The Surprises of 2010

Byron R. Wien
Senior Managing
g g Director
Tel: 212.583.5055
Email: wien@blackstone.com

Byron's monthly essays are broadly recognized for their insight and perspective. If you would like to
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i ' t @bl k t
The Ten Surprises of 2009
1. The Standard and Poor
Poor’s
s 500 rises to 1200. In anticipation of a second
second-half
half recovery in the
U.S. economy, the market improves from a base of investor despondency and hedge fund
and mutual fund withdrawals. The mantra changes from “fortunes have been lost” to
“fortunes can still be made.” Higher quality corporate bonds, leveraged loans and
mortgages lead the way

2. Gold rises to $1,200 per ounce. Heavy buying by Middle Eastern investors and a worldwide
disenchantment with paper currencies drive the price of precious metals higher. In a time
of uncertainty, investors want something they can count on as real

3. The price of oil returns to $80 per barrel. Production disappointments and rising Asian
demand create an unfavorable supply / demand balance. Other commodities also rise,
some doubling from their 2008 lows. Natural gas goes to $9 per mcf

4. Low Treasury interest rates coupled with huge borrowing by the Treasury send the dollar
into a serious downward slide. Overseas investors become concerned that the currency
printing presses will never stop. The yen goes to 75 and the euro to 1.65

5. The ten-year U.S. Treasury yield climbs to 4%. Later in the year, as the economy shows
signs of recovery, economists and investors shift their mood from concern about deflation
to worries about inflation. A weak dollar, rapid growth in money supply and record-setting
deficits (over $1 trillion) are behind the change

1
The Ten Surprises of 2009
6. China s growth exceeds 7% and its stock market revives. World leaders credit China’s
China’s China s
authoritarian government for its thoughtful stimulus policies and effective execution during
a challenging period. The Chinese consumer begins to spend more and save less and this
shift is behind the unexpected strength in the economy

7
7. Falling
F lli tax
t revenues from
f the
th financial
fi i l sector
t cause New
N York
Y k State
St t to
t threaten
th t bankruptcy
b k t
and other states and municipalities follow. The Federal government is forced to step in and
provide substantial assistance. The New York Post screams “When will the bailouts stop?”

8. Housing starts reach bottom ahead of schedule in the fall, and house prices stabilize after
dropping 15% from year-end 2008 levels. The Obama stimulus program proves effective
and a slow growth recovery begins before year-end. Third and fourth quarter real gross
domestic product numbers are positive

9. The savings rate in the United States fails to improve beyond 3%, as most economists
expect. The concept of thrift seems to have vanished from American culture. Peak job
insecurity and negative growth drive increased savings early in the year, but spending
resumes as the economic growth turns positive in the second half, making Christmas 2009
the best ever

10. Citing concerns about Iraq’s fragile democratically elected government and the danger of a
Taliban-controlled Afghanistan, Barack Obama slows his plan for troop withdrawal in the
former and meaningfully
g y increases U.S. military yppresence in the latter. In a hawkish speech
p
he states that the threat of terrorism forces the United States to maintain a strong military
force in this strategic area
2
The Ten Surprises of 2010
1. The United States economy grows at a stronger than expected 5% real rate during the year
and the unemployment level drops below 9%. Exports, inventory building and technology
spending lead the way. Standard and Poor’s 500 operating earnings come in above $80

2. The Federal Reserve decides the economy is strong enough for them to move away from
zero interest rate policy. In a series of successive hikes beginning in the second quarter
the Federal funds rate reaches 2% by year-end

3. Heavy borrowing by the U.S. Treasury and some reluctance by foreign central banks to
k
keep b
buying
i notest and d bonds
b d drives
di the
th yield
i ld on the
th 10-year
10 T
Treasury above
b 5.5%.
5 5% BBanks
k
loan more to corporations and individuals and pull away from the carry trade, thereby
reducing demand for Treasuries. Obama says, “The suits are finally listening”

4
4. In a roller coaster year the Standard and Poor
Poor’ss 500 rallies to 1300 in the first half and then
runs out of steam and declines to 1000, ending where it started at 1115.10. Even though
the economy is strong and earnings exceed expectations, rising interest rates and full
valuations present a problem. Concern about longer term growth and obligations to
reduce leverageg at both the public
p and private
p level unsettle investors

5. Because it is significantly undervalued on a purchasing power parity basis, the dollar

rallies against the yen and the euro. It exceeds 100 on the yen and the euro drops below
$1.30 as the long slide of the greenback is interrupted. Longer term prospects remain
uncertain

3
The Ten Surprises of 2010
6. Japan stands out as the best performing major industrialized market in the world as its
currency weakens and its exports improve. Investors focus on the attractive valuations of
dozens of medium sized companies in a market selling at one quarter of its 1989 high. The
Nikkei 225 rises above 12,000
7. Believingg he must be a leader in climate control initiatives,, President Obama endorses
legislation favorable for nuclear power development. Arguing that going nuclear is
essential for the environment, will create jobs and reduce costs, Congress passes bills
providing loans and subsides for new plants, the first since 1979. Coal accounts for about
50% of electrical power generation, and Obama wants to reduce that to 25% by 2020
8. The improvement in the U.S. economy energizes the Obama administration. The White
House undergoes some reorganization and regains its momentum. In the November
Congressional election the Democrats only lose 20 seats, much less than expected
9. When it finally passes, financial service legislation, like the health care bill, proves to be
softer
ft on the
th industry
i d t than
th originally
i i ll feared.
f d There
Th is
i greater
t consumer protection,
t ti more
transparency, tighter restriction of leverage and increased scrutiny of derivatives, but the
regulatory changes for investment bankers and hedge funds are not onerous. Trading
volume and merger activity increases; financial service stocks become exceptional
performers in the U.S. market
10. Civil unrest in Iran reaches a crescendo. Ayatollah Khamenei pushes out Mahmoud
Ahmadinejad in favor of a more public relations adept leader. Economic improvement
becomes the key issue and anti-Israel rhetoric subsides. Talks with the U.S. and Europe
begin
g but the country y remains a nuclear threat. Pakistan becomes the hotspot
p in the
region because of the weak government there, anti-American sentiment, active terrorist
groups and concerns about the security of the country’s nuclear arsenal
4
Surprises Not on the 2010 List

! Gold
! Oil
! China
! Commercial Real Estate
! Tax policy

5
Crowd Sentiment Poll
Daily Data 1/03/2000 - 12/29/2009
S&P 500 Composite Index (updated weekly on Wednesday mornings)
Arrows represent extremes in optimism and
Extremes Generated when Sentiment Reading:
1560 pessimism. They do not represent buy and 1560
Rises above 61.5% = Extreme Optimism sell signals and can only be known for
1500 Declines below 55.5% = Extreme Pessimism certain (and added to the chart) in hindsight. 1500
1440 1440
Sentiment must reverse by 10
1380 percentage points to signal an 1380
1320 extreme in addition to the above 1320
extreme levels being reached.
1260 1260
1200 1200
1140 1140
1080 1080
1020 1020
S&P500 Gain/Annum When:
960 12/01/1995 - 12/29/2009 960
900 900
NDR Crowd Gain/ %
840 Sentiment Poll is: Annum of Time 840
Average Value Of Indicator At:
780 Optimistic Extremes (down arrows)= 67.8
* Above 61.5 -1. 2 35. 8 780
720 Pessimistic Extremes (up arrows)= 45.9 Between 55.5 and 61.5 6. 3 21. 8 720
Average Spread Between Extremes = 21.9 55.5 and Below 8. 6 42. 4
660 660
M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D M J S D
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Extreme Optimism (Bearish) 75.7 12/29/2009 = 65.2
75 73.5 75
71.9 72.2
72 70 5
70.5 72
69.2 69.6 69.5
69 66.8 66.4 67.2 67.1
68.1
67.1
69
66.1 66.6 66.7
66 66
63.1
63 62.0 61.9 62.2 63
60 59.4
58.1 60
57 57
54 53.5 54.8 55.4 54
54.5
51 51.5 51.9 51
49.7 49.9
48 48.7 48
47.3 47.6
46.5 46.6 46.8
45 46.0 45.7 45
43.8
42 42.5 42
39 40.4 39
37.6 38.0
36 37.1 36
33 33.9 33.9 Extreme Pessimism (Bullish) 33
32.5
30.9

(S574) NDR Crowd Sentiment Poll

!"Copyright 2009 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/ .
Source: Ned Davis Research.

6
MSCI World Index (in USD)
(in US$) MSCI World Index
1,200

1,090

980

870 Minor divergence has developed…

the average stock has just begun to
760 lag the cap-weighted averages. Not
yet a reason to sell, though
650
Dec 08 Feb 09 Mar 09 May 09 Jul 09 Sep 09 Oct 09 Dec 09

MSCI World Index Daily Advance / Decline Line

950

904

858

812

766

720
Dec 08 Feb 09 Mar 09 May 09 Jul 09 Sep 09 Oct 09 Dec 09
Source: The Leuthold Group.

7
Standard & Poor’s 500 Stock Index
(Monthly Data 12/31/1968 – 11/30/2009 (Log Scale))

1,270 Price Move of:

-0.4% to Overvalued (+1 SD) = S&P 500 Level of 1,091.06
1,070 -25.7% to Median Fair Value = S&P 500 Level of 813.84
-51.0% to Undervalued (-1 SD) = S&P 500 Level of 536.61
870
670
470
270
11/30/2009 = 1,095.63
70
1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

(Davis100)
S&P 500 Median Price / Earnings Ratio (NDR Calculation) with Historical Median
34
30 Very Overvalued
+2 SD
26
Overvalued
22 1 SD
+1
18 41-Year Median = 16.5

14
-1 SD
10 Bargains
11/30/2009 = 22.2
6
1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
Source: Ned Davis Research.

8
World Market Cap as of 12/31/2003
World Market Cap as of 12/31/2003 World Market Cap as of 12/31/2008
Secular Bulls Secular Bulls
8.5% 14.2%
Other
11.5%
12.0% Other

73.8%
Secular
S l 80 0%
80.0% Secular
Bears Bears

Countries in Secular Bull Markets Countries in Secular Bear Markets

Market Cap as a % Market Cap as a % Market Cap as a % Market Cap as a %
of World Market of World Market Point of World Market of World Market Point
Cap in 2003 Cap in 2008 Change Cap in 2003 Cap in 2008 Change
China 0.36% 1.72% 1.36 U.S. 52.47% 45.03% (7.44)
Canada 2.54% 3.50% 0.96 U.K. 10.45% 8.35% (2.10)
Brazil 0.42% 1.22% 0.81 Italy 1.56% 1.54% (0.02)
Taiwan 0.55% 1.03% 0.48 France 3.99% 4.58% 0.59
South Korea 0.83% 1.29% 0.46 Germany 2.91% 3.67% 0.76
Australia 2.05% 2.50% 0.45 Japan 8.64% 10.60% 1.96
India 0.26% 0.62% 0.36 Total 80.02% 73.77% (6.25)
Russia 0.22% 0.54% 0.32
Mexico 0.29% 0.49% 0.20
Hong Kong 0.65% 0.84% 0.19
Singapore 0.33% 0.45% 0.12
Total 8.49% 14.21% 5.72

For data vendor disclaimers refer to www.ndr.com/vendorinfo. Further distribution prohibited without prior permission.
Copyright 2009 (c) Ned Davis Research, Inc. All rights reserved.

9
World Nominal GDP as of 12/31/2003
World Nominal GDP as of 12/31/2003 World Nominal GDP as of 12/31/2008
Secular Bulls
Secular Bulls
18.0%
24.2%

Secular
18.2% Other Bears 53.3%
Secular 63.8%
22.5%
Bears Other

Countries in Secular Bull Markets Countries in Secular Bear Markets

GDP as a % of GDP as a % of Point GDP as a % of GDP as a % of Point
World GDP in 2003 World GDP in 2008 Change World GDP in 2003 World GDP in 2008 Change
China 4.57% 7.63% 3.06 U.S. 30.88% 24.94% (5.94)
Russia 1.21% 2.86% 1.65 Japan 11.75% 8.49% (3.26)
Brazil 1.55% 2.76% 1.22 U.K. 5.17% 4.63% (0.53)
India 1.51% 1.96% 0.45 Germany 6.80% 6.33% (0.47)
Australia 1.47% 1.74% 0.27 Italy 4.19% 3.99% (0.20)
Canada 2.41% 2.61% 0.20 France 5.01% 4.95% ((0.06))
Singapore 0.26% 0.31% 0.06 Total 63.80% 53.33% (10.46)
Hong Kong 0.44% 0.37% (0.07)
South Korea 1.78% 1.64% (0.15)
Taiwan 0.86% 0.70% (0.17)
Mexico 1.95% 1.59% (0.36)
Total 18.00% 24.16% 6.16

For data vendor disclaimers refer to www.ndr.com/vendorinfo. Further distribution prohibited without prior permission.
Copyright 2009 (c) Ned Davis Research, Inc. All rights reserved.

10
Diminishing Returns from Debt-Financing by Decade
(12/31/1949 - 6/30/2009)
($ in billions)
Diminishing Returns from Debt-Financing by Decade
12/31/1949-6/30/2009
Decade Decade
Change in Change in
Debt GDP
Debt Range (billions $) (billions $) Debt/GDP GDP/Debt

12/31/1949-12/31/1959 337.6 248.0 1.36 0.73

12/31/1959-12/31/1969 752.1 491.3 1.53 0.65

12/31/1969-12/31/1979 2,785.2 1,654.9 1.69 0.59

12/31/1979-12/31/1989 8,562.8 2,922.3 2.93 0.34

12/31/1989-12/31/1999 12,550.0 4,026.0 3.12 0.32

12/31/1999-06/30/2009* 27,403.6 4,543.5 6.03 0.17

Source: Ned Davis Research.

(*) Most recent data available.

11
The Economy (The Index of Coincident Economic Indicators)

(12-Month Total – $ in billions)

$400
Budget Surplus Federal Government Budget
$100

($200) Budget Deficit

($500)

($800)

($1,100)
11/30/2009 = ($1,433.0)
($1 433 0)
($1,400)
1965 1970 1975 1980 1985 1990 1995 2000 2005 2009

5
Federal Budget Deficit / Surplus
Budget Surplus 2.7 11/30/2009 = -10.0%
as a % of Nominal GDP
2

(1)

(4)
Budget Deficit
(4.0)
(7)
(5.7) (5.4)
(10)
1965 1970 1975 1980 1985 1990 1995 2000 2005 2009

Source: Ned Davis Research.

National Bureau of Economic Recessions.
12
Government Debt (Federal, State, and Local) as % of GDP
Quarterly
Q l Data
D 3/31/1952
3/31/19 2 – 9/30/2009
106%
Government Debt = $14,834.2 billion = 104.0%
100%
Gross Domestic Product = $14,266.3 billion
94%
88% 83.6% 85.6%

82%
55-Year Mean = 66.9%
76%
70% 71.0%

64%
58%
53.2%
49.6%
52% 45.1%
47.2%
46%
1950 1955 1961 1967 1973 1979 1985 1991 1997 2003 2009

Data Subject to Revisions by

The Federal Reserve Board
Source: Ned Davis Research.

13
Foreign Central Banks

8% 120%
U.S. Nominal Trade-weighted Dollar(1)

6% 100%

4% 80%
% of GDP
P

Foreign Official Flows(2) to the U.S.

2% 60%

0% 40%

-2% 20%
1 97 0
1 97 1
1 97 2
1 97 3
1 97 4
1 97 5
1 97 6
1 97 7
1 97 8
1 97 9
1 98 0
1 98 0
1 98 2
1 98 3
1 98 4
1 98 5
1 98 6
1 98 7
1 98 8
1 98 9
1 99 0
1 99 1
1 99 2
1 99 3
1 99 4
1 99 5
1 99 6
1 99 7
1 99 8
2 09 9
2 00 0
2 00 1
2 00 2
2 00 3
2 00 4
2 00 5
2 00 6
2 00 7
09
19

Note: Shaded regions reflect periods of heavy foreign official inflows.

(1) Source: J.P. Morgan Chase & Co, BCA Research.
(2) Central Banks and Monetary Authorities.

14
Dollar Watch – Two Foreign Holders of U.S. Treasury Securities

($ in billions)
$900
Treasury Holdings as of 9/30/2009
$800

$700
$798.9
$600

$500

$400
$185.3
$300

$200

$100

$0
2001 2001 2002 2003 2004 2005 2006 2007 2007 2008 2009

China OPEC

Source: Ned Davis Research.

15
The United States Economy
 Good News
History Suggests +4% Recovery Is Conservative

Real GDP
Peak-to-
Trough First year 9
1982 2008
Recession Decline Recovery 8 1953

During
7

Firstt Year of Recoverry (%)

1957 -3.7% +6.9% 1957
1960

ase in Real GDP D

6
1974
1973 -3.1% +6.1% 5
Deep
4
1981 -2.9% +8.5% 1990
3 1970

Increa
Regression
2009 -3.9% +8.6%e 2 2001 Y = 2.2 + 1.7*X
R2 = 64%
1
Shallow 2001 -0.3% +1.9%
0
0 -1 -2 -3 -4 -5

Decline in Real GDP During Recession (%)

Source: ISI Group.

17
Good News
By Component,
Component It’s
It s Not Hard to Get +4
+4.0%
0% Real GDP
2010:4Q Real GDP
4Q / 4Q Cont. to GDP

Consumer Spending +1.0% 0.7%

CapEx Eqp +10.0% 1.0%

Housing +10.0% 0.2%

Inventories +$196.0 1.5%

Trade +$140.0 1.0%

Federal Government +6.0% 0.4%

St t Government
State G t -1.0%
1 0% -0.1%
0 1%

CapEx Structures -10.0% -0.5%

Real GDP 4 2%
4.2%

Source: ISI Group.

18
Bad News
Recovery Off to a Slow Start

Real GDP Q/Q % A.R.

1 and 2nd Quarter of Recovery
st

1st 2nd

1975 +3.1% +6.9%

1983 +5.1% +9.3%

1991 +2.7% +1.7%

2002 +3.5% +2.1%

2009 +2.8% r +3.0%e

Source: ISI Group.

r = expected revision

19
Not a Normal Cycle
Real Retail Sales
( )(YoY) Consumer Confidence
( (Conf) Board)
Typical Cycle This Cycle 1 StDev Typical Cycle This Cycle 1 StDev
15% 160

140
10%
120

5% 100
`
80
0%

60
-5%
40

-10% 20
-36 -28 -20 -12 -4 4 12 20 28 36 44 52 60 -36 -28 -20 -12 -4 4 12 20 28 36 44 52 60

Real Home Price Inflation

S&P 500 (In) (Home Prices YoY – CPI YoY)
Typical Cycle This Cycle 1 StDev Typical Cycle This Cycle 1 StDev
80% 15%
60%
10%
40%
5%
20%
0%
0%
-5%
-20%

-40% -10%

-60% -15%

-80% -20%
-36 -28 -20 -12 -4 4 12 20 28 36 44 52 60 -36 -28 -20 -12 -4 4 12 20 28 36 44 52 60
Source: Bridgewater

20
Good News
Lift to GDP from Spending Part of Stimulus
($ in billions) Funds Distribution Reported By Week
(Total Stimulus Amount – $787 Billion)
$300
Sep 30, 2010
$255 e
$250

$200
Paid Out
Nov 6 $132.5 b
$150

$100

$50

$0
Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10

Source: ISI Group.

21
Good News
Inventories Still Plunging
U.S. Real Inventory Change
2009: 3Q -$130.8
$150

$100

$50

$0

($50))
($

($100)

(($150))

($200)
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2009

Source: ISI Group.

22
CapEx – Help for Industrial Machinery Shares
U.S. Nominal CapEx Eqp Ex Tech
Q/Q % Ch A.R.
2009:3Q: - 10.0%
30

20

10

-10

20
-20

-30

-40
40

-50

-60
1Q 2003 1Q 2004 1Q 2005 1Q 2006 1Q 2007 1Q 2008 1Q 2009

Source: ISI Group.

23
U.S. Employment
Unusually Large Job Cuts Relative to GDP
2008
-5.0% Actual

-4.5%

-4.0% 1957
ecline

3.5%
-3.5% 1953
2008
nt
Peak-tto-trough De
In Employmen

Fitted
-3.0%
1982
-2.5% 1974

-2.0% 2001
-1.5% 1960
Regression
1990
-1.0%
1 0% Y = -0.9
09+00.7
7*X
X
1970 2
R = 73%
-0.5%

0.0%
0.0% -0.5% -1.0% -1.5% -2.0% -2.5% -3.0% -3.5% -4.0%
Source: ISI Group.
Peak-to-trough Decline in Real GDP
24
U.S. Employment
Likely to Increase Soon
U.S. Temp Employment
M/M Ch 3 Mo. Avg.
Nov 38
60

40

20

-20

-40

-60

-80

-100
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: ISI Group.

25
U.S. Employment
Likely to Increase Soon

Total Work Week

Nov 33.2
35.0

34.5

34.0

33.5

33.0
1988 1989 1991 1993 1994 1996 1998 1999 2001 2003 2004 2006 2008 2009

Source: ISI Group.

26
U.S. Profits
Another Blowout Quarter for Productivity

U.S. Productivity
2 Qtr. % Ch. A.R. 2009:3Q 8.2%
10
Biggest Gain in almost
8 Five Decades

-2

-4

-6
1Q 1980 1Q 1982 1Q 1984 1Q 1986 1Q 1988 1Q 1990 1Q 1992 1Q 1994 1Q 1996 1Q 1998 1Q 2000 1Q 2002 1Q 2004 1Q 2006 1Q 2008

Source: ISI Group.

27
Increased Household Savings Reduces Spending
— U.S.
U S Personal Savings Rate — U.S.
U S Household Net Worth % Disposable Income
14% 700%

12% 650%

10% 600%

8% 550%

6% 500%

4% 450%

2% 400%

0% 350%

-2% 300%
60 64 68 72 76 80 84 88 92 96 00 04 08

Source: Bridgewater

28
U.S. Consumer
CID Down a Record Amount Over the Past Six Months

U.S. Consumer Installment Debt

8 Mo. % Ch. A.R. Sep -6.3%
25%

20%

15%

10%

5%

0%

-5%

-10%
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Source: ISI Group.

29
Housing
Inventory of New Houses for Sale at a 38-Year Low
U.S. New Houses for Sale
Oct 0.239
0.60
0.55
0.50
0.45
0.40
0.35
0.30
0.25
0.20
1988 1990 1993 1996 1998 2001 2004 2007

U.S. Existing Houses For Sale

Oct 2.97
4.0

3.5
3.0

2.5
2.0

1.5
1988 1990 1993 1996 1998 2001 2004 2007

Source: ISI Group.

30
Housing
Prices Increasing

U.S. House Price Index (Case-Shiller)

SA M/M % Sep 0.3%
2 0%
2.0%

1.5%

1.0%

0.5%

0.0%

0 5%
-0.5%

-1.0%

-1.5%

-2.0%

-2.5%
2005 2006 2007 2008 2009

Source: ISI Group.

31
U.S. Manufacturing
Exports Increasing Significantly
U.S. Mfg PMI Export Orders Latest Click 56.0%
3 Mo. Avg. Nov: 55.5%
65%
60%
55%
50%
45%
40%
35%
2000 2001 2002 2004 2005 2006 2008 2009

U S Real Goods Exports

U.S.
3 Mo. Avg. 3 Mo. % A.R. Sep: 25.0%
30%

10%

-10%

-30%

-50%
2000 2001 2002 2004 2005 2006 2008 2009
Source: ISI Group.

32
U.S. Manufacturing
Nov IP Probably +0.6%
+0 6% M/M

U.S. Industrial Production

5 Mo. % A.R. Nov 8.8% e
20

15

10

-5

-10

-15

-20

-25
1970 1975 1980 1985 1990 1995 2000 2005 2009

Source: ISI Group.

33
Small Business Not Hiring

U.S. Small Business Trends (NFIB)

Job Openings 3 Mo.
Mo Avg.
Avg Nov 8.0%
8 0%
35%

Latest Click 8.0%

30%

25%

20%

15%

10%

5%
1988 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

Source: ISI Group.

34
Good News
Monetary Base Increasing at a +84
+84.2%
2% Annual Rate

U.S. Monetary Base

Nov 4 $ 1,999.8
$2,200

$2,000

$1 800
$1,800

$1,600

$1 400
$1,400

$1,200

$1,000
$ ,

$800
Jan 07 Jun 07 Nov 07 Apr 08 Sep 08 Feb 09 Jul 09 Dec 09

Source: ISI Group.

35
Good News
Money Moving Into Riskier Investments

Junk Bond Yields (Merrill Lynch)

Nov 13 9.82%
9 82%
24%

22%

20%

18%

16%

14%

12%

10%

8%

6%
2006 2007 2008 2009

Source: ISI Group.

36
U.S. Profits
Profits-Led Recovery
ISI Global Economic Diffusion Index
13 Wk. Avg. Dec 7 11.7
15

-5

-15

-25
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

First Call Earnings Revisions Up

SA by ISI 13 Wk. Avg. Nov 27 62.5%

60

50

40

30

20
1998 1999 2000 2001 2002 2003 2005 2006 2007 2008 2009
Source: ISI Group.

37
U.S. Inflation
Inflation Watch
U.S. Average Hourly Earnings U.S. CPI Core
Y/Y % Oct 2.4% Y/Y % Sep 1.5%
5% 3.0%
4% 2.5%
3%
2.0%
2%
1.5%
1%
0% 1.0%
1998 1999 2001 2003 2005 2007 2009 1998 1999 2001 2003 2005 2007 2009

U.S. CPI Total Rent

Rent plus Owners’ Equivalent Rent
Y/Y % Sep 1.4%
5%

4%

3%

2%

1%
1998 1999 2001 2003 2005 2007 2009
Source: ISI Group.

38
The Rest of the World
Conditions Have Diverged
Industrial Production Index
— U.S.A. — Europe — Japan
105 105 105
100 100 100
95 95 95
90 90 90
85 85 85
80 80 80
75 75 75
70 70 70
65 65 65
60 60 60
00 02 04 06 08 10 00 02 04 06 08 10 00 02 04 06 08 10

— China
Chi — Emerging
E i Markets
M k t — EM ex-China
Chi
120 110 105

110 100
100
100 95

90 90 90

80 85
80
70 80

60 70 75

50 70
60
40 65

30 50 60
00 02 04 06 08 10 00 02 04 06 08 10 00 02 04 06 08 10
Source: Bridgewater.

40
Japan Real Exports
Nominal GDP Likely to Remain Weak

Japan Real Exports

Q/Q % A.R. 2009 3Q: 69.4
100
Real Price Nominal 95
GDP Deflator GDP 90
85
2009 1Q -12.2% +2.4% -10.1% 80
75
2Q +2.7% -4.2% -1.6% 70
65
+13.2%
3Q +4.8% -4.8% -0.3% 60
1/0/002006 1/4/002007 1/8/002008 2009
1/12/00 1/16/00

Source: ISI Group.

41
Japan
Government and Corporate Debt % GDP Much Higher than in the U.S.
US
250% 300%
200% 250%
200%
150%
150%
100%
100%
50% 50%
0% 0%
1980 1985 1990 1994 1999 2004 2009 1980 1985 1990 1994 1999 2004 2009

JAPAN GOVT DEBT % GDP U.S. GOVT DEBT % GDP JAPAN NONFIN CORPORATE DEBT % GDP U.S. NONFIN DEBT % GDP
2009:2Q: 204.4% 2009:2Q: 67.0% Debt Securities and Loans 2009:2Q: 77.3%
2009:2Q: 178.3%

105% 500%
95% 400%
85%
300%
75%
200%
65%
55% 100%
45% 0%
1980 1985 1990 1994 1999 2004 2009 1980 1985 1990 1994 1999 2004 2009

JAPAN CONSUMER DEBT % GDP U.S. CONSUMER DEBT % GDP JAPAN NONFIN TOTAL DEBT % GDP U.S. TOTAL DEBT % GDP
2009:2Q: 78.6% 2009:2Q: 96.5% 2009:2Q: 461.3% 2009:2Q: 242.5%
Source: ISI Group.

42
Severe Underperformance From Japanese Equities

Japan MSCI Index Relative To World MSCI Index

3.2

3.0

2.8

26
2.6

2.4

2.2

2.0

1.8

1.6
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: BCA Research 2009.

43
The 20th Century was a Growth Anomaly For China
% of World GDP
35%

30%

25%

20%

15%

10%

5%

0%
1

1000

1500

1600

1700

1820

1870

1900

1913

1950

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2003
Source: Historical Statistics for the World Economy – Angus Maddison, J.P. Morgan Securities, Inc.

44
China
Another Package of Strong China Data

China Exports China Imports

S.A. by ISI, Oct 725.8 S.A. by ISI, Oct 622.6
900 800

850 750

700
800
650
750
600
700
550
650
500
+36.2%
+34.9%
600 450 Annual Rate
Annual Rate

550 400
2007 2008 2009 2007 2008 2009

Source: ISI Group.

45
India
GDP Set to Reaccelerate

India Real GDP Y/Y%

12

10 Forecast
2010 3Q 8.3%
2010:3Q 8 3%
8

6
2009:2Q 6.2%
4

0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: ISI Group.

46
Brazil
GDP Set to Reaccelerate

Brazil Real GDP Y/Y% Forecast

8
2010:1Q
6.9%
6

0
2009:1Q
-1.4%
-2
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: ISI Group.

47
Some Thoughts About the
Price of Oil
Long-Term Demand Drivers Are Still in Place
Petroleum Consumption per Capita for Selected Countries
31 31
Yearly Data 12/31/1960 - 12/31/2007
30 In Barrels per Person per Year 30
29 29
28 28
27 27
26 26
25 25
24 24
23 23
22 22
21 21
20 20
19 19
18 18
17 17
16 Consumption 16
15 Country Per Capita Year 15
14 14
13
3 3
13
United States 25.1
25 1 2007
12 12
11 Japan 14.3 2007 11
10 Russia 7.5 2007 10
9 Brazil 4.5 2007 9
8 China 2.1 2007 8
7 7
India 0.9 2007
6 6
5 5
4 4
3 3
2 2
1 1
0 0
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Sources: Energy Information Administration and U.S. Census Bureau. Ned Davis Research.

49
Oil Supply / Demand Prospects
W ld Primary
World Pi Energy
E Demand
D d
6,000
Peak Oil:
2015
5 000
5,000
Peak Oil:
2010
4,000
Oil
Coal
Mtoe
e

3,000 Gas
Biomass
Nuclear
2,000 Other Renewables

1,000

0
1980 1990 2000 2010 2020 2030

World energy demand expands by 45% between now and 2030 – an average rate of
increase of 1.6% per year – with coal accounting for more than a third of the overall rise
Source: IEA World Energy Outlook 2008. Bank of America Merrill Lynch.

50
Oil Supply / Demand Prospects
BRIC and
d Middl
Middle E
Eastt D
Demand
dOOutlook
tl k
(in Mmbl/d)
2008 2030E
Demand Demand Increase

Brazil 2.4 3.6 +1.2

Russia 2.9 3.9 +1.0

India 3.1 7.3 +4.2

China 7.9 17.0 +9.1

Middle East 5.9 10.0 +4.1

Total 22.2 41.8 +19.6

Conclusions:
(1) Competition for oil supplies between emerging markets and mature countries is
potentially a problem
(2) The world needs and will actively seek out demand “Game Changers”
Source: IEA World Energy Outlook 2008. Bank of America Merrill Lynch.

51
Disclaimer
The views expressed
p in this commentary
y are the p
personal views of Byron
y Wien of Blackstone Advisory y Services L.P.
(together with its affiliates, “Blackstone”) and do not necessarily reflect the views of Blackstone itself. The views
expressed reflect the current views of Mr. Wien as of the date hereof and neither Mr. Wien nor Blackstone undertakes
to advise you of any changes in the views expressed herein.
Blackstone and others associated with it may have positions in and effect transactions in securities of companies
mentioned or indirectly y referenced in this commentary y and may
y also perform or seek to perform investment banking
g
services for those companies. Blackstone and/or its employees have or may have a long or short position or holding
in the securities, options on securities, or other related investments of those companies.
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52