Commentary on Economics, Markets and Politics to Help Business Leaders Make Good Decisions June 9, 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 Now is a good time to access credit (investment grade corporate and high-yield issues are coming to market) and raise equity (12 weeks into stock market rally) 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

Now is a good time to access credit (investment grade corporate and high-yield issues are coming to market) and raise equity (12 weeks into stock market rally) 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 politicians are very involved in the banks and the U.S. auto industry. Look for auto parts suppliers to pursue government rescue money. FDIC says CEOs at banks that received TARP money may be replaced. California will likely pursue a federal bailout as a response to failed state politics. The extension of Washington rescue packages to support states and municipalities would be messy with no end-game for exit. Sending stimulus dollars to the states is the least disruptive means for the federal government to provide a lift to local economies. Business executives should look for opportunities from new programs and funding sources through cities, states and federal agencies that will spend stimulus and bailout monies.

Washington is inserting itself more aggressively in the corporate realm.

The politicians are very involved in the banks and the U.S. auto industry. Look for auto parts suppliers to pursue government rescue money.

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

California will likely pursue a federal bailout as a response to failed state politics.

The extension of Washington rescue packages to support states and municipalities would be messy with no end-game for exit.

Sending stimulus dollars to the states is the least disruptive means for the federal government to provide a lift to local economies.

Business executives should look for opportunities from new programs and funding sources through cities, states and federal agencies that will spend stimulus and bailout monies.

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 17% 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 , 6/9/09 Lehman Brothers collapse and AIG bailout 12-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 17% 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 and Commodities Investors have been aggressively piling into emerging markets stocks and commodities as conditions in the U.S. appear to stabilize. MSCI Emerging Markets index is up 60% since the beginning of March. 5/28/09 +60%

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

MSCI Emerging Markets index is up 60% since the beginning of March.

The U.S. Recession is in Its 18 th – 19 th Month Q1: -5.7% 4Q08 with 1Q09 is worst actual GDP (3.0%) 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 May unemployment hit 9.4%, the highest since February 1983, 26 years ago, after nonfarm payrolls fell 345K in May, the smallest monthly decline in Sep. 2008. The comprehensive unemployment rate of marginally attached and involuntary part-time workers (called U-6 by the Dept. of Labor) hit 16.4% in May, 6.6% higher than a year ago. Look for consumer spending to drop in Q2 2009. May: 9.4%

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 May unemployment hit 9.4%, the highest since February 1983, 26 years ago, after nonfarm payrolls fell 345K in May, the smallest monthly decline in Sep. 2008.

The comprehensive unemployment rate of marginally attached and involuntary part-time workers (called U-6 by the Dept. of Labor) hit 16.4% in May, 6.6% higher than a year ago.

Look for consumer spending to drop in Q2 2009.

U.S. Household Savings Rate is Rising – Good/Bad Household savings rate has increased to 5.7% of after-tax income, the highest rate since 1995. Increased savings rates create a near-term drag on economic growth, but improve the long-term health of the economy. Between 1970 and 2009 the average household savings rate was 6.6% broken down into two distinct periods: 1970 – 1985 it was in a sideways range of 8 – 12% 1985 – 2007 the savings rate marched from 8% down to 0% as credit availability grew Still, household debt is near record highs. 6/1/09 6/8/09

Household savings rate has increased to 5.7% of after-tax income, the highest rate since 1995.

Increased savings rates create a near-term drag on economic growth, but improve the long-term health of the economy.

Between 1970 and 2009 the average household savings rate was 6.6% broken down into two distinct periods:

1970 – 1985 it was in a sideways range of 8 – 12%

1985 – 2007 the savings rate marched from 8% down to 0% as credit availability grew

Still, household debt is near record highs.

Consumer Spending Declined Badly at the End of 2008 But Has Stabilized Around 0% Growth April: $337.7 billion April: -0.1%

Manufacturing Continues to Contract – 18 Months and Counting April: -0.5% Still contracting but at a slower rate than late 2008 May: 42.8 Still contracting but at a slower rate than the end of 2008

Durable Goods Orders Show Short-Term Stabilization Durable goods orders rose 1.9% in April after falling 2.1% in March. February through April is the first net positive 3-month period for durable goods orders since May – July of 2008. It is not clear if this is a pause before further declines or the building of a new base before new growth for orders. 5/28/09

Durable goods orders rose 1.9% in April after falling 2.1% in March.

February through April is the first net positive 3-month period for durable goods orders since May – July of 2008.

It is not clear if this is a pause before further declines or the building of a new base before new growth for orders.

Housing Transactions and Supply Appear to Be Stabilizing But It Is Unclear if This is a Pause in Declines or the Beginning of Stabilization April: 458,000 April: 4.68 million 5/22/09 April: 9.8 mos. inventory, 6 mos. is long-term average

Mortgage Delinquencies and Foreclosures are still Rising with Unemployment Policy makers and investors are concerned that an increase in mortgage rates from the recent all-time lows might damage the housing market further. Unemployment rates and consumer confidence will be larger drivers of the health of the housing market than half-point moves in interest rates. 5/28/09

Policy makers and investors are concerned that an increase in mortgage rates from the recent all-time lows might damage the housing market further.

Unemployment rates and consumer confidence will be larger drivers of the health of the housing market than half-point moves in interest rates.

Commercial Real Estate Is/Will Accumulate Large Losses There are $700B of commercial mortgage-backed securities (CMBS) in the U.S. $155B of CMBS loans are coming due between now and 2012. Two-thirds will likely not qualify for refinancing. Default rates could hit 30% ($210B) with loss rates hitting 13%, worse than the last serious collapse in commercial real estate in the early 1990’s. The Moody’s/REAL Commercial Property Price Index was at 148 in March. The commercial property index has declined 21% from a year ago. 5/26/09 6/9/09

There are $700B of commercial mortgage-backed securities (CMBS) in the U.S.

$155B of CMBS loans are coming due between now and 2012. Two-thirds will likely not qualify for refinancing.

Default rates could hit 30% ($210B) with loss rates hitting 13%, worse than the last serious collapse in commercial real estate in the early 1990’s.

The Moody’s/REAL Commercial Property Price Index was at 148 in March.

The commercial property index has declined 21% from a year ago.

Inflation Pressures Have Faded Near-Term, Some Concerns about Inflation in the Longer-Term April: - 3.7% April: -0.7%

Interest in Oil Grows – Speculation, Hedge Against Inflation, Expectations of Global Economic Growth Oil hit $68.44 on 6/5/09, double prices in March. Prices hit $125/barrel in July 2008. No concern that those highs will be hit again anytime soon. Global oil consumption is down 3% in 2009 compared to 2008. Buying interest in oil is driven by desires for hedge against future inflation and hopes for a recovery in demand. All eyes are on China, consumer of 9% of the world’s oil to see what happens with demand.

Oil hit $68.44 on 6/5/09, double prices in March.

Prices hit $125/barrel in July 2008.

No concern that those highs will be hit again anytime soon. Global oil consumption is down 3% in 2009 compared to 2008.

Buying interest in oil is driven by desires for hedge against future inflation and hopes for a recovery in demand.

All eyes are on China, consumer of 9% of the world’s oil to see what happens with demand.

Oil Demand, Inventories Do Not Support Higher Prices Global oil demand is down 30% from a year ago but oil has risen from $40/barrel in February to $65 in May/June. U.S. oil inventories are as high as any in the last 10 years. Oil is trading up on a hope for an improving global economy that drives up demand. Demand has not started to rise, yet. 5/28/09

Global oil demand is down 30% from a year ago but oil has risen from $40/barrel in February to $65 in May/June.

U.S. oil inventories are as high as any in the last 10 years.

Oil is trading up on a hope for an improving global economy that drives up demand. Demand has not started to rise, yet.

Watch US Dollar, Gold and Oil for Inflation and Health of the Global Economy Oil price collapsed in 2008 after hitting a record high in the summer. Oil prices appears to have found a bottom at $40 - $45 per barrel) and has rallied $25 as oil demand stops falling rapidly. Gold had an up-trend in place after the collapse of Lehman Brothers but the uptrend paused/stopped at $1,000/ounce as conflicting influences from longer-term inflation concerns from central bank easing meet greater risk appetites from investors and rising interest rates. Dollar has been weakening against most currencies since stocks hit a bottom in March. 6/9/09 6/9/09 6/9/09

Oil price collapsed in 2008 after hitting a record high in the summer. Oil prices appears to have found a bottom at $40 - $45 per barrel) and has rallied $25 as oil demand stops falling rapidly.

Gold had an up-trend in place after the collapse of Lehman Brothers but the uptrend paused/stopped at $1,000/ounce as conflicting influences from longer-term inflation concerns from central bank easing meet greater risk appetites from investors and rising interest rates.

Dollar has been weakening against most currencies since stocks hit a bottom in March.