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10-Mar-09 REFLATION REQUEST

Deflation officially arrived in China in February with the CPI index YoY down 1.6 %, a situation not seen since 2001/2002. Producer
price index (-4.5 % YoY) and purchasing price index, which reflects changes in the level of prices of raw materials, fuels and power paid
by industrial enterprises (-7.1 % YoY), plunged as well. These data may re-ignite fears of a global deflation at a time when the economic
key issue to get out of the financial and economic crisis is that inflation is better then deflation. The lessons derived from the postbubble
crisis during the Great Depression and later in Sweden and Japan are many, but perhaps the most important one is the demonstrable
need for a reflationary shock to end deflationary expectations and ensure positive nominal GDP growth. The fundamental reason that a
reflationary shock is needed in a postbubble period is tied to the need to reduce the real burden of debt. As bubbles inflate, households
and firms assume more and more debt with interest rates fixed largely in nominal terms (and not in real ones…). Deflation is an unstable
process because as prices fall and nominal GDP shrinks, the real burden of debts rises, financial institutions’ viability is severely impaired
or destroyed, consumption and investment collapse, employment falls, and another round of further deflation continues the cycle.
Leadership on the reflationary front will have to be exercised by the Fed. It needs to announce clearly its intention to prevent
deflation by declaring a future price-level target that implies an inflation rate averaging between 2 and 3 % YoY until the real burden of
debt and the attendant contractionary behavior in the economy begin to atrophy. The rules that applies to financial rescues – be
transparent, proactive and systematic – also applies to central bank policy when it comes to arresting a move toward highly damaging
deflation. The FOMC (see the minutes of the 27/28th January meeting) has projected a “longer run” (5/6 years) PCE inflation of 1.7 % to
2.0 % (corresponding to an overall CPI roughly between 2.0 and 2.5 %) for the first time. This may be regarded as the harbinger of an
“inflation targeting” policy, which is one of the major challenges facing Ben Bernanke.
Unfortunately, the news flow was not very supportive for U.S. equities yesterday as Warren Buffet, whose Berkshire Hathaway
posted its worst results ever in 2008, said the economy “has fallen a cliff” (Economic Pearl Harbor! he added) and that efforts to stimulate
recovery may lead to inflation higher than the 1970’s. The global economy is likely to shrink for the first time since World War II and trade
will decline by the most in 80 years, the World Bank said on Sunday. The IMF said that world trade contraction could reach 5 % this year.
In addition to that, Nouriel Roubini said that the S&P 500 index is likely to drop to 600 or lower this year as the global recession
intensifies. Merrill Lynch economist David Rosenberg also forecast the index slumping to that level, saying it will probably bottom in
October. But there was a kind of resilience in the fact that the S&P 500 index, which decreased as much as 1.5 % and climbed +1.7 %
intraday, swung between gains and losses at least 25 times! Bank of America (+19 % yesterday) said it will sell $8.5bn in debt backed
by the Federal Deposit Insurance Corp. It’s a good sign that a large financial institution which is really critical to lending is going ahead
with plans to sell debt. It reminds investors that if we can get some normal functioning in the credit market, we can get some stability of
the real economy and overall market. Bank of America will be an “earnings powerhouse” once the economy recovers, Barron’s said in an
th
article published on March 7 .
This morning in Asia, the Nikkei was slightly down (-0.44 %) but Hong Kong (+3.10 % at 06.00 GMT) and the Korean market (+2.10 %)
were on the upside. China auto sales surged 25 % in February, the first gain in 4 months: China has halved sale taxes on small cars
and the economic stimulus package ($585bn) is helping. General Motors doubled its forecast for China’s nationwide auto sales growth
th
this year. Oil prices rose (WTI at $47.07 /bbl, +1.55 $) ahead of Opec meeting in Vienna (March 15 ) and as Saudi Arabia told Asian
refiners that it will maintain supply cuts next month. At 06.45 GMT, U.S. index futures were up roughly 1 %.
WTI €/$ $/¥ 10 yr US 10 yr Euro Basic Energy Financ Health Tech Tel Indus Utilities SOX S&P NAS DOW Close

Last 47,2 1,2715 98,62 2,90 2,94 -1,43 0,45 1,45 -0,89 -2,48 -3,60 -0,85 -2,42 -2,33 -1,00 -1,95 -1,21 US
Perf 1d % 1,42 0,82 0,24 4,03 bp 1,1 bp 0,53 2,34 2,82 -0,43 -0,64 -1,63 0,97 -0,89 0,23 0,46 -0,23 0,07 Europe
ECONOMIC DATA with impact
French industrial production – 7.45 GMT / exp –0.6% / previous –1.8%
UK industrial production – 9.30 GMT / exp –1.2% / previous –1.7%
Wholesale inventories – 14.00 GMT / exp –1.00% / previous –1.4%
ABC consumer confidence – 21.00 GMT / exp -49 / previous -49
POSITIVE IMPACTS
EADS : FY revenue €43.3bn (41.64bn) / Ebit €2.8bn (2.2bn exp) / FCF €2.6bn end 2008 with net cash of €9.2bn / Order intake +18%
to €400bn / Dividend €0.20 / Says 2009 revenues should roughly be in line with the 2008 level / However, said that revised industrial
plans to complete the A400M programme could lead to a significant charge, weighing on EBIT
PEUGEOT : Malaysian Naza Group is in talks with Peugeot to jointly develop a compact car (Malaysian press)
VOLKSWAGEN : China February sales jumped 25%, first gain in 4 months / Separately, VW sales of cars and trucks in Brazil increased
13.7% in February from January (Brazil is also a key market for FIAT…)
D. POST may enjoy exemptions to Value Added Tax for longer than expected as a law to revoke them can’t be passed in the
current legislative period / Separately, Deutsche Post is poised to appoint M. Rosen, CFO at Fresenius Medical Care, as its new
CFO (FT)
ROCHE would have sweetened again its offer for Genentech by about 2%to $46.7 bn ($95)
HSBC has no plans to halt its £12.5bn rights issue or change the terms of the offer / It will hold a news briefing at 0700 UKT / HSBC
clawed back 14% in Hong Kong trade / HK securities watchdog said it was looking into Monday's sharp fall
SANTANDER bought out Tokio Marine's stake in a jointly owned Brazilian insurer for $285 m, aiming to strengthen its positionin Brazil
GAS NATURAL is due Today to hold a meeting to approve its €16.7bn bid for UNION FENOSA / Gas Natural‘s Shareholders will vote to
approve a plan to sell 224m new shares in a rights offering to help finance the takeover
NORSK HYDRO : Hydro's head of Energy, Jørgen C. Arentz Rostrup, will take over as the company's CFO, effective May 1.

TEXAS INSTRUMENT narrowed the range of its Q1 forecast, with the midpoint of its revenue guidance rising 2.7% / Sees Q1 share loss
$0.08-breakeven from -0.11 to +0.03 / Sees Q1 revenue $1.79-$2.05 from $1.62bn-2.12bn
TSMC said its Feb. sales fell 59% from a year earlier, but sharply raised its Q1 guidance due to rush orders from China = Now sees Q1
sales T$36 bn-T$38 bn (from T$32 bn-T$35 bn it made in Jan. ) with Q1 profit margin to be 14-16%, vs a forecast of 1-5% previously
NEGATIVE IMPACTS
E.ON : FY08 sales €86.8bn (€82.9bn e) / EBIT €9.9bn, in line / Net debt end-Dec €44.9bn / To invest €10bn/year from 2009-2011 / To
divest at least €10bn worth of assets through 2010 / Cut its 2010 adj. Ebit target to €11bn from €12.4 bn / Sees 2009 adj. EBIT unch. vs
2008 + sees 2009 adj. net down 10% due to lower electricity & gas sales volumes, lower upstream gas margins, effects from the
regulation & currency effects
TF1 (Bouygues) said advertising revenue fell 20% in the January-February period, compared with a year earlier, while its share of the
advertising market declined by 3.7 percentage points to 57.9%
ALSTOM wants a stake in the transmission and distribution operations of Areva, which in turn is uninterested (Les Echos)
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10-Mar-09 REFLATION REQUEST

DTE-FTE… : A panel of EU lawmakers voted yesterday in favour of capping the price to consumers of roamed text messages and
extended by 2 years to 2012 current EU price limits on roamed voice calls
CONTINENTAL : Schaeffler has put plans to merge its auto parts business with that of Continental on hold to deal with its more pressing
debt problems (Handelsblatt)
RESULTS DIVIDENDS EVENTS
Roche AGM / Walt Disney / Caterpillar analyst meeting /
Bulgari / EADS / E.On / Finmeccanica / SBM Offshore / Metropole TV /
Today Hospitality & Gaming conf at Deutsche Bank /
Antofagasta
Transportation conf at JP Morgan
Banca Monte dei Paschi di Siena / JC Decaux / Deutsche Lufthansa / Enel
TUI Travel (GBp 7.666667) /
Wednesday / International Power / Lagardere Groupe / Ingenico / National
Coca Cola Co ($0.41)
Semiconductor / Bulgari / Terna / Hannover Re
Thursday Carrefour / VW / Aegon final / ADP / Delhaize / Geberit Nordea EGM
Friday Allianz / ENI / Eiffage
Monday Acerinox / Linde
TRADING IDEAS
BUY RENAULT / DAIMLER / TELEFONICA / VINCI / THYSSEN on reversal Head & Shoulder possibility
BUY ENI / NOKIA to play recovery
BUY CREDIT SUISSE / ALLIANZ / TOTAL / SAP on double bottom possibility

BUY HOLCIM / SELL LAFARGE // BUY BAYER / SELL BASF // BUY FTE / SELL TEF // BUY PHILIPS / SELL ASML // BUY SIEMENS / SELL
ALSTOM
BROKER METEOROLOGY
MAN GROUP................................RAISED TO BUY FROM SELL .................................................................................. BY CITIGROUP
IMPERIAL TOBACCO .................RAISED TO BUY FROM HOLD ................................................................................. BY CITIGROUP
LUXOTTICA ................................RAISED TO BUY FROM NEUTRAL ............................................................ BY BANK OF AMERICA
AGUAS DE BARCELONA ..........RAISED TO BUY FROM NEUTRAL ...................................................................................... BY UBS
VESTAS .......................................RAISED TO HOLD FROM SEL ....................................................................... BY DEUTSCHE BANK
VOLKSWAGEN ...........................RAISED TO NEUTRAL FROM UNDERWEIGHT ................................................................. BY HSBC
SWISS RE ....................................RESTARTED NEUTRAL .....................................................................................BY CREDIT SUISSE
FORTIS ........................................RAISED TO BUY FROM HOLD ...............................................................................................BY ING
DAIMLER .....................................RAISED TO OVERWEIGHT ......................................................................... BY MORGAN STANLEY

GOLD ..........................................RAISED TO OVERWEIGHT FROM NEUTRAL ..................................................................... BY UBS

CREDIT AGRICOLE ....................CUT TO SELL FROM NEUTRAL ........................................................................................... BY UBS

ACCOR ........................................CUT TO NEUTRAL FROM BUY .................................................................... BY GOLDMAN SACHS
GENERALI ..................................CUT TO UNDERPERFORM ......................................................................... BY BANK OF AMERICA

PLEASE FIND BELOW ON THE NEXT PAGE OUR MORNING ECO

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10-Mar-09 REFLATION REQUEST

CHART OF THE DAY
Nikkei (NKY Index)
since 1980

40000

35000

30000

25000

20000

15000

10000

5000
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08

Source : Bloomberg

The Nikkei 225 Stock Average in Tokyo fell to its lowest close since Oct. 6, 1982 at 7086.03. This drop was led by the fears about
General Motors and by the risk of non adoption of the second revival plan in China.

ECONOMIC DATA
Time Country Indicator Period GE forecasts Consensus Previous
0.01 GMT United Kingdom RICS house price balance February -76% -75% - 76%
2.00 GMT China Producer price index February -4,5% YoY -4,4% YoY -3,3% YoY
6.00 GMT Japan Machine tool orders (preliminary) February -84,1 % YoY
7.00 GMT Germany Consumer price index (final) February 0,6%,+1,0%YoY -0,5%,+0,9%YoY
7.00 GMT Germany Trade balance January € 9,5 billion € 6,9 billion
7.00 GMT Germany Current account January € 9,2 billion € 12,3 milliards
7.45 GMT France Industrial production January - 0,5 %, - 11,6 % YoY -0,6%,-11,9 %YoY -1,8%,-11,1% YoY
7.45 GMT France Trade balance January - € 2,3 billion - € 3,0 billion - € 2,5 billion
7.45 GMT France Central Government balance January - € 56,5 billion
9.30 GMT United Kingdom Industrial production January -1,2% ,-9,9%YoY -1,7%,-9,4% YoY
14.00 GMT United - States Wholesale inventories January -1,0% -1,4%
14.00 GMT United - States IDB/TIPP economic optimism March 43,0 44,6
21.00 GMT United - States ABC consumer confidence March 8 th -49 -49

Inde x e s P rice % 5 D a ys Ytd Forex Price % 5 Days Ytd

DJIA 6547,1 - 3,14% - 25,40% EUR/USD 1,2708 1,08% -9,12%
S&P 500 676,5 - 3,39% - 25,10% EUR/JPY 125,01 -1,44% -1,26%
Nas daq 1268,6 - 4,07% - 19,56% USD/JPY 98,38 -0,38% 8,01%
CA C 40 2519,3 - 2,41% - 21,71% Oil Price % 5 Days Ytd
DA X 3692,0 - 0,49% - 23,25% Brent $/b 44,5 1,50% 6,61%
Eur os tox x 50 1810,0 - 3,87% - 26,05% Gold Price % 5 Days Ytd
DJ 600 158,0 - 3,83% - 20,36% Gold $/oz 917,1 0,02% 3,90%
FTSE 100 3542,4 - 2,23% - 20,11% Rates USA Euro Japan
Nikkei 7055,0 - 2,67% - 20,37% Central Banks* 0,25 1,50 0,10
Shanghai Comp 2132,2 1,21% 17,10% Overnight 0,20 1,05 0,10
Sens ex ( India) 8160,4 - 5,19% - 15,41% 3 Months 0,23 0,78 0,23
MICEX ( Rus s ia) 688,9 3,43% 11,19% 10 Y ears** 2,90 2,94 1,31
Bov es pa ( Bras il) 36741,4 1,40% - 2,15% *US: Fed Funds; Jap: Overnight; Euro: Ref i
** Euro: German Bund rate So urc e : B lo o m berg
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10-Mar-09 REFLATION REQUEST

ECONOMIC DATA PREVIEW
No major economic data due in the United-States

Watch in Germany the release of the trade balance for January due at 07.00 GMT. The trade surplus is expected to increase in
Germany. Indeed even if exportations are declining due to the global economic downturn reducing the demand for German’s goods
abroad, importations are slumping as Germany is facing its worst recession since world war two. Keep and eye on the final release of
the consumer price index due at 07.00 GMT expected to slightly increase in February as the barrel stop dropping.

Watch in France the release of the industrial production for January due at 07.45 GMT and expected to pursue is drop trend. Indeed
the weakness of the domestic demand in France as well as in Europe and in the United-States led French industry toward it sharpest
recession since the seventies. Watch as well the release of the trade balance for January due at 07.45 GMT . The French trade deficit
is expected to narrow led by the sharp drop of importations./JB

ECONOMY

JAPAN : THE TRADE DEFICIT PLUNGED TO AND HISTORICAL LOW IN JANUARY

Japan’s growth being essentially based on exports the country is very sharply hit by the global economic downturn cutting demand for
Japanese goods abroad. Indeed in January the trade balance dropped to an historical low at -Yen 844.4 billion (prior -Yen 197.9
billion) and Japan posted its first current-account deficit (- Yen 172.8) in 13 years led by the collapse of exportations. Japan is facing
again a deflation situation generating a rise of the bankruptcies (+10.4% in February) and a rise of unemployment hitting the domestic
demand and increasing the deflation as exports are not taking over./JB
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10-Mar-09 REFLATION REQUEST

VIXindex: impliedvolatilityontheS&P500 $Libor -3-Month(InterbankRate)
6
85
80 5,5
75
5
70
65 4,5
60
55 4
50
3,5
45
40 3
35
30 2,5
25
20 2
15 1,5
10
5 1
12/03/2007 12/09/2007 12/03/2008 12/09/2008 12/03/2009 12/03/2007 12/09/2007 12/03/2008 12/09/2008 12/03/2009
Source : Bloomberg Source : Bloomberg

UnitedStates: 10-year Treasuryyield 10-year Treasury spreadUSA-Eurozone

5,5 1,2
5,25 1
5
0,8
4,75
0,6
4,5
4,25 0,4
4 0,2
3,75
0
3,5
3,25 -0,2
3 -0,4
2,75
-0,6
2,5
2,25 -0,8

2 -1
12/03/2007 12/09/2007 12/03/2008 12/09/2008 12/03/2009 12/03/2007 12/09/2007 12/03/2008 12/09/2008 12/03/2009
Source : Bloomberg Source : Bloomberg

Oil : Brent ($/b) Forex: Eurovs Dollar (EUR/USD)

150 1,65
140
1,6
130
1,55
120
110 1,5
100
1,45
90
1,4
80
70 1,35
60
1,3
50
40
1,25

30 1,2
12/03/2007 12/09/2007 12/03/2008 12/09/2008 12/03/2009 12/03/2007 12/09/2007 12/03/2008 12/09/2008 12/03/2009
Source : Bloomberg Source : Bloomberg