Commentary on Economics, Markets and Politics to Help Business Leaders Make Good Decisions September 18, 2009 – Update Sean Lannan www.linkedin/in/SeanLannan

Commentary on Economics, Markets and Politics for Good Business and Investor Decision Making The financial markets have rallied for five months and are 56% above the March lows, manufacturing is showing early growth, the employment picture is still bad and commercial real estate market is deteriorating. Economic commentators expect 2 – 4% annualized GDP growth in the second half of 2009 and 2+% growth in 2010, modest growth but growth none the less. Consumer spending will not be a near-term engine for growth In 2010, the unemployment rate is expected to rise above the current 9.7%. Household savings rates are rising as spending falls. Defaults on mortgages and consumer credit will continue to rise for the rest of 2009. Now is a good time to access longer term credit and equity financing. High-yield debt spreads continue to narrow vs. treasuries. IPO market is reopening for select companies. 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.

The financial markets have rallied for five months and are 56% above the March lows, manufacturing is showing early growth, the employment picture is still bad and commercial real estate market is deteriorating.

Economic commentators expect 2 – 4% annualized GDP growth in the second half of 2009 and 2+% growth in 2010, modest growth but growth none the less.

Consumer spending will not be a near-term engine for growth

In 2010, the unemployment rate is expected to rise above the current 9.7%.

Household savings rates are rising as spending falls.

Defaults on mortgages and consumer credit will continue to rise for the rest of 2009.

Now is a good time to access longer term credit and equity financing.

High-yield debt spreads continue to narrow vs. treasuries.

IPO market is reopening for select companies.

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 The Washington debate over health care reform is distracting law makers from an important job of reforming the financial industry and managing systemic risk. The debates on how to reform health care and its costs are important to the health of individuals and America business and will take a long time to work out. Risks of trade disputes are growing. Washington just placed 35% duties on the import of Chinese-made vehicle tires. Beginning of a trade war with China or the first efforts to reform the export-driven Chinese industrial policy model? It is hard to judge how strong the private sector economy is in the U.S. with high levels of government intervention, easy monetary policy and stimulus spending. Look for positive surprises from economic numbers during the stimulus spending through 2010. Risk to growth if easy monetary policy and stimulus spending stops too soon.

The Washington debate over health care reform is distracting law makers from an important job of reforming the financial industry and managing systemic risk.

The debates on how to reform health care and its costs are important to the health of individuals and America business and will take a long time to work out.

Risks of trade disputes are growing.

Washington just placed 35% duties on the import of Chinese-made vehicle tires.

Beginning of a trade war with China or the first efforts to reform the export-driven Chinese industrial policy model?

It is hard to judge how strong the private sector economy is in the U.S. with high levels of government intervention, easy monetary policy and stimulus spending.

Look for positive surprises from economic numbers during the stimulus spending through 2010.

Risk to growth if easy monetary policy and stimulus spending stops too soon.

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 rebounded 56% from the March lows on the largest injection of liquidity is U.S. economic history (equivalent to 29% of GDP) and government intervention on a large scale. Doug Short at http://dshort.com/charts/bear-markets.html?four-bears , 9/18/09

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

The market has rebounded 56% from the March lows on the largest injection of liquidity is U.S. economic history (equivalent to 29% of GDP) and government intervention on a large scale.

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 22% in late 2008 to 9% in August. Investors are taking more risk in their search for yields. Companies, again, have access to credit outside of the bank loan market. 9/11/09

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

High-yield risk premiums declined 22% in late 2008 to 9% in August.

Investors are taking more risk in their search for yields.

Companies, again, have access to credit outside of the bank loan market.

Deterioration of the Labor Markets has Slowed Since the First-Half of 2009 The U.S. economy is shedding jobs very rapidly and creates a negative feedback loops since consumers drive 70% of U.S. GDP. In August unemployment hit 9.7%, the highest since 983, 26 years ago. 14.9 million are out of work. The comprehensive unemployment rate of marginally attached and involuntary part-time workers (called U-6 by the Dept. of Labor) hit 16.8% in August, 26.3 million people. The U.S. economy has lost 7.4 million jobs since the start of the recession in Dec ‘07. More jobs have been lost in this recession than were created in the previous expansion – a first. Lack of job openings will keep consumer spending and economic growth surpressed. July: 9.7% 8/6/09 9/9/09

The U.S. economy is shedding jobs very rapidly and creates a negative feedback loops since consumers drive 70% of U.S. GDP.

In August unemployment hit 9.7%, the highest since 983, 26 years ago. 14.9 million are out of work.

The comprehensive unemployment rate of marginally attached and involuntary part-time workers (called U-6 by the Dept. of Labor) hit 16.8% in August, 26.3 million people.

The U.S. economy has lost 7.4 million jobs since the start of the recession in Dec ‘07.

More jobs have been lost in this recession than were created in the previous expansion – a first.

Lack of job openings will keep consumer spending and economic growth surpressed.

U.S. Household Debts Shrink and Savings Rise Household debt has been contracting since the middle of 2008. The decrease either voluntary or forced by credit tightness by lenders will push down consumer purchasing. Household savings rate has increased to 6.9% of after-tax income in May. Increased savings is drag on economic activity. Between 1970 and 2009 the average household savings rate was 6.6% broken down into two distinct periods:1970 – 1985 it was in a range of 8 – 12% and 1985 – 2007 the savings rate marched from 8% down to 0%. Household debt is near record highs. It peaked at 133% of disposable income in Q4 2007 and had decreased to 128% in June 2009. 9/9/09 7/8/09

Household debt has been contracting since the middle of 2008. The decrease either voluntary or forced by credit tightness by lenders will push down consumer purchasing.

Household savings rate has increased to 6.9% of after-tax income in May. Increased savings is drag on economic activity.

Between 1970 and 2009 the average household savings rate was 6.6% broken down into two distinct periods:1970 – 1985 it was in a range of 8 – 12% and 1985 – 2007 the savings rate marched from 8% down to 0%.

Household debt is near record highs. It peaked at 133% of disposable income in Q4 2007 and had decreased to 128% in June 2009.

Will the U.S. Recession End in Q3 2009? This is the first time since quarterly record keeping started in 1947 that GDP contracted for four quarters in a row (3Q08 – 2Q09). August capacity utilization was 67%. Q2: -1.0% 9/21/09

This is the first time since quarterly record keeping started in 1947 that GDP contracted for four quarters in a row (3Q08 – 2Q09).

August capacity utilization was 67%.

Business Will Not Kick-Start a Strong Recovery Business will need to lead the U.S. economic recovery since households are burdened with debt, diminished retirement savings, and fears of job losses. Business investment in software and equipment is close to levels as high during the tech boom. Manufacturing capacity is running at only 67%. Business-led growth will be weak. 8/25/09

Business will need to lead the U.S. economic recovery since households are burdened with debt, diminished retirement savings, and fears of job losses.

Business investment in software and equipment is close to levels as high during the tech boom.

Manufacturing capacity is running at only 67%.

Business-led growth will be weak.

Manufacturing Has Started to Grow Aug: +0.8% Production has been growing for the last two months Aug: 52.9 Expanding for the first time since 2007

Housing Unit Sales Appear to Be Stabilizing But Price Declines Continue to Grind Onward Aug: 598,000 July: 5.2 million 6/22/09 More upscale homes are going into foreclosure, prices continue to fall

Commercial Real Estate Is/Will Accumulate Large Losses There are $700B of commercial mortgage-backed securities (CMBS) in the U.S. $153B of CMBS loans are coming due between now and 2012. Two-thirds will likely not qualify for refinancing. Deliquency rates were 3.1% in July, six times the levels of a year ago. 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. 8/31/09

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

$153B of CMBS loans are coming due between now and 2012. Two-thirds will likely not qualify for refinancing.

Deliquency rates were 3.1% in July, six times the levels of a year ago. 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.

Commercial Real Estate is Struggling Badly The market for U.S. commercial real estate is $6.5 trillion. Commercial property prices are down 35% from the 2007 peak and are at levels last seen in 2004. Public REITs are starting to make selective acquisitions of properties. $150 billion of commercial mortgage-backed securities will come due between 2009 and 2012. Refinancing will be a challenge which will raise the risk of default. There has been an 8X increase to 4% in delinquent loans since 2007. Treasury issued new guidance that loan restructurings can tax place without adverse tax consequences. 8/25/09 9/15/09

The market for U.S. commercial real estate is $6.5 trillion.

Commercial property prices are down 35% from the 2007 peak and are at levels last seen in 2004.

Public REITs are starting to make selective acquisitions of properties.

$150 billion of commercial mortgage-backed securities will come due between 2009 and 2012. Refinancing will be a challenge which will raise the risk of default.

There has been an 8X increase to 4% in delinquent loans since 2007.

Treasury issued new guidance that loan restructurings can tax place without adverse tax consequences.

Inflation Pressures Have Faded Near-Term Aug: - 4.3% Aug: - 1.5%

Watch US Dollar, Gold and Oil for Inflation and Health of the Global Economy Oil, gold and the U.S. dollar are metrics to watch for inflation and the health of the world economy. Oil prices collapsed in 2008 after hitting a record high in the summer. Oil prices are trading sideways after finding a bottom at $40 - $45 per barrel and has rallied $30 as the world economy stabilized. Gold started climbing after the collapse of Lehman Brothers and the Fed and Treasury established credit and liquidity facilities to flood the credit channel. Inflation concerns are growing over the next several years. Dollar has weakened vs. the major currencies as investors and traders believe non-U.S. economies will grow more quickly than the U.S. and will raise interest rates sooner than the U.S. The appetite for riskier assets outside the U.S. grows. 9/15/09 9/16/09 9/16/09 Oil (WTI futures) Gold (Comex futures)

Oil, gold and the U.S. dollar are metrics to watch for inflation and the health of the world economy.

Oil prices collapsed in 2008 after hitting a record high in the summer. Oil prices are trading sideways after finding a bottom at $40 - $45 per barrel and has rallied $30 as the world economy stabilized.

Gold started climbing after the collapse of Lehman Brothers and the Fed and Treasury established credit and liquidity facilities to flood the credit channel. Inflation concerns are growing over the next several years.

Dollar has weakened vs. the major currencies as investors and traders believe non-U.S. economies will grow more quickly than the U.S. and will raise interest rates sooner than the U.S. The appetite for riskier assets outside the U.S. grows.

Weakness in the Banking Sector Continues to Hurt the Economy Banking industry will be a drag on the U.S. economy until capital reserves are rebuilt in the next 2 – 3 years. The FDIC insurance fund has shrunk to $10.4B, the lowest since mid-1993, which insures $6.2T in U.S. bank deposits. The FDIC will need and injection of new capital through higher premiums to banks (drag on banks) or taxpayer dollars. 8/28/09 8/28/09

Banking industry will be a drag on the U.S. economy until capital reserves are rebuilt in the next 2 – 3 years.

The FDIC insurance fund has shrunk to $10.4B, the lowest since mid-1993, which insures $6.2T in U.S. bank deposits.

The FDIC will need and injection of new capital through higher premiums to banks (drag on banks) or taxpayer dollars.

Global Trade Is Not On Firm Footing Yet 90% of the world’s physical trading of goods is on ships and the Baltic Dry Index (BDIY) is a good indicator of trade. Shipping rates fell 85% in the second-half of 2008. Rates recovered one-half the losses in the first-half of 2009. But rates have lost on-half of the rebound in the last three months. 8/28/09

90% of the world’s physical trading of goods is on ships and the Baltic Dry Index (BDIY) is a good indicator of trade.

Shipping rates fell 85% in the second-half of 2008.

Rates recovered one-half the losses in the first-half of 2009.

But rates have lost on-half of the rebound in the last three months.