August 5, 2009

Equity Strategy Outlook

SAXO BANK RESEARCH
Hot topic: Passing the 1000-level in S&P500 – then what? David Karsbøl
Summary: It is still not the end of the bear market. Admittedly it’s becoming an Chief Economist
uphill struggle to remain basically skeptical with markets just continuing higher. DKA@SaxoBank.com

But fundamentals are still really ugly – both on the corporate and the macro side. John J. Hardy
The earnings season is almost done in the US with 69% of the companies in FX Consultant
S&P500 issued their reports. EPS growth YoY is down by 33.47% and sales down JJH@SaxoBank.com
by 17% YoY. What is more worrying however is that markets expect a revenue
Christian T. Blaabjerg
rise of 22% in the next 6 months leading to an increase in EPS of 114.9% in Equity Strategist
S&P500. Given the late US consumer spending behavior and the development in CTB@SaxoBank.com
US GDP this seems rather optimistic. Macro vise there is still not any support for
a recovery. Mads Koefoed
Market Strategist
MKOF@SaxoBank.com
Long run view: BEARISH. The indicators we use for signaling the end of the bear
market do not flash green yet. However some do. The Reported Return on Equity
Robin B.-Sjöback
(ROE) ex. financials for S&P500 is now below its long run average – 11.8% vs. Market Strategist
12.8%. Our business cycle indicator has stopped falling, but remains at very RSJO@SaxoBank.com
depressed levels seemingly unable to pick up. The inventories of the unsold
homes are still above the last 8 months sales. The latest report from the Senior
Loan Officer survey from April has not moved. A new will be released in August.
For the long run we remain bearish.

Short run view: BULLISH. Markets have rallied during July and the S&P500 closed
yesterday above 1000. Our indicators points toward continuously higher equity
markets; the VIX is still heading lower, the CDS price index is dropping, credit
markets are getting tighter and the weekly indicator has turned quite
significantly. The CAPE however seems to have retraced a bit. Our indicators
point towards still increasing equity markets. Technically we have passed the
1000-level in S&P500 which is most likely going to be retested, but the real test is
at 1014. A strong break of this level will bring us to 1121 in S&P500.

For important disclosures, refer to the

Disclosures Section, located at the
end of this document.

Saxo Bank. The Specialist in Trading and Investment.

Equity Strategy Outlook – back to basics, but when?

CAPE - 10yr Trailing P/E (15.1)

50

45

40

35

30

25

20

15

10

0
sep-11

sep-18

sep-25

sep-32

sep-39

sep-46

sep-53

sep-60

sep-67

sep-74

sep-81

sep-88

sep-95

sep-02
aug-04
apr-02

maj-09

maj-16

maj-23

maj-30

maj-37

maj-44

maj-51

maj-58

maj-65

maj-72

maj-79

maj-86

maj-93

maj-00

maj-07
jan-07

jan-14

jan-21

jan-28

jan-35

jan-42

jan-49

jan-56

jan-63

jan-70

jan-77

jan-84

jan-91

jan-98

jan-05
10yr Traling P/E Avg (16x)

Comments: Corporate bonds have been edging lower in the past weeks, but remain at very elevated levels. The same goes for CDS
prices and the VIX. CAPE is trading at 15 – still not attractive. Our fundamental indicator has stopped declining and shown a weak
rebound, but remains at very depressed levels. Our technical indicator is suggesting that the market points toward continuously
higher equity markets.

1
Equity Strategy Outlook – back to basics, but when?

Equity Market Drivers and sector exposure

Our Business Cycle indicator (see graph below) shows that the world economy is no longer contracting,
but remains at quite depressed levels.

Better than expected earnings have driven equities a leg higher and to be quite honest we find it difficult
to understand what should bring this market higher from here, but short-lived positive psychology. It is
not based on macro or earnings fundamentals.

So far the rotation into cyclical has outperformed the defensives significantly. However due to the recent
rally and we do not expect this to continue for long now and we therefore continue with our defensive
view with an overweight in defensives as they have not picked up yet (see graph below) and is most
likely not going to get hammered as much as the cyclical in a downbeat market. We expect markets to
head south again, but at the next sign of weakness we will be looking to cautiously alter our exposure
towards the equity market rotating into early cyclicals. Consequently we continue to stick to our
defensive strategy.

2
Equity Strategy Outlook – back to basics, but when?

On the basis of on where we see the earnings cycle and our economics team assessment of the general
macro economic outlook we recommend this exposure towards sectors. We stick towards our defensive
strategy despite an expectation of markets going higher in the short term, but we are looking to
cautiously enter markets overweighting early cyclicals at the sign of renewed weakness in equity
markets.

Sector Exposure
Resources
Energy Underweight. At current oil price level dividends are now twice as high as in 04-05 and
since we expect the oil price to head lower earnings will be hit.

Materials Neutral. The risk/rewards is beginning to look attractive. However if our deflation
scenario plays out as expected the demand for commodties will drop.

Exporters
Industrials Underweight. Industrial earnings have not found a bottom yet. Industrial production
and capacity utilization is still in free fall.

Technology Underweight. Margins are heavily under pressure due to the fact that companies cutting
back on investments. The sector trades at high P/E, has a low free cash-flow, low
dividends and cyclical dependence – things that all are negative in the current
enviroment.

Defensives
Staples Overweight. Food sales tends to fall in past recessions, but on the other hand staples
has in prior recession shown remarkably stable earnings.

Health care Overweight. Pharma faces political headwind and pricing weakness, but in case of
another drop in equity markets investors will head for health care as safe heaven.

Telecom Neutral. Offers attractive dividends, but earnings are more exposed towards consumer
spending than prior and consequently less stable.

Utilities Overweight. Cash flow is very strong, despite the high P/E in the sector.

Other
Discretionary Underweight. Tends to perform poorly when there are significant job losses and
personal consumption is heading lower globally.

Financials Neutral. Banks underweight, insurance overweight. Despite recent solid earnings from
banks we are affraid that the expected losses on loans (coming from the real economy)
and expected losses on Commercial Real Estate is not yet priced in.

3
Equity Strategy Outlook – back to basics, but when?

Earnings
The US earnings season is almost done and as we stated in our prior Equity Strategy Outlook (July
edition) we could be in for a surprise to the upside which we surely have been. 80% of the earnings have
to this day been better than expected and this has actually made analysts start to rise their earnings
forecast signaling that they believe we have passed the bottom.

In the table below we have displayed IBES consensus EPS estimates and Saxo Bank EPS estimates.
Generally we are somewhat more pessimistic regarding EPS growth compared to IBES. We are especially
more negative towards sectors like energy, technology, discretionary and telecom due to the expectation
as to when earnings are going to bottom out. We don’t see this happening until 1H 2010, but according
to the IBES estimates this is in the making. We are more positive towards classic defensives like staples,
health care, telecom and utilities than IBES which is due to the expected stability in earnings within these
sectors in the current economic environment.

Table: EPS estimates for S&P500

EPS Growth YoY (%) – IBES EPS Growth YoY (%) – Saxo Bank
Sector 2008/2009 2009/2010 2010/2011 2008/2009 2009/2010 2010/2011
Resources
Energy -56.0 42.0 34.2 11.1 12.0 7.0
Materials -60.4 83.3 28.7 -49.6 17.0 6.0
Exporters
Industrials -29.7 7.0 18.2 -2.7 1.0 5.0
Technology -17.7 19.6 15.9 -9.2 6.0 15.0
Defensives
Staples 1.7 6.2 10.0 6.9 3.0 9.0
Health care 0.2 9.5 9.4 3.4 4.0 7.0
Telecom -19.5 8.0 7.7 -4.4 -4.0 4.0
Utilities -4.7 7.6 7.9 -0.4 3.0 10.0
Other
Discretionary -27.7 36.2 23.2 -63.0 -19.0 16.0
Financials 142.0 31.2 63.5 142.0 20.0 30
Source: Thomson-Reuters DataStream, Saxo Bank Research

4
Equity Strategy Outlook – back to basics, but when?

Index levels forecast

We expect equities to trade flat to higher in the short term led by better than expected earnings. We have
priced in a V-shape recovery in the economy in equity markets, but according to our economics team we find
a W-recovery (double dip) more likely – similar to what happened back in the early 1980’s.

What we have witnessed within this earnings season so far is what we have termed the revenueless recovery
meaning that most profits have been made from cost cutting. But obviously it is not possible to improve
earnings for the next quarter that much by just doing cost cutting – we need sales to grow. Our main
scenario is that we will have a production led pickup for a very short term and then the consumer (US and
European) should show up and take the recovery further. But we do not think this is going to happen with
the strength anticipated by markets. Data points towards that the consumer is still saving more and more;
the US savings/disposable income ratio is now at 6.9% - the highest since 1993. In addition to this banks are
very reluctant to lend money – so in total we believe that spending will at best raise modestly, at worst stay
at these elevated levels.

So our main scenario is in the short run to see a continued surging equity market from here testing at least
1014 in S&P500 and possible a break of this level to the upside. After the end of the earnings season we
expect market to head back and look towards the macro numbers and start plunging on the back of this.

Table: Index levels forecast

Index Current* Sep 09E Dec 09E Mar 10E Jun 10E
S&P500 1002 940 846 803 820
Nasdaq100 1628 1461 1315 1223 1272
Dow Jones 9298 8535 7852 7460 9101
DAX 5426 8535
4870 4383 4076 4239
FTSE100 4682 4298 3954 3756 3831
4870
Nikkei225 10352 9291 8362 7777 8088
*) Close as of 3rd of August 2009. Source: Saxo Bank Research.

5
Equity Strategy Outlook – back to basics, but when?

General
These pages contain information about the services and products Germany of Saxo–Bank
HDAXA/S (hereinafter referred to as “Saxo Bank”). The material is
provided for informational purposes only without regard to any particular user's investment objectives, financial situation, or means. Hence, no
information contained herein Gainers
is to be construed as a analysis; or an offer to buy or sell; or the solicitation Losers
of an offer to buy or sell any security,
financial product, or instrument; or to participate in any particular trading strategy in any jurisdiction in which such an offer or solicitation, or
Nametrading strategy would be illegal. 1DSaxo Bank doesMTDnot guarantee
YTD the accuracy
Nameor completeness of any information
1D or analysis
MTD supplied. Saxo
YTD Bank
TELEshall
ATLASnotNV
be liable to any customer#VALUE!
or third person for the accuracy
#VALUE! #VALUE!of theVOLKSWAGEN
information orAGany market quotations
-7,53%supplied 32,66%
through this service
136,07%to a
customer, nor for any delays, inaccuracies, errors, interruptions or omissions in the furnishing thereof, for any direct or consequential damages
E.ONarising
AG from or occasioned by said#VALUE! #VALUE! errors,
delays, inaccuracies, #VALUE! PFLEIDERER
interruptions AG-REGISTERED
or omissions, -6,49% of the-15,89%
or for any discontinuance service. Saxo-49,44%
Bank
accepts
DAIMLER no responsibility
AG-REGISTERED or liability
SHARES for the contents
8,94% of any other
-27,53% -61,42% SHS linked
site, whether
LEONI AG to this site or not, or any consequences
-6,02% from your-67,02%
-48,10% acting
upon the contents of another site. Opening this website shall not render the user a customer of Saxo Bank nor shall Saxo Bank owe such users any
DEUTSCHE POSTBANK AG 8,12% -16,09% -63,18% PRAKTIKER BAU-UND -5,91% -31,28% -78,14%
duties or responsibilities as a result thereof.
HYPO REAL ESTATE HOLDING 7,97% 50,12% -82,74% HEIMWERK
AUSTRIA A
TECHNOLOGIE & -5,88% -31,82% -69,98%
SYSTEM

Analysis Disclosure & Disclaimer

Index Technicals Austria – ATX
The pivot support and resistance levels and the trend indications displayed below are provided forLosers
Gainers trading purposes.
Risk warning
Saxo Bank A/S shall not be responsible for any loss arising from any investment based on any analysis, forecast or other information herein
Name 1D
contained. The contents of this publication MTDnot be construed
should YTD as anName 1D or implication
express or implied promise, guarantee MTD by Saxo YTDBank that
BOEHLER-UDDEHOLM #VALUE!
clients will profit from the strategies herein or 0,00%
that losses in6,66% ERSTE GROUP
connection therewith BANK
can or AGlimited. Trades
will be -8,21% -36,08%
in accordance -54,60% in
with the analysiss
an analysis,
INTERCELL AG especially leveraged investments
3,17% such as foreign-20,19%
-8,44% exchange trading and investment
MAYR-MELNHOF in derivatives,
KARTON AG can be very-10,61%
-6,76% speculative and may
-35,03%
result in losses as well as profits, in particular if the conditions mentioned in the analysis do not occur as anticipated.
VOESTALPINE AG 1,29% -20,28% -64,93% OEST ELEKTRIZITATSWIRTS-A -6,11% -17,01% -25,21%
ZUMTOBEL AG 1,15% -12,01% -64,47% A-TEC INDUSTRIES AG -5,60% -27,30% -51,32%
BWIN INTERACTIVE 1,12% -27,38% -49,27% FLUGHAFEN WIEN AG -4,57% -29,04% -60,06%
ENTERTAINME

Switzerland – SMI
Gainers Losers
Name 1D MTD YTD Name 1D MTD YTD
NOVARTIS AG-REG 7,90% -2,05% -7,65% SYNGENTA AG-REG -2,68% -31,07% -43,33%
CREDIT SUISSE GROUP AG-REG 6,37% -3,01% -28,93% UBS AG-REG -1,89% 1,46% -59,81%
SWISSCOM AG-REG 6,12% 0,68% -24,07% ZURICH FINANCIAL SERVICE- -1,14% -31,83% -37,26%
ROCHE HOLDING AG- 5,85% -3,55% -13,96% REG
HOLCIM LTD-REG -1,01% -21,17% -47,36%
GENUSSCHEIN
NESTLE SA-REG 5,43% -10,50% -17,04% BALOISE HOLDING-REG -0,28% -29,99% -52,78%