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bcd Edward Kerschner, CFA +1 212 713 2448 Michael Geraghty +1 212 713 2581 Jeremy Zirin, CFA Associate Analyst The All American Shopping List April 1, 2001 Where U.S. Consumers' Money Will Be Going nAfter several years of robust growth, a confluence of factors has caused a temporary retrenchment in consumers’ incomes, expenditures. Those factors should soon ease. nLong-term fundamentals for consumer remain favorable. Low unemployment, a cyclical economic rebound, stabilizing energy prices, tax cut, growth in productivity should combine to lead to real after-tax wage gains. And baby boomers are in their peak income years. nRather than dwell on the current malaise, to anticipate consumer behavior, UBS Warburg had Gallup conduct a proprietary survey asking what consumers will do “when things get better.” nThere is now some pent-up demand. “When things get better,” 37% will buy greater quantity of goods, 10% smaller quantity. In July 2000, only 20% said they would buy a greater quantity, 20% a smaller quantity. It’s still about quality: 27% want higher quality, just 2% lower quality, vs 23% higher quality/4% lower quality in July 2000. nThe priorities reflect the dominant demographic—the aging baby boomer. Few Americans will buy a new home (19% will, 80% won’t) or new car (34% will, 65% won’t), or spend more money on clothes (33% will, 67% won’t). 39% will spend more in home product stores (11% less). 34% will spend more in superstores (8% less). But the trends are not as favorable for department stores (27% will spend more, 12% less), discount stores (23% more, 15% less) and clothing stores (21% more, 21% less). 46% will spend more on vacations. Of those, over 70% will take a domestic flight or stay in an upscale hotel. 56% will save more. Of those, 47% will buy a mutual fund, 27% to use a broker. nIt’s still about online speed: 56% of Americans now access the Net from home (up from 40% in 2000). A year from now, 45% of those online Americans want to be accessing the Net by some fast method (cable modem, DSL, satellite), just 37% by dial-up modem (versus 68% using dial-up today). 21% will spend more money on a PC over next 12 months. GLOBAL INVESTMENT S TRATEGY Thematic Investing
Transcript
Page 1: Michael Geraghty +1 212 713 2581 - New York Universitypages.stern.nyu.edu/~ekerschn/pdfs/readingsemk/EMK NYU S03 Th… · than last year on a PC, only 14% on a TV or 15% on a DVD

bcdEdward Kerschner, CFA+1 212 713 2448

Michael Geraghty+1 212 713 2581Jeremy Zirin, CFAAssociate Analyst

The All American Shopping ListApril 1, 2001

Where U.S. Consumers' Money Will Be Going

n After several years of robust growth, a confluence of factors has caused a temporaryretrenchment in consumers’ incomes, expenditures. Those factors should soon ease.

n Long-term fundamentals for consumer remain favorable. Low unemployment, acyclical economic rebound, stabilizing energy prices, tax cut, growth in productivityshould combine to lead to real after-tax wage gains. And baby boomers are in theirpeak income years.

n Rather than dwell on the current malaise, to anticipate consumer behavior, UBSWarburg had Gallup conduct a proprietary survey asking what consumers will do“when things get better.”

n There is now some pent-up demand. “When things get better,” 37% will buy greaterquantity of goods, 10% smaller quantity. In July 2000, only 20% said they would buya greater quantity, 20% a smaller quantity. It’s still about quality: 27% want higherquality, just 2% lower quality, vs 23% higher quality/4% lower quality in July 2000.

n The priorities reflect the dominant demographic—the aging baby boomer.

• Few Americans will buy a new home (19% will, 80% won’t) or new car (34%will, 65% won’t), or spend more money on clothes (33% will, 67% won’t).

• 39% will spend more in home product stores (11% less). 34% will spend morein superstores (8% less). But the trends are not as favorable for departmentstores (27% will spend more, 12% less), discount stores (23% more, 15% less)and clothing stores (21% more, 21% less).

• 46% will spend more on vacations. Of those, over 70% will take a domesticflight or stay in an upscale hotel.

• 56% will save more. Of those, 47% will buy a mutual fund, 27% to use a broker.

n It’s still about online speed:

• 56% of Americans now access the Net from home (up from 40% in 2000).• A year from now, 45% of those online Americans want to be accessing the Net

by some fast method (cable modem, DSL, satellite), just 37% by dial-upmodem (versus 68% using dial-up today).

• 21% will spend more money on a PC over next 12 months.

GLO

BAL

INV

ESTM

ENT

STRA

TEG

YThematic Investing

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Exhibit 1: Key Findings of the UBS Warburg/Gallup Survey

Taxes and Money

n Almost half (42%) of Americans think that federal tax rates will be reduced over the next12 months.

n Of those Americans who expect a tax cut, over three-quarters (77%) think that they willhave as much—or more—money to spend on goods and services over the next 12 monthsas they did in the past year.

What Americans Will Buy

n As economy rebounds, a majority of Americans will not buy a new home (80% won’t) ornew car (65% won’t), or spend more money on clothes (67% won’t).

n But there is some pent-up demand. 37% plan to buy a greater quantity of goods as theeconomy rebounds, 10% plan to buy a lesser quantity. This compares to 20% to buy more /20% to buy less in July 2000.

n 27% will buy higher quality goods. Just 2% will buy lower quality goods. This compares to23% to buy higher quality / 4% to buy lower quality in July 2000.

n As economy rebounds, 50% will spend more on home improvement, 39% will spend moreon home furnishings.

n 46% will spend more money on vacations.

Where Americans Will Give Their Business

n To selected retailers. 39% say they will spend more in home product stores. 34% willspend more in superstores. But the trends are not as favorable for department stores (27%will spend more, 12% less), discount stores (23% more, 15% less) and clothing stores(21% more, 21% less).

n To restaurants, but not to movie theaters. 23% will spend more at restaurants, 14% willspend less. But 19% will spend less on movies, just 16% will spend more.

n To upscale hotels, airlines and theme parks. Of those spending more on vacations, over70% will spend more on taking a flight within the U.S. or staying in a nice hotel. 50% willspend more on going to a theme park.

n To mutual funds and brokerage firms. 56% will save more. 47% of those savers will putsome savings into a mutual fund, 27% into a brokerage account.

Technology

n 21% say that, as things get better over the next 12 months, they will spend more moneythan last year on a PC, only 14% on a TV or 15% on a DVD recorder.

n 56% of Americans now access the Internet from home, up from 40% in 2000.

n 68% of online Americans now access the Net from home via a dial-up modem, down from80% in July 2000.

n Almost half (45%) of Americans who currently access the Internet by dial-up modem fromhome say that, a year from now, they will be accessing the Net by some faster method,such as a cable modem or DSL. That compares with 34% in 2000.

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A Consumer Spending ReboundIs a Matter of When, Not IfOn Wall Street there are few certainties, but today three things seem pretty likely:

n President Bush and Fed Chairman Alan Greenspan will succeed in boostingconsumer incomes through a combination of lower taxes and lower interest rates.

n The weather will get better.

n Americans will be a year older in 2001 than they were in 2000.

For the reasons discussed below, these three factors should have a material impact onconsumer spending in 2002. The first two factors likely mean that a rebound inspending is now only a matter of when, not if. And the third factor should stronglyinfluence how consumers direct their spending when the rebound occurs.

To try to anticipate consumer behavior over the next year, UBS Warburg and TheGallup Organization, a leading expert on consumer behavior, recently conductedanother proprietary survey of 1,000 Americans. This is the fourth survey of Americansthat the Investment Strategy group has conducted with Gallup over the past four years.(The results of the first survey were discussed in our report “The New MillenniumAmerican—Changing attitudes drive consumer behavior,” September 7, 1998.) Theresults of the most recent survey are discussed throughout this report.

A Cyclical Slowdown Amidst Secular StrengthImportantly, a rebound in consumer spending, when it occurs, will be a continuationof a spending boom that began in the late 1990s (Chart 1). As we have discussed inmany reports in recent years (beginning with “Consumer Comeback,” September 4,1995), since the late 1990s consumer spending growth has been driven by real incomegrowth (Chart 2). Driving real wage gains has been a healthy combination of:

n Strong demand for labor/low unemployment (Chart 3), in the context of a mutedbusiness cycle.

n A slowly growing supply of labor (Chart 4), because most women and boomershave entered the labor force.

These real wage gains have not boosted inflation because productivity is rising rapidly.

To try to anticipateconsumer behaviorover the next year,UBS Warburg andThe GallupOrganizationrecently conductedanother proprietarysurvey of 1,000Americans.

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Chart 1: Real Personal Consumption Expenditure GrowthYear over year percent change

-2%

0%

2%

4%

6%

8%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Average 3.3%1900 - 2000

Source: Bureau of Economic Analysis.

Chart 2: Real Disposable Income GrowthYear over year percent change

-2%

0%

2%

4%

6%

8%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Average 2.6%1990 - 2000

Source: Bureau of Economic Analysis.

Chart 3: Unemployment Rate

3

4

5

6

7

8%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001Source: Bureau of Labor Statistics.

Chart 4: U.S. Labor Force Growthby decade (CAGR)

1.08%

1.67%

2.66%

1.67%

1.20% 1.12%

0%

1%

2%

3%

1950s 1960s 1970s 1980s 1990s 2000sSource: Bureau of Labor Statistics.

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However, in 2000 the environment became much less favorable, with several factorstemporarily pressuring consumers’ incomes and spending power:

n Higher interest rates. Between November 1998 and May 2000, the Fed raisedinterest rates by 175 basis points.

n Higher energy costs. Natural gas prices rose from a low of $1.64 (per MMBtu) inMarch 1999 to a high of $8.12 in December 2000, while the price of a barrel of oil(West Texas Intermediate) rose from $10.73 in December 1998 to $37.20 inSeptember 2000.

n An economic slowdown. Higher interest rates and energy prices increased costs forcorporate America, while the strong dollar reduced the competitiveness of U.S.companies. At the same time, the dot.com sector imploded, throwing thousands ofpeople out of well-paid jobs. Reflecting these factors, the unemployment rate rosefrom a low of 3.9% in September 2000 to 4.2% in February 2001.

n A modest “wealth effect.” The dot.com implosion was a key factor behind thecollapse of the Nasdaq, which has plunged 60% from its March 2000 high. In July2000, our Gallup survey revealed that the vast majority (90%) of those Americanswith some kind of investments in the financial markets (57% of the population) saidthat, up to that point, changes in the stock market had no effect on their spendinglevels. However, those investing Americans also said that their portfolios would haveto decrease by an average of 27% before they would feel it necessary to reducespending. With the Nasdaq down much more than 27% in the last 12 months, itseems likely that there has been some “wealth effect” on consumer spending,although the diversified nature of most investors’ portfolios likely means that effecthas been quite modest.

n Higher taxes. One of the downsides of the economic boom of the past few years hasbeen that more people are paying higher taxes. A key culprit in this regard is theAlternative Minimum Tax (AMT), which was designed to prevent people with veryhigh incomes from using special tax benefits to pay little or no tax. But because offlaws in the way the legislation was crafted, the AMT has been impacting moretaxpayers each year, including some people who don't have very high incomes.Today, consumers’ tax burden is close to the highest share of GDP in peacetimehistory—a hefty 10.4%, versus a 1980-95 average of 8.1%.

Reflecting these adverse factors, consumer sentiment has plunged. Just about half ofAmericans rate economic conditions in the U.S. as either “excellent” (7%) or “good”(44%), while 36% consider them “only fair” and 13% rate them “poor” (Chart 5). Bycontrast, in July 2000 and September 1999, over two-thirds of Americans ratedeconomic conditions in the U.S. as either “excellent” or “good,” while no more thanone in three Americans considered them “only fair” or “poor.”

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Chart 5: How Americans View Economic ConditionsThree surveys of Americans: September 1999, July 2000, February 2001

20%

47%

24%

8%

26%

48%

21%

4%7%

44%

36%

13%

0%

10%

20%

30%

40%

50%

60%

Excellent Good Fair Poor

Sept '99July '00Feb '01

Source: UBS Warburg LLC/Gallup.

Not only do economic conditions seem bad, but a majority of Americans also thinkthey are getting worse. As Chart 6 illustrates, two-thirds of Americans say that economicconditions in the U.S. are getting worse, as compared to less than one in three who feltthat way in September 1999 and July 2000.

Chart 6: How Americans Think Economic Conditions Will ChangeThree surveys of Americans: September 1999, July 2000, February 2001

59%

29%

9%

58%

29%

9%

23%

66%

8%

0%

10%

20%

30%

40%

50%

60%

70%

Getting Better Getting Worse Same

Sept '99July '00Feb '01

Source: UBS Warburg LLC/Gallup.

Brightening on the HorizonAmidst this gloom, there are some signs of brightening on the economic horizon:

n Lower rates. Since January, the Fed has cut interest rates by 150 basis points, andUBS Warburg expects that rates will be cut by another 150 basis points this year.

n Lower energy costs. Both natural gas prices and oil prices are down from their highs,and it is expected that those prices will fall further. Two key points to bear in mind inthis regard: First, the winter heating season is just about over, so demand for energyshould drop as the weather improves. Second, on the supply front, energy is, ofcourse, a commodity and the recent high prices have spurred increased explorationactivity, as evidenced by the North American oil rig count which has jumped from558 in April 1999 to 1,657 in January 2001. So the combination of lower demand andincreased supply should ensure lower energy costs. UBS Warburg is forecasting thatnatural gas prices will fall from $5.75 (per MMBtu) in 2001 to $3.75 in 2002, andthat the price of oil (West Texas Intermediate) will fall from $28 per barrel in 2001 to$24 per barrel in 2002.

Amidst this gloom,there are some

signs ofbrightening on theeconomic horizon.

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n An economic rebound. Thanks to the end of the inventory correction and thepositive impact of lower rates, UBS Warburg expects real GDP growth to reboundlater this year, from slightly negative growth (-0.5%) in Q2 to +2.5% growth in Q4.

n A better stock market. In 2000, the DJIA fell 6%, the S&P 500 dropped 10% and theNasdaq Composite plunged 39%. Declines of such magnitude over the next 12months are unlikely for three reasons. First, interest rates are low, which shouldsupport P/E levels. Second, economic activity should rebound, which should helpcorporate profit growth later this year and in 2002. Third, valuations are at lowlevels. The UBS Warburg Equity Valuation Model gauges that stocks have +30%appreciation potential to normal value.

n Lower taxes. President Bush made lower taxes a key part of his election platform.According to an analysis by the accounting firm Deloitte & Touche, a fairly typicalAmerican couple with $60,000 of income and two children would see their taxesdrop by 28%, to $3,545 from $4,945, if the Bush plan were fully phased in. (Note thatthe reductions won’t begin to take hold until the 2001 tax year at the earliest, andmany parts of the plan phase in over several years.)

It’s important to bear in mind, however, that while economic conditions are weaktoday, they are not nearly as weak as in prior downturns. This is clearly illustrated by the“misery index”—the sum of the unemployment rate and the inflation rate.

n At just 8.0%, the misery index is currently lower than the levels in 60% of the 600+months since 1950 (Chart 7).

n And the misery index today is lower than the levels in 86% of the 360 months inthe last 30 years—i.e., the “adult years” of the baby boom generation.

Chart 7: Misery IndexSum of unemployment rate and inflation rate

0%

5%

10%

15%

20%

25%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000Source: Bureau of Labor Statistics.

The misery indextoday is lower thanthe levels in 86% ofthe 360 months inthe last 30 years—i.e., the “adultyears” of the babyboom generation.

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Consumers are rational observers of the economic landscape, so although Americanssay that economic conditions in the U.S. are currently deteriorating (Chart 6), they alsorealize that things will get better over the next 12 months. In this regard, the latestGallup survey reveals that:

n Almost half (42%) of Americans think that federal tax rates will be reduced overthe next 12 months (Chart 8).

Chart 8: “What Will Happen to Federal Tax Rates over the Next 12 Months?”

Reduced42%

Unchanged26%

Increased27%

No Opinion5%

Source: UBS Warburg LLC/Gallup.

n Not surprisingly, of those Americans who expect a tax cut, over three-quarters(77%) think that they will have as much—or more—money to spend on goods andservices over the next 12 months as they did in the past year (Chart 9).

Chart 9: “Compared to Last Year, How Much Money Will You Have to Spend on Goodsand Services over the Next 12 Months?”Of those Americans who expect a tax cut in the next 12 months

More37%

Same40%

Less23%

Source: UBS Warburg LLC/Gallup.

Almost half (42%)of Americans think

that federal taxrates will be

reduced over thenext 12 months.

Of thoseAmericans who

expect a tax cut,over three-quarters

(77%) think thatthey will have as

much—or more—money to spend

on goods andservices over the

next 12 months asthey did in the past

year.

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Here Comes the SunIn addition to the adverse factors cited above (interest rates, energy costs, economicslowdown, etc.), the snowy, cold weather this past winter probably restrainedconsumer demand. The average weekly temperature was below normal for 10 of 13weeks in the period from November through January, including 9 consecutive weeksfrom mid-November through the beginning of January (Chart 10).

Chart 10: Degrees Fahrenheit Above or Below NormalWeekly for the United States

-10

-8-6

-4-2

02

4

November December January

Warmer

Colder

Source: AGA and National Oceanic and Atmospheric Administration.

Additionally, there were large accumulations of snow throughout the Northeast, withthe major metropolitan areas of Boston and New York being particularly hard hit.Therefore, as pent-up consumer spending is released with the onset of spring, we mayexpect a greater-than-normal uptick.

Changes in Attitudes as Americans AgeHigher incomes and better weather should ensure that consumer spending picks uplater this year. As for the beneficiaries of that spending, the results of the most recentUBS Warburg/Gallup survey continue to support some of the longer-term themes wehave identified in earlier reports. Note that in our most recent polling, we askedconsumers about what they would do over the next 12 months if things actually gotbetter, i.e., if economic conditions improve, federal tax rates are cut and interest ratesmove a little bit lower (as UBS Warburg assumes).

n It’s still not car/house/clothes. As we noted in “Consumer Comeback,” “older andwiser, now middle-aged, John Q. Public is not the ‘ebullient youth’ of the 60s, northe ‘conspicuous consumer’ of the 80s” and so the beneficiary of consumer spendingis not “the cyclical auto/housing/retailing troika.” Our latest survey reveals that fewAmericans say that they will buy a new home or new car, or spend more money onclothes in the next 12 months (Chart 11), even as the economy improves, federal taxrates are cut and interest rates remain low.

The averageweeklytemperature wasbelow normal for10 of 13 weeks inthe period fromNovember throughJanuary including 9consecutive weeksfrom mid-November throughthe beginning ofJanuary.

Few Americans saythat they will buy anew home or newcar, or spend moremoney on clothesin the next 12months, even asthe economyimproves, federaltax rates are cutand interest ratesremain low.

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Chart 11: “If Things Get Better, What Will You Do?”

19%

34% 33%

80%

65% 67%

0%

30%

60%

90%

Buy New Home Buy New Car Spend More on Clothes

YesNo

Source: UBS Warburg LLC/Gallup.

n It’s still home improvement. In “The American Age of Affluence,” (November 7,1999) we wrote that “rather than constantly ‘trading up’ to a ‘better’ house, manyAmericans are spending heavily on home improvement.” Our latest survey indicatesthat the percentage of Americans that will boost their spending on homeimprovement and home furnishings exceeds (by a factor of two to one) thepercentage that will cut back on such spending (Chart 12).

Chart 12: “If Things Get Better, I Will Spend More Money/Less Money on . . . ”

50%

39%

14% 17%

0%

10%

20%

30%

40%

50%

60%

Home Improvement Home Furnishings

MoreLess

Source: UBS Warburg LLC/Gallup.

n It’s still about trading up to better quality. In “More Affluent Than Ever,”(September 4, 2000) we noted that our July 2000 survey revealed that “23% ofAmericans say that, over the next 12 months, they will buy higher-quality goods,versus just 4% of Americans who plan to trade down to lower-quality items”(Chart 13b). A desire to trade up to better quality is still prevalent today, with 27% ofAmericans saying that, if things get better, “over the next 12 months I will be buyinggoods that are of higher quality than the goods I bought in the past year” (Chart13a). Just 2% say they will trade down to lower-quality items.

February 2001 July 2000Chart 13a: Quality of Goods that Americans Chart 13b: Quality of Goods that AmericansPlan to Buy over Next 12 Months If Things Get Better Plan to Buy over Next 12 MonthsVersus last 12 months Versus last 12 months

0%

20%

40%

60%

80%

100%

Higher or Same Lower

2%

Same

Higher27%

70%

Source: UBS Warbug LLC/Gallup, February 2001.

0%

20%

40%

60%

80%

100%

Higher or Same Lower

4%

Same

Higher23%

71%

Source: UBS Warbug LLC/Gallup, July 2000.

The percentage ofAmericans that will

boost theirspending on homeimprovement andhome furnishings

exceeds (by afactor of two to

one) thepercentage thatwill cut back onsuch spending.

27% of Americanswill trade up to

better qualityitems. Just 2% say

they will tradedown to lower

quality.

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February 2001 July 2000Chart 14a: Quantity of Goods that Americans Chart 14b: Quantity of Goods that AmericansPlan to Buy over Next 12 Months If Things Get Better Plan to Buy over Next 12 MonthsVersus last 12 months Versus last 12 months

0

20

40

60

80

100%

More Less

37%

10%

Source: UBS Warburg LLC/Gallup, February 2001.

More Less

20% 20%

0

20

40

60

80

100%

Source: UBS Warburg LLC/Gallup, July 2000.

While Americans have a strong desire for higher-quality goods, the economicslowdown has led to a modest increase in the number of Americans who desire topurchase a greater quantity of goods. In July 2000, the percentage of Americans whosaid they planned to buy a greater quantity of goods (20%) equaled the percentage ofAmericans who planned to buy a lesser quantity (20%). Today, however, there is somemodest pent-up demand, with 37% of Americans saying they plan to buy a greaterquantity of goods, and just 10% saying they plan to buy a lesser quantity (Chart 14a).

Follow the MoneyGiven the three factors listed above (no big ticket spending, a focus on homeimprovement, a desire for better quality), it’s not surprising the type of storesAmericans say they would shop in as things get better over the next 12 months(Chart 15).

Chart 15: “If Things Get Better, I Will Spend More Money/Less Money in . . . ”By type of store

0%

10%

20%

30%

40%

50%

27%

12%

Dept. Store

23%

15%

Discounter

34%

8%

Superstore

39%

11%

Home Products

21% 21%

Clothes

MoreLess

Source: UBS Warburg LLC/Gallup.

n Reflecting the intention of Americans to continue spending heavily on homeimprovement, two in five consumers (39%) say they will spend more in homeproduct stores as the economy improves. This trend is clearly bullish for stores suchas Home Depot and Bed, Bath and Beyond.

n One in three Americans (34%) plans to increase their spending in superstores suchas Wal-Mart or Costco.

Today there issome modestpent-up demand,with 37% ofAmericans sayingthey plan to buy agreater quantity ofgoods, and just10% saying theyplan to buy a lesserquantity.

Two in fiveconsumers (39%)say they will spendmore in homeproduct stores asthe economyimproves.

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For other retailers, however, the trends are not as favorable:

n One in four Americans (27%) say that, as things get better, they will spend moremoney in department stores such as Sears and JC Penney, but one in ten (12%) saythey will cut back on spending in those stores.

n One in four Americans (23%) say they will spend more in discount stores, such asKmart and Dollar General, but about one in seven (15%) say they will cut back onspending in those stores.

n And while one in five Americans (21%) say they will spend more in clothing stores,such as Gap or Limited, an identical amount (21%) say they will cut back onspending in those stores.

As for the types of services they will be spending on as the economy rebounds, theGallup survey reveals that, in contrast to eating out in restaurants or going out tomovies, vacations still hold tremendous appeal to Americans (Chart 16).

Chart 16: “If Things Get Better, I Will Spend More Money/Less Money on . . . ”46%

23%

16%12% 14%

19%

0%

10%

20%

30%

40%

50%

Vacations Restaurants Movies

MoreLess

Source: UBS Warburg LLC/Gallup.

That Americans will spend more on vacations is not surprising. We noted in “MoreAffluent Than Ever” that “with their discretionary income rising, stressed-outconsumers are spending heavily on vacations and other leisure activities. And . . . whiletime-starved Americans are not taking more vacations, they are paying up for bettervacations.” Chart 17 illustrates the types of vacations that Americans will spend moreon as things get better.

Chart 17: “In Terms of Vacations, Will You Spend More Money on . . .?”Of those Americans who will spend more on vacations

77%71%

50%42% 42%

30%22%

28%

50%56% 58%

70%

0%

30%

60%

90%

Nice Hotel Fly in U.S. Theme Park Cruise Fly overseas Casino

YesNo

Source: UBS Warburg LLC/Gallup.

n Going to stay at a nice hotel has the most appeal. Of those Americans who saidthey will spend more on vacations as the economy improves, three-quarters (77%)say they will spend more on a nice hotel. This trend is bullish for companies such asFour Seasons Hotels and Starwood Hotels.

Vacations still holdtremendous

appeal toAmericans

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n Flying to a nice destination in the U.S. is almost as appealing. More than two inthree (71%) of the Americans who will spend more on vacations say they will take adomestic flight, a positive trend for Delta Airlines.

n A possible domestic destination for those Americans is a theme park. Half (50%)of Americans who will spend more on vacations say they will go to a theme park, abullish trend for Disney.

n Going far from the U.S. on vacation has mixed appeal. Two in five (42%) ofvacationing Americans will spend more on a cruise, which is positive for Carnivaland Royal Caribbean.

n Similarly, two in five (42%) vacationing Americans will spend more on flying to adestination overseas.

n But going to a casino has limited appeal. More than two in three vacationingAmericans (70%) will not spend more at casinos.

Finally, although Americans plan to continue spending heavily as the economyrebounds, they also plan to save more (Chart 18). But note that, given continued realincome gains and the expected tax cuts, these two trends are not inconsistent.

Chart 18: “If Things Get Better, I Will Save More Money/Less Money than in the PastYear”

56%

34%

9%

0%

20%

40%

60%

Save More Same Save LessSource: UBS Warburg LLC/Gallup.

Where will the investment funds of those 90% of Americans who say they will saveeither more or the same amount go? Reflecting the “Big Shift” into equities that hasbeen underway for the past decade (see “The Big Shift,” September 1, 1991 and “TheBig Shift—Barely Begun,” February 8, 1998):

n Three in five (60%) of those Americans who will save more or the same amountwill put some of their savings into a retirement account.

n Almost half (47%) will put some of their savings into a mutual fund.

n About one in four (27%) will put some of their savings into a brokerage account.

Beneficiaries of the continued “Big Shift” into equities include American Express,Bank of New York, Citigroup, Hartford Financial and Merrill Lynch.

AlthoughAmericans plan tocontinue spendingheavily as theeconomyrebounds, they alsoplan to save more.

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The Need for SpeedA key reason why Americans are so stressed out is “time deepening,” or doing severalthings at once (e.g., cooking, watching TV, talking on the phone and helping the kidswith their homework). Indeed, Americans now feel so pressed for time that a recentsurvey found that 45% of Americans say they would rather have more time than moremoney. This represents a notable increase from 1996, when another survey found that40% of Americans said that lack of time was a bigger problem for them than lack ofmoney (Chart 19).

Chart 19: Percentage of Americans Saying They Would Rather Have More Timethan More MoneyIn 1996 and 2000

40%

45%

30%

35%

40%

45%

50%

1996 2000Source: The Wall Street Journal, Roper Starch Worldwide.

As we noted in “More Affluent Than Ever,” time-starved Americans want to go faster,and the “need for speed” is prevalent in every aspect of boomers’ lives, includingInternet access. This is especially true because, as the latest UBS Warburg/Gallupsurvey reveals, over half (56%) of all Americans now access the Internet from home, upfrom 40% in 2000 (Chart 20).

Chart 20: Percentage of Americans Who Access the Internet from HomeIn July 2000 and February 2001

40%

56%

0%

15%

30%

45%

60%

75%

July 2000 February 2001Source: UBS Warburg LLC/Gallup.

That number is likely to keep rising, as more Americans get hooked up to theInformation Age. Our most recent survey revealed that fully 21% of Americans saythat, as things get better over the next 12 months, they will spend more money thanlast year on a PC (Chart 21), a significantly greater percentage than those who say theywill spend more on a TV (14%) or DVD recorder (15%). This is positive for PC-oriented firms such as Dell, Gateway, Hewlett-Packard, IBM, Intel and Microsoft.

Fully 21% ofAmericans say

that, as things getbetter over the

next 12 months,they will spend

more money thanlast year on a PC, a

significantlygreater percentage

than those whosay they will spend

more on a TV(14%) or DVD

recorder (15%).

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Chart 21: “If Things Get Better, I Will Spend More Money/Less Money on . . . ”

21%

15%14%

10%

15% 16%

0%

5%

10%

15%

20%

25%

PC DVD TV

MoreLess

Source: UBS Warburg LLC/Gallup.

A considerable source of frustration for Net users continues to be the fact thatbandwidth to the home has not been developing as quickly as PC chip technology.While large institutions and government agencies maintain their own networks, mostconsumers at home access the Internet by dialing into a local or long-distancetelephone company. According to the most recent UBS Warburg/Gallup survey, 68%of Americans now access the Net from home via a dial-up modem (Chart 22a), downfrom 80% in July 2000 (Chart 22b).

February 2001 July 2000Chart 22a: Current Method of Accessing the Net Chart 22b: Current Method of Accessing the NetAs of February 2001 As of July 2000

Dial-up Modem

68%Cable Modem

13%

DSL7%

Satellite1%

Other/Don't Know11%

Source: Gallup, February 2001.

Dial-up modem80%

Cable modem8%

DSL 3%Satellite 1%

Other / Don't Know 8%

Source: Gallup, July 2000.

However, time-starved consumers are clamoring for significantly higher connectionspeeds, and, thanks to improved technologies—including cable, DSL and satellite—faster Internet access is becoming more widely available. According to the latest UBSWarburg/Gallup survey, almost half (45%) of Americans who currently access theInternet by dial-up modem from home say that, a year from now, they will be accessingthe Net by some faster method, such as a cable modem or DSL (Chart 23a). Thatcompares with 34% in 2000 (Chart 23b).

February 2001 July 2000Chart 23a: Expected Method of Accessing the Net Chart 23b: Expected Method of Accessing the Net12 months from February 2001 12 months from July 2000

Dial-up Modem

37%

Cable Modem24%

DSL 16%

Satellite 5%

Other/Don't Know18%

Source: Gallup, February 2001.

Dial-up

Cable

DSL 12%

Satellite 3%

Other / Don't Know

modem 45%

modem 19%

21%

Source: Gallup, July 2000.

Almost half (45%)of Americans whocurrently accessthe Internet by dial-up modem fromhome say that, ayear from now,they will beaccessing the Netby some fastermethod, such as acable modem orDSL.

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Strong demand for fast Internet access is bullish for Cisco Systems, Juniper Networksand Nortel Networks (networking), Verizon and WorldCom (DSL access), Motorola(General Instrument’s cable modems and set-top boxes) and AOL Time Warner (cablemodems).

Additional information available upon request.Prices of companies mentioned as of March 29, 2001:American Express 2 AXP $38.96AMR Corp 2 AMR $34.52AOL Time Warner Inc. AOL $40.75Bank of New York 2 BK $48.50Bed, Bath & Beyond 1 BBBY $23.19Carnival Corporation CCL $27.63Cisco Systems 1 CSCO $15.25Citigroup 2 C $44.70Continental Air 2 CAL $41.02Costco Wholesale Corp 1 COST $37.94Dell Computer Corp 1 DELL $26.94Delta Air Lines 2 DAL $39.79Dollar General DG $20.00Four Seasons Hotels FS $47.77Gap Inc GPS $23.69Gateway Inc GTW $16.80Hartford Financial Services 2 HIG $59.05Hewlett-Packard HWP $30.64Home Depot HD $42.66IBM 2 IBM $95.04Intel Corp 1 INTC $26.56J.C. Penney 2 JCP $15.94Juniper Networks 1 JNPR $39.40Kmart Corp KM $9.65Limited Inc LTD $15.77Merrill Lynch & Co. 2 MER $55.50Microsoft Corp 1 MSFT $55.38Motorola Inc 2 MOT $14.52Nortel Networks NT $13.50Royal Caribbean Cruises Ltd RCL $22.60Sears, Roebuck & Co S $34.69Starwood Hotels & Resorts HOT $33.80The Walt Disney Company DIS $28.10Verizon Communications 2,57 VZ $48.20Wal-Mart Stores WMT $50.62WorldCom Inc. 1 WCOM $19.061. UBS Warburg LLC and/or one of its affiliates makes a market in the securities of this company.2. UBS Warburg LLC, UBS PaineWebber Inc. and/or one of their affiliates has acted as a manager/co-manager orplacement agent in underwriting securities of this company or one of its subsidiaries in the past three years.57. UBS Warburg LLC is acting as co-manager in underwriting securities of Verizon Wireless.

UBS Warburg LLC, 1285 Avenue of the Americas, New York, NY 10019 Phone: +1-212-713-2000This report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. This report is based on information obtainedfrom sources believed to be reliable but no independent verification has been made, nor is its accuracy or completeness guaranteed. This report is published solely forinformational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Opinions expressed herein aresubject to change without notice and the division, group, subsidiary or affiliate of UBS AG (“UBS”) which produced this report is under no obligation to update or keep theinformation current. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. UBS and/or its directors, officers andemployees may take positions in, and may make purchases and/or sales as principal or agent or UBS may act as market-maker in the securities or related financialinstruments discussed herein. UBS may provide corporate finance and other services to and/or serve as directors of the companies referred to in this report. UBS acceptsno liability for any loss or damage of any kind arising out of the use of this report. EEA: This report has been issued by UBS Warburg Ltd., a subsidiary of UBS AG,regulated in the UK by the Securities and Futures Authority. This report is for distribution in the UK to persons who are not UK private customers. US: This report is beingdistributed to US persons by either UBS Warburg LLC or UBS PaineWebber Inc., subsidiaries of UBS AG, or by a division, group or affiliate of UBS AG, that is notregistered as a US broker-dealer (a “non-US affiliate”), to major US institutional investors only. UBS Warburg LLC or UBS PaineWebber Inc. accepts responsibility for thecontent of a report prepared by another non-US affiliate when distributed to US persons by UBS Warburg LLC or UBS PaineWebber Inc. Canada: This report is beingdistributed by UBS Bunting Warburg Inc., a subsidiary of UBS AG and a member of the principal Canadian stock exchanges & CIPF. Singapore: This report is beingdistributed in Singapore by UBS Warburg Singapore Pte. Ltd. For transactions, please contact your local sales representative. Additional information will be madeavailable upon request.© 2001. All rights reserved. This report may not be reproduced or distributed in any manner without the permission of UBS.


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