures Have Faded Near-Term, Some Concerns about the Risk of Deflation April: - 3.7% April: -0.7%

Watch US Dollar, Gold and Oil for Inflation and Health of the Global Economy Gold, oil and the U.S. dollar are metrics to watch for inflation and the health of the world economy as the U.S., UK, Japan and, maybe, EU embark on quantitative easing programs and other countries enact stimulus and bailout plans. Gold had an up-trend in place after the collapse of Lehman Brothers but the uptrend went flat as safehaven status of gold diminished with signs of stabilization and few near term fears about inflation. Seen some uptick in gold prices to $927/oz since this chart was published. Oil price collapsed in 2008 after hitting a record high in the summer. Oil prices appear to have found a bottom ($40 - $50 per barrel). 5/14/09 5/13/09 5/5/09

Gold, oil and the U.S. dollar are metrics to watch for inflation and the health of the world economy as the U.S., UK, Japan and, maybe, EU embark on quantitative easing programs and other countries enact stimulus and bailout plans.

Gold had an up-trend in place after the collapse of Lehman Brothers but the uptrend went flat as safehaven status of gold diminished with signs of stabilization and few near term fears about inflation. Seen some uptick in gold prices to $927/oz since this chart was published.

Oil price collapsed in 2008 after hitting a record high in the summer. Oil prices appear to have found a bottom ($40 - $50 per barrel).