Synovate economic $ummary q2 2010

$ynovate Economic
$ummary: Q2, 2010

© 2010 Synovate Inc.

What's In The Key Econmic Outlook Interesting Looking
Background Summary News Indicators Half Full Half Empty Headlines Advertising Ahead References

Background
• Quarterly overview of trends and driving forces in the US economy and the Financial Services
(FS) sector.
- Useful as a backdrop against which to interpret changes in market research tracking data.
• Includes a number of key market metrics:
- Economic & financial indicators (S&P 500, interest rates, forex, commodity prices, etc.)
- Consumer measures (Synovate’s Financial Sentiment Index, the Conference Board’s
Consumer Confidence Index)
- Other indicators (housing data, unemployment, etc.)
• Definitions:
- Leading economic indicators change in advance of the overall economy and are useful for
prediction. Example: stock market returns, since the market usually declines and improves
before the economy does.
- Lagging economic indicators do not change direction until a few quarters after the
economy does and are useful for confirmation. Example: the unemployment rate; it tends
to increase 2 - 3 quarters after the economy starts to improve.
- Coincident economic indicators move at the same time the economy does and therefore
are the best measures of the current state of the economy. Examples: Gross Domestic
Product and personal income.

© 2010 Synovate Inc. 2


The quarter that was…
The economic recovery continued in Q2 2010 although the pace of the recovery
slowed significantly. As predicted in our $E$ over a year ago, the recovery continues
its false-starts; a series of “W-patterns” are to be expected until some of the
significant risks like commercial real estate, housing, sovereign defaults, etc., are
behind us.
Half Full:
- Consumer Confidence
- Small businesses
- Increasing retail sales
- Positive GDP

Half Empty:
- A sustained high unemployment
rate
- Commercial real estate
- Consumer lending
- Global worries (especially of the
euro-zone kind)



Key Financial & Industry News
• S.E.C. Accuses Goldman Sachs of Fraud (Apr. 16): The Securities and Exchange Commission filed a civil lawsuit against Goldman Sachs over a
fraudulent housing deal. The S.E.C. claims that Goldman Sachs created and sold a mortgage investment that was secretly intended to fail. The bank
denies the accusations.
• Deepwater BP Oil Spill (Apr. 20): The Deepwater Horizon exploded in the Gulf of Mexico killing 11 people. The subsequent oil spill disaster has
devastated a vast area of the U.S. marine environment and has had a serious impact on the local fishing industry. BP has since set aside a $20 billion
escrow fund to compensate U.S. businesses or workers who have been hurt by the spill. Analysts are estimating the total cost of this disaster
anywhere between $29 billion to as high as $63 billion.
• United, Continental Announce Merger (May. 3): The chairmen of United Airlines and Continental Airlines announced their intent to merge, with
United's purchase of Continental. The new enormous airline company will have 10 national hubs and will be bigger than the current leader, Delta Air
Lines.
• Apple Passes Microsoft as Most Valuable Technology Company (May. 26): In a stunning turnaround over the last decade, Apple passed Microsoft
as the world's top technology company. Microsoft had dominated the technology industry for over 20 years.
• Fannie & Freddie Stocks Delisted (June. 16): The Federal Housing Finance Agency, the regulator for Fannie Mae and Freddie Mac demanded for the
stocks to be delisted as early as July. The announcement caused the stock price to fall almost 40% for both companies. The move, although harsh on
the existing stock holders, signals that these companies should eventually emerge out of conservatorship in a different form.
• Merrill Makes Move Into Online Investing (June. 21): Bank of America Merrill launched Merrill Edge, an online discount brokerage. This brokerage
intends to help Bank of America Merrill combat the expanding influence of the likes of Charles Schwab and Fidelity Investments, which now are
popular destinations for younger investors who aren’t ready for a full-service adviser.
• Financial Regulation Bill passes House and Awaits Senate Vote (June. 30): After more than a year of work and two weeks of negotiations,
lawmakers passed the financial regulation bill. The bill address the following key areas:
Consumer Protection: Creates a consumer agency, credit scores for consumers, Interchange fees, etc.
Too Big to Fail: New oversight committee, unwinding powers to FDIC, forcing ‘skin in the game’, etc.
Risky Bets: Regulating derivatives, spinning off swaps desks, curbing executive pay, etc.



Key Financial Measures and News
Volatility returned to global financial Quarterly Markets Review
markets with a vengeance in the second
quarter, sending investors fleeing from
stocks world-wide and driving them into
defensive investments, especially U.S.
Treasury's and gold.

• The S&P 500 (a leading indicator) posted
its worst quarterly performance since the
final three months of 2008 when the
financial crisis was in full swing. The S&P
500 fell about 12% for the quarter.

• The prime rate (a coincident indicator) remained level at 3.25% this quarter.

• Mortgage rates fell to a record low during Q2 2010. The 30-year fixed-rate mortgage dropped to 4.69%, the lowest since Freddie
Mac started the survey in April 1971. The decline in mortgage rates is related to the weak economy and falling treasury yields.
National Mortgage Rates – 1 year
Prime Rate



Currency Rates & Trade
During the second quarter, the euro faced its biggest test in

Euro v. U.S. $ – 1 yr
its relatively brief life as the Greek debt crisis threatened to
tear apart the European Union.

• The euro was sent into a tailspin which by early June
amounted to an 11% decline against the U.S. dollar
from the end of March. At one point, the euro came
within shouting distance of the $1.18 at which it
exited the first day of trading when it was introduced

GBP v. U.S. $ – 1 yr
in 1999.

• The euro-zone worries took the GBP down with it,
however, the GBP recovered quickly and differentiated
itself from the euro.

• As contagion from the debt crisis threatened global
markets, investors seeking haven gave a boost to the
U.S. dollar and Japanese yen despite those countries' U.S. $ v. JPY – 1 yr
own economic and fiscal woes, including yawning
deficits and low interest rates.



Yuan’s New Direction
On June 20, China announced that it would allow the
Renminbi to appreciate against the USD once again.

• China has kept the yuan pegged against the dollar
since July 2008.

• The effect of this currency undervaluation is
twofold:
1. It makes the Chinese goods
artificially cheap to foreigners
(enhancing exports)…
2. ….While making foreign
goods artificially expensive to
the Chinese (reducing imports)


Outlook: Half Full or
Half Empty


The Gloom Lifts A Little, But It’s Still Dark
Out There
Most Americans are still feeling blue about the change in their personal financial situations
over the past year, although the picture is a little less gloomy than in March of last year, just
before the stock market hit its recessionary low.

• The Conference Board said its index of consumer confidence for June increased modestly to 52.9 compared
with the 52.5 seen in March.

• Synovate’s Consumer Financial Sentiment Index (FSI) now stands at -52, an improvement of 12 points from
the March 2010 FSI of -64.



Government Trying To Help Small Business
The economy is on the mend. The government has launched a boatload of programs to get financing for small
businesses. President Obama has urged banks to give companies a "third and fourth look" before rejecting them
for loans. Yet entrepreneurs are still struggling to land credit.

• The government is trying to entice more small businessesto tap one of its loan programs,
the Small Business Administration's 504 loan program.
- Hoping to spur expansion among small companies, the SBA is offering inducements
like lower rates and no-fee deals.

• The U.S. House approved legislation to create a $30 billion fund to boost
lending to small businesses through community banks.
- This will be combined with the $3.5 billion package of tax cuts for small businesses for Senate approval.

• In a recent National Federation of Independent Business (NFIB) survey, 32% of NFIB
borrowers accessing capital markets at least once a quarter report difficulties arranging
credit.
- A copy of the report, which includes the NFIB’s
Optimism Index, can be found at:
http://www.nfib.com/Portals/0/PDF/sbet/SBET201006.pdf



Big Banks’ Lending Programs
Some of the largest U.S. financial institutions have pledged new commitments to small businesses in recent
months, but it remains to be seen how much these efforts will help business owners secure financing.

• Goldman Sachs, an investment bank that doesn't lend directly to entrepreneurs, is funneling $300
million to community development financial institutions (CDFIs), which primarily lend to small
businesses in low-income communities.

• Citigroup also announced a program in May to invest $200
million in CDFIs, which will allow them to request five-year
loans from Citi in order to boost lending to qualifying small
firms.

• Bank of America is taking a more direct approach by
increasing its direct lending to small and midsized
businesses by $5 billion in 2010.
- In May they reported a total of $19.4 billion loaned in its first
quarter, and will need to lend more than $22 billion over the
remainder of the year to meet this goal.

• JP Morgan Chase & Co. will lower the interest rate charged
on a line of credit to small business customers by half a
percentage point for every new hire they make, for up to three hires.



Fees Are Here, And More To Come
Banks are preparing new fees on basic banking services as they try to replace billions in revenue lost to regulatory
rules, in a push that is expected to spell an end to “free” checking accounts for many Americans.

• Industry leaders like Bank of America, Wells Fargo, HSBC, Fifth
Third and others are experimenting by imposing maintenance fees
on checking accounts to rolling out new charges for services like
fraud alerts, debit cards and credit reports.

• The new world of checking is likely to resemble the cable-television
industry, where customers pay one amount for bare-bones service
and then can load on additional options.

Bank Fees
$12.55: Average monthly fee for falling below the minimum
balance on interest-bearing checking accounts.
$29.58: Average overdraft fee in 2009, up from $22.62 a decade
ago.
16%: Average credit-card rate increase in the year since the
Card Act was passed in 2009.
$39: Median fee charged by banks for late credit-card
payments.



Unemployment Issues Continue
The unemployment report released by the government wasn't as grim as it might have been, but it still showed
that the pace of the U.S. economic recovery has slowed as the quarter closed.

• The U.S. lost 125,000 jobs as census workers exited the labor force. The private sector added only 83,000
jobs and the unemployment rate fell to 9.5% down from 9.7% in March.
- Economists estimate the private sector has to create more than 150,000 jobs per month to make a serious dent in the
unemployment rate.

• The unemployment rate is down to its lowest level in a year, but the move was driven by a huge drop in the
work force. The participation rate* fell to 64.7% in June from 65% in May.

*The participation rate is important in determining the number of individuals who are willing to work, are working, or are actively looking for work.
Those who have no interest in working are not included in the participation rate.



Mortgage Rates Plunge, Housing Looks Weak,
and Tax Credit Extended
How’s this for clashing superlatives? Mortgage rates have fallen to their lowest levels of the
last 50 years, and yet signed home-purchase contracts plunged by 30% in May from April.
Housing struggles are expected to continue through the summer, but can a last minute tax
credit extension help?

• Mortgage rates fell to 4.69% on 30-year fixed-rate loans, the
lowest since Freddie Mac’s weekly count began in 1971.

• In May, new home sales sunk to the lowest level since at least
1963, when the Census Department began keeping records.
They fell to an annualized rate of 300,000, down 33% compared
to April, which was much worse than economists’ expectations
of 405,000.

• The median price of a new home sold in May was $200,900, 9.6%
lower than a year earlier.

• Congress approved an extension to the June 30 closing deadline for the home buyer tax credit, hours before
it was set to expire. The move will give would-be buyers who signed a purchase agreement by April 30th
more time to close on those deals and receive the credit that is worth up to $8,000. The new deadline is
Sept. 30.



European Spotlight: Understanding the crisis
Global financial markets were highly volatile in Q2 2010 as fiscal concerns
and the risk of weaker growth caused investor confidence to deteriorate
rapidly. Investor worries about unsustainable fiscal positions crystallized
around the problems of Greece and other euro area sovereigns.

• The announcement of a significant European rescue package
(€750 billion, almost a trillion dollars) bought a temporary reprieve
from contagion in euro sovereign debt markets, but could not allay
market concerns about the economic outlook.
• Investors and market commentators focused on the risk that the
surge of public debt could derail the economic recovery.

Why should we care?
• Immediately after the bailout announcement, the U.S.
Federal Reserve announced it would reopen swap lines
with other central banks to make sure they had ample
access to dollars.
• The crisis in Europe, risks of contagion and the
deflationary pressures associated with those problems
will keep the Fed on the sidelines even longer than we
initially thought.



Black Swan
What is it?
• An event or occurrence that deviates beyond what is normally expected of a situation
and that would be extremely difficult to predict.
(Before the discovery of Australia, people in the old world were convinced that all swans
were white, an unassailable belief as it seemed completely confirmed by empirical
evidence).

• Risks of Black Swans, previously perceived to be small by corporations, investors,
politicians and regulators, are now being reassessed, owing to (among other issues)
globalization, the acceptance of greater risk taking and so forth.

• A greater and more dynamic instability is the new normal.
Witness some of these historical black swan events over the past decade:
- the tech bubble bust
- the September 11 attack on the World Trade Center
- the failure of Lehman Brothers and the sale/liquidation of Bear Stearns
- BP's Gulf oil spill
- the market's flash crash (a 1,000-point drop in the DJIA on May 6, 2010)



Flash Crash
The lightning descent on May 6 lasted roughly 10 minutes and the Dow’s decline grew to 9.8% at its worst. Trades, many
executed in milliseconds, reached 19 billion shares.

• The SEC has since introduced circuit breakers for individual stocks (part of S&P 500) should they rise or fall more than
10 percent in a five-minute span (for a six-month test period).
• In the month of June, these circuit
breakers were tested multiple times:
once when tech services company
Diebold saw its shares plunge 35
percent then recover in a period of a
few minutes, and again when
Washington Post shares doubled to
$929 from $460 and most recently on
June 29, when Citi shares plunged 18%.

• The circuit breakers essentially did their
job, halting trading in all cases, but the
mystery remains over why such events
happen in the first place.

• These massive intra-day swings raise
serious questions about the "safety"
factor expected with stop loss orders -
as the markets tumble, individual
investors' positions are sold, often
resulting in big losses for the investor.



An ATM that Dispenses Gold (Gold To Go)
• Following the example set by a German
entrepreneur, who began testing the cash-for-
gold machines in his native country in 2009, this
ATM-style kiosk in the Emirates Palace
monitors the daily gold prices and offers gold
coins up to 10 grams with customized designs.

• The opening ceremony coincided with gold
hitting a record high of more than $1,250 an
ounce.

• Normally, mass hysteria define ‘tops’ in markets,
however, given gold’s ‘flight to safety’ status and the
doubts surrounding fiat currencies owing to the
massive sovereign deficits, huge amounts of ‘smart
money’ (money that major hedge funds, mutual
funds invest) is currently being parked in gold.



Financial Institution Ad Campaigns

U.S. Trust Launches Advertising Campaign Charles Schwab Launches @schwabmoneywise on Twitter
May 3rd: U.S. Trust unveiled its "What is Jun. 17th: Charles Schwab has announced a new educational
Worth?“ advertising campaign. Development campaign to help young adults facing “financial firsts” as they
for the new campaign included extensive graduate, start working and begin living on their own. The
market research that underscored the fact that people do not consider their campaign will be delivered through Schwab’s award
'worth' and their 'wealth' to be synonymous; they see their worth as a winning educational website, SchwabMoneyWise.com,
reflection of their values, goals, work ethic, relationships, history and and via Twitter. A new hub on schwabmoneywise.com
legacy. now addresses the specific financial challenges facing young
people in their 20s who are just starting out.
Visa Rolls Out FIFA Social Media Feature
Allstate Declares “Mayhem is Coming” in New Campaign
May 18th: Visa Inc., a sponsor for the 2010 FIFA
World Cup launched the Visa Match Planner, a Jun. 21st: As a complement to the reassuring "Our
social media application that enables users to Stand" advertising representing the brand since
create customizable World Cup viewing schedules 2003, Allstate has introduced anti-hero "Mayhem“
to share with friends on social networking channels. in a new national television campaign, with rollout
The application is the latest extension of Visa’s FIFA World Cup global plans for online and place-based advertising,
marketing campaign called “Go Fans,” which also includes print, television, including cinema and television throughout the
outdoor advertising, merchant promotions in host country South Africa, and summer.
Visa card-use promotions.

Goldman Sachs Launched 10,000 Small Businesses Initiative Ink From Chase Launches New Advertising Campaign
Jun. 30th: Ink from Chase unveiled a new broad-based
Jun. 14th: The Goldman Sachs Group,
advertising campaign focusing not only on its portfolio of
Inc. announced the greater Los Angeles
business cards but also its customers. The campaign will
10,000 Small Businesses initiative. Throughout the Los Angeles
feature actual Ink small business owners who will
metropolitan area, the program will offer a unique combination of three
highlight card benefits that have impacted their bottom
resources to help small businesses grow and create jobs: Business and
line. Marlo Scott, owner of Sweet Revenge in NYC will
Management Education, Access to Capital, and Business Support
appear in television, radio, print and web advertisements.
Services.



What’s Next?
• The second half of 2010 is expected to be extremely bumpy as fiscal woes in Europe, global stock-market
declines and a stubbornly high unemployment rate continue to present obstacles in the road to recovery.

• The low interest rates from the Fed and their continual emphasis to keep these rates low for an ‘extended
period of time’ almost guarantee no rate hike in 2010 which should continue to provide the much needed
liquidity to facilitate a recovery, albeit a gradual one. However, if the easy money and other quantitative
easing policies aren’t removed gradually from the system, we are at risk of yet another leg down.

• The financial services industry continues to emerge progressively from the credit crisis and is beginning to
deal with the new realities laid down in the financial regulation bill, the CARD Act and other similar
legislations that are either in effect already or are about to come into effect.

• Another new reality is increased competition from new revolutionary business models (Mango Financial,
to name one of many). These new businesses are trying to capitalize on niche markets (unbanked in
Mango Financial’s case) at a time when the major players are dealing with issues from Washington and
consumer backlash. These behemoths need to adapt swiftly or risk losing share to the new rivals.



References
• Wall Street Journal. (Q2 2010). Retrieved from www.wsj.com
- Dow Slides 10% in Volatile Second Quarter
- Euro Trips Amid Identity Crisis
- S.E.C. Accuses Goldman Sachs of Fraud
- Deepwater BP Oil Spill
- United, Continental Announce Merger
- Apple Passes Microsoft as Most Valuable Technology Company
- Fannie & Freddie stocks delisted
- Merrill Makes Move Into Online Investing
- Financial Regulation Bill passes House and awaits Senate vote
- Yuan’s New Direction
- Consumer Confidence Tumbles
- A Credit Crunch That Lingers
- The SBA Has a Deal for You
- House Passes Bid to Boost Small-Business Loans
- Cash for Chocolate? Creative Ways to Raise Funds
- Big Banks' Lending Programs Yielding Few Results So Far
- J.P. Morgan Offers Small Businesses Rate Cuts If They Hire
- End Is Seen to Free Checking
- The New Bank Fees: How to Fight Back
- Jobs Data Leaves Markets Relieved
- Mortgage Rates Plunge to 4.58%, But Housing Looks Weak
- Congress Approves Tax Credit Closing Deadline Extension
- Parallel Plunges: 'Flash Crash' and Black Monday
- Gold To Go
• S&P 500 Retrieved from http://www.wsj.com/
• Mortgage-X. (Q2 2010). Mortgage Rates. Retrieved from http://mortgage-x.com
• Finance.yahoo.com. (Q2 2010). Currencies. Retrieved from http://finance.yahoo.com/currency-investing
• Moneycafe. (Q2 2010). Prime Rate. Retrieved from www.moneycafe.com/library/primerate.htm
• CNNMoney.com (Q2 2010). Wall Street Reform: What’s in the Bill. Retrieved from http://money.cnn.com/2010/06/25/news/economy/whats_in_the_reform_bill/index.htm
• Consumer Confidence Index Retrieved from http://www.economicpopulist.org
• Small Business Credit Conditions Retrieved from http://www.nfib.com
• Modest private sector hiring in June Retrieved from http://www.marketwatch.com/
• New Home Sales Plunge Retrieved from http://www.theatlantic.com
• New York Times (Q2 2010). The Renminbi Runaround. Retrieved from http://www.nytimes.com/2010/06/25/opinion/25krugman.html
• New York Times (Q2 2010). The Black Swan: The Impact of the Highly Improbable. Retrieved from http://www.nytimes.com/2007/04/22/books/chapters/0422-1st-tale.html
• BIS Quarterly Review (June 2010). International banking and financial market developments. Retrieved from http://www.bis.org/publ/qtrpdf/r_qt1006.pdf
• Minyanville.com (Q2 2010). European Spotlight: Understanding the Crisis. Retrieved from http://www.minyanville.com/businessmarkets/articles/eurozone-greece-government-
bonds-debt-sovereign/6/16/2010/id/28769


The $E$ is brought to you by…Synovate U.S.
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