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Economic & Market Update

Denver
November 2009

The investments described herein are:


NOT FDIC INSURED • NOT BANK GUARANTEED • MAY LOSE VALUE • NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL OR STATE GOVERNMENT AGENCY
Looking back
“Perhaps the worst “financial earthquake” since the 1930’s.”

The “Great Recession”


 The financial system on the brink of collapse
 The economy in a nose dive
 Public panic
So far, 2009:
 Economic recovery taking hold
 A large government stimulus package
 But long-term problems that continue to overhang the economy and
the markets

Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
2 contained herein are subject to change without notice and are not intended as individual investment advice.
The stages of economic recovery
“Like the wall of water released by a dam burst,
economic growth tends to surge early in economic recovery.”

Stage 1: The recession ends


 The economy gradually stabilizes
 Pessimism remains high Currently between Stage 1 and Stage 2
Stage 2: A initial growth surge
 “Catch up” consumer spending is unleashed
 Inventories are replenished, productive capacity restored
 Pessimism wanes
Stage 3: Sustainable growth
 Growth settles back to the “sustainable” rate
 Optimism takes hold

Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
3 contained herein are subject to change without notice and are not intended as individual investment advice.
Areas that drive economic activity
“The health of the economy depends upon the health of its parts.”

Consumers

Businesses

Exports

Government

Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
4 contained herein are subject to change without notice and are not intended as individual investment advice.
Consumers
“Even a slowly flowing stream releases a surge of water
when a dam is removed.”

Do consumers have the confidence to spend?


 Consumer confidence has lagged economic recovery in the past
 Consumer confidence has improved but remains low
 The economy continues to show improvement
 Business confidence, which is a better predictor, has improved sharply

Do consumers have “spendable” reserves?


 Credit remains constrained for many spenders
 Spending remains high relative to personal income
 90% of the public retain their jobs
 Many of the “still employed” have curtailed spending
 Unemployment likely will continue to increase
 How much growth can consumer spending drive longer term?
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
5 contained herein are subject to change without notice and are not intended as individual investment advice.
Businesses
“The foundation for improved business activity has been laid.
Businesses just need to see improving sales.”

Business surveys: Expectations for the future have improved


 A good indicator of an improving economy
Businesses are exceptionally “lean”
 Inventories have been pared substantially
 Employment: hour reductions versus layoffs
Lingering concerns
 Sales need to improve
 Competition remains fierce: Little pricing flexibility
 Margin pressure: Energy and other commodity costs
 Uncertainty about healthcare and energy policy

Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
6 contained herein are subject to change without notice and are not intended as individual investment advice.
Exports
“Overseas economies have typically lagged
U.S. recovery by about six months.”

Emerging markets
 Remain a strong source of global growth
 Activity has pulled back a bit, but growth seems likely to resume
Developed markets
 Some countries are recovering faster than the United States
 Could provide earlier support for the U.S. economy
A declining dollar could help drive exports
 The dollar normally declines after a global recession
 Overseas fears of the large U.S. deficits may also push the dollar
lower

Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
7 contained herein are subject to change without notice and are not intended as individual investment advice.
Longer-term problems
“The “sustainable” growth rate may be lower over the next few years.”

Consumer spending relative to income

Employment

Deficits and Inflation

Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
8 contained herein are subject to change without notice and are not intended as individual investment advice.
Spending relative to Income
“Spending, relative to income, is still high.”
Monthly Data 1/31/1959 - 8/31/2009 (Log Scale)
P
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ump
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84.99 2005 84.99

84.48 84.48

83.98 83.98

83.48 83.48

82.98 82.98

82.49 1960 82.49

82.00 82.00

81.51 81.51

81.03 81.03

80.55 80.55

80.07 80.07

79.59 79.59

79.12 79.12

78.65 78.65

78.18 78.18

77.72 1998 77.72

77.26 77.26

76.80 76.80

76.34 76.34

75.89 75.89

75.44 75.44

74.99 74.99

74.54 74.54

74.10 74.10

KCP75
1960 1965 1970 1975 1980 1982 1985 1990 1995 2000 2005

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Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
contained herein are subject to change without notice and are not intended as individual investment advice.
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Employment
“Michael Jordan (at 46), versus LeBron James (at 24):
Economies, like people, also age.”
Monthly Data 12/31/2000- 9/30/2010
P
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118 118

117 117

116 116

115 Average of the last five expansions 115


R
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Nov
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113 113

112 112

111 Av
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107 107

106 106

105 2001 expansion 105

104 104

103 103

102 C
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101 101

100 100

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
(BL29453x01) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
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Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
contained herein are subject to change without notice and are not intended as individual investment advice.
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When do government deficits cause inflation?
“When deficits grow faster than the economy,
eventually it damages the economy.”
Pressure on the dollar
 Government debt rises as a percentage of GDP
 Interest costs absorb an ever larger share of the budget
 Lenders become concerned
Interest rates rise significantly
 Lenders require a “risk premium” to invest
 Other investment projects get “crowded out”
Borrowing cannot cover the deficits
 The government must reduce spending or print money
 Inflation erodes the value of the debt – and the currency
 Economic growth suffers

Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
11 contained herein are subject to change without notice and are not intended as individual investment advice.
Denver longer term: Growth focus
“Denver Employment Growth over the past 5 yrs has averaged 1.6% vs. 1.1% for the
US.

Industries that drove Denver’s faster growth


 Manufacturing – avg. decline at -0.4% vs. -1.5% for US, 0.6x exposure
 Drove 0.2% of 0.5% out-performance for DEN vs. the US
 Prof. & Tech. – avg. growth at 4.1% vs. 3.5% for the US
 DEN had a 1.4x exposure to the best performing industry in the US
 Of the 0.5% annual out-performance Prof. & Tech. drove 0.1%
 Population growth per year for DEN of 1.7% was above the US at 0.9%.
Relative to pop. growth, DEN employment growth inline with US.

Industries that partially offset faster growth


 Info. – decline of -2.3% vs. -1.2% for US, 1.7x concentration
 Mining & Cons. – Growth of 1.2% vs. 1.9% for US

Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
12 contained herein are subject to change without notice and are not intended as individual investment advice.
Denver Employment Outlook
Employment Growth / Decline
 Decline in DEN Employment more severe than US
 US Leading Economic Indicators bottomed in March 2009
 US Employment lagged the trough in LEIs by:
 Bottom: 1991 – 6 mos. 2001 – 11 mos.
 Renewed Growth 1991 – 15 mos. 2001 – 33 mos.
 DEN Employment lagged the trough in LEIs by:
 Bottomed: 1991 – NA 2001 – 10 mos.
 Renewed Growth 1991 – NA 2001 – 35 mos.

Factors affecting the employment outlook


 Exposures to materials could benefit from secular growth in China and
other emerging economies but at the cost of volatility.
 Important to maintain high quality of life that has attracted strong net
migration and led to dynamic population and employment growth.

Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
13 contained herein are subject to change without notice and are not intended as individual investment advice.
Stockmarket outlook
“We may be in the latter innings of the equities rally,
but it should have more to go.”
Reasons the rally should continue
 Continuing economic improvement – but with continuing skepticism
 Estimates of company earnings are still low
 Many investors still seem to be on the sidelines
After the rally plays out
 We may not see a sharp selloff
Overseas markets may also have brighter prospects
 Economic growth may be stronger
 Inflation fears about the U.S. could also drive gains for foreign stocks

Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
14 contained herein are subject to change without notice and are not intended as individual investment advice.
Key Private Bank Investment Recommendations
Asset Classes Geographic Region
Stocks Bonds Cash United International
States
Emphasize Deemphasize Deemphasize Developed Emerging
Deemphasize Emphasize Emphasize

Market Sectors
Basic Materials Emphasize
Market Investment Style
Capitalization
Consumer Cyclicals Emphasize Value Growth

Energy Emphasize
Large Cap Neutral Neutral
Industrials Emphasize
Mid-Cap Deemphasize Emphasize
Technology Emphasize Small Cap Deemphasize Emphasize
Financials Neutral

Consumer Staples Deemphasize


Alternative Investments
Health Care Deemphasize
Commodities Emphasize
Utilities Deemphasize
November 2009
Information is based on data from recognized services and sources and is believed to be reliable. Any opinions, projections or recommendations
15 contained herein are subject to change without notice and are not intended as individual investment advice.
Disclosures

Key Private Bank is part of KeyBank National Association. Trust services provided by KeyBank National Association.

Investments are:
NOT FDIC INSURED • NOT BANK GUARANTEED • MAY LOSE VALUE • NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL OR STATE GOVERNMENT AGENCY

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