MORGAN STANLEY RESEARCH
GLOBAL
March 2009
U.S. Strategy
Equity Research
U.S.
Equity
Strategy
U.S. Equity Strategy
Bear Market Still Intact
Morgan Stanley & Co. Incorporated
Jason E. Todd
[email protected]
+1 212 761 7991
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MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Key Global Economic Themes
Critical global issues:


Global growth risks are now more balanced, but around a contracting baseline in 2009. A record global recession
and weakness in commodity prices should persist, while the dollar should show renewed weakness later in 2009.

How deep and how long? The answer will hinge on policy actions taken to break the ‘adverse feedback loop’ from
credit to the economy and back and whether those policies get traction soon.

Massive stimulus helps China recover first. But China is better positioned than most in the developing world. A
severe global downturn and tepid recovery are still likely.

Aggressive (in some cases quantitative) easing, new financing facilities, tools to fix financial systems, and fiscal
stimulus are now weapons of choice to fight credit crunch, deep slump and deflation risks.
What’s Next?


Look for others to follow the US with more aggressive monetary ease, fiscal stimulus, and backstops for financial
institutions and markets. Look for weaker exports and commodity prices to confirm weaker global growth,
especially in EM. Falling inflation could fuel the deflation scare. Look for signs of thawing in funding and credit,
and a less-intense rate of decline in output.
Where we differ

Growth: Below consensus in both the industrial and developing economies

Inflation: Deflation scare may intensify, but reflation will ultimately prevail

Rates: Curves rangebound for now, TIPS still attractive, given inflation and policy uncertainty

Equities: More bearish than consensus on growth and margins. Lower inflation unlikely to help stocks; seen as lost pricing
power. Overweight EM over developed markets.

Credit: More bullish than consensus on investment grade globally

Currencies: Modestly more bearish on the USD than consensus, and selectively more bearish on EM currencies
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
2
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Key US Equity Recommendations

2009 S&P 500 Outlook
-825 target on $57 dollars of earnings and 14.5x P/E

Key Recommendations
- Buy Corporate Credit – IG (Financials/cash rich Tech over Industrial and Materials)
- Buy Consumers over Producers (Retail, Healthcare, Food & Beverage, Personal Products over Cap Goods, Metals, Energy)
- Buy Brand, Content and Franchise value (CSCO, NKE, MCD, PM, LO, MSFT) over Distribution

Sector Weightings
- Overweight Healthcare, Telecoms
- Neutral Financials, Discretionary, Staples, Energy
- Underweight Materials, Industrials, Tech

Stock & Sector Recommendations:
-Buy healthcare with earnings visibility, yield and strong cash flow - JNJ, ABT, AMGN, BAX
-Buy domestic food and beverage - GIS, CL, K
-Buy custodians (STT, BK) as money markets normalize; WFC and JPM as industry consolidation winners.
-Buy Energy Equipment & Services for long term structural upside – SLB, HAL, BHI, WFT, SII
-Sell - Metals into strength - FCX, X, AKS, CLF
-Sell - Construction machinery, power gen, transportation equipment (FAST, ITW, GWW, EMR, CAT, ROK)
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
3
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
A Slow Path to Global Recovery – Asia/EM’s to Lead Rebound
Despite aggressive stimulus…
… lingering headwinds imply a sub-par global recovery
4
Discretionary Measures in Percent of GDP, 2008-2010
Real GDP (Year-over-Year Percent Change)
3
G-20
US
3.4%
2
Turkey
0.0%
1
Italy
Europe
0.3%
Brazil
0
0.5%
Mexico
-1
1.0%
France
1.3%
Argentina
1.3%
U.K.
-2
-3
-4
1.5%
Russia
1.7%
India
1.7%
Japan
-6
2008E
2.2%
Indonesia
Japan
-5
12
2.4%
South Africa
2010E
Real GDP (Year-over-Year Percent Change)
10
2.6%
Korea
2.8%
8
Canada
2.8%
6
Germany
2009E
3.5%
China
China
Asia ex-Japan
and China
4
4.4%
Australia
2
4.5%
Spain
0
5.0%
U.S.
5.9%
-2
Saudi Arabia
9.2%
0
1
2
3
4
5
Source: IMF Staff Estimates, Morgan Stanley
6
7
8
9
10
-4
2008E
Latin America
2009E
2010E
E = Morgan Stanley Research estimates
Source: Morgan Stanley
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
4
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Alternative strategies depending on timing / strength of recovery
Policy strength and policy traction will dictate the outcome
strong
BUY RISK NOW
STAY PATIENT: BUY RISK AT LOWER LEVELS
Bear curve steepening, followed by flattening
Curves range-bound for now
Equities are a buy now; shift into cyclical sectors
Add to equities at lower levels
IG credit continues to rally; HY starts to participate
IG returns attractive, but too early for HY
USD: rally if US-led; weak if Asia-led
USD: entering final leg of rally
Commodities rise heading into 2010
Commodities: too early to buy
strength
of recovery
weak
ADD SELECTIVE, HIGH QUALITY RISK
KEEP AVOIDING RISK
Moderate curve steepening
Bullish curve flattening
Equities stabilise; early cyclicals firm
Equities make new lows; cyclicals underperform
IG credit rallies; HY lags
Rally in credit stalls
USD: modestly negative
US dollar remains ‘best house in bad neighborhood’
Commodities stabilize
Commodities to new lows
2H09
timing of
recovery
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
2010
and beyond
5
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Sequencing the healing process

The road to repair will be long and difficult. We do not expect any quick fixes, and the deep structural nature of the
problems suggest that time and patience are required

We believe the path to a sustained recovery has to be sequenced as follows:
Systemic
Repair
Funding
Bank
Deleveraging
Credit
Housing
Trough &
Default Peak
Corporate
Earnings
Downdraft
Risk Assets
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
6
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Credit Market – Further Healing Still Necessary
LIBOR-OIS spread still hasn’t stabilized
TED spread still elevated
400
500
364
350
450
10/20/87
Post '87 Stock Market
Crash
308
400
300
350
250
300
200
250
150
200
107
LTCM
150
100
100
95
50
50
0
Oct-04
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Corporate and HY spreads rose again this month
HY issuance near all time lows!
2200
HY issuance on a monthly basis ($bn)
35
550
11/30/2006
34
30
2009
Corporate Bond Option Adjusted Spread - LHS
2/25/2009
1838
High Yield Spread to Worst
450
25
20
1700
350
1200
15
250
10
700
5
150
Jan-09
Sep-08
May-08
Jan-08
Sep-07
Jan-07
May-07
Sep-06
Jan-06
May-06
Sep-05
Jan-05
May-05
Sep-04
Jan-04
May-04
Sep-03
Jan-03
May-03
Sep-02
Jan-02
May-02
50
2002
200
2003
2004
2005
2006
2007
2008
2009
Source: Datastream, Robert Schiller, FactSet and Morgan Stanley Research
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
7
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
New Credit Cycle Some Way Off
Same Story For Mortgage Growth
Household Debt Growth Weakest On Record
20%
Household Debt YoY Growth
30%
Corporate Debt YoY Growth (ex-fin)
US Home Mortgages YoY Growth
US Consumer Credit YoY Growth
25%
15%
20%
10%
15%
10%
5%
5%
0%
0%
-5%
1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
-5%
1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
With Lending Standards Still Close To All Time “Tight”
Debt Levels Are Finally Stabilizing
110
Federal Reserve Senior Loan Officer Survey
% Institutions Reporting Tightening of Lending Standards
100
80
64
60
59
48
40
90
Corporate Debt (ex-fin) % of GDP
Household Debt % of GDP
Mortgages % of GDP
80
70
20
60
0
50
40
-20
Mortgages
-40
1990
1992
1994
1996
Commercial & Industrial
1998
2000
2002
Credit Cards
2004
2006
2008
30
20
1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
Source: Datastream, Robert Schiller, FactSet and Morgan Stanley Research
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
8
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
US Housing Market – No Sign Of Bottom 3 Years After Peak
House Prices Continue To Fall From Peak…
… With The Futures market pricing in a 30-40% peak to trough decline
US Established House Prices
US House Prices & Futures Index
300
14
280
10
260
6
240
2
220
-2
200
-6
180
12M%
18
-10
-14
-18
-22
1988
REPEAT SALES*
OFHEO PRICES**
160
* Case-Shiller Index (3MMA)
**OFHEO Purchase-Only Index
120
1992
36%
Index Levels Implied by
Futures Market
140
1996
2000
2004
2008
* RPX 28 City Composite & Latest Implied Prices From Futures Contracts
100
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Delinquencies still rising…
Inventory levels remain high in part due to rising foreclosures
MBA Mortgage Delinquencies: % Past Due
18.8
16.8
14.8
12.8
25%
Months Supply of New Single Family Houses
Subprime FRMs
Months Supply of Existing Homes
Subprime ARMs
20%
Adjustable rate mortgages
are most at risk
22.1%
Prime FRMs
Months Supply of Condos and Coops
18.5%
Prime ARMs
15%
10.8
8.8
10%
8.4%
6.8
5%
4.8
3.6%
2.8
0%
0.8
98
99
00
01
02
03
04
05
06
07
08
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Datastream, Robert Schiller, FactSet and Morgan Stanley Research
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
9
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Breaking the Bear...


3 Ways to Break the Bear Market:
1.
Policy Action – QE + Fiscal Policy Support (banks recapitalize and remove toxic assets from balance sheets)
2.
Market Trades Lower – Market becomes outright cheap – valuations compensate for poor fundamentals
3.
Debt/Deflation Spiral – Japanese Scenario Revisited
Requirements for Sustainable Bottom:
1.
Stabilization in House Prices & Inventory Levels (look for lead from Homebuilders)
2.
Market moves closer to trough in Earnings – Incl Financials, trough in 3Q09; Excl Financials, Trough in 2Q10
3.
Link between Credit and Economy Broken – negative feedback loop from credit markets to economy broken
2Q07
S&P500
Earnings
Peak
$92
3Q07 4Q07 1Q08 2Q08
3Q08
Down 70%
S&P500
Ex Fin
Earnings
Peak
$73
4Q08 1Q09 2Q09
3Q09
4Q09 1Q10
2Q10
S&P500
Earnings
Trough
$27
Down 42%
S&P500
Ex Fin
Earnings
Trough
$42
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
10
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
S&P 500 Targets
Bull Case
Base Case
Bear Case
2009
S&P 500
Price Target
2009
Operating
EPS
2010
Operating
EPS
2009
Operating
Forward P/E
1040
57
65
16.0x
825
40
350
29
57
35
Scenario
Shallow earnings downturn in 2009.
Strong & Sustainable recovery in 2010
Domestic demand improvement from very supportive
monetary conditions and improved credit outlook.
14.5x
Earnings weakness in 2009 but recovery in 2010.
Limited visibility on sustainbility of growth recovery
10.0x
Much weaker growth and outright
deflationary environment.
Year-end Targets and Views:
•
825 for the S&P 500
•
$40 operating earnings in 2009 rising to $57 in 2010
•
14.5x fwd operating P/E (no multiple expansion)
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
11
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
S&P 500 Outlook
Bullish Drivers
Bearish Drivers

Risk measures on the rise again (VIX nearing 50)

Still weak housing

Massive policy intervention

Significant earnings disappointments ahead

Valuations discounting earnings recession/corporate cash
levels building

Yield curve steepening

Stronger USD

Lower energy and commodity prices

Improved inflation readings

Asset deleveraging in financials has made significant
progress
–
Slowdown in revenue growth
–
Margins vulnerable
–
Provisioning cycle to intensify

Weakening external demand

Substantial deterioration in labor market conditions

Severe credit crunch still unfolding

Rising risk of protectionist policies
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
12
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Earnings – Rising Risk to Optimistic Consensus Estimates
…A powerful headwind to foreign earnings…
US Trade Weighted Dollar, volatile but Stronger
% Foreign share of US corporate profits
150
40
40
35
35
30
30
25
25
20
20
15
15
10
10
140
130
120
110
100
83.1
90
80
70
60
Jan-73
Jan-78
Jan-83
Jan-88
Jan-93
Jan-98
Jan-03
Jan-08
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008
…And profit margins
Negative Earnings Drivers:
Corporate Profits as a percentage of GDP
18
Stronger USD
16
All time high foreign earnings contribution
After-tax corporate profits
w/ IVA & CCAdj as a
percentage of corporate GDP
14
12
Slowing non-US growth
Higher funding costs/equity dilution
Rising pension plan requirements
10
Inventory revaluation drag
8
Positive Earnings Drivers:
After-tax corporate
profits as a percentage
of corporate GDP
6
Falling input prices
4
70
73
76
79
82
85
88
91
94
97
00
03
06
Limited wage pressures, unit labor costs contained
Steepening yield curve
Source: Haver, Datastream, Factset, Morgan Stanley Research.
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
13
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Earnings Expectations – Deriving our 2009 Estimate
2008A
Consensus 2009E
MS 2009E
MS 2010E
Consumer Discretionary
23
21
28
35
Consumer Staples
74
71
67
73
Energy
142
75
60
85
Financials
(145)
60
(36)
45
Health Care
93
101
85
93
Industrials
88
68
52
53
Info Tech
81
78
49
55
Materials
23
13
3
10
Telecom Services
22
21
22
22
Utilities
27
28
26
26
S&P 500 ($bn)
427.6
535.0
356.0
496.7
S&P 500 (Operating EPS)
49.2
61.6
41.0
57.1
65.4
70.5
68.4
45.1
52.0
$Billions
S&P ex Prov + WD (EPS)
S&P ex Financials (EPS)
Cyclical
214.4
180.0
132.0
153.0
Defensive
216.1
220.6
200.0
213.7
Energy
141.8
74.7
60.0
85.0
Financials
-144.7
59.7
-36.0
45.0
S&P 500 ($bn)
427.6
535.0
356.0
496.7
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
14
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
2009 Earnings – How Much Downside to Bear Case?
$Billions
MS Bear
MS Base
MS Bull
Consumer Discretionary
12
28
38
Consumer Staples
60
67
73
Energy
50
60
90
Financials
(90)
(52)
0
Health Care
80
85
95
Industrials
45
52
72
Info Tech
43
49
68
Materials
(2)
3
15
Telecom Services
20
22
24
Utilities
24
26
28
S&P 500 ($bn)
242.0
340.0
503.0
S&P 500 (Operating EPS)
27.8
39.1
57.9
Probability
20%
65%
15%
Source: Morgan Stanley Research
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
15
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
2009-10 Earnings Revisions – A New Record in Progress....
Cyclicals’ earnings have fallen the most on YoY basis*…
2009 non-financials consensus earnings remain elevated
-75%
2008e
-145
-20%
-17%
-50%
475
60
-65%
-62%
Energy
2008e
392
2009e
Utilities
-5%
Materials
-45
10%
0%
552
-25%
2009e
8%
Health
Care
451
2010e
84
25%
Telecom
45
2010e
4Q08 Earnmings YoY%
Non Financial Earnings $bn
Earnings
Industrials
Financial Earnings $bn
-57%
572
601
131
Cons
Staples
2007
Consensus
Tech
2007
Cons Disc
S&P 500
-100%
MS
Earnings expectations falling off a cliff
Revisions To S&P 500 Consensus Forecasts
130
2010
120
2009
110
Rolling 12 mo
Forward EPS
100
2008
2007
$ Per Share
90
2006
2005
80
70
2004
60
Based On IBES Consensus Estimates
2000
50
1997
1995 1996
40
30
20
10
1985
1985
1988 1989
1987
1986
1987
1989
1990
1991
1991 1992
1993
2003
1998
1999
2001
1993 1994
1995
1997
2002
Largest Downgrades
on Record
1999
2001
2003
2005
2007
2009
Source: Datastream, FactSet and Morgan Stanley Research
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
16
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Earnings vs. Performance – Markets Can Move Ahead of Earnings
…But equity performance leads earnings growth
Earnings down 32% on estimates made 12 months ago....
S&P 500 Rolling Earnings Surprise %
12mo Forward Estimates vs. Actuals
15%
10%
S&P 500 %YoY Chg vs %Chg in 12mo Forward Estimates
50%
40%
Underestimate
Earnings
5%
0%
30%
20%
-5%
10%
-10%
-20%
0%
Over-estimate
Earnings
Growth
-15%
1/31/87, -18.5%
-10%
12/31/91, -25.0%
-25%
1985
1987
1989
Grey shading represents US
Recession
1993 1995 1997 1999
1991
-30%
12/31/01
-25.2%
-30%
-35%
12mo
Forward
Estimate
s
-20%
2/28/09
-31.6%
-50%
2001
2003
2005
2007
2009
S&P 500
-40%
1985
1987
1989
Grey shading represents US
Recession
1991 1993 1995 1997 1999
2001
2003
2005
2007
2009
Instances of >10% EPS decline and Positive S&P Returns
Year (t)
Earnings
Growth
S&P Return
(t+1) Earnings
Growth
1908
1911
1918
1921
1927
1938
1942
1951
1958
1970
1975
1982
1991
Average
-12.1
-19.2
-22.7
-63.8
-10.5
-43.4
-11.2
-14.1
-14.2
-10.9
-11.5
-16.2
-14.8
-20.3
37.4
0.7
16.2
7.3
30.9
25.2
12.4
16.5
38.1
0.1
31.5
14.8
26.3
19.8
31.0
18.6
-6.1
137.9
24.3
40.6
-8.7
-1.6
17.3
12.4
24.7
12.0
8.1
23.9
Year
Earnings
Growth
S&P Price
Return
1956
1957
1958
1959
-5.8
-1.2
-14.2
17.3
2.6
-14.3
38.1
8.5
1917-1921
1930-1932
1956-1958
2007-2009
Earnings
Decline
-81%
-75%
-20%
-55% ?
Year
Earnings
Growth
S&P Price
Return
2007
2008E
2009E
-2.4
-40.6
-18.5
3.5
-38.5
?
Consecutive
Yrs of -ve EPS 'g'
5
3
3
3?
Source: Datastream, Robert Schiller, FactSet and Morgan Stanley Research
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
17
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Yield Curve Positive for Growth and Financials
Yield Curve: Fed Funds less UST 10 Year Yield
7
Inverted Curve Indicates that Fed Policy is Tight
6
5
4
3
2
LR Average = -0.88
1
0
-1
-2
-3
Upward-Sloping Yield Curve Indicates that Fed Policy is Accomodative
-4
1960 1963 1966 1969 1972 1975 1978 1981 1984 1987
NBER-Dated Recessions
1990
1993
1996
1999
Fed Funds Rate Target Less 10-Year Treasury Yield
2002
2005
2008
average
Source: Morgan Stanley Research
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
18
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Financial Sector Scorecard
1.
Provisioning and markdowns - 60% through the cycle, with listed and unlisted financials globally writing down $1200bn. Final cumulative
loss estimate of $1.8tn, split evenly between markdowns and provisioning.
2.
Earnings – S&P Financials posted a loss of -$145bn in 2008 and will likely post a further loss of -$36bn in 2009 (peak pre-tax, preprovisioning earnings were $340bn).
3.
Sustainable earnings – Sustainable ROE of 12% (versus 18% historically) on a book value of around $1.2tn. Alternatively, 1% ROA on
15x Tangible Assets/Tangible Equity (TA/TE) ratio ($12tn of assets).
4.
Valuation – Using an implied ROE of 12%, S&P 500 Financial sector on a sustainable P/E of 3.9x. Using a 1% sustainable ROA we
estimate that our selection of Financial stocks are trading on a P/E of 4.5x.
5.
Deleveraging – Progress is slow due to difficult asset markets and poor pricing transparency. TA/TE down from 24x to 16x for the bulk of
BKX members, already well below the long-term average of 19x.
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
19
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Financial Write-Down & Provisioning Cycle – Leverage Falling Fast
Tangible Assets to Tangible Equity Ratio
Total Provisioning and Write-Downs
Total Write downs and Provisioning to Date
$bn
% of Total
US Financial Sector Losses
850
69%
Europe Financial Sector Losses
350
28%
30
2%
Asia Financial Sector Losses
Global Financial Sector Losses*
26
24
1230
22
* includes losses on both US and Non US Assets
20
US Asset Losses to Date
estimated US Provisioning
203
estimated US Markdowns
563
US Firm Losses to Date
15 Year Average = 19x
18
765
estimated Non-US Provisioning
30
estimated Non-US Markdowns
177
16
15.9
Non US Firm Losses to Date
207
Total Losses on US Assets
972
14
12
1990Y
Losses to Come on US Assets
US Provisioning
450
Non US Firm Provisioning
100
Total Provisioning to Come
1996Y
1999Y
2002Y
2005Y
2007Q4
2008Q3
550
US Firm Asset Markdowns
120
Non US Firm Asset Markdowns
134
$Billions
Total Mark Downs to Come
254
Total US Asset Losses to Come
804
Total US Asset Losses
1993Y
Provisioning
Markdowns
Total
Losses to Date
233
739
972
Losses to Come
550
254
804
Total US Asset Losses
783
993
1776
1776
Source: Morgan Stanley Research
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
20
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Drivers of Delinquency Cycle – Claims & Capacity Utilization
Capacity Utilization a Good Indicator of C&I Delinquencies
Claims and Residential Mortgage Delinquencies Closely Correlated
60%
US Initial claims for unemployment insurance (%yoy, sadj)
35%
-10%
50%
US residential mortgage delinquencies (% of loans, %yoy, sadj, RHS)
30%
-8%
25%
40%
80%
US Delinquency Rates - Commercial and
Industrial Loans (yoy%)
60%
20%
30%
-4%
40%
10%
-2%
20%
5%
0%
0%
2%
-20%
4%
-40%
15%
20%
10%
0%
0%
-10%
-5%
-20%
-10%
-30%
Q2 1984
-6%
100%
US capacity utilisation - All industry sadj
(inverted yoy%) (LH)
-15%
Q2 1987
Q2 1990
Q2 1993
Q2 1996
Q2 1999
Q2 2002
Q2 2005
Q2 2008
6%
-60%
Q2 1988 Q2 1990 Q2 1992 Q2 1994 Q2 1996 Q2 1998 Q2 2000 Q2 2002 Q2 2004 Q2 2006 Q2 2008
Source: Morgan Stanley Research
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
21
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Valuation – Equities Not Yet Cheap
…But Valuations Haven’t Yet Reached “Cheap” Territory
Markets Have More Than Halved In The Current Bear Market
-20
40
-30
35
-40
30
%
PE Ratio
-10
45
-50
-60
-70
-60
-63
-68
20
15
12.9
12M Trailing PE
2000
1980
1970
1960
1950
1940
1990
6.8
5.5
1930
1910
1900
1890
1920
4.9
0
2010
2000
1990
1980
1970
1960
1950
1940
1930
1920
1910
1900
1890
1880
1870
25
5
* Decline from inflation-adjusted peak for S&P 500. Calculated from monthly data that may
under-state the exact peak
-100
Long Term
Average: 16.4
10
-81
-90
46.1
* Graham-Dodd Price-Earnings, based on
10Yr real average earnings
1880
-80
S&P Trough-the-Cycle PE Ratio*
50
2010
Decline from peak*
0
Multiple Expansion to be driven by Declining Inflation
S&P 500 ROE
S&P 500's Median Trailing P/E Multiple in Different Inflation Environments,
Apr '53 to Dec '08
22%
20
18%
18.3
17.2
18
17.1
15.4
14%
13.0%
11.4%
10%
6%
Median S&P 500 LTM P/E
16
14
15.2
13.8
12.6
12
10.8
9.6
10
8.4
9.0
8.1
8
6
4
2
2%
1970
1974
1978
1982 1986
S&P 500
Source: FactSet and Morgan Stanley Research
1990 1994 1998 2002
S&P 500 (Ex-Financials)
2006
0
<0%
0-1%
1-2%
Sweet Spot
2-3%
3-4%
4-5%
5-6%
6-7%
7-8%
8-9%
9-10%
>10%
Key Inflection Points
Level of Y/Y Headline CPI Inflation
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
22
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Balance Sheets – US Corporates (ex Financials) are better than in prior Cycles
Cash Levels For Corporates Are High And Debt Levels Low
Capex to Sales Reasonable
25%
Capex to Sales - S&P 500
8.0%
100%
Cash to Total Capital
Employed (ex Fin)
8.5%
90%
80%
20%
87%
7.5%
80%
7.0%
15%
Average = 6.8
16%
70%
6.5%
10%
6.0%
10%
60%
58%
5.5%
7%
5%
Debt to Equity
(ex Fin) - rhs
5.0%
4.5%
1984
1987
1990
1993
1996
1999
2002
2005
20081H
Cash levels Are High
40%
2Q88
3Q90
4Q92
1Q95
2Q97
3Q99
4Q01
1Q04
2Q06
3Q08
Corporate Balance Sheets Are In Better Shape This Time Around
US-Based Cash as percentage of Market Cap
2008
40%
Market cap includes total market cap of NYSE, Amex and NASDAQ (World
Federation of Exchanges)-updated till Nov 08; Cash in $ bn includes MMF
assets, S&P 500, ex fin cash and cash with equity MFs
2,929 2,945 2,853 2,831
Cash/Debt
Debt/Equity
(ex-fin)
Capex/Dep
Pretax
Margins
14.7%
23.1%
37.8%
86.6%
76.2%
56.8%
1.46
1.36
1.34
7.4%
8.7%
10.7%
4,645
Past Recessions
4,138
1990 to 91
2000 to 01
Current
3,283
Cash as a % of
Market Cap
0%
1Q86
50%
3,028
2,466
2,136
1,774
2008
2007
2006
2005
2004
2003
2002
2001
1994
2000
1993
1999
1992
1998
1991
1997
784
1,234
1996
741
1995
711
860
660
1990
1,455
1,041
Source: Datastream, FactSet, Thomson Financial, Morgan Stanley Research.
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
23
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Recession Analysis – How does 2008 Compare?
S&P 500
Peak
Recession
Start of
S&P 500
End of
Duration
Recession Trough Recession (months)
1/5/53
7/31/53
9/14/53
5/28/54
7/15/57
8/30/57
10/22/57
1/5/60
4/29/60
10/25/60
5/16/69
12/31/69
1/11/73
Acknowledgement
Capitulation
Peak to
Start of
Peak to Start
Recession of Recession
(months)
(%)
Start of
Recession to
Start of
Trough
Recession to
(months)
Trough (%)
10
7
4/30/58
8
2/28/61
10
5/26/70
11/30/70
10/31/73
10/4/74
2/13/80
1/31/80
11/28/80
Full Impact
Recovery
Peak to
Trough
(months)
Peak to
Trough
(%)
Trough to
End of
Recession
(%)
8
-14.8%
28.5%
-7.1%
2
-8.2%
2
-8.0%
2
-13.8%
3
-20.7%
11.4%
4
-10.0%
6
-3.8%
10
-13.4%
21.3%
11
8
-13.1%
5
-24.7%
13
-34.6%
25.8%
3/31/75
17
10
-9.9%
11
-42.4%
21
-48.2%
33.7%
3/27/80
7/31/80
6
-3.6%
2
-14.0%
1
-17.1%
23.9%
7/31/81
8/12/82
11/30/82
16
8
-6.8%
13
-21.8%
21
-27.1%
35.3%
7/17/90
7/31/90
10/11/90
3/28/91
8
0.5
-3.1%
2
-17.0%
3
-19.6%
27.0%
3/27/00
3/30/01
9/21/01
11/30/01
8
12
-23.9%
6
-16.8%
18
-36.6%
18.0%
10/9/07
12/3/07
11/20/08
2
-5.9%
12
-48.9%
14
-51.9%
Average
11
6
-9.1%
6
-21.1%
11
-28.4%
25.0%
Median
10
7
-7.5%
5
-16.9%
11
-23.9%
25.8%
ROE
Corporate profits/GDP
S&P 500 Peak to Trough
ROE Peak
ROE Trough
Peak
Trough
Peak
Trough
Duration
(Months)
ROE Decline
Profit Margin
Decline
Sep-57
Sep-59
Sep-69
Sep-74
Feb-80
Jun-81
Aug-90
Aug-00
Apr-07
Sep-58
Jun-61
Dec-70
Dec-75
Sep-80
Mar-83
Dec-91
Mar-02
Dec-08
Average
Median
13.2%
11.2%
11.7%
14.6%
16.4%
14.6%
13.4%
19.9%
18.1%
14.4%
14.0%
9.8%
9.0%
9.8%
11.2%
14.7%
11.0%
10.6%
13.0%
13.6%
11.1%
10.8%
10.9%
10.6%
9.1%
11.5%
11.5%
8.3%
8.3%
8.8%
17.8%
9.9%
9.9%
8.8%
9.0%
7.4%
8.9%
9.5%
6.5%
8.1%
7.8%
14.0%
8.3%
8.5%
12
21
15
15
7
21
16
19
20
16
16
-3.4%
-2.2%
-2.0%
-3.4%
-1.7%
-3.7%
-2.8%
-6.9%
-4.4%
-3.3%
-3.1%
-2.1%
-1.6%
-1.7%
-2.6%
-2.0%
-1.8%
-0.2%
-0.9%
-3.8%
-1.6%
-1.8%
Source: FactSet and Morgan Stanley Research
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
24
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Telecoms: Pricing, Dividend, Earnings Delivery
Telecoms Trailing P/E
Telecom Services Dividend Yield
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
35
30
25
20
15
10
5
0
1984
1987
1990
1993
1996
1999
2002
2005
2008
1984
1987
1990
Telecoms % of S&P 500 Market Cap
1993
1996
1999
2002
2005
2008
Telecoms CPI (%YoY)
12%
10%
10%
5%
8%
0%
6%
-5%
4%
0%
1984
CPI - Wireless
CPI - Long Distance
CPI - Local Service
-10%
2%
-15%
1987
1990
1993
1996
1999
2002
2005
2008
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: Datastream, Morgan Stanley Research
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
25
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Healthcare – Dividend + Earnings Delivery
Healthcare Relative Trailing P/E
US DS Pharamceuticals Relative EPS vs Relative performance
0.6
1.6
50%
40%
1.5
0.4
30%
1.4
0.2
1.3
10%
1.2
1.1
20%
0
0%
Ave 1984-2001 = 1.4x
Ave 2002-2008 = 1.1x
-0.2
-10%
1.0
-20%
New relative
multiple range
(patent, price, pipeline risk)
0.9
0.8
-0.4
-30%
-0.6
0.7
1984
7.0
Relative performance (RHS)
-40%
Jan-77 Jan-80 Jan-83 Jan-86 Jan-89 Jan-92 Jan-95 Jan-98 Jan-01 Jan-04 Jan-07
1987
1990
1993
1996
1999
2002
2005
2008
Dividend Yield - S&P 500 vs. US
Pharma
6.0
5.0
Relative EPS
S&P
500
Rising DY
corresponds
with falling LTG
Earnings certainty, attractive and safe
dividend/buyback yield and decade low valuations;
4.0
3.0
2.0
Pharma
1.0
Downside risks well recognized and priced (patent
cliff) with upside risk (product pipeline
expectations, restructuring) underappreciated;
0.0
Jan-73 Jan-77 Jan-81 Jan-85 Jan-89 Jan-93 Jan-97 Jan-01 Jan-05
Source: Morgan Stanley Research
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
26
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Global Construction Activity Rapidly Deteriorating
Global Construction Composite
12%
(%)
10%
Global Construction Activity Rapidly Deteriorating
11 Year Low
(%)
11 year High
(%)
Current (%)
Australia
-5.8
24.7
12.1
4%
Brazil
-2.1
23.1
16.3
2%
China
10.2
25.7
12.4
France
-2.5
13.8
11.0
Germany
-6.3
8.5
7.7
India
8.2
27.9
24.5
50%
Japan
-7.3
1.3
-7.3
40%
Spain
-0.7
16.6
-0.7
UK
0.0
12.5
0.0
US
-8.6
11.1
-8.6
Composite
3.3
11.0
3.3
8%
%YoY
6%
0%
1996
1998
2000
2002
2004
2006
2008
%YoY Industrials Earnings
2010
30%
20%
10%
0%
-10%
-20%
-30%
-40%
Jan-74
Jan-78
Jan-82
Jan-86
Jan-90
Jan-94
Jan-98
Jan-02
Jan-06
Source: FactSet and Morgan Stanley Research
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
27
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Industrial Earnings Trough after Recession, but They Always Decline...
%YoY Industrials Earnings
• The top 15 US industrial companies get 66%
50%
of revenues from the US
40%
30%
• Even excluding the rails, the percentage of
revenues from the US is around 60%
20%
10%
• Most of the US exposure is concentrated in
construction, transportation equipment and
industrial equipment, all vulnerable to the
unfolding US recession
0%
-10%
-20%
-30%
-40%
Jan-74
Jan-78
Jan-82
Jan-86
Jan-90
Jan-94
Jan-98
Jan-02
Jan-06
%YoY Industrial Production Growth (6 mo. avg)
15%
20%
15%
10%
•Biggest threat is current global financial
market conditions and rising cost of funding,
causing EM project related spending to slow.
Project cancellation has already increased
exponentially
10%
5%
5%
0%
0%
-5%
China IP YoY
Brazil IP YoY
India IP YoY
Russia IP YoY
-10%
Oct-95
-5%
-10%
Oct-97
Oct-99
Oct-01
Oct-03
Oct-05
Oct-07
Source: Datastream, FactSet and Morgan Stanley Research
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
28
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Info Tech – Downside Risks Still Elevated
US IT Earnings Growth During Different GDP Growth Environments
Median US IT Earnings Growth
Information Technology
130%
0
30%
0
110%
27%
20%
0
13%
7%
0
18%
15%
21%
Price Performance, y/y
90%
70%
3%
50%
0
30%
0
10%
0
-10%
2008/2009 GDP
Growth Range
0
-33%
0
<0%
0-1%
Three Month Earnings
Revision Factor
[(#Up - #Down) / Total #
Estimates]
-30%
-50%
1-2%
2-3%
3-4%
4-5%
5-6%
6-7%
7-8%
>8%
-70%
Dec-97
Level of Y/Y Real GDP
Dec-99
Dec-01
Dec-03
Dec-05
Dec-07
US Profits vs IT Capex Growth
40%
30%
US corporate
profits
(yoy%)
30%
20%
Tech Sector PPI (%YoY)
4%
1.7%
2%
0%
15%
-2%
-3.8%
-4%
10%
-6%
-6.7%
-8%
0%
0%
-10%
-12%
-10%
US nom business fixed
investment (yoy% 3qtr lag)
-20%
1966
1970
1974
1978
1982
1986
1990
1994
1998
2002
PPI Semi and Oth Elec Mgf
PPI Com Equip Mfg
PPI Computer and Peripheral Equip Mfg
-14%
-15%
2006
-16%
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Source: Datastream, FactSet and Morgan Stanley Research
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
29
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Defensives & Global Cyclicals Outperform Domestic Cyclicals
Defensives have outperformed cyclicals YTD…
But the Valuation attraction has eroded
Performance of US Cyclicals relative to US Defensives
0.65
Cyclicals\Defensive Relative Valuation (Composite)
3
0.60
1
0.55
0.50
Defensives Relatively Attractive
2
Defensive
Outperformance
Defensive
Outperrformance
Cyclical
Outperrformance
0
(1)
Cyclicals Relatively Attractive
0.45
(2)
(3)
0.40
Mar-08
May-08
Jul-08
Sep-08
Nov-08
Jan-09
Mar-09
86
Global cyclicals have outperformed domestic cyclicals YTD..
1.90
But performance is at odds with future earnings risk
% Difference MS vs. Consensus 2009 Earnings Estimates
Head
Fake?
0%
1.70
-18%
-8%
-7%
-16%
-25%
Oct-90, 1.15
1.10
-19%
Tech
Dec-87, 1.06
Utilities
-13%
-20%
-11%
Telecom
-15%
1.30
-12%
Cons Disc
1.50
-10%
Cons
Staples
-5%
Aug-00, 1.46
Health
Care
Jan-08
Composite Indicator is an average of relative p/sales, p/e, and p/book zscores.
88
90
92
94
96
98
00
02
04
06
08
-30%
0.90
-35%
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Industrials
1985
Energy
Grey shading represents US recession
0.50
-100%
Materials
-40%
Sep-02, 0.84
Financials
Jul-98, 0.84
0.70
Source: Datastream, FactSet and Morgan Stanley Research
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
30
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Domestic over Global Cyclicals
25%
Global Cyclicals Relative to US Domestic Cyclicals vs
TWD
US Bank Relative to SPX vs TWD
-40%
20%
-30%
15%
-20%
10%
-10%
5%
0%
0%
10%
-5%
20%
-10%
30%
-15%
40%
-20%
-25%
1985
40%
30%
US Banks
vs SPX
10%
0%
0%
-10%
-20%
1989
1993
1997
60%
-20%
TWD
%YoY (rhs)
50%
Trade-Weighted
Dollar
2001
2005
20%
20%
-40%
1974
-30%
1978
1982
1986
1990
1994
1998
2002
2006
Source: Datastream, FactSet and Morgan Stanley Research
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
31
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Strongest Consensus Calls
1.
Economy weak in 1H09 but recovers in 2H09
2.
The US is not Japan
3.
Global decoupling is Dead
4.
Underweight US Treasuries
5.
Equities will end 2009 modestly higher after a 1H09 sell down
6.
Buy Corporate Bonds
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
32
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Commodities Likely To Lag Recovery Unless Supply Bites First
The Bottom in Commodities Usually Comes Well After Equities
Vertical axis: indexed price, 100 at recession start; median path of spot price
horizontal axis: months following start of recession
130
Trough May Be Yet to Come With Only 12 Months Behind Us
180
160
120
140
110
100
120
90
100
80
80
70
60
60
40
50
Another 12 months plus
of weak prices?
20
-12 -9
S&P 500
-6
-3
0
3
Gold
6
9
Crude Oil
12 15 18 21 24 27 30 33
Copper
Soybeans
-12 -9
But… Oil Rig Cuts Following Peak Oil Price Are Well Ahead of 1997
-6
-3
S&P 500
Trough
0
3
Gold
6
9
12 15 18 21 24 27 30 33
Crude Oil
Copper
Soybeans
And The Number of Project Delays/Cancellation Is Growing Fast
Vertical axis: energy project cancellations and delays
Vertical axis: rig count; horizontal axis: months from oil price peak
450
100
88
90
400
80
350
70
300
60
50
250
44
40
200
30
20
150
19
10
100
0
0
3
6
Source: Morgan Stanley Commodities Research
9
12
1996-Dec
15
18
21
24
Identified up to 5th Nov
Identified as of 18th Nov
Identified as of 19th Jan
2008-Jun
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
33
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Core US Equity Portfolio
Ticker
Name
S &P 500 Index
Industry Group/ Industry
Price
3/12/2009
750.74
MS
Rating
Market
Value
($ Mil)
Ann.
Div
Yield
2009e
P/E
MS Rec
Weight
100.0
Weight
vs
S &P 500
0.0
Performance
from
Inclusion %
Date
Added
Price
at
Inclusion
-41.9
-27.8
-8.6
-30.1
-49.3
1/4/08
1/4/08
12/5/08
9/18/08
61.74
57.05
22.34
28.52
-28.6
-29.4
-32.2
-22.3
-1.4
-28.3
1/4/08
3/28/08
12/5/08
2/6/09
1/4/08
23.10
51.06
27.42
49.63
78.78
-44.0
-14.8
-55.9
-56.3
-72.6
12/5/08
5/19/08
1/4/08
1/4/08
74.42
53.44
85.56
64.14
-70.4
-44.4
-70.9
-37.5
-48.9
-71.7
-28.4
5/7/08
1/4/08
6/11/08
11/12/08
5/7/08
12/5/08
44.37
81.82
37.13
27.30
61.10
51.85
-33.0
-27.1
-58.2
-16.9
-16.4
-25.6
-6.5
-7.4
25.1
1/4/08
1/4/08
7/26/08
1/4/08
1/4/08
7/18/08
1/4/08
12/8/08
87.76
55.97
60.48
55.79
65.84
22.23
47.83
34.20
-55.8
-35.8
-14.7
-14.9
-45.4
1/4/08
12/5/08
12/5/08
9/15/08
84.74
49.01
39.53
111.69
-41.4
9.5
-13.9
-23.9
-9.0
-45.0
-10.6
12/5/08
1/4/08
1/31/08
2/6/09
9/18/08
1/4/08
14.56
34.91
20.55
17.04
20.07
101.13
Consumer Durables & Ap p arel
Consumer Services
Retailing
Consumer Durables & Ap p arel
141.53
44.59
52.17
15.61
14.46
NC
O/I
O/I
O/C
17,039
56,875
22,132
4,574
2.24
3.83
2.18
0.00
9.08
13.35
14.46
7.65
11.0
3.5
3.5
2.0
2.0
2.6
NKE
M CD
LOW
COH
Consumer Discretionary
Nike Inc. (Cl B)
M cDonald's Corp .
Lowe's Cos.
Coach Inc.
Consumer S taples
Altria Group Inc.
Philip M orris Int
Kroger Co.
Wal-M art Stores Inc.
Colgate-Palmolive
Food Beverage & Tobacco
Food Beverage & Tobacco
Food & Stap les Retailing
Food & Stap les Retailing
Household & Personal Products
209.09
16.30
34.64
21.30
48.94
56.51
E/A
O/A
O/A
O/I
NC
33,770
68,075
13,585
106,114
28,456
7.85
6.24
1.69
1.94
2.83
9.39
11.88
10.30
8.15
13.34
14.5
3.0
3.5
2.5
3.0
2.5
1.5
MO
PM
KR
WM T
CL
Energy
Chevron Corp .
M arathon Oil Corp .
ConocoPhillip s
Valero Energy Corp .
332.48
63.40
23.57
37.39
17.58
NC
NC
NC
NC
124,386
15,939
56,621
8,808
4.10
4.07
5.03
3.41
12.52
8.31
10.19
5.79
11.0
3.0
2.0
3.0
3.0
-2.7
CVX
M RO
COP
VLO
Financials
Bank of New York M ellon
State Street Corp .
JPM organ Chase & Co.
Wells Fargo & Co.
M etLife Inc.
Chubb Corp .
Diversified Financials
Diversified Financials
Diversified Financials
Banks
Insurance
Insurance
109.07
24.66
23.85
23.20
13.95
17.30
37.13
O/I
O/I
O/I
O/I
O/I
NC
25,855
9,486
76,140
50,133
12,118
12,684
3.89
4.03
6.55
9.75
4.28
3.56
8.17
7.39
11.27
12.93
4.16
6.91
9.5
1.5
1.5
2.0
1.5
1.5
1.5
-0.9
BK
STT
JPM
WFC
M ET
CB
Health Care
Becton Dickinson
Aetna Inc.
Amgen Inc.
Abbott Laboratories
Johnson & Johnson
Bristol-M y ers Squibb Co.
Teva Pharmaceutical
Wy eth
Health Care Equip & Srvs
Health Care Equip & Srvs
Biotechnology
Pharmaceuticals
Pharmaceuticals
Pharmaceuticals
Pharmaceuticals
Pharmaceuticals
270.89
63.95
23.42
50.27
46.65
49.00
20.78
44.30
42.78
O/A
NC
O/I
O/A
O/A
NC
E/A
NC
14,969
9,881
50,084
68,999
132,902
41,124
34,465
56,964
2.06
0.17
0.00
3.09
3.76
5.97
1.17
2.81
12.65
5.58
10.55
12.07
10.78
10.76
15.05
11.82
18.7
2.5
1.5
3.0
3.0
2.5
2.5
1.7
2.0
3.2
BDX
AET
AM GN
ABT
JNJ
BM Y
TEVA
WYE
Industrials
Danaher Corp .
United Technologies Corp .
Boeing Co.
Lockheed M artin Corp .
Cap ital Goods
Cap ital Goods
Cap ital Goods
Cap ital Goods
150.89
54.42
41.80
33.63
61.02
E/C
E/C
O/C
O/C
13,326
39,032
24,381
19,370
0.22
3.68
5.00
3.74
11.30
9.61
6.46
6.71
8.0
2.0
2.0
2.0
2.0
-1.7
DHR
UTX
BA
LM T
Information Technology
Texas Instruments Inc.
Accenture Ltd.
Oracle Corp .
Cisco Sy stems Inc.
Nokia Corp . (ADR)
IBM
Semis & Semi Equip
Software & Services
Software & Services
Tech Hardware & Equip
Tech Hardware & Equip
Tech Hardware & Equip
224.95
15.94
30.05
15.63
15.51
11.04
90.40
O/I
NC
O/A
O/I
O/I
O/I
20,367
18,235
60,093
90,640
47,630
119,057
2.76
1.66
0.00
0.00
7.56
2.21
45.81
10.48
8.39
15.04
12.03
10.52
14.5
2.5
2.0
2.5
2.0
3.0
2.5
-3.3
TXN
ACN
ORCL
CSCO
NOK
IBM
Materials
DuPont
Chemicals
121.97
19.06
NC
16,558
8.60
9.09
1.5
1.5
-1.7
DD
-52.0
-21.0
12/5/08
24.12
Diversified Telecom
Diversified Telecom
Diversified Telecom
97.74
7.18
24.35
16.44
O/A
O/A
E/A
3,058
137,602
87,142
13.93
6.74
8.23
8.22
11.73
4.44
7.3
2.3
2.5
2.5
3.3
WIN
T
VOD
Telecom S ervices
Windstream Corp .
AT&T Inc.
Vodafone Group PLC (ADS)
-40.5
-40.0
-40.5
-14.6
0.0
3/12/09
1/4/08
12/5/08
11.97
40.89
19.25
Utilities
American Electric Power
Exelon Corp .
Electric Utilities
Electric Utilities
117.60
25.02
41.38
NC
NC
9,972
26,416
6.55
5.07
7.73
4.0
2.0
2.0
-0.1
AEP
EXC
-45.2
-45.9
-49.6
1/4/08
1/4/08
46.29
82.03
43,839
4.01
3.22
10.76
11.50
Oil Gas
Oil Gas
Oil Gas
Oil Gas
Portfolio Performance since Inception
Average
S &P 500
Relative Return
& Consumable Fuels
& Consumable Fuels
& Consumable Fuels
& Consumable Fuels
-47.26
-45.18
-2.08
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
34
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Valuation Snapshot – S&P 500
Select S&P 500 Valuation Metrics
As of
S&P 500 Level
721.4
Sectors
3/11/2009
Price Perf. (%)
Vs. 52-Wk.
YTD 2008
High
Low
Proportion of Total
Mkt. Cap.
Net Income
2008e
2009e
NTMe
P/E
2008e
2009e
'07-'08e
Earnings Growth
'08-'09e
NTMe LTG est.
Margins
2008e
2009e
FCF Yield
2008e
2009e
EV/EBITDA
2008e
2009e
P/B
ROE
(LTM)
P/S
(LTM)
Indicated
Div.
Yield
Payout
ratio
NTMe
Consumer Discretionary
Automobiles & Components
Consumer Durables & Apparel
Consumer Services
Media
Retailing
(20)
(39)
(27)
(19)
(26)
(10)
(35)
(66)
(36)
(21)
(38)
(32)
(49)
(80)
(55)
(36)
(55)
(41)
8
10
12
6
9
17
8.4%
0.2%
0.9%
1.8%
2.4%
3.1%
4.9%
-5.4%
-0.4%
2.1%
4.4%
4.2%
3.9%
-3.8%
0.6%
1.7%
2.8%
2.5%
21.2
NM
14.2
11.9
8.8
14.2
24.8
NM
NM
12.3
7.9
10.9
25.6
NM
17.8
12.3
10.0
14.6
-63.0%
NM
NM
-9.6%
-12.0%
-24.1%
-3.2%
13.8%
290.1%
-0.2%
-21.1%
-25.4%
16.7%
17.3%
NM
-1.6%
-5.1%
-16.4%
10.5%
12.3%
11.4%
11.0%
8.5%
12.1%
10.8%
2.4%
6.1%
21.8%
24.7%
9.1%
10.3%
-1.3%
9.8%
22.3%
23.7%
8.1%
3.7%
NM
19.2%
5.5%
16.7%
8.0%
5.1%
NM
12.3%
6.0%
14.4%
8.9%
6.37
NM
10.23
6.68
4.44
5.29
6.38
NM
6.80
6.80
4.50
5.83
2.0
NM
1.3
3.1
0.9
1.7
7%
NM
1%
25%
10%
15%
0.4
0.0
0.5
1.2
0.7
0.4
2.6%
2.8%
3.9%
2.9%
2.2%
2.3%
55%
NM
56%
35%
20%
32%
Consumer Staples
Food & Staples Retailing
Food Beverage & Tobacco
Household & Personal Products
(17)
(15)
(15)
(25)
(18)
(12)
(20)
(17)
(32)
(33)
(30)
(38)
2
2
3
2
13.2%
3.5%
6.5%
3.1%
17.1%
4.4%
8.6%
4.1%
13.4%
3.5%
6.7%
3.1%
11.1
11.4
11.1
11.1
11.2
11.5
11.1
11.1
11.6
11.7
11.5
11.8
6.9%
11.1%
1.5%
14.5%
-3.7%
-2.1%
-3.3%
-6.4%
2.0%
4.8%
0.6%
2.1%
9.8%
11.6%
8.9%
9.7%
11.8%
7.0%
17.4%
21.8%
11.5%
6.7%
17.5%
23.0%
7.9%
8.3%
8.2%
6.8%
7.9%
8.2%
8.3%
6.8%
6.52
5.07
7.00
8.01
6.42
4.88
7.04
7.78
2.7
1.9
3.4
2.8
23%
17%
27%
24%
0.7
0.3
1.1
1.4
3.8%
2.1%
4.7%
3.7%
42%
24%
52%
41%
Energy
(16)
(36)
(52)
6
13.9%
32.6%
13.9%
11.2
6.2
11.9
11.1%
-47.7%
-37.7%
8.2%
20.3%
20.3%
8.5%
4.7%
3.10
4.98
1.6
23%
0.6
2.6%
30%
Financials
Banks
Diversified Financials
Insurance
Real Estate
(41)
(53)
(35)
(44)
(36)
(57)
(50)
(60)
(59)
(45)
(73)
(76)
(72)
(75)
(69)
21
32
25
9
16
9.9%
2.0%
5.1%
1.9%
0.9%
-30.0%
-0.1%
-12.6%
-16.7%
-0.6%
10.9%
1.5%
4.1%
4.9%
0.4%
8.9
12.4
10.8
4.3
23.8
NM
NM
NM
NM
NM
10.7
15.6
14.8
4.6
23.6
-199.1%
-102.5%
-204.2%
-238.6%
-123.8%
144.6%
NM
139.6%
136.0%
193.7%
NM
NM
NM
247.5%
-35.9%
9.8%
8.3%
9.9%
10.2%
10.3%
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
0.6
0.6
0.5
0.5
1.1
-1%
1%
0%
-6%
7%
NA
NA
NA
NA
NA
4.4%
7.8%
2.4%
3.9%
9.2%
39%
NM
NM
NM
NM
Health Care
Health Care Equip & Services
Pharmaceuticals & Biotech
(17)
(17)
(17)
(24)
(38)
(17)
(34)
(43)
(29)
2
2
2
15.4%
4.5%
10.9%
21.3%
6.0%
15.3%
19.0%
5.9%
13.1%
9.3
8.7
9.5
10.5
10.9
10.4
9.6
8.9
9.9
3.4%
-1.5%
5.4%
9.8%
21.4%
5.2%
3.5%
8.6%
1.4%
9.2%
12.5%
7.7%
16.2%
8.2%
33.7%
16.6%
8.4%
34.9%
8.1%
10.7%
7.0%
10.8%
12.3%
10.2%
6.30
5.84
6.53
5.66
5.22
5.89
2.3
1.8
2.6
24%
19%
27%
1.0
0.4
2.2
3.0%
1.0%
3.8%
28%
9%
36%
Industrials
Capital Goods
Commercial & Professional Services
Transportation
(30)
(31)
(27)
(29)
(42)
(46)
(29)
(20)
(59)
(62)
(49)
(52)
9
10
5
9
9.7%
7.0%
0.7%
2.0%
20.3%
16.0%
1.0%
3.3%
12.5%
9.6%
0.7%
2.2%
9.0
8.5
11.0
10.4
7.0
6.4
10.5
8.7
9.2
8.7
11.3
10.8
-2.6%
-3.6%
1.2%
1.4%
-24.1%
-26.2%
-7.0%
-18.9%
-14.9%
-16.9%
-12.2%
-6.1%
10.5%
10.3%
10.4%
11.2%
16.2%
15.2%
21.6%
19.2%
15.1%
13.9%
21.3%
19.1%
12.4%
13.9%
12.0%
7.3%
11.3%
12.9%
10.1%
6.2%
6.95
7.60
5.79
4.89
4.76
4.52
5.95
5.25
1.6
1.5
1.9
1.7
19%
20%
20%
17%
0.6
0.5
0.8
0.7
3.9%
4.1%
3.9%
3.3%
35%
35%
44%
34%
(6)
(2)
(7)
(5)
(44)
(49)
(44)
(42)
(45)
(49)
(43)
(45)
10
18
10
10
18.1%
2.6%
7.0%
8.5%
19.3%
2.1%
7.4%
9.8%
14.7%
0.1%
6.9%
7.8%
12.9
71.5
11.1
11.6
13.6
18.2
13.7
12.6
14.6
517.6
12.1
13.0
-9.3%
-32.0%
-5.2%
-5.7%
-6.6%
-96.5%
13.6%
-2.8%
-5.1%
-69.2%
5.6%
-3.5%
12.0%
12.5%
12.6%
11.3%
22.4%
28.0%
35.7%
16.0%
21.6%
16.9%
36.0%
16.0%
10.1%
7.1%
10.6%
10.7%
9.4%
4.5%
11.0%
9.6%
5.88
5.99
5.39
6.29
6.13
12.74
4.92
6.29
2.6
2.0
3.1
2.4
21%
9%
27%
21%
1.4
1.8
2.3
1.0
1.4%
3.1%
1.2%
1.0%
18%
220%
13%
12%
Materials
(14)
(47)
(58)
10
3.3%
3.1%
2.4%
14.6
15.3
16.2
-49.6%
-5.5%
-31.8%
9.1%
16.2%
14.4%
5.2%
4.8%
5.03
6.57
1.9
16%
0.6
3.3%
47%
Telecommunication Services
(16)
(34)
(40)
7
4.0%
5.2%
4.0%
12.0
11.4
11.9
-4.4%
-4.1%
-15.8%
4.7%
33.7%
32.7%
11.6%
12.7%
4.38
4.43
1.6
14%
0.9
6.6%
80%
Utilities
(22)
(32)
(45)
2
4.2%
6.2%
5.2%
9.1
9.9
9.5
-0.4%
4.2%
2.2%
7.6%
24.1%
26.1%
-5.9%
-2.0%
6.51
6.37
1.2
13%
0.7
5.7%
52%
S&P 500
(20)
(38)
(50)
8
11.0
14.6
11.9
-41.0%
22.9%
2.3%
9.6%
17.0%
16.4%
8.1%
8.2%
5.44
5.66
1.6
13%
0.7
3.2%
35%
Information Technology
Semi's & Semiconductor Equip
Software & Services
Technology Hardware & Equip
Source: Morgan Stanley Research, Factset, Based on Thomson Financial Consensus EPS Estimates; FFO for Reits;
Note: a) NTM=(Consensus) Next 12 months, LTM=Last 12 months, LTG=Long Term Growth
b) Data adjusted for aggregation purposes when required.
c) LTM ROE is LTM Net Income divided by avg. equity.
d) LTG estimate is NTM income weighted.
e)Margins, FCFyield, EV/EBITDA and P/B ratio for index are ex-financials
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
35
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Valuation Snapshot – Others
Russell MidCap
P/E
LTM
Russell 2000
Rel. P/E
NTMe
2009e
NTMe
Earnings Growth
2009e
NTMe
'08-'09e LTG est.
ROE
Ind.
(LTM)
Div.
Sectors
Yield
P/E
LTM
NTMe
Rel. P/E
2009e
NTMe
Earnings Growth
2009e
NTMe
'08-'09e LTG est.
ROE
Ind.
(LTM)
Div.
Sectors
Yield
Consumer Discretionary
21.0
17.1
16.4
1.5
1.4
NM
242.0%
12.5%
-3%
2.0%
Consumer Discretionary
NM
NM
NM
NM
NM
149.7%
166.6%
14.5%
-5%
1.4%
Consumer Staples
10.3
10.3
10.1
0.9
0.9
8.8%
10.7%
8.6%
16%
3.2%
Consumer Staples
15.3
16.5
15.2
0.9
0.9
13.9%
17.8%
11.5%
10%
1.9%
5.0
8.5
8.4
0.7
0.7
-37.7%
-37.1%
13.1%
21%
1.8%
Energy
6.9
12.6
12.3
0.7
0.7
-48.2%
-47.2%
12.8%
9%
2.6%
Financials
10.9
9.9
9.9
0.8
0.9
55.9%
58.9%
9.1%
4%
5.2%
Financials
16.9
12.6
12.7
0.7
0.7
8.2%
-1%
5.7%
Health Care
13.3
11.9
11.9
1.0
1.0
5.7%
5.8%
12.8%
16%
0.3%
Health Care
NM
NM
NM
NM
NM
107.9%
114.8%
18.3%
-4%
0.3%
Industrials
8.0
10.2
10.2
0.9
0.9
-17.7%
-17.5%
12.2%
16%
2.4%
Industrials
8.7
15.2
15.0
0.9
0.9
8.5%
11.0%
13.1%
9%
1.5%
12.7
16.8
16.7
1.4
1.4
-37.8%
-37.0%
13.8%
13%
0.9%
Information Technology
18.3
23.1
22.6
1.3
1.3
-30.9%
-26.6%
15.3%
6%
0.3%
7.5
11.8
11.7
1.0
1.0
-39.1%
-38.8%
8.2%
17%
3.0%
Materials
8.6
14.2
14.0
0.8
0.8
-27.6%
-26.2%
6.5%
6%
2.4%
33.3
20.5
20.1
1.8
1.7
31.8%
17.9%
7.9%
7%
3.7%
Telecommunication Services
NM
NM
NM
NM
NM
NM
NM
13.0%
-37%
2.7%
8.9
9.4
9.3
0.8
0.8
-5.2%
-3.8%
7.6%
11%
5.4%
Utilities
14.5
13.0
13.0
0.7
0.8
19.3%
19.4%
7.2%
8%
5.1%
10.5
11.7
11.6
1.0
1.0
-9.8%
-7.2%
10.9%
10%
2.7%
Index
16.4
17.8
17.2
1.0
1.0
97.4%
106.5%
12.2%
2%
2.2%
Energy
Information Technology
Materials
Telecommunication Services
Utilities
Index
Dow Jones Industrial Average
P/E
LTM
NTMe
Rel. P/E
2009e
NTMe
NM
Nasdaq 100
Earnings Growth
2009e
NM
NTMe
'08-'09e LTG est.
ROE
Ind.
(LTM)
Div.
Sectors
Yield
P/E
LTM
NTMe
Rel. P/E
2009e
NTMe
Earnings Growth
2009e
NTMe
'08-'09e LTG est.
ROE
Ind.
(LTM)
Div.
Sectors
Yield
Consumer Discretionary
NM
NM
NM
NM
NM
11.0%
1.0%
9.1%
NM
3.6%
Consumer Discretionary
13.6
13.6
13.5
1.0
1.0
0.0%
1.4%
10.7%
11%
0.9%
Consumer Staples
12.2
12.6
12.6
1.0
1.0
-3.7%
-3.3%
9.9%
21%
3.3%
Consumer Staples
15.6
15.4
15.8
1.1
1.1
1.2%
-7.4%
12.4%
14%
1.4%
6.9
13.1
13.8
1.1
1.1
-47.1%
-49.9%
7.9%
34%
2.9%
Energy
Energy
Financials
NM
NM
NM
NM
NM
152.7%
134.9%
7.4%
-4%
1.4%
Financials
Health Care
7.3
8.2
8.0
0.7
0.6
-10.9%
-8.1%
4.4%
30%
6.4%
Health Care
14.9
13.4
13.4
0.9
0.9
10.9%
10.5%
15.1%
20%
0.2%
Industrials
6.0
8.3
8.3
0.7
0.7
-27.1%
-26.9%
9.2%
22%
4.6%
Industrials
13.7
14.1
13.9
1.0
1.0
-2.8%
-1.5%
17.8%
23%
1.4%
Information Technology
9.8
10.7
10.6
0.9
0.9
-8.9%
-7.8%
10.4%
32%
2.7%
Information Technology
12.1
14.7
14.6
1.0
1.0
-18.1%
-17.6%
13.0%
24%
1.3%
Materials
6.1
19.9
17.1
1.6
1.4
-69.1%
-64.2%
4.4%
15%
9.6%
Materials
7.6
9.4
9.6
0.7
0.7
-18.6%
-22.0%
8.3%
25%
2.5%
Telecommunication Services
9.1
11.4
11.0
0.9
0.9
-20.4%
-2.1%
4.6%
16%
6.9%
Telecommunication Services
7.5
7.0
7.3
0.5
0.5
6.9%
2.7%
11.6%
25%
0.0%
12.6
14.2
14.2
1.0
1.0
-11.3%
-10.9%
13.2%
20%
1.1%
Utilities
Index
Utilities
10.3
12.1
12.3
1.0
1.0
-15.3%
-14.8%
8.0%
16%
3.9%
Index
Source: Morgan Stanley Research, Factset, Based on Thomson Financial Consensus EPS Estimates
Note: a) NTM=(Consensus) Next 12 months, LTM=Last 12 months, LTG=Long Term Growth, NM = Not Meaningful
b) Data adjusted for aggregation purposes when required.
c) LTM ROE is LTM Net Income divided by avg. equity.
d) LTG estimate is NTM income weighted.
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
36
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Will Massive Fiscal Stimulus Get Traction?

American Recovery and Reinvestment Act

Stimulus “back-loaded” into F2010

Shovel ready? Infrastructure outlays come slowly

Assume that consumers save ½ to ¾ of tax cuts

“Multiplier” effects muted until credit crunch abates
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
37
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Will Massive Fiscal Stimulus Get Traction?
Distribution of the Fiscal Stimulus
Stimulus Backloaded
(Fiscal Years, Billions)
(% of Overall Stimulus by Fiscal Year)
55
Fiscal Year
% of Total
2009-19
in 2009
2009
2010
"Infrastructure" Outlays
29
117
359
8.1
Income Support Spending
60
73
168
35.7
Tax Cuts - Total
80
167
292
27.4
Tax and Spending Stimulus in the House Bill as
a % of the Overall 10-Year Impact of $819 bil.
50
43.5
45
40
35
30
25
21.4
20.6
20
For Individuals
14
113
185
7.6
For Businesses
66
54
107
61.7
10
169
357
819
20.6
5
15
6.0
Overall Total
3.1
2.9
1.3
0.0
0.2
0.4
0.5
2016
2017
2018
2019
0
2009
2010
2011
Policy Multipliers:
2013
2014
2015
Change in Standardized Budget Deficit
The Cumulative Impact on GDP of Various Policy Options
(Percent of Potential GDP)
5
Purchases of Goods and Services by the
Federal Government
Transfers to State and Local Governments
for Infrastructure
Transfers to State and Local Governments
Not for Infrastructure
Transfers to Persons
Two-Year Tax Cuts for Lower- and MiddleIncome People
One-Year Tax Cuts for Higher-Income
People
Tax-Loss Carryback
2012
Source: CBO, JCT, Morgan Stanley estimates
Source: CBO, JCT, Morgan Stanley estimates
High
Low
2.5
1.0
4
2.5
1.0
1.9
2.2
0.7
0.8
1.7
0.5
0.5
0.4
0.1
0.0
Note: For each option, the figures shown are a range of “multipliers,” that is, the cumulative change in
gross domestic product over several quarters, measured in dollars, per dollar of additional spending or
reduction in taxes.
Source: Congressional Budget Office
5
Change in standardized budget deficit
(percent of potential GDP)
4
3
3
Actual
2
2
1
1
0
0
-1
-1
-2
-2
-3
MS estimates
-4
-3
-4
63
66
69
72
75
78
81
84
87
90
93
96
99
02
05
08
Note: Values above zero represent restraint; values below zero represent stimulus.
Source: CBO with Morgan Stanley estimates for FY 2009-10
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
38
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
US Housing Recession at Least Through 2009
Affordability Soaring but Pent-Up Demand Unfavorable
Inventories of Unsold Homes Plunging, But Still High
200
70
600
180
69
550
160
68
500
140
67
450
66
400
65
350
64
300
63
250
15
New single-family
homes for sale,
thousands of
units (left scale)
13
11
Composite housing
affordability index
(left scale)
120
New single-family
homes for sale,
months supply
(right scale)
9
7
100
US homeownership
rate (right scale)
80
60
80
82
84
86
88
90
92
94
96
98
00
02
04
06
3
96
08
Source: Census Bureau, National Association of Realtors
5
Mortgage equity withdrawal,
as a % of disposable income,
4-quarter moving average
Active
Passive
10
98
99
00
01
02
03
04
05
06
07
08
09
Source: Census Bureau
Construction Employment: More Declines Coming
Equity Extraction Is Collapsing
12
97
Nonfarm Payrolls, Year-over-Year Percent Change
12
12
8
8
8
4
4
6
0
4
-4
2
-8
0
Residential
building
construction
Specialty trade
contractors:
residential
-4
-8
-12
1Q
91
4Q
91
3Q
92
2Q
93
1Q
94
4Q
94
3Q
95
2Q
96
1Q
97
4Q
97
3Q
98
2Q
99
1Q
00
4Q
00
3Q
01
2Q
02
1Q
03
4Q
03
3Q
04
2Q
05
1Q
06
4Q
06
3Q
07
2Q
08
0
Updated estimates of the mortgage system provided by Jim Kennedy, presented in “Estimates
of Home Mortgage Originations, Repayments, and Debt On One-to-Four-Family Residences,"
Alan Greenspan and James Kennedy, Federal Reserve Board FEDS working paper no. 2005-41.
-12
-16
-16
86
88
90
92
94
96
98
00
02
04
06
08
Source: Bureau of Labor Statistics
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
39
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Corporate America Retrenches; Capex Recession
Corporate America’s Needs Not Financeable?
Slowing Growth Becomes the Brake for Capex
25
25
Private nonresidential
investment in equipment & software,
year-over-year percent change
20
15
8
8
Financing gap as a
percentage of nonfinancial
corporate GDP
20
6
6
15
10
10
5
5
0
0
-5
-5
-10
4
4
2
2
0
0
-2
-2
-4
-4
-10
-15
-15
Accelerator*
-20
-20
-25
-25
60
65
70
75
80
85
90
95
00
05
-6
10
-6
52
Note: The accelerator is defined as the year-over-year difference of the year-over-year percent
change in real non-farm business output.
Source: Bureau of Economic Analysis, Morgan Stanley Research
55
58
61
64
3.4
Average hourly earnings,
total private industries,
year-over-year percent
change (left scale)
3.2
3.0
2.8
3.0
2.6
JOLTS job
openings rate,
total private
(right scale)
2.5
2.4
2.2
2.0
2.0
1.5
1.8
00
01
02
Source: Bureau of Labor Statistics
03
04
05
06
07
73
76
79
82
85
88
91
94
97
00
03
06
09
Pent-Up Demand for Capex?
3.6
3.5
70
Note: 4Q08-4Q10 values are Morgan Stanley estimates.
Source: Federal Reserve, Morgan Stanley Research
Soft Labor Markets Cap Pay Gains
4.5
4.0
67
08
09
2.0
2.0
Capex/depreciation, other equipment
1.9
Capex/depreciation, computers & software
1.9
1.8
1.8
1.7
1.7
1.6
1.6
1.5
1.5
1.4
1.4
1.3
1.3
1.2
1.2
1.1
1.1
1.0
1.0
0.9
0.9
0.8
0.8
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
05
07 09E
Source: Macroeconomic Advisers, Morgan Stanley Research
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
40
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Global Forecast at a Glance
REAL GDP GROWTH
CPI INFLATION
2008E
2009E
2010E
2008E
2009E
2010E
Global Economy
Industrial World
Developing World
3.3
0.8
5.9
-0.5
-2.5
1.5
3.0
1.2
4.6
6.2
3.3
9.1
2.0
-0.5
4.5
3.5
1.8
5.0
US
1.1
-3.3
1.8
3.8
-1.4
2.4
Europe
EMU
UK
0.8
0.9
0.7
-1.5
-1.6
-1.3
1.2
1.1
2.0
3.3
3.3
3.6
0.5
0.5
0.7
1.7
1.6
2.2
CEEMEA
4.2
-1.7
2.5
11.6
8.3
8.2
Japan
Asia ex-Japan
China
-0.7
7.0
9.0
-4.0
3.0
5.5
-0.3
6.4
8.0
1.5
6.4
5.9
-1.2
1.1
-0.8
-0.1
2.7
1.5
Latin America
4.3
-0.4
2.4
8.0
8.3
7.6
Source: Morgan Stanley Research
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
41
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Winners and Losers in the Global Economy?
Growth Outside the US and China Matters More
Recoupling Risks
10
16
14
Annual percent
change in real GDP
2007
2008E
2009E
10
Real GDP, YoY % chg
2010E
China
12
Non-Japan
Asia
8
8
Non-US
6
6
4
4
2
2
10
8
Latin
America
World
6
4
Europe
Other Dollar
Bloc
Japan
0
US
0
2
US
0
-2
-4
-2
-2
-4
-4
-6
-6
74
-6
76
80
82
84
86
88
90
92
94
96
98
00
02
04
06
08
10
Note: 1Q09-4Q10 values are Morgan Stanley estimates.
Source: Bureau of Economic Analysis, Macroeconomic Advisers LLC, Morgan Stanley Research
Source: IMF, E = Morgan Stanley Estimates
Growth Risks Now More Balanced…
6
78
…While Inflation Risks Tilt Higher
7
Global Economy: Real GDP (%)
Global Economy: CPI Inflation (%)
6.2
5
6
6.2
5
3.0
Bull
Base
Bear
4
3.0
3.5
3
2.0
1.3
1
2
0.4
0
1
-0.5
-1
Bull
Base
Bear
1.8
0
-1.4
0.0
-2
2006
4.8
6.2
3.3
3
2
4.3
3.3
3.3
4
-1
2007
2008E
Source: Morgan Stanley Research, E = Morgan Stanley Estimates
2009E
2010E
2006
2007
2008E
2009E
2010E
Source: Morgan Stanley Research, E = Morgan Stanley Estimates
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
42
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
US Economic Outlook
US Economic Outlook
4th Qtr/4th Qtr
Percent Change
Year over Year
2008A
2009E
2010E
Real GDP
Final Sales+
Personal Consumption Expenditures
Business Fixed Investment
-- Structures
-- Equipment
Residential Investment
Exports
Imports
Federal Government
State & Local Government
1.1
1.4
0.2
1.7
11.5
-3.0
-20.7
6.2
-3.3
6.0
1.2
-3.3
-2.9
-0.8
-17.7
-11.7
-21.0
-21.4
-13.4
-10.4
5.2
-0.9
1.8
1.5
2.1
-2.7
-4.1
-1.8
8.9
-0.4
2.3
1.8
1.9
Business Indicators++
Net Exports of Goods & Services
Current Account as a % of GDP
Change in Real Nonfarm Inventories
-$392.3
-4.6
-32.8
-$398.5
-4.1
-67.6
904
13.1
-1.8
5.8
476
9.8
-10.0
9.2
Housing Starts (Thous)
Light Vehicle Sales (Millions)
Industrial Production (Pct Chg)
Civilian Unemployment Rate (Percent)
After-Tax "Economic" Profits**
-- Percent Change from Prior Year
After-Tax "Book" Profits
-- Percent Change from Prior Year
Real Disposable Personal Income (Pct Chg)
Personal Saving Rate
Prices and Costs (Percent Change)
GDP Chain Price Index
Consumer Price Index
CPI ex Food & Energy
PCEPI ex Food & Energy
Market-Based PCEPI ex Food & Energy
Producer Price Index
Compensation Per Hour
Productivity
Unit Labor Costs
$1,098.4
-7.9
$1,219.4
-15.1
1.3
1.8
Percent Change
from Prior Quarter*
2008A
2009E
2010E
-0.8
-0.7
-1.5
-5.0
7.3
-11.2
-19.3
-1.8
-7.1
8.2
0.5
-2.3
-1.9
1.1
-17.9
-16.7
-18.6
-16.0
-12.3
-7.1
2.5
-0.8
3.1
2.6
2.3
4.2
1.6
5.8
15.7
4.1
5.0
1.4
3.0
3Q08A
4Q08A
1Q09E
2Q09E
3Q09E
4Q09E
1Q10E
2Q10E
3Q10E
4Q10E
-0.5
-1.3
-3.8
-1.7
9.7
-7.5
-16.0
3.0
-3.5
13.8
1.3
-6.2
-6.4
-4.3
-21.1
-5.9
-28.8
-22.2
-23.6
-16.0
6.7
-1.4
-5.5
-4.4
0.4
-26.4
-24.6
-27.5
-31.7
-23.3
-16.6
3.5
-3.7
-4.0
-3.2
0.0
-24.9
-22.0
-26.7
-27.3
-12.9
-10.6
4.4
-0.8
-1.0
-1.0
1.6
-12.1
-10.0
-13.4
-10.3
-7.4
-1.2
0.7
-0.1
1.5
1.0
2.3
-6.4
-9.0
-4.7
11.4
-4.3
1.2
1.5
1.6
2.5
2.3
2.5
0.6
-3.0
3.0
19.7
2.5
4.9
1.3
2.4
3.4
2.8
2.1
4.1
4.4
4.0
17.8
4.0
4.1
4.1
2.3
3.3
2.6
2.1
5.3
2.9
7.0
14.1
4.9
4.6
0.5
3.4
3.4
2.7
2.4
6.7
2.4
9.6
11.4
5.0
6.2
-0.1
3.8
-$443.4
-4.6
-30.7
-$353.1
-4.8
-33.3
-$372.9
-3.7
-25.0
-$385.1
-3.7
-53.7
-$383.2
-3.4
-75.8
-$403.3
-4.3
-77.7
-$422.3
-5.0
-63.2
-$435.1
-4.9
-56.8
-$439.9
-3.9
-41.3
-$443.9
-4.5
-22.1
-$454.8
-5.1
-2.6
670
11.4
1.7
9.7
876
12.9
-8.9
6.0
661
10.3
-12.1
6.9
462
9.2
-17.5
8.0
422
9.7
-7.8
9.0
474
10.1
-3.0
9.6
549
10.3
0.0
9.9
609
10.7
3.0
9.9
654
11.2
5.0
9.8
694
11.6
5.1
9.7
724
12.1
5.1
9.6
$735.6
$820.6
-33.0
11.5
$923.4 $1,039.2
-24.3
12.5
2.5
2.3
5.2
5.6
$1,121.3
-7.9
$1,300.2
-10.1
-8.5
1.3
$955.2
$862.0
-18.9
-27.6
$886.3 $1,009.9
-39.3
-25.1
3.4
7.4
3.2
4.9
$759.4
-32.6
$939.6
-30.1
3.2
5.7
$681.5
-39.2
$887.5
-31.7
-0.7
5.2
$639.6
-33.0
$856.8
-3.3
0.9
4.9
0.4
-3.1
1.0
0.8
0.7
-2.2
2.4
-0.7
3.1
0.2
2.0
0.8
0.6
0.5
4.5
2.4
0.8
1.6
0.4
2.6
0.9
0.7
0.6
8.0
2.8
2.2
0.6
2.2
3.8
2.3
2.2
1.9
6.4
3.7
2.8
0.9
*Annualized percent change from prior period, unless noted
**Including inventory valuation & capital consumption adjustments
E = Morgan Stanley estimates
Forecast as of March 9, 2009
1.5
-1.4
1.2
1.1
1.0
-2.7
3.8
0.7
3.1
1.5
2.4
1.1
0.9
0.8
4.3
3.1
1.9
1.2
2.0
1.5
2.0
1.9
1.8
1.3
4.1
2.2
1.8
0.9
-0.3
0.9
0.7
0.7
1.3
3.0
0.7
2.3
1.8
2.9
1.2
1.1
1.0
4.7
3.5
2.4
1.0
3.9
6.2
2.8
2.4
2.5
9.7
5.7
2.1
3.5
0.5
-8.3
0.6
0.8
1.0
-19.1
5.3
-0.4
5.7
2.8
-2.4
1.0
0.9
0.8
-4.5
4.4
0.5
3.9
$707.2
$866.0
$865.2
$844.0
-18.0
14.0
27.0
32.0
$915.7 $1,093.2 $1,085.1 $1,062.9
-9.3
16.4
22.3
24.1
1.0
7.6
2.1
2.3
4.6
5.9
5.9
5.9
1.2
2.9
1.1
0.9
0.8
7.6
3.2
1.6
1.6
4.9
3.0
1.1
1.0
0.9
-5.1
3.4
2.7
0.7
0.6
3.0
1.3
1.2
1.1
8.5
3.6
2.7
0.9
0.7
2.9
1.5
1.4
1.3
8.4
3.8
2.8
0.9
+GDP less inventory change
++Billions of dollars; real in billions of chain-type 2000 dollars
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
43
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Disclosure Section
Morgan Stanley ModelWare is a proprietary analytic framework that helps clients uncover value, adjusting for distortions and ambiguities created
by local accounting regulations. For example, ModelWare EPS adjusts for one-time events, capitalizes operating leases (where their use is significant), and
converts inventory from LIFO costing to a FIFO basis. ModelWare also emphasizes the separation of operating performance of a company from its financing
for a more complete view of how a company generates earnings.
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The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in
exchange for expressing specific recommendations or views in this report: Jonathan Garner, Vinicius Silva, Michael Wang.
Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.
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Important US Regulatory Disclosures on Subject Companies
As of February 29, 2008, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Acer Inc., America Movil, Arabtec Holdings, China Steel
Corp., Companhia Vale do Rio Doce, Corporacion GEO, Ctrip.com, Garanti Bank, Gazprom, Grupo Financiero Banorte, Grupo Televisa, Hon Hai Precision, Hurriyet, Hyflux Ltd, Hyundai Heavy Industries Co. Ltd., Lonmin Plc, Millicom,
NHN Corp, Petrobras, Samsung Electronics, Satyam Computer Services, TSMC, Vimpelcom, Yang Ming Marine, Abbott Laboratories, Amgen, Cisco Systems, Coach Inc, J.P.Morgan Chase & Co., Lowe's Companies,
MetLife Inc., Nokia, Philip Morris International Inc, Wells Fargo & Co BRISTOL MYERS SQUIBB... .
As of February 29, 2008, Morgan Stanley held a net long or short position of US$1 million or more of the debt securities of the following issuers covered in Morgan Stanley Research (including where guarantor of the securities):
Companhia Vale do Rio Doce, Garanti Bank, Gazprom, Grupo Televisa, Hon Hai Precision, Isbank, Kazkommertsbank, Kookmin Bank, Millicom, Mobile TeleSystems, Petrobras, Samsung Electronics, Telekom Malaysia, Tenaga Nasional
Bhd, TIM Participacoes, TPSA, NIKE, INC., CHEVRON CORPORATION, CONOCOPHILLIPS, UNITED TECHNOLOGIES CORPORATION, EXELON CORPORATIONAbbott Laboratories, Altria Group, Inc.,
Amgen, AT&T, Inc., Boeing Company, Cisco Systems, Coach Inc, Danaher Corp., IBM, J.P.Morgan Chase & Co., Kroger Co., Lockheed Martin Corp., Lowe's Companies, McDonald's Corporation, MetLife
Inc., Nokia, Oracle Corporation, Philip Morris International Inc, State Street Corporation, Teva Pharmaceutical Industries Ltd., Texas Instruments, Vodafone Group, Wal-Mart, Wells Fargo & Co...
Within the last 12 months, Morgan Stanley managed or co-managed a public offering of securities of BIM, China Mobile Limited Amgen, AT&T, Inc., Cisco Systems, IBM, J.P.Morgan Chase & Co., McDonald's Corporation,
MetLife Inc., Oracle Corporation, State Street Corporation, Wal-Mart, Wells Fargo & Co...
Within the last 12 months, Morgan Stanley has received compensation for investment banking services from America Movil, Companhia Vale do Rio Doce, Gazprom, Implats Limited, MMK, Norilsk Nickel, Petrobras, Tenaris S.A, TPSA
from Abbott Laboratories, Altria Group, Inc., Amgen, AT&T, Inc., Boeing Company, Cisco Systems, Danaher Corp., IBM, J.P.Morgan Chase & Co., Kroger Co., Lockheed Martin Corp., McDonald's
Corporation, MetLife Inc., Nokia, Oracle Corporation, State Street Corporation, Texas Instruments, Vodafone Group, Wal-Mart, Wells Fargo & Co...
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
44
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Disclosure Section
In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from America Movil, Bangkok Bank, BIM, China Mobile Limited, China Steel Corp., Companhia Vale do
Rio Doce, Embraer, Garanti Bank, Gazprom, Grupo Financiero Banorte, Grupo Televisa, Hon Hai Precision, Hurriyet, Implats Limited, Isbank, Kazakhmys, Kookmin Bank, Lonmin Plc, LUKOIL, Mediatek, Millicom, MMK, Mobile
TeleSystems, Naspers, Norilsk Nickel, Petrobras, Sasol, Satyam Computer Services, Telekom Malaysia, Tenaga Nasional Bhd, Tenaris S.A, TPSA, Vimpelcom from Abbott Laboratories, Altria Group, Inc., Amgen, AT&T,
Inc., Becton Dickinson, Boeing Company, Cisco Systems, Coach Inc, Danaher Corp., IBM, Lockheed Martin Corp., Lowe's Companies, McDonald's Corporation, MetLife Inc., Nokia, Oracle
Corporation, State Street Corporation, Teva Pharmaceutical Industries Ltd., Texas Instruments, Vodafone Group, Wal-Mart, Wells Fargo & Co...
Within the last 12 months, Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment banking services from Bangkok Bank, Companhia Vale do Rio Doce, Gazprom, Grupo
Financiero Banorte, Isbank, Kookmin Bank, LUKOIL, Petrobras, Samsung Electronics, Sasol.
Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: America Movil, Bangkok Bank, BIM, China
Mobile Limited, China Steel Corp., Companhia Vale do Rio Doce, Embraer, Garanti Bank, Gazprom, Grupo Financiero Banorte, Grupo Televisa, Hon Hai Precision, Hurriyet, Implats Limited, Isbank, Kazakhmys, Kookmin Bank,
Lonmin Plc, LUKOIL, Mediatek, Millicom, MMK, Mobile TeleSystems, Naspers, Norilsk Nickel, Petrobras, Sasol, Satyam Computer Services, Telekom Malaysia, Tenaga Nasional Bhd, Tenaris S.A, TPSA, Vimpelcom.
Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship
with the following company: Acer Inc., America Movil, Bangkok Bank, Companhia Vale do Rio Doce, Garanti Bank, Gazprom, Grupo Financiero Banorte, Grupo Televisa, Hon Hai Precision, Isbank, Kazkommertsbank, Kookmin
Bank, LUKOIL, Norilsk Nickel, Petrobras, Samsung Electronics, Sasol, Telekom Malaysia, Tenaris S.A, TPSA, Yang Ming Marine Abbott Laboratories, Altria Group, Inc., CHEVRON CORPORATION, MARATHON
OIL, CONOCOPHILLIPS, VALERO ENERGY, BANK OF NEW YORK MELLON, CHUBB, ACCENTURE, DUPONT CAPITAL MANAGEMENT. AT&T, Inc., Boeing Company, Cisco Systems, IBM,
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The research analysts, strategists, or research associates principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor
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Morgan Stanley & Co. Incorporated makes a market in the securities of Ctrip.com, Millicom Abbott Laboratories, Altria Group, Inc., Amgen, AT&T, Inc., Becton Dickinson, Boeing Company, Cisco Systems,
Coach Inc, Danaher Corp., IBM, J.P.Morgan Chase & Co., Kroger Co., Lockheed Martin Corp., Lowe's Companies, McDonald's Corporation, MetLife Inc., Oracle Corporation, Philip Morris
International Inc, State Street Corporation, Teva Pharmaceutical Industries Ltd., Texas Instruments, Wal-Mart, Wells Fargo & Co CONOCOPHILLIPS, VALERO ENERGY, BANK OF NEW YORK
MELLON, BRISTOL MYERS SQUIBB..
Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.
Global Stock Ratings Distribution
(as of March 31, 2008)
For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight and Underweight. Morgan Stanley
does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below).
To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight to hold and Underweight to sell recommendations, respectively.
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
45
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Disclosures
Global Stock Ratings Distribution
(as of February 28, 2008)
For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight and Underweight. Morgan Stanley
does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions
below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight to hold and Underweight to sell recommendations, respectively.
Coverage Universe
Stock Rating
Category
Overweigh
t/Buy
Equalweight/Hol
d
NotRated/Hold
Underweig
ht/Sell
Total
Investment Banking Clients (IBC)
Count
% of
Total
Count
% of
Total IBC
% of Rating
Category
714
32%
216
38%
30%
1003
44%
246
43%
25%
33
1.50%
9
1.60%
27.30%
507
2,257
22%
100
571
18%
20%
Jason Todd +1 212 761 7991 (for enquiries or requests please email [email protected])
46
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Disclosure Section
Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.
Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months.
Analyst Stock Ratings
Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.
Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.
Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months.
More volatile (V). We estimate that this stock has more than a 25% chance of a price move (up or down) of more than 25% in a month, based on a quantitative assessment of historical data, or in the analyst's view, it is likely to
become materially more volatile over the next 1-12 months compared with the past three years. Stocks with less than one year of trading history are automatically rated as more volatile (unless otherwise noted). We note that
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Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.
Analyst Industry Views
Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below.
In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below.
Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below.
Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index.
Stock Price, Price Target and Rating History (See Rating Definitions)
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47
MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
Disclosure Section
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MORGAN STANLEY RESEARCH
March 2009
U.S. Equity Strategy
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