1. Merchant Banking | Global Markets | Client Solutions Development Group (CDSG) Marketing Communication
Structured Equity Market Overview # 13
Bi-Weekly
02-Feb-2009
I. Editorial by Philippe Gijsels Structured Equity Strategist
Still undecided
We see similar reflexes all around the world as governments try to protect
The US stock market suffered a fourth straight losing week on the
their own jobs and own markets. It is not hard to imagine how the actions
back of mostly bad economic data and mostly cautious earnings guidance.
Stock markets in Europe and Asia fared a bit better. However, there was by one nation may cause other countries to “retaliate” in terms of
not immediately a stock market party either. protectionism, causing a negative chain reaction. Overall, the stimulus
plan will create a better stock market environment and be a key element
Over 230 companies from the S&P500 reported earnings. And for
in the continuation of the bear market rally. On the other hand, we should
whom it was not already crystal clear: earnings estimates for 2009 are still
certainly not be blind to the risks of protectionism and remember that the
way too high and will have to come down. Analysts have already brought
protectionist reflex greatly contributed to the severity of the great
down their figures for Q1 and Q2 of 2009. However, they still expect the
depression. Our history books teach us that the in 1930 passed
economy to rebound (strongly) in the second half of this year. This
Snoot-Hawley tariffs were met with reciprocal tariffs in other
will just not happen.
countries and world trade declined by 60%. Imagine what this
would do to our “globalised” world…
Microsoft even refused to give guidance for the entire 2009, which
means that they have no visibility whatsoever. Caterpillar a company with
60% of its turnover outside the US, also reported very disappointing figures As for the “bad bank”, there were rumors on friday that the idea is
and announced job cuts. The German IFO was a bit above expectations as put in the fridge for the time being. However, we would not be
was US Q4 GDP. The latter was mainly because of rising inventories, surprised if the Obama Administration were to announce a “big
something that should be corrected (in a negative sense) over the next bang” financial cleanup program in the not too distant future. Quite a
couple of quarters. Overall, there is and remains only one word to describe bit of options are still being discussed as what money (TARP money?) will
the current economic and corporate environment: Bad.
be used and how the assets that are moved from the banks’ balance
sheets will be valued. A model-based approach instead of an auction
So what we can hope for over the next couple of weeks is the (re)-
seems to have the largest probability. There is also a rumor that some
emergence of some leadership on the stimulus plan and the “bad
sort of a plan to reduce mortgage payments to maximum 38% of income
bank” idea. The Obama stimulus plan has been voted in the House of
is under consideration. It is clear that this would help the housing market
Representatives (without the supports of the Republicans, so it will not be a
to get back on its feet.
bi-partisan deal that many hoped for). So over course of the next couple of
weeks the plan will most probably also be voted in the senate. It will
contain something for everyone: tax cuts; incentives to hire workers, So, even though the battle between Central Banks an governments
infrastructure spending, aid for the States etc… After all, we are talking and the crisis is still undecided we continue to give the rally the
about quite a bit of money. It is doubtful that the plan will be able to create benefit of the doubt. In a way, it is impressive that markets were able to
the 3,000.000 new jobs that it is aiming for. However, in a war, even an hold on above the November lows, given the massive amount of bad
economic one, every riffle and bullet counts. There will certainly be jobs
news that has been hitting our screens. A market that no longer wants
created. And more importantly, it may boost confidence, which is
to go down on bad news, is ready to move up.
exactly what the economy and the stock markets around the world
need.
Over the next couple of weeks quite a bit of earnings and economic
figures will hit our screens. Most of them will continue to be bad.
One troubling aspect of the plan is the subtle move towards
We continue to cast our view hopefully towards Washington. White
economic nationalism. A “buy America” program is part of the
smoke on the “bad bank” and the Obama rescue package is what
stimulus package.
we need to see.

2. Marketing Communication
II. Fortis Market Sentiment Indicator
Fortis Sentiment Indicator
2.50
Since the collapse of Lehman Brothers mid september, our Too optimistic : sell
sentiment indicator has averaged -2.9. With a current 1.50
reading of -2.3, optimism remains weak in absolute terms
0.50
although this value is not dramatically low compared with
the current standards. -0.50
Sentiment
-1.50
-2.50
Too pessimistic: buy signal
-3.50 Bearn Stearns
LTCM collapse
2002 end of bear crisis
11 Sept. market
-4.50
Methodology of the indicator:
-5.50
Our sentiment indicator is built by combining 3 indices:
Jan 97
Sep 97
Jun 98
Feb 99
Oct 99
Jun 00
M 01
Nov 01
Jul 02
Apr 03
Dec 03
Aug 04
M 05
Jan 06
Sep 06
Jun 07
Feb 08
Oct 08
ay
ar
• the put call ratio,
• the difference between the American Association of Individual Investors (AAII) bullish and bearish readings and,
• the weekly average of the Vix index.
The data are updated on a weekly basis. All 3 indices are equallly-weighted and results are normalized. Our resulting sentiment index is a contrarian indicator.
Readings below -2.5 indicates extreme fear in the market or oversold conditions while readings above 1.6 show too much optimism or overbought conditions.
When the indicator is in oversold territory, it is usually a good entry point to buy equity. Conversely, when the indicator is in overbought territory, it is usually a
good sell signal.
We backtested our indicator from January 1997. We get 10 readings below -2.5 over that period. Entering the stockmarket at those moments of extreme stress
has yielded an impressive average 3-months return of 11.7% on the S&P 500 (i.e. 47% on a yearly basis) and of 11% on the DJ Euro Stoxx 50 (i.e. 44% on a
yearly basis).
Our indicator has reached a value of -3 five times over our 11 years history: in october 1998 when LTCM collapsed, the 11th of September 2001, in October
2002 at the end of the 2002 bear market, in March 2008 following the Bear Stearn crisis and now since the Lehman Brothers bankruptcy.
III. Implied volatility and implied correlations
• Implied volatility:it shows some tentative signs of easing off a bit. Still, it is important to note that we speak here about the medium term (5 year) implied
volatiltiy. In other words, the market now expects to be entering a much more volatile world in the years ahead.
• Correlation: the implied as well as the historical rolling correlations have levelled off at high levels
Implied volatility Correlation
5Y ATM implied volatility Historical rolling correlations
42.0
100%
38.0 80%
60%
34.0
40%
30.0
Correlation
20%
26.0
0%
22.0
-20%
18.0
-40%
14.0
-60%
06/2003
08/2003
11/2003
02/2004
05/2004
08/2004
10/2004
01/2005
04/2005
07/2005
10/2005
12/2005
03/2006
06/2006
09/2006
12/2006
03/2007
05/2007
08/2007
11/2007
02/2008
05/2008
07/2008
10/2008
01/2009
Jan-98
Jul-98
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
S&P 500 & DJE 50 S&P 500 & NIKKEI 225 DJE 50 & NIKKEI 225
DJ Eurostoxx 50 Nikkei 225 S&P 500 Source: Fortis
5Y implied volatility DJE 50 NIKKEI S&P 500 Correl ASK ATM DJE 50 NIKKEI 225 S&P 500
Standard deviation 4.3 4.2 4.4 DJE 50 100% 88% 92%
Mean (%) 22.3 20.9 21.1 NIKKEI 225 88% 100% 85%
Current level (%) 33.7 38.5 36.1 S&P 500 92% 85% 100%

3. Marketing Communication
IV. Valuations
Valuations of world equity markets are currently certainly not demanding. At the end of the day it of course all boils down to the question of how long and how
deep earnings will keep dropping. This quarter will be the 6th consecutive quarter of declining earnings, matching the earnings slump of 2001. With the 4th
quarter of earnings half-way through, one can draw some preliminary conclusions. We are currently heading to an earnings decline of about -30% compared with
Q4 2007 and we are back to the Q4 2002 earnings level. Of course Financials are taking on a big chunk of the losses. Excluding Financials, current decline is -
14.6% when share-weighted or -4% when market-cap weighted. As for the distribution of earnings surprises, the picture looks a little bit brighter than 2 weeks
ago with 60% of positive surprises (= actuel earnings higher than analysts' expectations). Still, we have to go back to the nineties to match current negative
surprises (which stand around 30% at the moment).
The tables below depict for the PE, the EPS and the dividend yields, 2007's mean level and JCF's forecasts for 2008. The historical averages are calculated from the last
10 years figures. The last column presents the ratio of the 2008 estimates and historical averages. The interest is to compare the current situation with a period that
represents a quot;full economic cyclequot;.
World indices DJ Eurostoxx sector indices
Datas & figures have been extracted from FACTSET Datas & figures have been extracted from FACTSET
Next 12
Next 12 Actual P/E Next 12 Hist. Avg months
Actual P/E Next 12 Hist. Avg
months P/E 2008 months P/E (last 10yrs) P/E Vs Hist
20088 months P/E (last 10 yrs) Avg
Vs Hist Avg
Automobiles & Parts 8.5 x 20.8 x 12.8 x 162%
6.8 x 8.3 x 14.7 x 57%
AEX Bench (NL) Banks 7.5 x 6.0 x 14.6 x 41%
Basic Resources 4.1 x 8.7 x 13.9 x 63%
13.0 x 8.4 x 14.9 x 57%
Bel 20 Bench (BE)
Chemicals 8.8 x 9.5 x 17.5 x 54%
8.6 x 8.8 x 18.2 x 48%
CAC 40 Bench (FR) Construction & Material 7.3 x 7.7 x 13.7 x 56%
14.6 x 9.3 x 20.9 x 45%
DAX Price Bench (DE) Financial Services 42.8 x 8.5 x 18.9 x 45%
9.1 x 8.2 x 18.3 x 45% Food & Beverage
DJ Euro Stoxx 50 Bench 12.0 x 11.6 x 18.9 x 62%
Health Care 10.7 x 9.7 x 24.1 x 40%
8.1 x 8.9 x 13.8 x 65%
FTSE 100 Full Share Bench (GB)
Industrial Goods & Services 9.0 x 8.7 x 21.2 x 41%
12.7 x 12.2 x 21.2 x 57%
S&P 500 (US) Insurance 12.2 x 6.5 x 19.4 x 34%
10.1 x 9.0 x 14.9 x 60%
Hang Seng Index (HK) Media 10.1 x 8.8 x 44.1 x 20%
Oil & Gas 6.1 x 7.9 x 13.5 x 58%
11.2 x 11.0 x 11.4 x 96%
KOSPI Index Bench (KR)
Personal & Household Goods 13.3 x 12.3 x 166.3 x 7%
16.0 x 15.9 x 35.3 x 45%
Nikkei 225 Bench (JP)
Retail 11.6 x 11.0 x 21.7 x 51%
Technology 10.8 x 17.1 x 51.0 x 34%
Actual Earnings
Historical EPS Growth Telecommunications 10.9 x 9.2 x 37.5 x 25%
Earnings Per Per Share Travel & Leisure 13.5 x 13.8 x 21.1 x 65%
Avg (last 10 09 Vs Hist
Share % % Change Utilities 11.0 x 9.4 x 16.6 x 56%
yrs) Avg
Change 2008 09
Actual Earnings
Historical EPS
-5.8% -18.3% 4.7% -387.7%
AEX Bench (NL) Earnings Per Per Share
Avg (last 10 Growth 09
Share % % Change
-50.2% 54.1% 2.9% 1839.3%
Bel 20 Bench (BE) yrs) Vs Hist Avg
Change 2008 09
-4.9% -10.5% 10.6% -98.8%
CAC 40 Bench (FR)
-26.7% -66.1% 7.9% -832.2%
Automobiles & Parts
-46.0% 38.8% 9.3% 418.5%
DAX Price Bench (DE)
-36.9% 12.7% 8.5% 149.8%
Banks
-19.9% 0.9% 9.4% 9.2%
DJ Euro Stoxx 50 Bench
76.3% -55.4% 33.1% -167.6%
Basic Resources
10.2% -17.0% 10.9% -155.6%
FTSE 100 Full Share Bench (GB) 4.9% -15.9% 16.6% -95.9%
Chemicals
-14.7% -6.5% 5.4% -120.5%
S&P 500 (US) -8.2% -13.2% 14.6% -90.7%
Construction & Material
-2.9% 3.4% 10.8% 31.6%
Hang Seng Index (HK) -81.2% 341.2% 1.9% 17542.4%
Financial Services
-19.3% 2.1% -3.7% -56.5%
KOSPI Index Bench (KR) 4.1% 2.3% 7.5% 31.1%
Food & Beverage
5.3% 9.1% 10.5% 87.1%
Health Care
-32.6% -11.6% 33.5% -34.7%
Nikkei 225 Bench (JP)
3.9% -4.3% 12.4% -35.0%
Industrial Goods & Services
-63.3% 61.8% 11.9% 521.1%
Insurance
Stock markets did some rollercoasting over the last 2 weeks, losing little ground -6.3% 7.0% 12.7% 55.3%
Media
in the end. 13.3% -23.6% 16.1% -146.8%
Oil & Gas
-11.5% -2.4% 565.8% -0.4%
Personal & Household Goods
0.6% 4.7% 4.9% 96.4%
Retail
Surprisingly, sectors with a defensive tone like Telecommunications or Health
-2.7% -42.4% 27.9% -151.9%
Technology
Care did very bad during the fortnight The Telecommunications sector has lost -8.4% 6.5% 27.0% 24.2%
Telecommunications
more than 15% since its high reached in begin January this year. Gainers are to -32.6% -10.2% 13.7% -74.3%
Travel & Leisure
6.1% 6.9% 11.8% 58.0%
Utilities
be found among Oil & Gas, Retail or Personal & Household Goods.
Actual Net Net Div
Net Div Hist. Avg
Div Yield Yield 08 Vs
Yield 09 (last 10yrs)
2008 Hist Avg
Actual Net Actual Net Net Div 2.9% 2.6% 2.7% 95.7%
Automobiles & Parts
Hist. Avg
Div Yield Div Yield Yield 09 Vs 4.6% 7.1% 3.2% 221.5%
Banks
(last 10yrs)
2008 YTD Hist Avg 5.6% 5.6% 3.5% 160.6%
Basic Resources
4.9% 5.4% 3.0% 178.9%
Chemicals
AEX Bench (NL) 5.7% 6.0% 3.4% 175.2% 5.7% 6.1% 2.7% 222.0%
Construction & Material
5.9% 6.6% 3.4% 195.0%
Financial Services
Bel 20 Bench (BE) 4.0% 4.8% 3.1% 155.3%
3.7% 3.5% 2.2% 158.6%
Food & Beverage
CAC 40 Bench (FR) 4.8% 5.6% 2.5% 224.5% 3.5% 3.8% 1.7% 223.1%
Health Care
DAX Price Bench (DE) 4.4% 5.1% 2.5% 200.9% 4.7% 4.9% 2.4% 199.7%
Industrial Goods & Services
5.6% 6.7% 2.8% 237.8%
Insurance
DJ Euro Stoxx 50 Bench 5.1% 6.2% 2.9% 211.9% 5.9% 6.4% 2.6% 249.1%
Media
FTSE 100 Full Share Bench (GB) 5.3% 5.6% 3.5% 156.6% 6.5% 6.5% 3.5% 182.1%
Oil & Gas
3.0% 3.4% 1.6% 207.9%
Personal & Household Goods
S&P 500 (US) 3.0% 3.1% 1.7% 178.7%
3.8% 3.8% 1.9% 199.8%
Retail
Hang Seng Index (HK) 4.7% 5.1% 3.0% 171.1% 3.0% 3.1% 1.4% 223.0%
Technology
6.7% 7.9% 3.2% 250.5%
Telecommunications
KOSPI Index Bench (KR) 2.3% 2.3% 2.1% 106.9%
4.4% 4.5% 2.3% 190.9%
Travel & Leisure
Nikkei 225 Bench (JP) 2.4% 2.6% 1.2% 220.0% 5.7% 6.2% 3.8% 165.7%
Utilities

4. Marketing Communication
V. Earnings momentum
Earnings growth estimates for 2008 were initially quite high as the comparison with a weakened 2007 was fairly easy and analysts were assuming that the
impact of the credit crunch related fallout would be limited in time and scope. As the crisis drags on, earnings estimates for 2008 were sharply revised down.
The same scenario seems to be repeating itself in 2009, as earnings estimates are gradually coming down.
Forward PE evolution S&P 500 : EPS growth (%)
40
26
35
21
30 16
11
25
6
1
20
-4
15
-9
10 -14
-19
5
-24
01/10/01
01/03/02
01/08/02
01/01/03
01/06/03
01/11/03
01/04/04
01/09/04
01/02/05
01/07/05
01/12/05
01/05/06
01/10/06
01/03/07
01/08/07
01/01/08
01/06/08
01/11/08
31/01/07
30/04/07
31/07/07
31/10/07
31/01/08
30/04/08
31/07/08
31/10/08
F.Y. 2008 F.Y. 2010 F.Y. 2009
S&P500 DJE 50 NKY 225 Source: FACTSET Source :FACTSET
NIKKEI 225 : EPS growth (%) DJE 50 : EPS growth (%)
14
22 12
18 10
14 8
6
10
4
6 2
2 0
-2 -2
-4
-6
-6
-10 -8
-14 -10
-18 -12
-14
-22 -16
-26 -18
-30 -20
-34 -22
-24
-38
01/01/07
01/04/07
01/07/07
01/10/07
01/01/08
01/04/08
01/07/08
01/10/08
01/01/09
01/01/07
01/04/07
01/07/07
01/10/07
01/01/08
01/04/08
01/07/08
01/10/08
01/01/09
F.Y. 2009 F.Y. 2010 F.Y. 2008
F.Y. 2009 F.Y. 2010 F.Y. 2008 Source : FACTSET Source : FACTSET
Contact details:
Dirk-Emma Baestaens
Sales Derivatives & Structured Products
Head Client Solutions Development Group
dirk.baestaens@fortis.com
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