Brian Reynolds, CFA

Chief Market Strategist

Managing Director
macrostrategy@wjbcap.com
646.344.4300

Macro Strategy June 11, 2010

60 Broad Street, 34th Floor, New York, NY 10004 www.wjbcapital.com 646.344.4300

Mid-Year Checkup
Summary
The financial market action remains confusing to many investors
But the action ties in neatly with the three themes from our 2010 Outlook piece
We thought that now would be a good time for a mid-year checkup. We know it is not exactly the mid-point of 2010, but
quarter-end is in sight. More importantly, the crazy financial market action has many people confused, so we thought that
framing the action in terms of the themes that we used in our 2010 Outlook piece (January 4, 2010) would help people put
things into perspective.

Our 2010 Outlook piece was subtitled A Year of Living Dangerously, and that has proven to be true. We chose those words
because we felt the need to emphasize that that we are in a high risk environment and that this year will be a struggle with
sharp downdrafts in stock prices.

In that 2010 Outlook piece, we brought together three themes that we had been using separately since late in 2009. They
were:

-We are in a credit bull market that, like the last one, is likely to provide fuel to companies for shareholder
enhancement activities.

-Our financial system is weak and unbalanced, and equity investors are heavily betting against the bull
marketThus the risk level is extremely high, and we are likely to see a number of sharp downdrafts in stock
prices.

-This is a credit cycle. As such, it is likely to end at some point. When it does end, history has shown that
credit cycles usually end badly.

Those themes are still in place, and we think they explain much of the financial market action this year.

As to the first theme, we are still in a credit bull market. We have not seen forced liquidations of credit. While the credit
market had gotten hit in the last three weeks, it wasnt until yesterday that junk yields approached the levels they reached in
the February correction. Thats shown by our first chart on the next page (an update of the one we ran earlier this week)
showing the yield on Credit Suisses index of junk bonds.

Copyright 2010 WJB Capital Group. Inc. www.wjbcapital.com

Charts: Bloomberg and WJB Capital Group, Inc.
Analyst certifications and disclosures follow on last page.
 Brian Reynolds, CFA
Chief Market Strategist
Managing Director
macrostrategy@wjbcap.com
646.344.4300

Macro Strategy June 11, 2010

60 Broad Street, 34th Floor, New York, NY 10004 www.wjbcapital.com 646.344.4300

Looking at our second theme, the attacks by equity investors were joined by attacks from the credit bears, targeting many
credit derivatives. Our second chart on this page illustrates this action, with an update of ABCs 5-year credit derivative that
can symbolize many other credit derivatives that
have come in for a near-daily pounding solely in an
attempt to create financial market turmoil. So the
thought that we will have more, and more violent,
corrections than we did in the last credit bull market
is alive and well.

Finally, financial system leverage, especially in

unregulated and uncounted areas like credit hedge
funds, has likely continued to grow, even though
some sectors like consumers have reduced their
leverage. In our Outlook piece, we urged investors
to think about using protection. In mid-April, we
became so alarmed by the stresses in the system
that, with the S&P around 1200, we wrote that we
wanted protection for the rest of the bull market no
matter how long it lasted, and urged people to think
about protecting against a break of S&P 1150 and
1115.

Nothing has changed on that front. While a bear

market starting now is not the most likely outcome,
the fragility of the system and the vast potential
downside makes us want to continue having
protection.

We continue to feel that U.S. CDSs and options on

Treasuries are the most inexpensive forms of
protection against financial turmoil. For people that
cannot use those instruments, we continue to feel that some equity options do not fully reflect the stresses we are seeing in
the financial system.

Conclusion

Our three themes have served us well in the first half of the year. We think they are likely going to continue to do so in the
second half of the year.

Note: We will be traveling next week, so our next scheduled publication will be on Mon. Jun 21

Copyright 2010 WJB Capital Group. Inc. www.wjbcapital.com

Charts: Bloomberg and WJB Capital Group, Inc.
Analyst certifications and disclosures follow on last page.
 Brian Reynolds, CFA
Chief Market Strategist
Managing Director
macrostrategy@wjbcap.com
646.344.4300

Macro Strategy June 11, 2010

60 Broad Street, 34th Floor, New York, NY 10004 www.wjbcapital.com 646.344.4300

WJB Capital Group, Inc. Credit & Stock Dashboard

Junk Bond Spreads Credit Fear/Greed Indices Broker Credit Default Swap
CSFB High- Yield Index in Basis Point s
10.0
Spread Index
7.5 Log Scale; in Basis Points
1,800

1,600 5.0 400

300
1,400 200
2.5
1,200 100
1,000 0.0
50
800 Corp Bond
-2.5
600 Credit Derivat ive

400 -5.0
10
200 '95 '97 '99 '01 '03 '05 '07 '09
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10
7/ 4/ 96 7/ 4/ 98 7/ 4/ 00 7/ 4/ 02 7/ 4/ 04 7/ 4/ 06 7/ 4/ 08 7/ 4/ 10
Sour ce: B l oomber g Sour ce: WJB Capi t al Gr oup
Sour ce: B l oomber g

Stock vs. Corporate Bond Stock Buying and Selling

Valuation $ B il; 4 Qtr. M o ving A vg.
1000
S&P 500 Earn Yield as % o f Junk Yields
80 Stocks cheap
750
500
60 250 Net Purchases by operat ing
companies
0
%

40 -250
Net sales by household sector,
-500
20 including hedge f unds
-750
Stocks Expensive
-1000
0
'85 '88 '91 '94 '97 '00 '03 '06 '09 '52 '62 '72 '82 '92 '02
Sour ce: WJ B Capi t al Gr oup Sour ce: FRB

Copyright 2010 WJB Capital Group. Inc. www.wjbcapital.com

Charts: Bloomberg and WJB Capital Group, Inc.
Analyst certifications and disclosures follow on last page.
 Brian Reynolds, CFA
Chief Market Strategist
Managing Director
macrostrategy@wjbcap.com
646.344.4300

Macro Strategy June 11, 2010

60 Broad Street, 34th Floor, New York, NY 10004 www.wjbcapital.com 646.344.4300

Stocks mentioned in this report:

Disclosures

I, Brian Reynolds, attest that the views expressed in this research report accurately reflect my personal views about the subject matter,
security or issuer. Furthermore, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or
views expressed in this research report.

The material prepared by WJB Capital Group, Inc. (WJB), a registered U.S. broker-dealer, employs appropriate expertise, and WJB believes
that it fairly and accurately represents the subject matter reported upon and is not misleading. WJB accepts no liability for any loss resulting
from the use of the material presented in this report, except that this disclaimer of liability does not apply to the extent that such disclaimer may
be prohibited by specific statutes, laws or regulations applicable to WJB. This report is not to be relied upon in substitution for the exercise of
independent judgment. WJB may have issued and may in the future issue, other reports that are inconsistent with, and which reach different
conclusions than the information presented in this report. Those reports reflect the different assumptions, views, and analytical methods of the
analysts who prepared them and WJB is under no obligation to ensure that such other reports are brought to the attention of any recipient of
this report.

Our salespeople, traders, and other professionals may provide oral or written commentary or trading strategies to our clients that reflect
opinions that are their own and are contrary to the opinions expressed in WJB Capital Groups research.

FOR INSTITUTIONAL USE ONLY; NOT FOR USE WITH THE GENERAL PUBLIC

Additional information regarding the contents of this publication will be furnished upon request.

Copyright 2010 WJB Capital Group. Inc. www.wjbcapital.com

Charts: Bloomberg and WJB Capital Group, Inc.
Analyst certifications and disclosures follow on last page.