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LPL Quarterly Market Insight Chart Book 2nd Qtr 2011

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LPL Quarterly Market Insight Chart Book 2nd Qtr 2011

  1. 1. LPL FINANCIAL RESEARCH Market Insight Quarterly Chart BookSecond Quarter 2011 Member FINRA/SIPC
  2. 2. LPL FINANCIAL RESEARCHThe Quarterly Market Insight Chart Book is intended to provide unbiasedcontext to the markets and economy. The Chart Book provides a factualframework to discuss the issues most relevant to investing using simpleto understand charts of key data. The Chart Book can be helpful inaddressing key topics such as economic growth in the United States andabroad, job growth, stock market valuations, corporate profits, inflation,monetary policy, commodity prices, and bond yields. This data is intendedto help investors understand performance, recognize risks, and identifyopportunities.There are two sections to the chart book. The main section featurescharts that will regularly appear in each quarterly edition. The secondsection features topical charts most relevant to the current environmentthat will vary from quarter-to-quarter. LPL Financial Member FINRA/SIPC 2
  3. 3. LPL FINANCIAL RESEARCH Table of Content4 Gross Domestic Products (GDP) Growth Rate 23 High-Yield Bond Spreads & Default Rate5 Emerging Market Gross Domestic Product (GDP) Growth 24 10-Year Treasury Yield & 10-Year Treasury Yield Minus Core CPI6 Budget Deficit Percent of Gross Domestic Product (GDP) 25 Investment-Grade Corporate Spread & Yield7 Unemployment Rate 26 Emerging Market Debt (EMD) Spread & Average Yield8 Non-farm Job Growth 27 30-Year Municipal Yields as a Percentage of Treasuries9 Wages and/or Personal Income/Personal Spending 28 Trade Weighted Dollar10 Home Sales 29 Leading Economic Indicators11 Home Prices 30 Treasury & Muni Yield Curves12 Vehicle Sales13 Current Conditions Index (CCI)14 Current Conditions Index (CCI) Components15 Consumer Price Index (CPI) Second Quarter Key Themes16 Commodity Price Index 32 The Debt Ceiling17 Institute for Supply Management (ISM) Index 33 The Impact of the Earthquake in Japan on the Global Economy18 Consumer Sentiment 34 Selling Municipal Bonds19 Federal Funds Rate with Futures Implied Going Out One Year 35 China’s Economy: Inflation & China’s Central Bank20 Federal Reserve (Fed) Balance Sheet 36 The Federal Reserves Next Steps21 S&P 500 EPS Historical & Estimates for the Next Four Quarters 37 ISM & S&P 500 Performance22 Historical S&P 500 PE Ratio Trailing & Forward 38 Classic Bubble Comparison LPL Financial Member FINRA/SIPC 3
  4. 4. LPL FINANCIAL RESEARCHGross Domestic Product (GDP) Growth Rate Real Gross Domestic Product: Quantity Index (Percent Change From Prior Quarter, Annual Rate) % 8 8 4 4 0 0 -4 -4 -8 -8 00 01 02 03 04 05 06 07 08 09 10 Source: Bureau of Economic Analysis /Haver Analytics 07/08/11 (Shaded area indicates recession) Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a countrys borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. LPL Financial Member FINRA/SIPC 4 Tracking# 734362 Exp. (7/13)
  5. 5. LPL FINANCIAL RESEARCHChina: Gross Domestic Product (GDP) Growth China: Gross Domestic Product at Current Prices & Exchange Rates % Change - Year to Year Bil.US$ 30 25 20 15 10 5 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Source: China National Bureau of Statistics/Haver Analytics 07/08/11 (Shaded area indicates recession) International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors. An emerging market is a nation that is progressing toward becoming advanced, as shown by some liquidity in local debt and equity markets and the existence of some form of market exchange and regulatory body. Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a countrys borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. LPL Financial Member FINRA/SIPC 5 Tracking# 734366 Exp. (7/13)
  6. 6. LPL FINANCIAL RESEARCHBudget Deficit Percent of Gross Domestic Product (GDP) Federal Surplus/Deficit {-} as Percentage of GDP Fiscal Year, % 2.5 0.0 -2.5 -5.0 -7.5 -10.0 65 70 75 80 85 90 95 00 05 10 Source: Office of Management and Budget /Haver Analytics 07/08/11 (Shaded area indicates recession) Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a countrys borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. LPL Financial Member FINRA/SIPC 6 Tracking# 734363 Exp. (7/13)
  7. 7. LPL FINANCIAL RESEARCHUnemployment Rate Civilian Unemployment Rate: 16 yr + Seasonally Adjusted 12 10 8 6 4 2 50 55 60 65 70 75 80 85 90 95 00 05 10 Source: Bureau of Labor Statistics /Haver Analytics 07/08/11 (Shaded area indicates recession) The unemployment rate is the percentage of the total labor force that is unemployed but actively seeking employment and willing to work. Tracking# 734364 Exp. (7/13) LPL Financial Member FINRA/SIPC 7
  8. 8. LPL FINANCIAL RESEARCHNon-farm Job Growth Change in Total Private Employment Seasonally Adjusted, Thousands 500 250 0 -250 -500 -750 -1000 01 02 03 04 05 06 07 08 09 10 11 Source: Bureau of Labor Statistics /Haver Analytics 07/08/11 (Shaded area indicates recession) Non-farm payroll employment is and economic indicator released by the U.S. Department of Labor. It is comprised of goods producing, construction and manufacturing companies. Tracking# 734365 Exp. (7/13) LPL Financial Member FINRA/SIPC 8
  9. 9. LPL FINANCIAL RESEARCHWages and/or Personal Income/Personal Spending Personal Income % Change - Year to Year Seasonally Adjusted Annual Rate, Bil.$ Personal Outlays % Change - Year to Year Seasonally Adjusted Annual Rate, Bil.$ 10.0 8 7.5 6 5.0 4 2.5 2 0.0 0 -2.5 -2 -5.0 -4 00 01 02 03 04 05 06 07 08 09 10 Sources: Bureau of Economic Analysis /Haver Analytics 07/08/11 (Shaded area indicates recession) Personal spending is the amount of expenses an individual has accounted for during the year. It includes mortgage payments, car payments, medical bills and shopping costs. Tracking# 734368 Exp. (7/13) LPL Financial Member FINRA/SIPC 9
  10. 10. LPL FINANCIAL RESEARCHHome Sales Existing 1-Family Home Sales: United States Seasonally Adjusted Annual Rate, Thousands New 1-Family Houses Sold: United States Seasonally Adjusted Annual Rate, Thousands 6750 1400 1200 6000 1000 5250 800 4500 600 3750 400 3000 200 01 02 03 04 05 06 07 08 09 10 Sources: NAR, CENSUS /Haver 07/08/11 (Shaded area indicates recession) Existing home sales is a measure of the number and price of sales of single-family homes other than new constructions. It is considered an economic indicator of the availability and affordability of mortgages and real estate in the United States. It is also considered a lagging indicator as it tends to react after changes in mortgage interest rates. Existing home sales tend to rise after a decline in mortgage rates and fall when the opposite happens. The U.S. National Association of Realtors publishes existing home sales monthly. LPL Financial Member FINRA/SIPC 10 Tracking# 734376 Exp. (7/13)
  11. 11. LPL FINANCIAL RESEARCHHome Prices S&P/Case-Shiller Home Price Index: U.S. National % Change - Year to Year Not Seasonally Adjusted, Q1-00=100 20 10 0 -10 -20 90 95 00 05 10 Source: S&P, Fiserv, and MacroMarkets LLC /Haver Analytics 07/08/11 (Shaded area indicates recession) The S&P/Chase-Shiller U.S. National Home Price Index tracks the growth in value of real estate by following the purchase price and resale value of homes that have undergone a minimum of two arms-length transactions. The index is named for its creators, Karl Chase and Robert Shiller. LPL Financial Member FINRA/SIPC 11 Tracking# 734373 Exp. (7/13)
  12. 12. LPL FINANCIAL RESEARCHVehicle Sales Light Weight Vehicle Sales {Autos+Light Trucks} Seasonally Adjusted Annual Rate, Mil. Units 22.5 20.0 17.5 15.0 12.5 10.0 7.5 90 95 00 05 10 Source: Bureau of Economic Analysis/Haver Analytics 07/08/11 (Shaded area indicates recession) Vehicle sales is the number of domestically produced units of cars, SUVs, minivans, and light trucks that are sold. These sales are reported on the first business day of the month. LPL Financial Member FINRA/SIPC 12 Tracking# 734374 Exp. (7/13)
  13. 13. LPL FINANCIAL RESEARCHCurrent Conditions Index (CCI) The Current Conditions Index is a weekly measure of the conditions that underpin our outlook for the markets and economy. The CCI provides real-time context and insight into the trends that shape our recommended actions to manage portfolios. This weekly index is not intended to be a leading index or predictive of where conditions are headed, but a coincident measure of where they are right now. We want to track the conditions in real-time to aid in investment decision making. Please see the weekly Current Conditions Index publication for specifics surrounding the make-up of the CCI. LPL Financial Member FINRA/SIPC 13 Tracking# 734375 Exp. (7/13)
  14. 14. LPL FINANCIAL RESEARCHCurrent Conditions Index (CCI) Components The Current Conditions Index (CCI) components are made up of 10 indicators that provided a weekly, real-time measure of the conditions in the economic and market environment. We standardized these components compared to their pre-crisis 10-year average, equally weighted their standardized scores, and aligned the resulting index with zero at the start of 2009. These components capture how the conditions are evolving from a wide range of angles. Each component is important and measures a different driver of the environment. Please see the weekly Current Conditions Index publication for specifics surrounding the make-up of the CCI. LPL Financial Member FINRA/SIPC 14 Tracking# 734379 Exp. (7/13)
  15. 15. LPL FINANCIAL RESEARCHConsumer Price Index (CPI) CPI-U: All Items % Change - Year to Year SA, 1982-84=100 CPI-U: All Items Less Food and Energy % Change - Year to Year SA, 1982-84=100 16 12 8 4 0 -4 65 70 75 80 85 90 95 00 05 10 Sources: Bureau of Labor Statistics /Haver Analytics 07/08/11 (Shaded area indicates recession) The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. LPL Financial Member FINRA/SIPC 15 Tracking#734382 Exp. (07/13)
  16. 16. LPL FINANCIAL RESEARCHCommodity Prices KR-CRB Spot Commodity Price Index: All Commodities 1967=100 600 500 400 300 200 90 95 00 05 10 Source: Commodity Research Bureau /Haver Analytics 07/08/11 (Shaded area indicates recession) The CRB Index is an unmanaged index, which cannot be invested into directly. Past performance is no guarantee of future results. The Commodity Research Bureau (CRB) Index is an index that measures the overall direction of commodity sectors. The CRB was designed to isolate and reveal the directional movement of prices in overall commodity trades. The fast price swings in commodities and currencies will result in significant volatility in an investors holdings. LPL Financial Member FINRA/SIPC 16 Tracking# 734380 Exp. (07/13)
  17. 17. LPL FINANCIAL RESEARCHInstitute for Supply Management (ISM) Index ISM Manufacturing: PMI Composite Index Seasonally Adjusted, 50+=Increasing 75 70 65 60 55 50 45 40 35 30 25 90 95 00 05 10 Source: Institute for Supply Management /Haver Analytics 07/08/11 (Shaded area indicates recession) The ISM index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys. Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. LPL Financial Member FINRA/SIPC 17 Tracking# 734381 Exp. (07/13
  18. 18. LPL FINANCIAL RESEARCHConsumer Sentiment University of Michigan: Consumer Sentiment Not Seasonally Adjusted, Q1-66=100 120 100 80 60 40 90 95 00 05 10 Source: University of Michigan /Haver Analytics 07/08/11 (Shaded area indicates recession) The University of Michigan Consumer Sentiment Index (MCSI) is a survey of consumer confidence conducted by the University of Michigan. The Michigan Consumer Sentiment Index (MCSI) uses telephone surveys to gather information on consumer expectations regarding the overall economy. LPL Financial Member FINRA/SIPC 18 Tracking# 734383 Exp. (07/13)
  19. 19. LPL FINANCIAL RESEARCHFederal Funds Ratewith Futures Implied Rates Going Out One Year Federal Open Market Committee: Fed Funds Target Rate % 10 8 6 4 2 0 90 95 00 05 10 Source: Federal Reserve Board /Haver Analytics 07/08/11 (Shaded area indicates recession) The Federal Funds Rate is the interest rate at which a depository institution lends immediately available funds (balances at the Federal Reserve) to another depository institution overnight. Tracking# 734384 Exp. (07/13) LPL Financial Member FINRA/SIPC 19
  20. 20. LPL FINANCIAL RESEARCHFederal Reserve (Fed) Balance Sheet All Fed Res Banks: Total Assets End Of Period, Bil.$ 3000 2500 2000 1500 1000 500 0 90 95 00 05 10 Source: Federal Reserve Board /Haver Analytics 07/08/11 (Shaded area indicates recession) The Federal Reserve Balance Sheet is the breakdown of the assets and liabilities held by the Federal Reserve. Tracking# 734388 Exp. (07/13) LPL Financial Member FINRA/SIPC 20
  21. 21. LPL FINANCIAL RESEARCHS&P 500 EPS Historical& Estimates for the Next Four Quarters $120 $100 $80 $60 $40 $20 $0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: LPL Financial, Thomson Financial, Bloomberg data 7/11/11 The S&P 500 is an unmanaged index, which cannot be invested into directly. Past performance is no guarantee of future results. The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Earnings per share (EPS) is the portion of a companys profit allocated to each outstanding share of common stock. EPS serves as an indicator of a companys profitability. Earnings per share is generally considered to be the single most important variable in determining a shares price. It is also a major component used to calculate the price-to-earnings valuation ratio. Tracking# 734389 Exp. (07/13) LPL Financial Member FINRA/SIPC 21
  22. 22. LPL FINANCIAL RESEARCH Historical S&P 500 PE Ratio Trailing & Forward S&P 500 Forward PE Ratio S&P 500 Trailing PE Ratio35 3530 3025 2520 2015 1510 10 5 5 0 0 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: LPL Financial, Thomson Financial, Bloomberg data 7/11/11 The S&P 500 is an unmanaged index, which cannot be invested into directly. Past performance is no guarantee of future results. The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The P/E ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio. LPL Financial Member FINRA/SIPC 22 Tracking# 734387 Exp. (07/13)
  23. 23. LPL FINANCIAL RESEARCHHigh Yield Bond Spreads & Default Rate Source: Barclays, Moody’s, LPL Financial 6/30/11 All Indices are unmanaged and cannot be invested into directly. High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. High-Yield spread is the yield differential between the average yield of high-yield bonds and the average yield of comparable maturity Treasury bonds. The Default Rate This rate can be used in reference to two main things: The rate of borrowers who fail to remain current on their loans. It is a critical piece of information used by lenders to determine their risk exposure and economists to evaluate the health of the overall economy. And, The interest rate charged to a borrower when payments on a revolving line of credit are overdue. This higher rate is applied to outstanding balances in arrears in addition to the regular interest charges for the debt. LPL Financial Member FINRA/SIPC 23 Tracking# 734390 Exp. (7/13)
  24. 24. LPL FINANCIAL RESEARCH10-year Treasury yield & 10-year Treasury YieldMinus Core Consumer Price Index (CPI) 10-Year Treasury Note Yield at Constant Maturity Real Yield Average,% 10-yr Treasury Yield Less Core CPI (YOY)6 3.5 3.05 2.54 2.0 Period Average 1.53 1.02 02 03 04 05 06 07 08 09 10 11 0.5 Source: U.S. Treasury /Haver Analytics 07/08/11 02 03 04 05 06 07 08 09 10 11 Source: Haver Analytics 07/08/11 (Shaded area indicates recession) The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of a fund shares is not guaranteed and will fluctuate. LPL Financial Member FINRA/SIPC 24 Tracking# 734391 Exp. (7/13)
  25. 25. LPL FINANCIAL RESEARCH Investment-Grade Corporate Spread & YieldSource: Barclays, LPL Financial 7/8/11Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additionalrisks based on the quality of issuer coupon rate, price, yield, maturity and redemption features.High-Yield spread is the yield differential between the average yield of high-yield bonds and the average yield of comparable maturity Treasury bonds. LPL Financial Member FINRA/SIPC 25Tracking# 734392 Exp. (7/13)
  26. 26. LPL FINANCIAL RESEARCHEmerging Market Debt (EMD) Spread & Yield Source: Barclays, LPL Financial 7/8/11 The Barclays Global EM Bond Index is unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. International and emerging markets investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. High-Yield spread is the yield differential between the average yield of high-yield bonds and the average yield of comparable maturity Treasury bonds. Yield is the income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investments cost, its current market value or its face value. LPL Financial Member FINRA/SIPC 26 Tracking# 734393 Exp. (7/13)
  27. 27. LPL FINANCIAL RESEARCH30-year Municipal Yields as a Percentage of Treasuries 30-year AAA Municipal Yield as a Percentage of Treasuries 225 200 175 150 125 100 75 03 04 05 06 07 08 09 10 11 Source: Haver Analytics 07/08/11 (Shaded area indicates recession) Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of a fund shares is not guaranteed and will fluctuate. An obligation rated AAA has the highest rating assigned by Standard & Poors. The obligors capacity to meet its financial commitment on the obligation is extremely strong. LPL Financial Member FINRA/SIPC 27 Tracking# 734394 Exp. (7/13)
  28. 28. LPL FINANCIAL RESEARCHTrade Weighted Dollar Nominal Trade-Weighted Exch Value of US$ vs Major Currencies Mar-73=100 160 140 120 100 80 60 75 80 85 90 95 00 05 10 Source: Federal Reserve Board /Haver Analytics 07/08/11 (Shaded area indicates recession) Trade weighted dollar is a representation of the foreign currency price of the US dollar or the export value of the US dollar. LPL Financial Member FINRA/SIPC 28 Tracking# 734395 Exp. (7/13)
  29. 29. LPL FINANCIAL RESEARCHLeading Economic Indicators ECRI Weekly Leading Index % Change - Year to Year 1992=100 30 20 10 0 -10 -20 -30 70 75 80 85 90 95 00 05 10 Source: Haver Analytics 07/12/11 (Shaded area indicates recession) ECRIs Weekly Leading Index (WLI) is a composite index constructed of seven USA weekly economic series (M2, JOC-ECRI industrial materials price index, initial unemployment insurance claims, mortgage applications, S&P 500, 10-yr Treasury bond yield, and bond quality spread). The limited availability of weekly data constrains the number of variables in the composite index, but this has not hurt the WLIs predictive power. LPL Financial Member FINRA/SIPC 29 Tracking# 734396 Exp. (7/13)
  30. 30. LPL FINANCIAL RESEARCH Treasury & Muni Yield Curves US Treasury Yield Curve AAA Municipal GO 5.00 5.00 4.50 4.50 4.00 4.00 3.50 3.50 3.00 3.00 Yield 2.50Yield 2.50 2.00 2.00 1.50 1.50 1.00 1.00 0.50 0.00 0.50 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 0.00 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036 2038 2040 Maturity Maturity Source: Factset 07/08/11 An obligation rated AAA has the highest rating assigned by Standard & Poors. The obligors capacity to meet its financial commitment on the obligation is extremely strong. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of a fund shares is not guaranteed and will fluctuate. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Yield Curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth. Tracking# 734397 Exp. (7/13) LPL Financial Member FINRA/SIPC 30
  31. 31. Second Quarter Key Themes
  32. 32. LPL FINANCIAL RESEARCHThe Debt Ceiling Has Been Raised NumerousTimes Over the Past 25 Years Public Debt Outstanding: Statutory Debt Limit End Of Period, Tril.$ Treasury Securities Outstanding Tril.$ 15.0 12.5 10.0 7.5 5.0 02 03 04 05 06 07 08 09 10 11 Sources: U.S. Treasury /Haver Analytics 07/08/11 (Shaded area indicates recession) The Statutory Debt Limit was established under the Second Liberty Bond Act of 1917 that limits the amount of public debt that can be outstanding. The Statutory Debt Limit, or debt ceiling, prevents the U.S. Treasury from issuing new debt once the limit has been reached. However, the debt limit can be raised, and has often been raised, with approval from the U.S. Congress. LPL Financial Member FINRA/SIPC 32 Tracking #74238 Exp. (07/13)
  33. 33. LPL FINANCIAL RESEARCHMarkets Probably Underestimated the Impact of the Earthquake in Japan on the GlobalEconomy, but Now Conditions in Japan Have Begun to Improve Noticeably (Japan GDP) Japanese Purchasing Managers Index (Index Greater Than 50, Japanese Manufacturing Expanding Index Less Than 50, Japanese Manufacturing Contracting ) 65 60 55 50 45 40 35 30 25 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Jan-04 Oct-04 Jan-05 Oct-05 Jan-06 Oct-06 Jan-07 Oct-07 Jan-08 Oct-08 Jan-09 Oct-09 Jan-10 Oct-10 Jan-11 Jul-04 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Source: Bloomberg 07/11/11 Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a countrys borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. LPL Financial Member FINRA/SIPC 33 Tracking #742384 Exp. (07/13)
  34. 34. LPL FINANCIAL RESEARCHSelling Municipal Bonds 300% Debt to GDP 250% 200% 150% 100% 50% 0% California Average State United States Portugal Greece Japan Illinois Source: LPL Financial, Center for Budget and Policy Research, Bureau of Economic Analysis 2/07/11 Debt-to-GDP is a measure of a countrys federal debt in relation to its gross domestic product (GDP). By comparing what a country owes and what it produces, the debt-to-GDP ratio indicates the countrys ability to pay back its debt. The ratio is a coverage ratio on a national level. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. LPL Financial Member FINRA/SIPC 34 Tracking #742385 Exp. (07/13)
  35. 35. LPL FINANCIAL RESEARCHAs China’s Economy has Cooled, Inflation has Heated UP,Prompting Higher Rates From China’s Central Bank China: Real GDP: Year-to-Year Percent Change %, (left scale) China: Consumer Price Index Not Seasonally Adjusted, year/year % change, (right scale) 14 10 8 12 6 10 4 2 8 0 6 -2 01 02 03 04 05 06 07 08 09 10 11 Sources: China National Bureau of Statistics /Haver Analytics 07/08/11 The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. LPL Financial Member FINRA/SIPC 35 Tracking # 742389 Exp. (07/13)
  36. 36. LPL FINANCIAL RESEARCHThe Federal Reserve’s Next Steps: LPL Financial Research’stake on the Potential Process for Unwinding QE Step 1 June 2011 End of QE2: Fed stops buying Treasuries to expand its balance sheet Step 2 Second half 2011 Fed maintains size of balance sheet by reinvesting interest payments and maturing debt Step 3 2012 and beyond Fed begins to not reinvest allowing the balance sheet to start to contract Fed begins to hike interest rates Fed begins selling bonds Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Tracking #742390 Exp. (07/13) LPL Financial Member FINRA/SIPC 36
  37. 37. LPL FINANCIAL RESEARCHISM & S&P 500 Performance Moves in Step 65 ISM S&P 500 YOY% 50% 40% 60 30% 55 20% 10% 50 0% -10% 45 -20% 40 -30% -40% 35 -50% 30 -60% 1997 1999 2001 2003 2005 2007 2009 2011 Source: LPL Financial, Bloomberg data 6/1/11 The ISM index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys. The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries and cannot be invested into directly.. Past performance is no guarantee of future results. LPL Financial Member FINRA/SIPC 37 Tracking # 742394 Exp. (07/13)
  38. 38. LPL FINANCIAL RESEARCHClassic Bubble Comparison 1200% NASDAQ 3/16/1990 1000% Oil Price 6/26/1998 800% S&P 500 Homebuilders 6/30/1995 Gold Price 1/4/2002 600% 400% 200% 0% -200% 0 1 2 3 4 5 6 7 8 9 10 11 12 Year of Bubble Source: LPL Financial, Bloomberg Data 5/9/11 Bubble describes an economic cycle characterized by rapid expansion followed by a contraction. The fast price swings in commodities and currencies will result in significant volatility in an investors holdings. Precious metal investing is subject to substantial fluctuation and potential for loss. LPL Financial Member FINRA/SIPC 38 Tracking #742393 Exp. (07/13)
  39. 39. LPL FINANCIAL RESEARCHImportant Disclosure The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. This research material has been prepared by LPL Financial. The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity. Tracking# 742279 | Exp (7/13) LPL Financial Member FINRA/SIPC 39

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