Market Outlook for 2012

Financial Network Investment Corporation, Member SIPC200 North Sepulveda Boulevard, Suite 1300

El Segundo, CA 90245310.326.3100

Cetera ResearchThe Outlook for 2012

Page 2

Where do we stand?

The five themes for 2012

Investment opportunities for 2012

Agenda

Page 3

Where do we stand?The economy is recovering from the worst contraction since the Great Depression. • GDP in the United States

has now risen nine quarters in a row.

• Economic activity is also still expanding in the Emerging Markets and rebounding from the Tsunami in Japan.

• Europe, however, is weakening. Some forecasters expect a recession.

Source: Bloomberg

6.0

0.0

-6.0

-12.0

Real GDP Growth, % YoY

Eurozone

Japan

U.S.

Page 4

Yet the recovery is disappointing• Economists surveyed by the Philadelphia Fed in February 2011

were looking for 3.2% GDP growth in the first half of 2011.

• They were too optimistic. Real GDP grew at a rate of only 0.7% in the first half.

• Preliminary figures indicate that real GDP growth picked up to 2.0% in 3Q, but that is well below the growth rate of past recoveries.

Page 5

For many, it does not feel like a recovery at allThere were 13.1 million unemployed in the United States as of October 2011, and nearly a third have been out of work for more than a year.

Page 6

2011: Okay for bonds, exasperating for stocks• Mid-year, treasury yields dropped in a flight to quality despite the S&P

downgrade

• Mixed economic news and political paralysis meant turmoil in the stock market

Dec-1

0

Jan-

11

Jan-

11

Feb-1

1

Feb-1

1

Feb-1

1

Mar

-11

Mar

-11

Mar

-11

Apr-1

1

Apr-1

1

May

-11

May

-11

May

-11

Jun-

11

Jun-

11

Jun-

11

Jul-1

1

Jul-1

1

Jul-1

1

Aug-1

1

Aug-1

1

Aug-1

1

Sep-1

1

Sep-1

1

Oct-1

1

Oct-1

1

Oct-1

1

Nov-1

11000

1100

1200

1300

1400

0.0

1.0

2.0

3.0

4.0S&P 500

10-year Treasury Yield

%

Page 7

Themes for 2012

Page 8

The outlook for 2012:

What themes will be driving the markets?

What are the catalysts for a continued rise in the markets?

What investments are attractive in this post-crisis climate?

Page 9

We believe five themes will drive investment performance in 2012:

Let’s take a look at each one in turn.

1 The pace of the global economic recovery

2 Fiscal and debt issues — on both sides of the Atlantic

3 Inflation (or its absence)

4 Market volatility

5 The U.S. presidential election

Page 10





4 Market volatility


Page 11

Will the recovery pick up steam?The economy has four building blocks: Consumption, investment, government, and trade. Which ones will provide the growth?

($Trillions)

Source: BEA

Government$2.5

Investment$1.8

Consumption$9.5

Net Exports$-.41

Page 12

2000Q3

2001Q2

2002Q1

2002Q4

2003Q3

2004Q2

2005Q1

2005Q4

2006Q3

2007Q2

2008Q1

2008Q4

2009Q3

2010Q2

2011Q1

-5

0

5

Real Consumption Spending

Consumers remain wary of opening up their pocket books• After declining sharply during the last recession, consumer spending is

growing again at a moderate pace.

• Consumer sentiment remains pessimistic, however, with jobs still a concern.

• Consumers are trying to rebuild the equity destroyed by falling home prices.

% change over a year ago

Source: BEA

Page 13

The housing market has been AWOL during this recoveryThe housing market is trying to find a bottom • The U.S. housing market cannot be relied upon to boost the recovery. It still

has to work through a large overhang of unsold and foreclosed homes.

• Globally, post-boom housing slumps have lasted six years. This one began in 2006.

Source: National Association of Realtors

Existing Home Sales

7.57.06.56.05.55.04.54.0

Jan-00Jan-01

Jan-02Jan-03

Jan-04Jan-05

Jan-06Jan-07

Jan-08Jan-09

Jan-10Jan-11

Million

Page 14

Page 15

% Change Over A Year Ago

2000Q3

2001Q2

2002Q1

2002Q4

2003Q3

2004Q2

2005Q1

2005Q4

2006Q3

2007Q2

2008Q1

2008Q4

2009Q3

2010Q2

2011Q1

-25

-20

-15

-10

-5

0

5

10

15

A surprise: Business investment is holding upCorporations are sitting on record amounts of cash, but are investing more than might be expected given the weak economy.

Source: BEA

Business Fixed Investment

Page 16

But government is no longer providing stimulus• The federal stimulus spending of 2009 is wearing off and state and local

governments are retrenching

• Government spending declined at a 3.4% annual rate in 1H 2011, taking 0.75% off of GDP growth

Source: BEA

2006Q42007Q2

2007Q42008Q2

2008Q42009Q2

2009Q42010Q2

2010Q42011Q2

2300

2350

2400

2450

2500

2550

2600

Real Government Spending, $ Trillions

Federal, State, and Local Spending

Page 17

Jan-01May-02

Sep-03Jan-05

May-06Sep-07

Jan-09May-10

Sep-11

60

70

80

90

100

110

120

The low dollar has helped boost exports• The U.S. dollar is 13% below its six-year average in real terms.

• The dollar, however, has been trendless for the past four years.

DXY U.S. Dollar Spot Index

Down 34% since end-2000, but flat since end-2007

Source: Bloomberg

Page 18

1Q 2006

3Q 2006

1Q 2007

3Q 2007

1Q 2008

3Q 2008

1Q 2009

3Q 2009

1Q 2010

3Q 2010

1Q 2011

3Q 2011

-80

-40

0

40

80

Net exports have helped, but growth in key export markets is falling offSince home prices peaked in 2006 net exports have risen by $324 billion in real terms, offsetting three-fourths of the decline in residential investment.

Quarterly Changes, Billions of 2005 Dollars

Net Exports

Source: BEA

Private Residential Investment

Page 19

Summing it up for 2012

Below-trend GDP growthWhich adds up to

The outlook:

Consumer spending Moderate growth

Housing Flat-lining

Business investment Moderate growth

Government spending Continued decline

Trade Peaking?

Page 20

Bottom line: Slow growth, but no recessionEconomists have been marking down their forecasts

Real GDP Growth Forecasts, %, United States

Source: Federal Reserve Bank of Philadelphia Survey of Professional Forecasters

2011 2012 2013 20140.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0 Forecast May-11 Forecast Nov-11

Page 21

Why such a slow recovery?• A consensus is growing among economists that the sub-par U.S.

recovery reflects the tendency of economies throughout history to experience rising debt burdens and several years of slow growth following a severe financial crisis.

• Problems that were a long time in the making take a long time to solve.

Page 22





4 Market volatility


Page 23

Debt reduction, worldwide

• Facing large fiscal deficits and debt burdens, governments around the world plan deep cuts in spending.

• Few doubt that in the long-term, deficit reduction and sustainable debt levels are needed.

• In the short-term, however, spending cuts in the face of weak economies mean lower demand and slower economic activity.

Page 24

Both Democratic and Republican administrations contributed to the high debt burdenAmerica’s Public Debt

Source: Bureau of Economic Analysis; US Treasury; White House; The Economist

*Annual figures before 1950†Subject to limit, as of June 30th 2011

Page 25

The fiscal situation in the United States: How bad is it?• The Congressional Budget Office projects that under current law the

federal budget deficit will decline gradually from 9.8% of GDP in 2011 to 3.2% by 2019.

• At that rate, however, debt would rise to over 75% of GDP and continue growing. This is not sustainable.

• If current laws are changed (including putting the Bush-era tax cuts on a permanent basis) deficits and debt levels will be even higher.

Page 26

Page 27

The good news for the United States: The fiscal problems are not insurmountable• Edward Lazear, Chairman of the CEA under George W. Bush, has noted that

if spending increases were held to the last three years’ inflation rate minus 1% in any year spending tops its 30-year average (18% of GDP), fiscal ratios would return to 2008 levels without tax increases.

• Alternatively, if current laws stay in place (tax rates rise to pre-2008 levels) and spending increases were limited to the inflation rate, fiscal ratios would also fall to sustainable levels.

Page 28

Europe is struggling with high debt loads, reflecting the recession and unsustainable deficits

Source: European Commission

Euro-area GovernmentGross Debt

As % of GDP2011 forecast

Over 125100-125

75-10050-7525-50

0-25Other EuropeanUnion members

Page 29

Resolving Europe’s debt problems will require loss-sharing…After every financial crisis, questions of who will bear the losses inevitably arise.

Will it be taxpayers?

Bank shareholders and employees?

Bondholders?

These are obviously difficult questions.Angela Merkel, Chancellor of Germany, not happy during the Greek bailout discussions

Page 30

Resolving Europe’s crisis will likely require new rules for the EurozoneA consensus is building that a solution will involve some combination of bail-outs of the heavily-indebted countries (several have already occurred), fiscal austerity, and losses to bondholders.

The stronger countries in the European Monetary Union need to insist on a common fiscal policy to ensure that future bailouts are not necessary.

Page 31



4 Market volatility




Page 32

Will inflation rear its ugly head?• Inflation concerns — dormant during most of the past decade —

came to the fore again in 2011 as commodity prices rose.

• After peaking at a 3.8% rate in August, headline CPI inflation declined to 3.5% in October. Core inflation (which excludes food and energy), has remained near 2%.

• Both the Fed and private forecasters see inflation subsiding in coming months as commodity prices decline and the economy continues to operate at less than full capacity.

Page 33

Dec-06Apr-07

Aug-07Dec-07

Apr-08Aug-08

Dec-08Apr-09

Aug-09Dec-09

Apr-10Aug-10

Dec-10Apr-11

Aug-11

-2

0

2

4

6

8

-60

-40

-20

0

20

40

60% YoY % YoY

Motor FuelsFood

Fuel, food, and housing prices have been rising

Motor Fuel, Food, and Housing Components of the CPI

Source: BLS

Owner Occupied Rent

Page 34

Q1 2000

Q4 2000

Q3 2001

Q2 2002

Q1 2003

Q4 2003

Q3 2004

Q2 2005

Q1 2006

Q4 2006

Q3 2007

Q2 2008

Q1 2009

Q4 2009

Q3 2010

Q2 2011

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Inflation will not remain subdued forever, but is under control for nowInflation tends to be low when the economy is running well below potential — as it is now

Source: BEA and CBO

GDP Gap (actual-potential)

Core PCE Inflation

*Core PCE inflation, the Fed’s preferred indicator, is the percent change in the personal consumption expenditures deflator ex. food and energy

Page 35

9/1/

10

9/20

/10

10/6

/10

10/2

2/10

11/9

/10

11/2

6/10

12/1

4/10

12/3

1/10

1/19

/11

2/4/

11

2/23

/11

3/11

/11

3/29

/11

4/14

/11

5/3/

11

5/19

/11

6/7/

11

6/23

/11

7/11

/11

7/27

/11

8/12

/11

8/30

/11

9/16

/11

10/4

/11

10/2

0/11

11/7

/11

1.2

1.6

2.0

2.4

2.8

60

80

100

120

140% $/bbl.

The market’s long-term inflation expectations remain muted• The Treasury bond market is forecasting an average inflation of about 2%

over the next ten years.

• The Treasury market sees an upturn in inflation to over 3%, however, after five years.

“Breakeven inflation” is the expected inflation rate implied by the difference between nominal 10-year Treasury and TIPS yields.

Source: Bloomberg and Cetera estimates

10-year Breakeven Inflation

Oil Price

Page 36

Fed Funds Rates Expected by the Market

Jun-10

Oct-10

Feb-11Ju

n-11Oct-

11

Feb-12

Jun-12

1.25

1.00

0.75

0.50

0.25

0.00

%

Future yields: Current Fed funds rate target 0% to 0.25%

Interest rates are likely to remain low — for now• The Fed has announced that it will keep short-term interest rates low until

well into 2013.

• The Treasury bond market, however, expects bond yields to begin rising within a few years as inflation picks up.

Source: Bloomberg

Jun 10

Nov 11

Nov 09

Page 37






4 Market volatility

Page 38

Dec-99

Aug-01

May-03

Jan-05Sep-06

May-08

Jan-10Sep-11

0

10

20

30

40

50

60

70

Will the market remain volatile?• The VIX index of future stock market volatility implied by options prices has

recently been well above normal levels.

• Volatility is likely to remain high, in our view, well into 2012 as fiscal issues remain unresolved and the threat of another global financial crisis cannot be ruled out.

VIX index of implied futurestock market volatility

Source: CBOE

Nov 2011: 33.6

Page 39




4 Market volatility



Page 40

The U.S. Presidential Election• Nearly all government policies could change with a new administration.

• Problems in predicting election results aside, forecasting the market’s reaction to elections has confounded researchers.

• Stock markets tend to fare much better under Democratic presidents — averaging 9% higher during 1927-2003.

• But to quote UCLA researchers, “There is no difference in the riskiness of the stock market across presidencies that could justify a risk premium.”*

*Pedro Santa-Clara and Rossen Valkanov, “The Presidential Puzzle: Political Cycles and the Stock Market,” Journal of Finance, October 2003).

Page 41

Presidential Elections and the Stock MarketA bull market has followed a change of control of both the presidency and Congress (Eisenhower, Clinton), but also when the opposition has controlled Congress (Reagan-Bush).

Source: S&P and Cetera calculations

Administrations Average return, %*

Truman 1945-1952 8.6

Eisenhower 1953-1960 10.2

Kennedy-Johnson 1961-1968 7.5

Nixon-Ford 1969-1976 0.3

Carter 1977-1980 6.6

Reagan-G.H. Bush 1981-1992 10.4

Clinton 1993-2000 15.0

G.W. Bush 2001-2008 -5.8

*Average compound growth rate of S&P 500

Stock Market Performance

Page 42

Investing in 2012

Page 43

Investing in a Slow Growth Environment

Don’t Forget About Equities• Dividend Paying Companies

• Defensive Sectors (Consumer Staples, Health Care and Utilities)

Elevated Volatility Levels• Corporate Bonds

• Unconstrained Investments

Increased Diversification• Alternative Strategies

Page 44

Common Alternative StrategiesCommodities Invests in commodities asset class via directly or indirectly using futures contracts and/or ETFs.

Real Estate Commits capital into a real estate asset (or part thereof) with the expectation of near-term increases in cash flow and value.

Absolute Return Strives to generate a positive return in any market at any time. The investment’s return is not evaluated relative to a specific index or the market’s performance.

Arbitrage Takes advantage of price differences in separate markets to generate profits. Accomplishes this strategy by purchasing securities in one market for immediate resale in another market at a better price.

Global Macro Attempts to profit from global mispricing and trends across various markets. In a volatile environment, these strategies may find more mispricing and, therefore, more possible investment opportunities.

Long/Short Holds stocks long and shorts other stocks to hedge the underlying long position. Unlike traditional long strategies, the ability to short stocks allows these portfolios to seek possible opportunities during weak markets.

Managed Futures Take long and short positions in futures contracts, government securities, and options on futures contracts. Managed futures tend to use technical analysis in most of their management practices.

Market Neutral Seeks to create portfolios not correlated to overall market movements and are insulated from systemic market risk

Commodities: Investment in commodities and commodity-index-linked securities be affected by overall market movements and other factors that affect the value of a particular industry or commodity, such as weather, disease, embargoes, or political and regulatory developments. ETFs are offered through prospectus, which should be read carefully before investing.

Real Estate: Investments in REITs are subject to additional risks such as illiquidity and property devaluation based on adverse economic and real estate conditions.

Absolute Return Strategies: Absolute Return Strategies engage in leveraging and other speculative investment practices which may increase the risk of investment loss. There are no guarantees that any strategy or investment technique will be successful.

Managed Futures: Managed Futures are not appropriate investments for all investors. A particular investor’s suitability must be determined before investing.

Page 45

DisclosuresThis information is compiled by Cetera Financial Group and is believed to be from reliable sources; however no representation is made as to its completeness or accuracy. The information has been selected to objectively convey the key drivers and catalysts standing behind current market direction and sentiment. Investment decisions should not be based on this material. All economic and performance information is historical and not indicative of future results. Investors cannot invest directly in an index. This is not an offer, recommendation or solicitation of an offer to buy or sell any security and investment in any security or use of investment strategy covered in this material may not be advisable or suitable.

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