Economic & Stock Market
Outlook 2012
Financial Planning Symposium October 27, 2011
Please refer to Appendix – Important Disclosures
Bruce Bittles
Chief Investment Strategist
(941) 906-2830
bbittles@rwbaird.com
The End of the Debt Super Cycle
Quarterly Data 3/31/1947 - 9/30/2010 (Log Scale)
Total Credit Market Debt's (All Sectors, as a % of GDP) Potential Impact On Growth
368
Nominal
GDP
Gain/Annum When:
353
339
325
312
Debt/GDP
* Above
Between
Below
Gain/
Annum
is:
270%
160%
Real GDP
Gain/Annum When:
and 270%
160%
%
of Time
Debt/GDP
4. 0
15. 0
6. 5
33. 1
* Above
Between
7. 6
52. 0
Below
Gain/
Annum
is:
270%
160%
368
Nonf arm Payrolls
Gain/Annum When:
and 270%
160%
%
of Time
Debt/GDP
1. 7
15. 0
3. 2
33. 1
* Above
Between
3. 7
52. 0
Below
Gain/
Annum
is:
270%
160%
and 270%
160%
353
%
of Time
-0. 2
15. 0
1. 8
33. 1
2. 3
52. 0
339
325
312
300
300
288
288
276
276
Debt High
265
265
254
254
244
244
Total Debt/GDP
234
225
234
225
216
216
207
207
199
199
191
191
183
183
176
176
169
169
162
162
Debt Low
155
155
149
149
143
143
Source:
137
1985
132
(HOT2011
01201B_C)
1950
1955
1960
1965
1970
1975
1980
1985
1990
Department of Commerce
Department of Labor
Federal Reserve Board
1995
2000
137
132
2005
2010
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Baird Market & Investment Strategy │ Page 2
.
Admitting the Problem
The Next Step?
Quarterly Data 3/31/1946 - 12/31/2010
Taxes and Government Spending
Government
Spending as a % of GDP
(60.0-Year Average = 19.5% of GDP)
12/31/2010
= 25.4%
(
)
25
24
25
Spending/GDP
24
23
23
22
22
21
21
20
20
19
19
18
18
17
17
16
16
Taxes as a % of GDP
(60.0-Year Average = 18.0% of GDP)
12/31/2010
= 15.9%
(
15
)
Taxes
15
14
14
Data Subject To Revisions By
The Federal Reserve Board
13
12/31/2010 = -9.6%
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
(E300)
13
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
Surplus
Surplus as a % of GDP
Deficit as a % of GDP
Deficit
(60.0-Year Average = -1.5% of GDP)
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
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.
Baird Market & Investment Strategy │ Page 3
Debt Restricts Growth
Ne w
Q
Nom inal G DP ( Ten- Year % Change)
17 5
17 0
16 5
16 0
15 5
15 0
14 5
14 0
13 5
13 0
12 5
42
60
. 5 - Ye a r
1
11 5
11 0
10 5
10 0
95
90
85
80
75
70
65
60
55
u a r t e r ly
Ch a r t
3 / 31 / 1 96 3
-
6 / 30 / 2 00 9
6/ 30 / 20 09
=
52 . 9 %
GDP Growth
M
ea n
=
1986
1 03 . 7 %
2010
1955 $1.35 of Debt Produced $1.00 GDP
2005 $5.75 of Debt Produced $1.00 GDP
1 9 6 5
1 9 7 0
1 9 7 5
1 9 8 0
1 9 8 5
1 9 9 0
36 0
1 9 9 5
2 0 0 0
17 5
17 0
16 5
16 0
15 5
15 0
14 5
14 0
13 5
13 0
12 5
12 0
11 5
11 0
10 5
10 0
95
90
85
80
75
70
65
60
55
2 0 0 5
36 0
34 0
3/ 31 / 20 09
De bt
3/ 31 / 20 09
G DP
32 0
= $5 2. 9 Tr ilo n
= $1 4. 2 Tr lio n
= 37 3. 1 %
34 0
32 0
30 0
30 0
28 0
28 0
26 0
24 0
46 . 2 5- Yea r
M e an
=
21 1. 6%
Debt Expansion
26 0
24 0
22 0
22 0
20 0
20 0
18 0
18 0
16 0
1 5 8 .
1 4 4 .
(
Dat a
D A V I
2
7
16 0
D a t a S u b je c t
To Re v s
i io n s B y
T h e F e d e r a l Re s e r v e B o a r d
Tot al Cr edit M ar ket Debt ( All Sect or s) as a % of G DP
S 1 3 1 )
Source: Federal Reserve and Ned Davis Research
Baird Market & Investment Strategy │ Page 4
Personal Savings Rate and Growth
Chart has been reanalyzed due to data revision
Yearly Data 12/31/1939 - 12/31/2010
Personal Saving Rate's (%) Potential Impact On Growth
26
%
26
Real GDP
Gain/Annum When:
25
24
WWII
23
Personal
Saving
Above
8.6%
* Between
22
Below
Rate is:
4.5%
and 8.6%
4.5%
Nominal GDP
Gain/Annum When:
Gain/
Annum
%
of Time
Personal
Saving
3. 9
33. 8
Above
3. 6
50. 7
* Between
3. 0
15. 5
Below
Gain/
Annum
Rate is:
8.6%
4.5%
25
10. 1
33. 8
6. 1
50. 7
5. 8
15. 5
and 8.6%
4.5%
24
%
of Time
23
22
21
21
Nonfarm Payrolls
Gain/Annum When:
20
19
Personal
18
Saving
Above
Below
Gain/
Annum
Rate is:
8.6%
* Between
17
4.5%
20
and 8.6%
4.5%
%
of Time
19
2. 6
33. 8
18
1. 9
50. 7
1. 1
15. 5
17
16
16
15
15
14
14
High Saving Rate
13
13
1985
12
11
12
11
10
10
8.50%
9
9
8
8
7
7
6
6
5.4%
5
4
4
Low Saving Rate
3
2010
2005
2000
1995
2
1990
1985
1975
1970
1965
1960
1955
1950
1945
1940
2
Department of Commerce
Department of Labor
Bureau of Economic Analysis
1980
Source:
3
(DAVIS146)
5
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Baird Market & Investment Strategy │ Page 5
.
Serial Bubble Creators
Monthly Data 1977-01-31 to 2011-07-31
Student Loan Debt Outstanding ($ Billions)
380
370
360
350
340
330
320
310
300
290
280
270
260
250
240
230
220
210
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
380
370
360
350
340
330
320
310
300
290
280
270
260
250
240
230
220
210
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
2011-07-31 = 385.7
Nonrevolving Student Loan Debt extended directly by the federal government
and by SLM Holding Corp, the parent company of Sallie Mae.
Student Loan Debts Outstanding
2004
1990
1978
HOT201110061_C
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
© Copyright 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
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QE2 Limited Value to Economy
Chart title has been changed.
Monthly Data 1/31/1976 - 12/31/2010 (Log Scale)
CoreLogic National House Price Index
189
167
148
131
116
102
90
80
71
63
55
49
43
38
34
30
27
24
-32.1%
National Home Price Index
2010
2009
2008
2007
2006
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
2005
12/31/2010 = 137.3
Source: CoreLogic National House Price Index, Haver Analytics
20
18
16
14
12
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
-16
-18
(E0761)
189
167
148
131
116
102
90
80
71
63
55
49
43
38
34
30
27
24
Non-Seasonally Adjusted
Excludes short sales and lender owned properties
12/31/2010 = -5.5%
Home Prices Rising
Home Price Trends
Home Prices Falling
20
18
16
14
12
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
-14
-16
-18
CoreLogic National House Price Index (Year-to-Year % Change)

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Baird Market & Investment Strategy │ Page 8
.
Home Sales in Previous Cycles
Monthly Data 12/31/2006 - 9/30/2012
Performance of Total Single-Family Home Sales vs Average of Past Housing Cycles
160
158
156
154
152
150
148
146
144
142
140
138
136
134
132
130
128
126
124
122
120
118
116
114
112
110
108
106
104
102
100
98
96
94
92
90
88
86
84
82
of Past Housing
(Excludes 1980)
(
)
Current
J
S
Housing
(
)
D
2007
M
2008
Cycles
Current Cycle
Foreclosure Rate Peak (+11)
Average
Residential Construction Spending Trough (+3)
Existing Home Prices Trough (+4)
Assumes home sales bottomed
in January 2009
Delinquency Rate Peak (+6)
Avg. Past Cycles
M
(E876J)
160
158
156
154
152
150
148
146
144
142
140
138
136
134
132
130
128
126
124
122
120
118
116
114
112
110
108
106
104
102
100
98
96
94
92
90
88
86
84
82
Cycle
J
S
D
M
J
S
D
2009
M
J
S
D
2010
M
2011
J
S
D
M
J
S
2012

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Baird Market & Investment Strategy │ Page 9
.
Fed Policy and Job Creation
Monthly Data 12/31/2005 - 12/31/2011
Performance of Nonfarm Payrolls vs Average of Last Six Recessions and Aftermath
105.0
104.7
104.4
104.1
103.8
103.5
103.2
102.9
102.6
102.3
102.0
101.7
101.4
101.1
100.8
100.5
100.2
99.9
99.6
99.3
99.0
98.7
98.4
98.1
97.8
97.5
97.2
96.9
96.6
96.3
96.0
95.7
95.4
95.1
94.8
94.5
94.2
93.9
93.6
(HOT
201109131_C)
105.0
104.7
104.4
104.1
103.8
103.5
103.2
102.9
102.6
102.3
102.0
101.7
101.4
101.1
100.8
100.5
100.2
99.9
99.6
99.3
99.0
98.7
98.4
98.1
97.8
97.5
97.2
96.9
96.6
96.3
96.0
95.7
95.4
95.1
94.8
94.5
94.2
93.9
93.6
*Dates used for determining
economic recessions
are those designated by the National Bureau of
Economic Research. The data has been adjusted
for ease of comparison with the current cycle.
Recession starting dates used: December 1969,
November 1973, January 1980, July 1981,
July 1990, and March 2001.
Recession
Recession started
in December 2007
Current
(
Cycle
)
Current Cycle Job Growth
Average of Last Six
Post World War II Recessions*
(
)
M
J
S
D
2006
M
2007
J
S
D
M
2008
J
S
D
M
2009
J
S
D
M
2010
J
S
D
M
J
S
D
2011
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Baird Market & Investment Strategy │ Page 10
.
Government Transfer Payments as a % of
Disposable Income
Monthly Data 1959-01-31 to 2011-07-31
Government Transfer Receipts as a % of Disposable Personal Income
20.5
20.5
20.3%
20.0
20.0
19.5
19.5
19.0
19.0
The Illusion of Economic Strength
18.5
18.5
18.0
18.0
17.5
17.5
17.0
17.0
16.5
16.5
16.0
16.0
15.5
15.5
15.0
15.0
14.5
14.5
14.0
14.0
13.5
13.5
13.0
13.0
12.5
12.5
12%
12.0
11.5
12.0
11.5
11.0
11.0
10.5
10.5
10.0
10.0
9.5
9.5
9.0
9.0
8.5
8.5
8.0
8.0
7.5
7.5
7.0
7.0
1960
1965
1970
HOT201109161_C
Source: Ned Davis Research
1975
1980
1985
1990
1995
2000
2005
2010
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Baird Market & Investment Strategy │ Page 12
Lead A Horse to Water But…..
Quarterly Data 3/31/1959 - 6/30/2011
M2 & M1 Money Supply Velocities
2.13
2.10
2.07
2.04
2.01
1.98
1.95
1.92
1.89
1.86
1.83
1.80
1.77
1.74
1.71
1.68
1.65
1.62
M2 Velocity (GDP/M2)
6/30/2011 = 1.66x
M1 Velocity (GDP/M1)
6/30/2011 = 7.79x
Velocity Of Money M2
2.13
2.10
2.07
2.04
2.01
1.98
1.95
1.92
1.89
1.86
1.83
1.80
1.77
1.74
1.71
1.68
1.65
1.62
10
10
9
9
8
8
7
7
6
6
5
5
4
4
(E0521)
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010

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Baird Market & Investment Strategy │ Page 13
.
Purchasing Power of U.S. Dollar?
Monthly Data 10/31/1914 - 8/31/2010 (Log Scale)
Purchasing Power of the U.S. Dollar ($1 in 1914)
97.9
97.9
$1
CPI
79.9
79.9
65.3
65.3
"There is no subtler, no surer means of overturning the
existing basis of society than to debauch the currency."
- Lord John Maynard Keynes (1883-1946)
53.3
53.3
43.5
43.5
35.5
35.5
29.0
29.0
23.6
23.6
19.3
19.3
15.8
15.8
12.9
12.9
10.5
10.5
8.6
8.6
2000
7.0
1920
5.7
4.7
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
1945
1940
1935
1930
1925
1920
(HOT2010
10121B_C)
5.7
8/31/2010 = 5 Cents
Source: Bureau of Labor Statistics
1915
4.7
7.0

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Baird Market & Investment Strategy │ Page 14
.
Is Gold Money?
“No”! Ben Bernanke
Baird Market & Investment Strategy │ Page 15
Real Wage Growth Now Negative
Source: Ned Davis Research
Baird Market & Investment Strategy │ Page 18
Lost Decade for Employment
1998
2010
Baird Market & Investment Strategy │ Page 19
Interest Rate Outlook 2011 - 2012
5.00%
4.00%
1.74%
Baird Market & Investment Strategy │ Page 20
The Road to Recovery
What Is Needed
Tax Reform
•
Flat Tax
•
Lower Corporate Rates/Remove Loopholes
•
National Sales Tax (Not a good idea)
Fed Policy
•
Focused on Stable Dollar
Budget Reform
•
Confront Entitlements
•
Cap Spending as a Percentage GDP to 20%
U.S. Energy Policy
•
Considering Only Oil and Natural Gas
Baird Market & Investment Strategy │ Page 22
Economic Outlook for 2011-2012
Secular Risks Remain
• Stock Market Trends Indicate Recession Risks High
• GDP Growth for 2011 Expected to Be 1.2 to 1.5%
• GDP Growth for 2012 Expected to Be 1.5% To 2.0%
• Interest Rates Expected to Stay Low and Stable
• Inflation Trends Higher in 2011 Lower in 2012
• Unemployment to Remain Stubbornly High
• Consumer as a % of GDP in Secular Decline
• Home Prices Remain Under Pressure
Baird Market & Investment Strategy │ Page 23
Stocks Market Outlook
Weight of the Evidence
Fundamental Factors
• Federal Reserve Policy
Bullish
+1
• Economic Fundamentals
Bearish
-1
• Valuations
Neutral
0
• Investor Sentiment
Bullish
+1
• Seasonal Influences
Neutral
-1
• Tape
Bearish
-1
Technical Factors
Weight of the Evidence = Neutral
Baird Market & Investment Strategy │ Page 24
Federal Reserve Policy - Bullish
Don’t Fight the Fed
Daily Data 9/02/2008 - 8/10/2011
Fed Policy Moves
1380
1360
1340
1320
1300
1280
1260
1240
1220
1200
1180
1160
1140
1120
1100
1080
1060
1040
1020
1000
980
960
940
920
900
880
860
840
820
800
780
760
740
720
700
680
(HOT2011
08111_C)
QE1 Ends
QE2
ends
QE2 Ends
1380
1360
1340
1320
1300
1280
1260
1240
1220
1200
1180
1160
1140
1120
1100
1080
1060
1040
1020
1000
980
960
940
920
900
880
860
840
820
800
780
760
740
720
700
680
QE1
ends
Standard & Poor's 500 Index
QE2
launched
QE 2 Launched
Bernanke
hints at QE2
Jackson Hole/Bernanke
QE1
QE1
announced
S
O
N
QE1
expanded
D
J
F
2009
M
A
M
J
J
A
S
O
N
D
J
F
M
A
M
J
J
A
S
2010
O
N
D
J
F
M
A
M
J
J
A
2011

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Baird Market & Investment Strategy │ Page 25
.
Economic Fundamentals - Bearish
Monthly Data 1/31/1940 - 1/31/2011 (Log Scale)
Standard & Poor's 500 Index
1345
1019
772
585
443
336
254
193
146
110
84
63
48
36
28
21
16
12
9
1/31/2011 = 1286.1
Standard
& Poor's 500 Index
Gain/Annum When:
Nonfarm
1940
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
(HOT2011
02111A_C)
Above
S&P 500
1945
1950
1955
1960
1965
1970
1975
Payrolls
1980
1985
Gain/
Annum
3.9
* Between
Below
(Y/Y) is:
-.1 and 3.9
-.1
1990
1995
%
of Time
-0. 6
19. 2
6. 2
59. 2
15. 6
21. 6
2000
2005
1345
1019
772
585
443
336
254
193
146
110
84
63
48
36
28
21
16
12
9
2010
1/31/2011 = 0.8%
Non-Farm Payrolls
Strong Employment Growth
Weak Employment Outlook
Source: Department of Labor
16
15
14
13
12
11
10
9
8
7
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
Nonfarm Payrolls (Year-to-Year % Change)

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See NDR Disclaimer at
Source: Ned Davis Research
www.ndr.com/copyright.html
. For data vendor disclaimers refer to
www.ndr.com/vendorinfo/
Baird Market & Investment Strategy │ Page 26
.
Corporate Earnings and the Stock Market
Monthly Data 12/31/1979 - 7/31/2011 (Log Scale)
S&P 500 vs Median Expected Earnings Growth
1446
1263
1103
964
842
736
643
561
490
428
374
327
286
250
218
190
166
145
127
111
S&P 500 Gain/Annum
When:
Expected
EPS
Growth Is:
* Above 14.2%
Between
4.2%
4.2%
and 14.2%
and Below
Buy/Hold
Gain/
Annum
%
of Time
-0. 5
16. 0
6. 9
65. 2
17. 2
18. 8
8. 2
100. 0
S&P 500 Index
S&P 500 Index
Calculation
is median 12-month
percent change in rolling one-year
Rolling one-year forecasted EPS is a time-weighted average of current fiscal
year's earnings estimates and following fiscal year's earnings estimates.
Forecasted EPS based on median estimates from Zacks Investment Research.
High Expectations
EPS.
7/31/2011 = 16.3%
Median Estimated One-Year Earnings Growth
Rate for S&P 500 Index Components (%)
21
forecasted
1446
1263
1103
964
842
736
643
561
490
428
374
327
286
250
218
190
166
145
127
111
21
18
18
15
15
12
12
9
9
6
6
3
3
0
0
-3
-3
-6
-6
-9
-9
-12
-12
-15
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
-18
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
(AA380)
-15
Earnings Expectations Low
-18

Copyright 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
See NDR Disclaimer at
Source: Ned Davis Research
www.ndr.com/copyright.html
. For data vendor disclaimers refer to
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Baird Market & Investment Strategy │ Page 27
.
Sentiment – Active Money Manager - Bullish
Daily Data 7/05/2006 - 10/06/2011 (Log Scale)
Standard and Poor's 500 Stock Index
1531
1465
1402
1342
1284
1229
1176
1126
1078
1031
987
945
904
865
828
793
759
726
695
S&P 500
Standard
NAAIM
N
14%
and 73%
14%
J
M
Index
Gain/
Annum
is
73%
Between
* Below
and Poor's 500 Stock
Gain/Annum When:
Survey
Above
S
M
J
(DAVIS134)
%
of Time
-10. 2
22. 6
-1. 7
70. 0
30. 9
7. 3
S
2007
95
90
85
80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
-5
1531
1465
1402
1342
1284
1229
1176
1126
1078
1031
987
945
904
865
828
793
759
726
695
N
J
2008
M
M
J
S
N
J
M
M
J
S
2009
N
J
2010
M
M
J
S
N
J
M
M
High Average Allocation (%)
Optimistic
Source:
National Association of Managers Sentiment (NAAIM)
http://www.naaim.org/newsroom.php
Low Average Allocation (%) Pessimistic
J
S
2011
80%
NAAIM member firms who are active money managers
are asked each week to provide a number which represents
their overall equity exposure at the market close on a
specific day of the week, currently Wednesdays.
(Weekly Data Updated Twice a Month)
95
90
85
80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
-5
National Association of Active Investment Managers (NAAIM) Survey Average

Copyright 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
See NDR Disclaimer at
Source: Ned Davis Research
www.ndr.com/copyright.html
. For data vendor disclaimers refer to
www.ndr.com/vendorinfo/
Baird Market & Investment Strategy │ Page 28
.
Consumer Confidence
Monthly Data 2/28/1967 - 7/31/2011 (Log Scale)
Dow Jones Industrial Average
19769
16025
12990
10530
8536
6920
5609
4547
3686
2988
2422
1963
1592
1290
1046
848
687
557
452
Oct 2007
DJIA Gain/Annum
When:
(2/28/1969 - 7/31/2011)
Consumer
Confidence
Above
is:
Gain/
Annum
%
of Time
-0. 2
20. 8
6. 4
61. 5
14. 4
17. 7
110
Between
66 and 110
* 66 and Below
Jan 2000
Dow Industrials
Jun 1998
Mar 2003
Mar 2009
Sep 1987
Feb 1989
Feb 1992
Jan 1991
Oct 1968
Dec 1972
Oct 1982
May 1980
7/31/2011 = 12143.2
Dec 1974
1970
1975
1980
1985
1990
1995
2000
2005
2010
150
150
140
140
Extreme Optimism = Bearish for Stocks
130
120
110
19769
16025
12990
10530
8536
6920
5609
4547
3686
2988
2422
1963
1592
1290
1046
848
687
557
452
130
Consumer Confidence
120
110
100
100
90
90
80
80
70
70
60
60
50
50
40
40
30
20
(S1060A)
30
Source: The Conference Board
Extreme Pessimism = Bullish for Stocks
20
Consumer Confidence (Conference Board)

Copyright 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
See NDR Disclaimer at
Source: Ned Davis Research
www.ndr.com/copyright.html
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www.ndr.com/vendorinfo/
Baird Market & Investment Strategy │ Page 29
.
Contrary Opinion and Stock Market Profits
Daily Data 2010-12-31 to 2011-08-09 (Log Scale)
Dow Jones Industrial Average And Five Key Events Of 2011
13,095
Apple Earnings
Bin Laden Death
12,965
Bin Laden Death
12,836
13,095
12,965
Apple Earnings Blowout
12,836
12,708
Debt
Ceiling
Agreement
12,582
12,708
12,582
12,457
12,457
12,333
12,333
12,210
12,210
12,088
12,088
11,968
11,968
11,849
11,849
11,731
11,731
11,614
11,614
11,499
11,499
Japan Nuclear Crisis Fear
11,384
11,384
Japan Disaster
11,271
11,271
11,159
11,159
11,048
11,048
10,938
10,938
10,829
10,829
10,721
S&P Downgrade
10,615
AAA Downgrade
10,509
03
12
Jan '11
24
02
11
Feb '11
HOT201108101_C
Source: Ned Davis Research
23
04
15
Mar '11
24
04
13
Apr '11
25
04
13
May '11
24
03
14
Jun '11
23
05
14
Jul '11
25
10,721
10,615
10,509
03
12
Aug '11
© Copyright 2011 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
See NDR Disclaimer at
www.ndr.com/copyright.html
For data vendor disclaimers refer to
www.ndr.com/vendorinfo/
Baird Market & Investment Strategy │ Page 30
Valuations - Neutral
Median Price / Earnings Ratio
Monthly Data 12/31/1968 - 8/31/2010 (Log Scale)
Standard & Poor's 500 Stock Index
1426
1206
1020
863
730
618
523
442
374
316
268
226
192
162
137
116
98
83
70
Price Move
41.1% to Overvalued (+1SD) = S&P 500 Level of 1480.95
5.7% to Median Fair Value = S&P 500 Level of 1109.15
S&P 500 Index
-29.7% to Undervalued (-1SD) = S&P 500 Level of 737.34
8/31/2010 = 1049.33
1970
1975
1980
1985
1990
32
1995
2000
2005
2010
32
Very Overvalued
Median Price/Earnings Ratio
+2 SD
30
28
1426
1206
1020
863
730
618
523
442
374
316
268
226
192
162
137
116
98
83
70
of:
26
30
28
26
Overvalued
22
24
+1 SD
24
16
Median
18
22
40 Year Norm
20
Price / Earnings16x
-1 SD
10
18
16
14
12
20
41.8-Year
Median = 16.7
14
12
10
8
8
Bargains
6
(DAVIS100)
8/31/2010 = 15.8
6
S&P 500 Median Price/Earnings Ratio (NDR Calculation) with Historical Median

Copyright 2010 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
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Source: Ned Davis Research
www.ndr.com/copyright.html
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www.ndr.com/vendorinfo/
Baird Market & Investment Strategy │ Page 31
.
Seasonal Patterns - Bullish
S&P 500 Cycle Composite For 2011 And 2012
109.8
109.8
109.5
109.2
108.9
109.5
109.2
108.9
108.6
108.3
108.0
107.7
107.4
108.6
108.3
108.0
107.7
107.4
Summer 2011
107.1
106.8
106.5
106.2
105.9
107.1
106.8
106.5
106.2
105.9
105.6
105.3
105.0
104.7
104.4
105.6
105.3
105.0
104.7
104.4
104.1
103.8
104.1
103.8
103.5
103.2
102.9
103.5
103.2
102.9
102.6
102.3
102.6
102.3
2011-2012 Cycle Composite
Equally-Weighted:
One-Year Seasonal Cycle
Four-Year Presidential Cycle
10-Year Decennial Cycle
102.0
101.7
101.4
101.1
100.8
100.5
100.2
(SSF
10_11A_C)
Second Qtr 2012
Based On Daily Data
1/3/1928 - 11/18/2010
J
F
M
A
2011
M
J
J
Line represents cumulative percent gain.
Trend is more important than level.
A
S
O
N
D
J
F
M
A
M
J
J
A
S
O
N
102.0
101.7
101.4
101.1
100.8
100.5
100.2
D
2012

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Source: Ned Davis Research
www.ndr.com/copyright.html
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.
Baird Market & Investment Strategy │ Page 32
Stock Market Breadth – Bearish
Baird Market & Investment Strategy │ Page 33
Financial Weapons of Mass Destruction
Quarterly Data 3/31/1990 - 6/30/2011
Total Notional Derivatives
250
245
240
235
230
225
220
215
210
205
200
195
190
185
180
175
170
165
160
155
150
145
140
135
130
125
120
115
110
105
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
(DAVIS90)
250
245
240
235
230
225
220
215
210
205
200
195
190
185
180
175
170
165
160
155
150
145
140
135
130
125
120
115
110
105
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
Total Notional Derivatives
$249 Trillion
6/30/2011 = $249.34 Trillion
(Total Notional Amount of Derivatives Contracts at all U.S. Commercial Banks)
Black Swan Events
1987, Flash Crash Day, Lehman,
Enron, Bear Stearns, UBS….
1990
1995
2000
2005
2010

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.
Baird Market & Investment Strategy │ Page 34
Contact Information
Bruce Bittles
Chief Investment Strategist
Robert W. Baird & Co., Inc.
(941) 906-2830
bbittles@rwbaird.com
Baird Market & Investment Strategy │ Page 35
Appendix - Important Disclosures
This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect
our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we
cannot guarantee the accuracy.
ADDITIONAL INFORMATION ON COMPANIES MENTIONED HEREIN IS AVAILABLE UPON REQUEST
The indices used in this report to measure and report performance of various sectors of the market are unmanaged and direct
investment in indices is not available.
Baird is exempt from the requirement to hold an Australian financial services license. Baird is regulated by the United States Securities
and Exchange Commission, FINRA, and various other self-regulatory organizations and those laws and regulations may differ from
Australian laws. This report has been prepared in accordance with the laws and regulations governing United States broker-dealers
and not Australian laws.
Copyright 2011 Robert W. Baird & Co. Incorporated
Other Disclosures
UK disclosure requirements for the purpose of distributing this research into the UK and other countries for which Robert W
Baird Limited holds an ISD passport.
This report is for distribution into the United Kingdom only to persons who fall within Article 19 or Article 49(2) of the Financial Services
and Markets Act 2000 (financial promotion) order 2001 being persons who are investment professionals and may not be distributed to
private clients. Issued in the United Kingdom by Robert W Baird Limited, which has offices at Mint House 77 Mansell Street, London,
E1 8AF, and is a company authorized and regulated by the Financial Services Authority. For the purposes of the Financial Services
Authority requirements, this investment research report is classified as objective.
Robert W Baird Limited ("RWBL") is exempt from the requirement to hold an Australian financial services license. RWBL is regulated by
the Financial Services Authority ("FSA") under UK laws and those laws may differ from Australian laws. This document has been
prepared in accordance with FSA requirements and not Australian laws.
Baird Market & Investment Strategy │ Page 36