July 3, 2009

Equity Strategy Outlook

SAXO BANK RESEARCH
Hot topic: Range bound David Karsbøl
Summary: It is still not the end of the bear market. Consumer confidence and Chief Economist
other ‘green shoots’ leading indicators have led markets higher until now, but DKA@SaxoBank.com

have now turned into yellow weeds as hard facts based indicators have not John J. Hardy
recovered as fast as expected. Earnings are back in focus and the ongoing FX Consultant
earnings season needs to show good signs other vise we will have a retracement JJH@SaxoBank.com
in equities. In the longer run we prefer shorting the market as we do not expect
Christian T. Blaabjerg
the economy to improve much beyond what is already priced in. Furthermore we Equity Strategist
do not see the risk of bond markets getting hit from the massive new issues of CTB@SaxoBank.com
debt from governments (which should lead to higher interest rates) being a part
of the current equity risk premium. Mads Koefoed
Market Strategist
MKOF@SaxoBank.com
Long run view: BEARISH. Our fundamental signposts that identify the end of the
bear market still do not all flash green yet. 1) The reported Return on Equity
Robin B.-Sjöback
(ROE) ex. financials for S&P500 should be below its long run average of 12.8%, Market Strategist
which it actually is now – reading 12%; 2) Our business cycle indicator should RSJO@SaxoBank.com
indicate a significant reversal in macroeconomic numbers – it has turned, but is
still at depressed levels, 3) Inventories of unsold homes should be below 8
months of sales and 4) Senior Loan officer (SLO) survey should be better than -
20%, where it is currently reading -39.6% (April numbers; the next survey will be
in July). We are still bearish on equity markets.

Short run view: BULLISH. Our market indicators show mixed signs as to whether
the current rally will continue. On the one hand the Volatility (VIX) continues its
decline and the CDS price index have followed pointing towards some support
for equity markets. Furthermore the bond spreads shows signs of improved
credit markets. On the other hand points our US weekly indicator the other way;
it is still at record lows showing only a marginal rebound and CAPE seems to have
retraced a bit. The conclusion based on our indicators is not firm regarding
direction. In order for equities to head higher we need to see a solid break of the
956-level in S&P500 and the next stop from here would be around 1014. If this is
not happening we expect it to range trade in the short run.

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.

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, but remains at very
depressed levels. Our technical indicator is suggesting that the market points towards a retracement in equity markets.

1
Equity Strategy Outlook – back to basics.

Equity Market Drivers and sector exposure

Our Business Cycle indicator (see graph below) still shows that the deceleration has decreased
significantly, but the world economy is still contracting.

The recent rally have been driven by improvements in leading indicators like the ISM Index and various
indicators – the so-called green shoots; they have now turned into yellow weeds since the hard facts
based numbers have not recovered as fast as expected. Equities have stopped rising and is now looking
towards earnings to fuel another leg higher.

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.

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)
is not yet priced in.

3
Equity Strategy Outlook – back to basics.

Earnings
We have just started the second earnings season this year and the very low level of expectations
suggests that we could be in for a minor surprise to the upside. We find this quite likely, but also that
earnings estimates will continue to be slashed for a while due to that analysts will start to postpone the
time of the earnings trough into 2010.

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 and have lowered
our estimates compared to the last report (June) especially for 2010. 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 should happen around 2H 2009. 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% 38.8% 32.9% 11.1 -62.0 7.0
Materials -60.4% 82.6% 23.4% -49.6 -40.0 6.0
Exporters
Industrials -29.7% 7.9% 15.9% -2.7 -44.0 3.0
Technology -17.7% 18.9% 16.1% -9.2 -31.0 15.0
Defensives
Staples 1.7% 6.5% 9.6% 6.9 .0
3.0 9.0
Health care 0.2% 10.1% 9.5% 3.4 4.0 7.0
Telecom -19.5% 7.8% 7.7% -4.4 -27.0 4.0
Utilities -4.7% 8.3% 7.6% -0.4 3.0 10.0
Other
Discretionary -27.7% 109.6% 33.2% -63.0 -29.0 16.0
Financials 142.0% 45.0% 68.0% 142% 20% 30%
Source: Thomson-Reuters DataStream, Saxo Bank Research

4
Equity Strategy Outlook – back to basics.

Index levels forecast

On the basis of macroeconomic data input we have firstly estimated the earnings for each index and through
a DDM model estimated the levels we expect the indices to trade at the given point in time. It is however
usually rather difficult to estimate a trading level for an index on a short time horizon like a quarter using
fundamental data. Consequently the uncertainties related to the estimates are significant, but it is our best
educated guess.

We expect equities to trade flat to higher in the short term as we have witnessed a dry out of green shoots
and equities returning to look at earnings. The result of the ongoing earnings season is therefore rather for
direction in equity markets. But if we take a look at what is priced in of increases in the major indices the
next 12 months markets expects an earnings increase of 25% in Dax, 20% in S&P500 and around 50% in
Nikkei225. Given the current macroeconomic environment we find this rather unlikely to happen. 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) most likely – similar to what happened back in the early 1980’s.

What we have seen so far is that industrials have slashed their storages and made significant cut backs on
production (and consequently laying off people) as if the world should end next quarter. They now realize
that this is not going to be the case and industrial production and capacity utilization will start to pick up
again. But it will not revert to previous levels due to very simple reason that consumers are not spending
(data shows the US consumers is saving – the highest level since 1995) and banks are not willing to lend
money to either companies or consumers on the back of a contracting economy and rising unemployment.
When markets realize this and start to price in another recovery the the V-shaped, then we will most likely
experience a significant retracement in equity markets. In the short run we expect equities to head north on
the back of decent earnings, but we expect to end when we enter the fall.

Please note that in our May and June editions we expected S6P500 to end June at 890, while the realized
number was 919. This is only a deviation of 3.26%!!!

Table: Index levels forecast

Index Current* Sep 09E Dec 09E Mar 10E Jun 10E
S&P500 923 800 760 780 810
Nasdaq100 1481 1230 1142 1190 1250
Dow Jones 8504 7450 7080 8640 7460
DAX 4905 4186 3900 4050 5000
FTSE100 4341 3840 3650 3730 3920
Nikkei225 9940 7750 7200 7500 8200
*) Close as of 1st of July 2009. Source: Saxo Bank Research.

5
Equity Strategy Outlook – back to basics.

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
MTDsupplied. 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%