From: US GIO To: Undisclosed recipients:; Subject: Eye on the Market, February 7, 2011 Date: Mon, 07 Feb 2011 16:41:55 +0000 Attachments: 02-07-11_ EOTM - Second_Wind,_Third_Wave.pdf Inline-Images: image001.png; image002.png; image003.png; image004.png; image005.png; image006.png February 7, 2011 Topics: US equities, Europe and Commodities (attached PDF is easier to read) US equity update: Q4 2010 was the 6th consecutive quarter of earnings higher than consensus Our largest regional equity position remains the US. As shown below, the percentage of US stocks with improving margins was at an all-time high at the end of Q4. While rising commodity prices are having an impact on some companies, high operating leverage and low labor costs continue to dominate the overall earnings equation. Technology, industrials and consumer staples have posted the best numbers vs expectations. We are beginning to see companies reduce elevated cash balances and increase capital spending, which is supportive for GDP and credit growth. While capital spending grew by 23% in Q4, it's rising from a low base, and we believe it has plenty of room to run. Recall that 2009 was the first year since 1950 when capital spending dipped below the rate of depreciation on the outstanding US capital stock. Share of large-cap stocks with improving pre-tax margins Labor costs as % of Sales: lowest in 60 years Percent- TIM pre-tax margins vs. prior year, ex financials& utilities Percent 80% - 70% 70% - 60% - • 50% 40% - 30% - A ,4\ 20% 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: NBER, co rperate reports, Empirical Research Partners. 68% 66% 64% • 62% . 60% 1947 1954 1961 1968 1975 1982 1989 Source: Bureau of Economic Analysis. 1996 2003 2010 To reiterate a point from our 2011 Outlook, S&P 500 revenues over the last 15 years have been considerably more linked to World GDP growth than US GDP growth. The internationalization of profits over the