Eye on the Market I March 2, 2011 J.P.Morgan Topics: The global recovery vs the Ides of March: the Middle East, European sovereign debt and Asian inflation The latest manufacturing surveys show a global economy that is still expanding, particularly in the developed world. This is what "zero cost of money" policies were supposed to create, but nevertheless, it is still reassuring to see it. Improvements include continued strong manufacturing and export data in the US, and a better than expected manufacturing outlook in both Italy and Ireland. In Germany. unemployment has fallen to the lowest rate since Reunification. Manufacturing surveys: the G-3 takes center Stage Index, sa 60 55 50 45 40 35 30 Jan•06 Jan-07 Jan-08 Source:E.Morgan Securities LLC. Developed markets EM Asia Jan-09 Jan•10 La ta m Jan•11 Cost of money = zero Policy rates adjusted for inflation, percent 6% 5% 4% 3% 2% 1% 0% •1% 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 Source:. Morgan Securities LLC. EM countries We are mindful, however, of The Ides of March, which begins earlier than the 15th this year. We believe we will get through the Ides better than Caesar, but that's a very low bar given what happened that day in the Roman Senate (Emperor: bludgeoned). While profits and balance sheets are in good shape, and while there's still a glut of cash looking to invest (from households, corporations and Sovereign Wealth Funds), 2011 looks to be the end of the free money train, and a more volatile year for markets. The situation in the Eastern Province of Saudi Arabia and Bahrain is also on edge, with tanks rolling into Qatif as I write this. We consider the median 500 forecast of 1425 to be too high; we're at 1350-1375. Preferred portfolio exposures: large cap US growth; private lending to real estate/mid-sized corporates; merger arbitrage; distressed European bank loans. March 11th & 20th Saudi nationwide "Days of Rage", and minority Shi'a protests t