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LPL FINANCIAL RESEARCH The first half of 2011 can be characterized as having experienced patches of clouds and sun with some ups and downs in the economy and markets. Neither bulls nor bears, we continue to expect the economy and the markets will be range-bound in 2011. Bound by economic and fiscal forces that will restrain growth, but not reverse it, we adhere to our prior forecast for modest single-digit rates of return: high single-digits for stocks and low single-digits for bonds.The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
LPL FINANCIAL RESEARCHU.S. Private Job Growth by MonthSource: LPL Financial, Bloomberg 06/01/11 LPL Financial Member FINRA/SIPC 2
LPL FINANCIAL RESEARCHFed Balance Sheet Near Peak as QE2 Ends ($ billions)Source: LPL Financial, Bloomberg 06/01/11Quantitative easing is a government monetary policy occasionally used to increase the money supply by buying government securities or othersecurities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increasedlending and liquidity. LPL Financial Member FINRA/SIPC 3
LPL FINANCIAL RESEARCHWeekly Money Flows to Domestic Stock Funds ($ billions)Source: LPL Financial, Investment Company Institute data 06/01/11Mutual Fund investing involves risk which may include loss of principal. LPL Financial Member FINRA/SIPC 4
LPL FINANCIAL RESEARCHTrade-Weighted US DollarSource: LPL Financial, Investment Company Institute data 06/01/11 LPL Financial Member FINRA/SIPC 5
LPL FINANCIAL RESEARCHOur outlook for the year is based on ourbelief that many counterbalancing forces willkeep the markets on a path of moderategrowth accompanied by the return ofvolatility. We adhere to our outlook, detailedlate last year, that the pace of gains will slowinto the high single-digits for U.S. stocksafter a powerful 2009 and 2010.
LPL FINANCIAL RESEARCHAssets: Positive Data Points LPL Financial Member FINRA/SIPC 7
LPL FINANCIAL RESEARCHLiabilities: Negative Data Points LPL Financial Member FINRA/SIPC 8
LPL FINANCIAL RESEARCHBeginning in late 2007, both monetary policyconducted by the Federal Reserve Board and fiscalpolicy conducted by the U.S. Congress have beenunusually focused towards stimulating economicgrowth. The transition from the stimulative to arestrictive fiscal and monetary policy environment hasimplications for financial markets and the economy.
LPL FINANCIAL RESEARCHKey Themes LPL Financial Member FINRA/SIPC 11
LPL FINANCIAL RESEARCHKey Themes AUGUST LPL Financial Member FINRA/SIPC 12
LPL FINANCIAL RESEARCHThe Fed is combating deflation by directly inflatingthe money supply through QE1 and QE2, all elseequal, means that with more dollars in the system,the value of the dollar goes down and prices in dollarterms go up, resulting in a faster pace of inflation. Wehave termed this return of deflated prices to a moredesirable level, reflation.
LPL FINANCIAL RESEARCHReflation Evident in CPISource: LPL Financial, Bureau of Labor Statistics, Haver Analytics 06/22/11The 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 consumergoods and services. LPL Financial Member FINRA/SIPC 14
LPL FINANCIAL RESEARCHCommodities Have Benefited from Fed StimulusSource: LPL Financial, CRB, FRB/Haver 06/22/11The fast price swings in commodities and currencies will result in significant volatility in an investors holdings. LPL Financial Member FINRA/SIPC 15
LPL FINANCIAL RESEARCHReflation Leads to Rising Bond Yields 10-Year Treasury Note Yield at Constant Maturity Average, % p.a.3.753.503.253.002.752.502.25 JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN 11Source: Federal Reserve Board /Haver Analytics 06/30/11 LPL Financial Member FINRA/SIPC 16
LPL FINANCIAL RESEARCHReflation Means Weaker US Dollar Trade-Weighted Exchange Value of US$ vs. Major Currencies 3/73=10080787674727068 JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN 11Source: Federal Reserve Board /Haver Analytics 06/30/11 LPL Financial Member FINRA/SIPC 17
LPL FINANCIAL RESEARCHGeopolitical and foreign policy conflicts along withregional violence escalated in the first half of2011. Geopolitical events have shaped themarkets in the first half with popular uprisingstoppling governments in North Africa and thedefeat of Osama bin Laden with his death at thehands of U.S. forces.
LPL FINANCIAL RESEARCHNorth African Unrest Domestic Spot Market Price: West Texas Intermediate, Cushing $/Barrel120115110105100 95 90 85 80 JAN 11 FEB 11 MAR 11 APR 11 MAY 11 JUN 11Source: Wall Street Journal /Haver Analytics 06/30/11 LPL Financial Member FINRA/SIPC 19
LPL FINANCIAL RESEARCHThe Defeat of Bin Laden US Active Duty Military Personnel thousands 1440 1420 1400 1380 1360 99 00 01 02 03 04 05 06 07 08 09 10Source: Department of Defense /Haver Analytics 06/30/11 LPL Financial Member FINRA/SIPC 20
LPL FINANCIAL RESEARCHThe second half of 2011 will be a time oftransition. The uncertainty this creates iscompounded by the already long list ofuncertainties that include the lingering aftermathof the earthquake in Japan, devastatingtornadoes and floods in the central and southernportions of the United States, turmoil in theMiddle East, and elevated energy prices.
LPL FINANCIAL RESEARCHCommodities Asset Classes & Commodity Sensitive Stocks Cash Price: London Gold Bullion, AM Fix US$/Troy oz1575150014251350127512001125 JUL AUG SEP OCT NOV DEC JAN FEB MAR APR MAY JUN 11Source: Wall Street Journal /Haver Analytics 05/30/11The fast price swings in commodities and currencies will result in significant volatility in an investors holdings. LPL Financial Member FINRA/SIPC 22Precious metal investing is subject to substantial fluctuation and potential for loss.
LPL FINANCIAL RESEARCHDeclining Defaults and Yield Spreads SupportHigh-Yield Bonds Barclays High-Yield Spread vs. Moody’s 12-Month Trailing Default RateSource: Barclays, Moody’s, LPL Financial 05/31/11The Barclays High-Yield Index is an unmanaged index, which cannot be invested into directly. Past performance is no guarantee of future results.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 23
LPL FINANCIAL RESEARCHTreasuries ExpensiveSource: Bloomberg, LPL Financial 05/31/2011Government 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 afixed rate of return and fixed principal value. However, the value of a fund shares is not guaranteed and will fluctuate.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 goodsand services. LPL Financial Member FINRA/SIPC 24
LPL FINANCIAL RESEARCHImportant DisclosuresIMPORTANT DISCLOSURESThe opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice orrecommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performancereferenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.Stock investing may involve risk including loss of principal.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.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.International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.Spread is the difference between the bid and the ask price of a security or asset.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 fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.Mutual Fund investing involves risk which may include loss of principal.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 andservices.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 inthe aggregate market value of 500 stocks representing all major industries.The Barclays Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed-ratebond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.The CRB Commodities Index is a measure of price movements of 22 sensitive basic commodities whose markets are presumed to be among the first to be influenced bychanges in economic conditions. As such, it serves as one early indication of impending changes in business activity. LPL Financial Member FINRA/SIPC 25
LPL FINANCIAL RESEARCHImportant DisclosuresCommodity Prices – While retail sales captures end user demand for goods, commodity prices reflect the demand for the earliest stages of production of goods. Commodityprices can offer an indication of the pace of economic activity. The CRB Commodity Index includes copper, cotton, etc. A rise in commodity prices acts as a positive on the CCI.Mortgage Applications – The weekly index measuring mortgage applications provides an indication of housing demand. With much of the credit crisis tied to housing, keepingtabs on real-time buying activity can offer insight on how the crisis is evolving. A rise in the index of mortgage applications acts as a positive on the CCI.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 makesno representation with respect to such entity.Tracking #742885 | Exp. (07/11) LPL Financial Member FINRA/SIPC 26
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