The Outlook

Intelligence for the Individual Investor

August 17, 2011 Volume 83 Number 30

Down, and Back Up

Market swings as risk of double dip recession looms.
For many people, one of the most vivid memories of childhood is that of time spent on that iconic piece of playground equipment, the swing set. Central to the swing set experience, of course, is the stomach-churning sensation of falling that comes as the swing begins its downward journey after reaching the limits of its previous upward arc. Investors have become reacquainted with that terrifying feeling of rushing uncontrollably toward the ground over the past two weeks as mounting concerns regarding a slowdown in U.S. economic growth combined with renewed fears of an exploding sovereign debt crisis in Europe and the downgrade of the U.S. long-term credit rating to send the stock market lurching violently down one day and then up the next. In the U.S., the lack of employment growth, weakening consumer spending, and sluggish manufacturing activity are raising the prospect not only of slower growth, but a

Vaughan Scully S&P Editorial

Whats Inside
Intelligencer Observatory Mutual Fund Strategies ETF Strategies Gold Stocks Onshore Drilling Consumer Staples Microsemi Stock Screen Master List Platinum Portfolio 2 3 4 5 6 7 8 9 10 11 12

S&P Equity Research Recommended Asset Allocation

Cash 15% Foreign Equities 15%

GLOBAL POST MORTEM (IN USD)

% OFF SPRING PEAK YTD

Bonds 25% U.S. Equities 45%

Please see page 3 for required research analyst certification disclosures. For important regulatory information, please go to: www.standardandpoors.com and click on Regulatory Affairs and Disclaimers.

Europe ex. U.K. EM EMEA Latin America Pacific ex. Japan Emerging Markets EAFE Canada EM Asia S&P 500 U.K. Japan

-23.9% -23.6% -23.5% -19.7% -19.7% -18.7% -18.2% -17.9% -17.8% -17.3% -15.9%

-11.5% -16.5% -21.6% -13.8% -15.9% -11.3% -10.3% -13.3% -10.9% -10.3% -10.9%

Sources: S&P Indices and MSCI (through 8/9; S&P 500 through 8/10).

new recession. The risks are increasing of a double dip, says S&P Senior Economist Beth Ann Bovino. Signs of economic stagnation are cropping up in Europe as well, she says, pointing to the July Global Manufacturing PMI Index falling to 50.6, perilously close to slipping under 50 an indication of slowing activity. For a global economy that was thought to be in recovery, these indicators are enough to make anyone feel queasy. For now, investors are wrestling with the question of how far down is far enough. All the major developed world equity indices are well below their recent peak set in late April and early May despite the fact that corporate earnings have been strong so far this year and appear likely to stay that way at least through the second half even as the global economy slows. Standard & Poors Investment Policy Committee believes that the underpinning of strong corporate profit growth now expected at 17.5% for 2011 compared with the 14.1% gain seen in April for the S&P will blunt the impact of a perceived increase in global risk and that attractive valuations will keep stocks from entering a freefall. While strong corporate profitability has come close to being enough to offset recent macro (economic) fears, says S&P equity strategist Alec Young, we believe near bear market declines in the S&P 500, MSCI EAFE, and MSCI Emerging Markets indices (in U.S. dollars) from their spring peaks have already discounted tremendous fundamental erosion. Unless the financial markets freeze up as they did in 2008, the swing will probably level off and begin to head back up, though at a painfully slow pace.

2 STANDARD & POORS THE OUTLOOK AUGUST 17, 2011

Intelligencer
Headlines, Highlights, and Whats on Our Minds
MASTER LIST CHANGE: Effective after the close on August 15, 2011, there will

Standard & Poors The Outlook

EDITORIAL Managing Editor Beth Piskora Senior Editorial Manager Vaughan Scully Statistician Chris Peng O P E R AT I O N S Managing Director, Global Business Operations Robert Barriera Vice President, Operations Frank LoVaglio

be one change to the Small/Mid-Cap Portfolio. Tupperware Brands (TUP 63 ) replaces Boston Beer (SAM 85 ).
AZIPODS MOVE GREAT SHIPS: How do the captains of the worlds largest luxury

cruise ships, Royal Caribbean Cruises (RCL 25 ) Allure of the Seas and Oasis of the Seas maneuver their 100,000 ton vessels out of tight berths and turn on a dime without tugs? Each ship, which carry over 6,000 passengers, has three Azipod engines, developed about 20 years ago by engineers from Switzerland-based ABB (ABB 22 ) using a radical design compared to conventional engines. The Azipods each contain a 20,000-kilowatt (26,800 horsepower) electric engine installed on a 360-degree rotating pod that is suspended under the stern with a 20-foot propeller. This arrangement delivers superior maneuverability and fuel savings of about 10%-15% compared to a conventional shaft-line propulsion system. In addition, Azipod powered ships do not need rudders, emit less CO2, and without the need of long shaft lines there is more space inside the hulls. ABB electric engines, with a total of over 5 million operating hours, are installed in vessels ranging from cruise liners to icebreakers and drilling rigs. ABB also provides the generators, main switchboards, frequency converters, transformers and remote control units on cruise ships. / Art Epstein
WANTED: MORE CLEAN COAL: With the need for clean energy rising rapidly worldwide, coal demand is increasing from the largest coal mining region in the U.S. Wyomings Powder River Basin (PRB) even though coal has long been considered a dirty fuel. Last month, the worlds largest private-sector coal company, Peabody Coal Energy (BTU 49 ), said it won control of 220 million tons of low sulfur PRB coal reserves and now controls about 2.9 billion tons of the basins coal. There are two major benefits of PRB coal: its low price and less air pollution. The price of a short ton of PRB coal for the week ended July 29, 2011 was $14.60, much less than the $41 to $80 price per ton in other U.S. coal regions, according to the U.S. Energy Information Administration (EIA), and the coals sulfur dioxide content is less than in other areas of the U.S. With Peabodys large reserves of ultra-low sulfur coal in the Powder River Basin, the company is able to charge a premium over higher sulfur coal, enabling this region to generate higher EBITDA margins than its Appalachian assets, says S&P Equity Analyst Mathew Christy. / Art Epstein

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The Outlook (USPS 415-780, ISSN 0030-7246) is published weekly except for one issue in January, April, July, September, and November by Standard & Poors, 55 Water St. New York, NY 10041.
Annual subscription: $298. Periodicals postage paid at New York, NY, and additional mailing offices. POSTMASTER: Send address changes to The Outlook, Standard & Poors, 55 Water St., New York, NY 10041. Copyright 2011 by Standard & Poors Financial Services LLC. All rights reserved. Standard & Poors, S&P, S&P 500, S&P MidCap 400, and S&P SmallCap 600 are registered trademarks of The McGraw-Hill Companies, Inc. Reproduction in whole or in part prohibited except by permission. All rights reserved. Officers of The McGraw-Hill Companies: Harold W. McGraw, III, Chairman, President and Chief Executive Officer; Jack F. Callahan, Jr., Executive Vice President and Chief Financial Officer; Elizabeth OMelia, Senior Vice President, Treasury Operations; Kenneth M. Vittor, Executive Vice President and General Counsel. Because of the possibility of human or mechanical error by S&Ps sources, S&P, or others, S&P does not guarantee the accuracy, adequacy, or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.

The Outlook is a publication of Standard & Poors Investment Services. This department operates independently of, and has no access to, non-public information obtained by Standard & Poors Ratings Services, which may in its regular operations obtain information of a confidential nature. Information included in The Outlook may at times be inconsistent with information available in S&Ps MarketScope, an electronically delivered online service. Permission to reprint or distribute any content from this newsletter requires the written approval of Standard & Poors.

S&P EVALUATION SYMBOLS

STARS Rankings
Our evaluation of the 12-month potential of stocks is indicated by STARS: Strong BuyTotal return is expected to outperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares rising in price on an absolute basis. BuyTotal return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis. HoldTotal return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis. SellTotal return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain. Strong SellTotal return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis. NR Not ranked.

MARKET MEASURES
INDEX CLOSE FRI. 8/12/11 % CHG. YEAR TO DATE % CHG. PAST 52 WKS. OPERATING P/E RATIO INDICATED EARNINGS FRI. ANNUAL % A2010 E2011 8/12/11 DIVIDEND YIELD

S&P 500 Composite S&P MidCap 400 S&P SmallCap 600 S&P SuperComposite 1500 Dow Jones Industrials Nasdaq Composite BBB Indus. Bond Yield (10-yr.)

1178.81 843.08 380.75 272.24 11269.02 2507.98 4.42

-6.3 -7.1 -8.4 -6.4 -2.7 -5.5 -1.13

9.2 14.8 16.6 10.0

83.77 43.91 17.00 18.64

98.90 53.35 22.09 22.12 ... ...

11.92 15.80 17.24 12.31 ... ... ...

26.38 12.69 4.85 5.83 ... ... ...

2.24 1.51 1.27 2.14 ... ... ...

Quality Rankings (QR)

Our appraisals of the growth and stability of earnings and dividends over the past 10 years for STARS and other companies are indicated by Quality Rankings: A+ Highest B+ Average C Lowest A High B Below Avg. D In reorganization A- Above Avg. B- Lower NR Not Ranked Quality Rankings are not intended to predict stock price movements.

9.4 857.59 15.4 ... -0.70

Data through 8/12/11. A-Actual. E-Estimated. Based on estimated 2011 earnings. Before special factors. Actual change in yield (not percentage change).

STANDARD & POORS THE OUTLOOK AUGUST 17, 2011

The Observatory
Selected actions for August 5 through August 11.
STARS CHANGE DATE NAME SYMBOL CURRENT PRICE ($) NEW STARS OLD STARS QUALITY RANK

Alcatel-Lucent American Express AutoNation Baidu Bank of America Blount International Cablevision Systems Camden Property Trust Celestica Cheesecake Factory Chubb Church & Dwight Corn Products Dell Dish Network Dynegy Energy Conversion Devices EQT Federal Realty Investment Trust Fossil Gulfmark Offshore Harris Intl Flavor & Fragrances James River Coal Kindred Healthcare Marriott International McDonalds Microchip Technology Parker-Hannifin Patterson-Uti Energy Paychex Public Storage Rockwell Collins Royal Dutch Shell Schlumberger Sears Holdings Skechers Sunoco SunPower Take-Two Interactive Software Teck Resources Toll Brothers ValueClick

ALU AXP AN BIDU BAC BLT CVC CPT CLS CAKE CB CHD CPO DELL DISH DYN ENER EQT FRT FOSL GLF HRS IFF JRCC KND MAR MCD MCHP PH PTEN PAYX PSA COL RDS.A SLB SHLD SKX SUN SPWRA TTWO TCK TOL VCLK

3 43 33 144 7 15 17 61 8 26 57 40 44 14 22 4 1 51 83 85 35 35 53 12 13 27 84 31 63 25 26 110 45 61 74 60 14 31 16 11 42 16 14

3 5 3 5 3 3 2 3 3 3 5 5 5 5 4 3 3 4 4 4 4 5 4 3 4 3 4 5 4 4 4 4 3 5 5 3 3 1 2 3 4 5 4

2 4 2 4 5 2 1 2 2 2 4 4 3 4 3 2 2 3 3 3 3 4 3 2 3 2 3 3 3 3 3 3 2 3 4 2 2 3 1 2 3 4 3

8/10/11 8/9/11 8/10/11 8/8/11 8/5/11 8/9/11 8/9/11 8/9/11 8/9/11 8/9/11 8/10/11 8/8/11 8/5/11 8/9/11 8/9/11 8/9/11 8/10/11 8/9/11 8/9/11 8/9/11 8/10/11 8/9/11 8/9/11 8/9/11 8/9/11 8/9/11 8/8/11 8/5/11 8/9/11 8/9/11 8/8/11 8/9/11 8/9/11 8/9/11 8/9/11 8/9/11 8/8/11 8/9/11 8/9/11 8/9/11 8/9/11 8/5/11 8/8/11

NR ABNR BBBBBB A A+ B+ B+ B BC B+ AB+ BAA NR NR AA B+ A B A B+ A NR NR NR B B+ NR C B+ C B-

For daily STARS changes, subscribers can call The Outlook hotline, 800-618-7827, and put in your subscriber access code.
S&P Observatory provides a selection of analytical actions upgrades, downgrades, initiations from S&P Equity Research. Stocks featured in S&P Observatory are selected by The Outlook according to factors including, but not limited to, newsworthiness, capitalization, and inclusion in a portfolio published by The Outlook. Please note that all investments carry risks. Investors should seek financial advice before investing. All of the views expressed in this research report accurately reflect the research analysts personal views regarding any and all of the subject securities or issuers. No part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.

4 STANDARD & POORS THE OUTLOOK AUGUST 17, 2011

FUND

STRATEGIES

Bond Funds for Reducing Volatility

Short-term bond funds hold up well in volatile times.
The downgrade of the U.S. longterm credit rating by Standard & Poors Ratings Services to AA+ sent equity markets into heartstopping gyrations and is likely to reduce investor appetite for risk in the months ahead. S&P Equity Research believes that short-term, taxable fixed income mutual funds are an area that many investors will seek out to reduce volatility in their portfolios. The Short Investment Grade Debt Fund peer group is comprised funds that own bonds with relatively short durations and strong credit ratings. In our view, investors in these funds can expect that while the yields will be more modest than other taxable bond funds and the total returns lower in bullish environments, the funds will be less volatile and hold up better in bearish times. Indeed, the data bear this out, as the average fund in the peer group had a recent 30-day SEC yield of 1.24% and was up just 3.95% in 2010, well below the taxable bond fund categorys 8.22%. During the meltdown of 2008, however, these funds held up better, declining just 2.91% compared to 6.55%. We searched for S&P five-star ranked mutual funds in that have their outperformed their peers on a total return basis and have relatively low net expense ratios, which is particularly important given the modest yields and returns that investors can expect. Homestead Short Term Bond Fund The best performer of the four funds on a three-year basis, with a 6.6% total return as of August 5, this fund recently had 65% of assets in bonds rated A or higher. The funds calculated duration is modestly above its peers at 2.4 years, but it offers a higher yield at 2.4%. However, the funds net expense ratio is 0.80%, just below the peer average of 0.86%. USAA Short-Term Bond Fund With a 5.5% total return in the past three years, this fund has also outpaced its peers. Duration is relatively low at 1.97 years and approximately 70% of assets are in bonds rated A or higher, while the funds 30-day SEC yield is competitive at 2.3%. Also helping this fund earn a top ranking from S&P is the net expense ratio of 0.63%, which is below peers. Vanguard Short-Term Bond Index Fund One of two S&P five-star ranked funds from Vanguard that met our criteria, this fund has a relatively strong three-year aver-

Todd Rosenbluth S&P Mutual Fund Analyst

age annual total return at 4.8% and stands out for its very low 0.22% net expense ratio. However, the funds 30-day SEC yield is just 0.78%, which is largely the result of having approximately 70% of assets in U.S. Government or Agency bonds, with much of the remainder in corporate bonds rated A or higher. The funds duration is 2.63 years. Vanguard Short-Term InvestmentGrade Bond Fund This low-cost Vanguard fund (0.22% net expense ratio) outperformed its peers in the past three years with a 4.9% total return, but invests with a different style than VBISX. More than 70% of assets are in domestic and foreign corporate bonds and the funds top ranking from S&P is helped by having 70% of assets in bonds rated A or higher. The funds duration is 2.34 years and its 30day SEC yield is 1.55%. Whether a short-term taxable bond fund is worthy of consideration in this environment is something that is best determined at an individual level, but investors would be wise to look at not just the past performance of these funds as there are differences between their underlying holdings, durations and cost structures.

POSITIVE POTENTIAL IMPLICATIONS

FUND NAME / TICKER S&P RANKING YTD *TOTAL RETURN 1-YEAR 3-YEAR 5-YEAR CURRENT PRICE EXPENSE RATIO

Homestead Short-Term Bond Fund / HOSBX USAA Short-Term Bond Fund; Retail / USSBX Vanguard Short-Term Bond Index; Investor / VBISX Vanguard Short-Term Invest.-Grade; Investor / VFSTX

5 5 5 5

1.5 1.9 2.8 2.0

2.5 2.6 2.6 2.8

6.5 5.5 4.8 4.9

5.2 5.1 5.2 4.8

5 9 11 11

0.80 0.63 0.22 0.22

Data through 8/11/11. *Total returns include reinvested dividends and capital gains, all annualized; calculations do not reflect the effect of sales charges. Source: S&P MarketScope Advisor.

STANDARD & POORS THE OUTLOOK AUGUST 17, 2011

STRATEGIES

ETF

Construction Equipment Sales Recover

Three ETFs tap into surprisingly strong market.
Since the beginning of 2010, when the global economy began to emerge from the ravages of 2008 and 2009, construction and machinery stocks have performed far better than the broad market. Last year, the S&P Construction & Farm Machinery & Heavy Trucks sub-industry index posted a 63.9% gain, compared with a 14.2% rise in the S&P 1500 Composite Index. More recently, with confidence in global growth projections faltering, those stocks have underperformed the market, with the equipment index falling 12.7% through August 5, versus a 4.9% decline in the S&P 1500. Following a severe downturn in global sales of construction equipment in 2008 and 2009, demand for equipment such as tractors, loaders, and excavators has been staging a rebound. Interestingly, the recovery being seen in construction equipment sales has been occurring despite what we view as very mixed trends in construction markets. We believe that very robust emerging market economies and the desire to industrialize undeveloped territory are the reasons behind the exceptionally strong sales levels of construction equipment, which have reached record levels in many areas. Also, while construction markets are still weak in most developed nations, equipment sales have been reviving there as well. We attribute much of this activity to the need to replace aging and worn-out equipment, as a long stretch of limited equipment purchases has left fleets quite old, in our view. Recent indications of slowing growth, especially in developed nations, have raised questions about how long the recovery in construction equipment will last. Although we acknowledge that a deceleration of growth may cause sales to slow, we nonetheless think that there are a variety of factors that will support robust demand for construction equipment in the future. We look for favorable economic growth trends in emerging markets and we expect to see early signs of a recovery in commercial construction in the U.S. Moreover, the massive earthquake and tsunami that struck eastern Japan in March 2011 is expected to result in a major reconstruction effort, which has been estimated to cost as much as $300 billion. For investors seeking exposure to a broad range of industrial sub-industries, with some

Michael Jaffe S&P Equity Analyst

concentration in the construction equipment industry, we advise considering the Industrial Select Sector SPDR Fund, which attempts to replicate the performance of the Industrial Select Sector Index. This exchange traded fund (ETF) has top 10 holdings in Caterpillar (CAT 87 ) and Deere (DE 73 ), which are both part of the S&P Construction & Farm Machinery & Heavy Trucks sub-industry. It also has major stakes in areas such as aerospace and defense as well as industrial conglomerates. Another ETF with industrials and construction equipment exposure is the SPDR Dow Jones Industrial Average ETF Trust. The fund has Caterpillar as a top 10 holding, and industrials (despite the name) represent about 22.3% of assets. There is also the Rydex S&P 500 Equal Weight Industrial ETF, with top two holdings Joy Global (JOYG 79 ) and Caterpillar, both of which are part of the Construction & Farm Machinery & Heavy Trucks sub-industry. Other major areas of holdings in the Rydex ETF are aerospace and defense as well as industrial machinery.

INDUSTRIAL ETFs
FUND NAME / TICKER S&P RANKING YTD *TOTAL RETURN 1-YEAR 3-YEAR 5-YEAR CURRENT PRICE EXPENSE RATIO

Industrial Select Sector SPDR / XLI Rydex S&P 500 Equal Weight Industrial / RGI SPDR Dow Jones Industrial Avg. ETF Trust / DIA

OW MW OW

-10.9 -12.2 -2.6

5.9 5.9 9.7

-2.7 -2.1 0.9

1.9 NA 2.6

31 47 113

0.20 0.50 0.16

Data through 8/11/11. *Total returns include reinvested dividends and capital gains, all annualized; calculations do not reflect the effect of sales charges. MW-Marketweight. OW-Overweight. NA-Not available. Source: S&P MarketScope Advisor.

6 STANDARD & POORS THE OUTLOOK AUGUST 17, 2011

Gold Stocks: Laggards No More

Mining company shares have lagged the metal, but look set for stronger gains.
Even with the price of gold reaching new record highs following the downgrade of the U.S. long-term credit rating, Standard & Poors Equity Research thinks there is still room for gold prices to rise further, and rising gold prices will likely drive gold stocks higher as well. We believe that gold is in a bull market, says Leo Larkin, S&P equity analyst for gold stocks. Larkin sees demand for gold outstripping supply for the foreseeable future. In fact, he expects the gap between production and consumption to persist as demand grows and global output remains stagnant. Larkin has a positive 12-month fundamental outlook for the gold industry, and he forecasts a rise in sales and earnings for gold equity stocks in 2012 based mostly on his expectation for higher gold prices. Strong demand has been the key to the rally, and its not only investors buying gold, Larkin says. Central banks from Mexico, South Korea, Thailand, and Russia have added to their gold reserves in 2011 even as prices rose. Their demand for gold is another positive development for gold stocks, Larkin says. Gold stocks have not kept up with the metals meteoric rise, and the reasons for the underperformance are three-fold, Larkin says: share dilution, rising expenses, and new ways to own gold. Over the past decade, gold mining companies have issued substantial amounts of new shares to finance exploration and mine construction, and they have also made a number of stock-based acquisitions. Consequently, the leverage to earnings per share from higher gold has been negated by an increase in shares outstanding, Larkin says. Furthermore, until 2011, input costs have been rising at nearly same rate as the price of gold, offsetting the impact of higher gold prices. Also, the introduction of exchange-traded funds (ETFs) that own gold and other similar gold proxies in recent years has depressed the valuations for gold mining stocks since investors can now obtain exposure to gold without the risk of investing in a gold mining company, Larkin says. But the wide disparity between the precious metal and the companies that produce it is about to narrow for two reasons, Larkin believes. For one, the gold companies are now generating enough free cash flow to fund internal expansion and external growth via acquisitions without resorting to dilutive financing. Secondly, gold is now rising faster than mining input costs so that there will be greater earningsper-share leverage to the higher gold price, he says. Larkin sees three gold stocks as likely to outperform the market over the next 12 months: Barrick Gold, Newmont Mining, and Randgold Resources. Barrick Gold, the worlds largest gold company in terms of both production and reserves, is Larkins favorite in large part because he thinks it is attractively valued at about 10 times his 2012 earnings-per-share estimate. He also likes Barricks strategy of increasing its reserve base through low-cost, long-life mines. With new production from lower-cost mines

Isabelle Sender S&P Editorial

and its output unhedged, Barrick is well positioned to capture the benefits of a rising gold price, according to Larkin. Newmont Mining has a similar mine-acquisition strategy and is among the largest of gold producers. In April, Newmont announced plans to increase its current annual gold production 35% by 2017, to approximately 7 million ounces. In July, Newmont reported earnings below both Larkins secondquarter estimate and Capital IQs consensus view, prompting Larkin to lower his 12-month target price on the stock to $67 from $75 and trim his 2011 and 2012 earnings estimates. But he still thinks the shares are attractively valued selling at 12.5 times his 2012 earningsper-share estimate with a dividend yield of 2.1%. Randgold Resources is another gold stock that Larkin likes. He thinks a rising gold price and the companys strong balance sheet, combined with cash flow from existing operations, will enable Randgold to complete its third mine and increase its exploration spending to find and develop new deposits. Larkin thinks Randgolds American Depositary shares (ADSs) are attractively valued, recently trading at about 16 times his 2012 earningsper-share estimate of $6.22 per ADS. However, he thinks it carries the highest risk of the three gold stocks.

S&Ps TOP GOLD STOCKS

COMPANY / TICKER STARS QUALITY RANKING *RISK STYLE CURRENT PRICE 12-MONTH TARGET P/E PRICE RATIO YIELD (%)

Barrick Gold / ABX Newmont Mining / NEM Randgold Resources / GOLD

5 4 4

BB NR

Medium Medium High

Foreign Growth Foreign

50 58 101

75 67 140

11.1 14.2 23.1

1.0 2.1 0.2

*Based on our analysts' assessment of qualitative factors, including financial strength, potential share volatility, competitive position, industry cyclicality, regulatory/legal issues, and other factors. Please note that all investments carry risks. See definitions on page 2. Based on S&P estimated fiscal 2011 earnings. Source: S&P Equity Research.

STANDARD & POORS THE OUTLOOK AUGUST 17, 2011

Onshore U.S. Oil Basins Still Profitable

Drop in oil prices wont shift drilling away from liquids to gas.
The recent shift in focus for energy producers toward onshore oil in the U.S. has been a prominent trend in the industry, driving new foreign investment, mergers and acquisitions, as well as a resurgence in U.S. oil drilling activity. Despite the recent decline in oil prices to their lowest in nine months, Standard & Poors Equity Research expects that the U.S. onshore oil and gas rig count will still be dominated by liquids-directed projects. With the decline in prices and a somber outlook for global growth, questions are likely to arise about the profitability of operations in some of these reservoirs. We do not see oil prices deteriorating to the extent they did in 2008, when the price of crude dipped below $34 a barrel to its lowest since June 2004. Emerging economies (China, India, Brazil, Middle East) are still forecast to increase their oil consumption, and significant risks to global supply persist, by our analysis. However, the possibility of further downward pressure on oil prices caused by a weakening global economy cannot be completely dismissed, and thus we analyze the impact of a further price breakdown on the level of drilling activity at the most active onshore liquids basin, the Eagle Ford Shale, to better gauge some of these profitability thresholds. Historically, U.S. onshore drilling has been dominated by natural gas rigs. Today, the Eagle Ford Shale, a largely undeveloped oil-rich play in South Texas, accounts for about 25% of all unconventional rigs in the U.S. Based on company and Standard & Poors Equity Research data, we believe Eagle Ford wells cost on average $6.5 million-$7 million to drill, with estimated ultimate recovery averaging about 475,000 barrels per well and finding and

Michael Kay S&P Equity Analyst

development costs of about $15-$20 per barrel. After transportation costs (about $15 per barrel), we estimate the average breakeven point for Eagle Ford Shale wells to be in the $50-$55 per barrel range. If we were to witness a decline in oil prices to $65 per barrel from the $86/bbl currently, we believe Eagle Ford wells would still generate rates of return in the 15%-25% range versus a 45%-60% return generated at $80 per barrel. By our analysis, we can expect higher service costs to impede returns somewhat in 2012 as Eagle Ford sees increased competition between operators. On these projections, we think it would take another 20%-30% decline in oil prices, and a decline in natural gas liquids demand, to lead to a slowdown in drilling at Eagle Ford. With the economics at Eagle Ford being superior to most other plays at this time, we believe a more modest decline in oil prices could result in slower drilling activity in other regions. However, we think economics at the Bakken, Permian, Texas Panhandle and several other active basins will still be attractive so long as there is not another prolonged and sustained

decline in demand and prices. Some of the larger Eagle Ford and onshore U.S. liquids operators are EOG Resources (EOG 93 ), Chesapeake Energy (CHK 31 ), Apache Corp. (APA 103 ), Newfield Exploration (NFX 54 ), Pioneer Natural Resources (PXD 77 ), ConocoPhillips (COP 66 ), Marathon Oil (MRO 26 ) and Anadarko Petroleum (APC 73 ). Smaller companies in our universe exposed to Eagle Ford include SM Energy (SM 77 ), Forest Oil (FST 20 ), Swift Energy (SFY 33 ) and Goodrich Petroleum (GDP 16 ). Of these, EOG and NFX also have exposure to the Bakken Shale. Given the recent turmoil in equity markets, we recommend investors limit upstream investment to lessvolatile, integrated oils and large-cap exploration and production companies, which would also provide significant exposure to unconventional onshore production and reserve growth in the U.S. With credit markets in flux, we believe funding issues could arise for smaller operators with heavy debt burdens. When oil prices plunged 70% between June and December 2008, the mid to small-cap exploration and production companies were among the most impacted. We have a positive fundamental outlook on the integrated oil and gas sub-industry, reflecting our outlook for strong long-term energy demand as well as low debt levels, strong cash positions, attractive valuations and robust dividend yields. We maintain a positive fundamental outlook on the exploration and production sub-industry and favor the large-cap companies, which, in our view, also carry less-risk on the balance sheet and more conservative spending habits than their smaller peers.

8 STANDARD & POORS THE OUTLOOK AUGUST 17, 2011

Consumer Staples for Troubled Times

Large-cap stocks with low debt, high dividends to fare best.
With the stock market now posting breathtaking gains and losses daily, its hard to judge which part of the market will perform best during the expected slowdown in global growth during the second half of 2011. In view of the recent volatility inducing events such as the downgrade of the U.S. long-term credit rating from AAA to AA+, Standard & Poors Equity Research recommends investors overweight consumer staples stocks in their portfolio. That reflects an appreciation of the defensive characteristics of the sector, says Tom Graves, S&Ps head of consumer staple equity coverage, as well as an expectation that larger cap stocks will outperform smaller names due to their strong dividends and healthy balance sheets. In the year ahead, we anticipate generally good cash flow from larger consumer staples companies, some of which we think will be used to support dividends and stock repurchase activity, says Graves, who notes the sectors recent 3.1% dividend yield (for consumer staples stocks in the S&P 500) is well above the broader markets 2.2%. S&P maintains a neutral fundamental outlook for the consumer staples sector. In our view, volume gains are likely to be limited by price increases that companies put in motion to at least partly offset higher commodity costs, says Graves. Based on Capital IQ consensus estimates, profits for consumer staples companies are expected to rise 10% in both 2011 and 2012. While the sector is receiving a premium P/E valuation, we see this as being merited because the nature of the sectors product mix for example, food, beverage and tobacco and the strength of its cash flow will provide some insulation from economic fears and weakness, Graves says. Whats more, the high and rising exposure of the large consumer staples companies to emerging markets such as China, India, and Brazil should provide better opportunities, to accelerate growth, he says. We expect rising income levels and changing lifestyles in various international markets to allow and include increased consumption of items such as packaged foods and household products provided by U.S.-based companies, he says. Graves sees growth prospects from emerging international markets being generally more favorable than what is likely from the mature U.S. and Western Europe markets. We would expect reported sales and profits from consumer staples companies to benefit from a weaker dollar, as international results are translated back into a larger number of dollars, Graves says. However, he thinks the impact will vary by company, depending on such factors as where they do business and to what extent they have currency hedges in place. Meanwhile, with U.S. unemployment expected to stay relatively high in the year ahead, Graves thinks less expensive private label goods will be more attractive to many domestic consumers than branded goods.

Barney Brodie S&P Editorial

Graves thinks that the increase in U.S. consumer food prices may ease in 2012, based on a late July forecast from the US Department of Agriculture (USDA). Overall, the USDA anticipates that the index for all food will be up 2.5% to 3.5% in 2012, a range that is modestly below the 3.0% to 4.0% projected for 2011. However, Graves notes, this would still exceed the relatively small increases for food prices in 2010 (0.8%) and 2009 (1.8%). Also, for 2012, the USDA forecasts a higher range (up 3.0% to 4.0%) for the rise in food-at-home prices than for away-from-home expenditures (e.g. restaurants), for which a 2.0% to 3.0% rise is projected. The at-home food price increase forecast for 2012 was slightly below the 3.5% to 4.5% range estimated for 2011. Year to date through August 5, Graves notes the consumer staples sector, which represented 11.2% of the S&P 500 index, was up 1.9% (price only), compared with a 4.6% decline for the S&P 500. On a year to date basis through August 5, consumer staples was the best performing of the S&P 500s 10 GICS economic sectors, and also had the smallest decline (-2.5%) of the 10 sectors in the first five trading days of August.
12-MONTH TARGET P/E PRICE RATIO

TOP-RANKED CONSUMER STAPLES CHOICES

COMPANY / TICKER STARS QUALITY RANKING *RISK STYLE CURRENT PRICE YIELD (%)

Altria Group / MO Church & Dwight / CHD Coca-Cola / KO

Corn Products / CPO

CVS Caremark / CVS

General Mills / GIS Heinz / HNZ Philip Morris / PM Wal-Mart Stores / WMT

5 5 5 5 5 5 5 5 5

A A+ A+ B+ A+ A+ B+ NR A+

Medium Low Low High Medium Low Low Low Low

Blend Growth Growth Blend Blend Blend Blend Blend Blend

25 41 66 45 33 36 50 66 50

29 44 79 57 44 42 60 83 65

12.4 18.6 17.0 10.5 11.7 13.8 14.9 13.7 11.1

6.1 1.7 2.8 1.4 1.5 3.4 3.8 3.9 2.9

Master List issue. *Based on our analysts' assessment of qualitative factors, including financial strength, potential share volatility, competitive position, industry cyclicality, regulatory/legal issues, and other factors. Please note that all investments carry risks. See definitions on page 2. Based on S&P estimated fiscal 2011 earnings. Source: S&P Equity Research.

STANDARD & POORS THE OUTLOOK AUGUST 17, 2011

The Defensive Semiconductor Stock

Microsemi prospers apart from the PC, handset, and consumer electronics trade.
Semiconductor shares have slumped this year amid rising inventory levels and wavering demand from customers in the computing, consumer, and communications industries. Semiconductor executives have also been warning that the second half of the year, which normally benefits from back-to-school and holiday related sales, may not provide the boost seen in previous years. For these reasons, we believe that who want exposure to the semiconductor industry should look at companies such as Microsemi that serve the industrys less cyclical end-markets. California-based Microsemi designs and manufactures high-performance analog, mixed-signal, and programmable semiconductors that manage and regulate power, protect against transient voltage spikes, as well as transmit, receive and amplify signals. Its products help optimize battery use, reducing size or protecting circuits. While about 80% of overall semiconductor industry revenue comes from personal computers, mobil handsets, and consumer electronics, Microsemi will get about 35% of its third quarter sales from defense and security customers, 26% from the aerospace industry, and another 21% from industrial and alternative energy companies. Not only is Microsemi more shielded from the whims of consumer spending trends than other semiconductor companies, it could also grow faster than its more cyclical peers, by our analysis. The company has made acquisitions to bring in technology that would take longer to build in house to grow revenue at a faster clip than the broader chip industry. Furthermore, it has done this without compromising its exceptionally long lead times and order cycles, which we believe provides demand visibility and helps to alleviate some concerns during tough economic conditions. Over the last decade, Microsemis revenues have risen at an 11% compound annual growth rate, better than the chip industrys mid-single digit growth. This gives us reason to believe that the company can reach its stated goal of growing at an above industry long-term rate of 15% to 20% annually. With four different operating segments defense and security, aerospace, industrial and alternative energy, along with enterprise and communications Microsemis product portfolio and customer base are highly diverse. Based on expected growth from its segments, we foresee calendar 2012 revenue growth of approximately 11% (fiscal year 2012 growth of 14%), which is slightly above the companys target of 10% organic growth.

Clyde Montevirgen S&P Equity Analyst

MICROSEMI
RELATIVE PERFORMANCE 200 175 150 125 100 75 50 25 0 MSCC SMALLCAP 600

2009

2010

2011

STATISTICS Ticker: MSCC S&P Ranking: Current Price: 17 12-Month Target Price: 27 Market Cap: $1.4 billion Investment Style: Small Cap Blend

The anticipated top-line growth should provide operating leverage, leading to margin expansion, by our analysis. We believe Microsemi has done a good job improving gross margins over the last decade, a reflection of its ability to integrate acquired businesses and rationalize product lines and manufacturing capacity. Following the acquisition of Actel Corporation in November 2010, gross margins have risen from 49% to 57% in the most recent quarter. A plant shutdown and higher-margin Actel products contributed to the improved results. We expect cross-selling activities and further cost reductions to help Microsemi reach its 60% gross margin and 30% operating margin targets over the next couple of years. If it meets these goals in calendar 2012, we estimate that operating earnings can grow by more than 25%, far above the 16% gain we project for the broader semiconductor industry. Although this higher growth would typically warrant above industry and market multiples, we believe that the companys business and financial risks could limit the stocks multiple expansion until organic sales and cash flow growth is deemed sustainable. Although we see the company growing faster than its more cyclical peers, MSCC shares are trading at multiples that are below the industry average because of risks, in our opinion. However as growth and cash flows improve, as we expect, we think that risks will abate and that shareholders will see the stocks true value. With our target price showing significant upside potential from current levels, our recommendation is Strong Buy.

10 STANDARD & POORS THE OUTLOOK AUGUST 17, 2011

Portfolio for a Steady Dividend Stream

If youre looking for income, these stocks provide the potential for a consistent dividend stream.
After the downgrade of U.S. sovereign debt to AA+ from AAA, Standard & Poors Equity Strategy advises equity investors concentrate on dividend-paying, large-cap companies with strong cash flow. Investors looking for regular income from their investments generally want that income to be paid out regularly throughout the year. To help investors accomplish this, weve grouped these 18 stocks according to the dates on which they usually pay quarterly dividends. By purchasing just six of these issues one in each time slot you would receive two dividend checks per month during the course of the year. Weve gone one step further, and identified exactly how many shares to purchase, in order to receive monthly income of about $100. For example, if you wanted to use only Master List stocks, you could buy 105 shares of Coca-Cola, 130 shares of Altria, 45 shares of Kinder Morgan Energy Partners,

Beth Piskora S&P Editorial

105 shares of Abbott Labs, 105 shares of ExxonMobil, and 65 shares of Chevron. At recent prices, the six-stock portfolio would cost $31,935 (before brokerage commissions) and provide annual income of $1,200, for a yield of 3.8%, higher than the recent 2.2% yield on the S&P 500. In addition, all the stocks in the table are ranked four- or fiveSTARS for expected above-average price appreciation over the next 12 months.

DIVIDEND PORTFOLIO
STARS QUALITY RANKING QUARTERLY DIVIDEND RATE NUMBER OF SHARES *RISK STYLE RECENT PRICE 12-MONTH TARGET PRICE P/E RATIO YIELD %

1 EARLY JAN., APRIL, JULY, OCT. Coca-Cola / KO Merck / MRK Nike / NKE 2 MID-JAN., APRIL, JULY, OCT. Altria Group / MO Heinz / HNZ Sempra Energy / SRE 3 EARLY FEB., MAY, AUG., NOV. AT&T / T Deere / DE Kinder Morgan Energy / KMP 4 MID-FEB., MAY, AUG., NOV. Abbott / ABT CVS Caremark / CVS Home Properties / HME 5 EARLY MARCH, JUNE, SEPT., DEC. American Electric Power / AEP ExxonMobil / XOM NextEra Energy / NEE 6 MID-MARCH, JUNE, SEPT., DEC. Chevron / CVX PPG Industries / PPG Travelers / TRV

5 4 4 5 5 4 5 4 5 4 5 4 5 5 4 5 5 5

A+ B A+ A B+ AB+ ANR A A+ B B A+ A A B+ A-

0.47 0.38 0.31 0.38 0.48 0.48 0.43 0.41 1.15 0.48 0.13 0.62 0.46 0.47 0.55 0.78 0.57 0.41

105 130 160 130 105 105 115 120 45 105 400 80 110 105 90 65 85 120

Low Medium Medium Medium Low Medium Medium Medium Low Medium Medium Low Low Low Low Low Medium Medium

Growth Blend Growth Blend Blend Blend Value Blend Blend Growth Blend Value Value Blend Blend Blend Blend Value

65 31 83 25 50 50 28 73 70 48 33 63 36 72 52 94 75 51

79 42 100 29 60 59 34 115 88 58 44 70 42 103 62 128 110 72

16.8 8.3 16.5 12.4 14.9 11.6 11.7 11.4 40.2 10.4 11.7 18.0 11.4 8.2 11.3 6.6 11.0 12.8

2.9 4.9 1.5 6.1 3.8 3.8 6.1 2.2 6.6 4.0 1.5 3.9 5.1 2.6 4.2 3.3 3.0 3.2

Master List issue. *Based on our analysts assessment of qualitative factors, including financial strength, potential share volatility, competitive position, industry cyclicality, regulatory/legal issues and other factors. Based on estimated fiscal 2011 earnings. Source: S&P Equity Research.

STANDARD & POORS THE OUTLOOK AUGUST 17, 2011

11

Total Return Portfolio

12/31/2010 8/5/2011 Base Currency: US Dollar
To enter the Total Return Portfolio, which is designed for long-term total return, a stock must have a current yield at least equal to or greater than that of the S&P 500. The company must not have cut its regular dividend in the past five years at the time of entry into the portfolio, and that dividend must be secure in the opinion of the S&P analyst who follows the stock. There is no S&P Quality Ranking requirement for this portfolio. S&Ps Senior Portfolio Group may replace any stock in the portfolio with another stock at any time for reasons that can include a downgrade in the S&P STARS, a dividend reduction, or other fundamental factors. The Total Return Portfolio outperformed its benchmark from the beginning of the year through August 5, falling 3.1% vs. a 3.6% drop in the S&P 500. The data on this page show which stocks contributed to, or detracted from, the portfolios performance year to date through August 5.

TOTAL RETURN PORTFOLIO

COMPANY / TICKER STARS QUALITY RANKING *RISK STYLE CURRENT PRICE 12-MONTH TARGET PRICE P/E RATIO YIELD (%)

Abbott Laboratories / ABT Altria Group / MO AT&T / T Chevron / CVX Coca-Cola / KO Deere / DE ExxonMobil / XOM Honeywell / HON Illinois Tool Works / ITW ITC Holdings / ITC Kinder Morgan Energy / KMP Microsoft / MSFT PPG / PPG Trustmark / TRMK United Parcel / UPS

4 5 5 5 5 4 5 4 5 4 5 4 5 4 4

A A B+ A A+ AA+ AA NR NR B+ B+ B B+

Medium Medium Medium Low Low Medium Low Medium Low Low Low Medium Medium Low Low

Growth Blend Value Blend Growth Blend Blend Value Growth Blend Blend Growth Blend Blend Growth

49 25 28 94 66 73 72 45 45 71 70 25 75 20 65

58 29 34 128 79 115 103 70 60 80 88 35 110 25 95

10.7 12.4 11.7 6.6 17.0 11.4 8.2 11.4 11.6 21.2 40.2 9.1 11.0 11.6 14.9

3.9 6.1 6.1 3.3 2.8 2.2 2.6 3.0 3.2 1.9 6.6 2.6 3.0 4.6 3.2

*Based on our analysts assessment of qualitative factors, including financial strength, potential share volatility, competitive position, industry cyclicality, regulatory/legal issues, and other factors. Please note that all investments carry risks. Price/earnings ratios are based on Standard & Poors estimated fiscal 2011 per-share earnings. See definitions on page 2. Source: S&P Equity Research.

LEADERS
COMPANY NAME YTD RETURN (%)

LAGGARDS
COMPANY NAME YTD RETURN (%)

Oneok* Altria Group Chevron Abbott Laboratories ITC Holdings ExxonMobil Coca-Cola AT&T Microsoft Kinder Morgan Energy

10.19 8.25 7.82 6.76 3.44 2.97 2.95 2.86 2.01 1.69

Intel ** NY Community Bancorp** PPG United Parcel Merck* Honeywell Trustmark Deere Illinois Tool Works

-3.99 -6.47 -6.68 -8.78 -8.93 -9.12 -10.11 -12.02 -16.24

The YTD Return column represents the performance for the period of time the security was in the portfolio, so if the security was not in the portfolio for the full YTD period, its the performance of the security from when it was added to the portfolio to 8/5/11. *Replaced on Februay 14. **Replaced on March 21.

12 STANDARD & POORS THE OUTLOOK AUGUST 17, 2011

S&Ps Platinum Portfolio

This portfolio potentially offers the best of both worlds: S&Ps STARS ranking system, based on fundamental analysis, and Fair Value, S&Ps proprietary quantitative model.
Each Platinum stock initially carries the highest possible investment ranking from Standard & Poors equity analysts and our Fair Value system. S&Ps STARS rankings are based on expected total return potential. Stocks with the five-STARS ranking are expected to outperform the total return of the S&P 500 index by a wide margin over the coming 12 months.

PLATINUM PORTFOLIO
RANKINGS FAIRCURRENT TICKER VALUE STARS QUALITY PRICE RANKINGS FAIRCURRENT TICKER VALUE STARS QUALITY PRICE

Aeropostale Apple Aspen Insurance Avnet Celgene Chevron Chicos FAS Chubb

ARO

3 5 4 5 5 5 5 5 3 5 5 3 4 5 5 5 5 5 5 4 3 4 5 4 4 5 3

B+ B NR C BA B A B+ B B+ B+ B A+ B+ NR AA+ B+ B B+ B+ A+ B NR AA-

12 374 26 28 54 94 13 61 16 74 53 29 14 33 15 20 47 70 80 10 55 21 36 37 562 37 31

HollyFrontier Intl Business Machines Jacobs Engineering Johnson Controls Kyocera Marvell Technology Medtronic MEMC Electronic MetroPCS Microsemi Monolithic Power Sys. Mylan NICE-Systems Oracle Philip Morris Randgold Resources Reliance Steel & Alum. Rio Tinto Royal Dutch Shell Thermo Electron Travelers Wal-Mart Stores Western Digital Xerox

HFC IBM JEC JCI KYO

5 4 5 3 5

5 5 5 5 5 5 3 3 5 5 4 5 5 5 5 4 5 5 5 5 5 5 3 5

B+ A+ B+ A NR NR A BNR B NR ANR ANR NR B+ NR NR B AA+ B B

70 167 35 32 96 13 31 7 10 16 12 19 30 28 66 101 40 58 64 53 51 50 30 8

AAPL 5 AHL AVT 5 5

CELG 5 CVX CHS CB 4 4 5

MRVL 5 MDT WFR PCS 5 5 5

S&P STARS rankings are based on expected total return potential.

S&Ps Fair Value model employs a proprietary algorithm to calculate the price at which a stock should be trading at current market levels. Fair Value ranks stocks in five tiers; those with the 5 designation are considered to be the most undervalued and to have the greatest price appreciation potential. Stocks are removed only if they lose the top ranking in both systems. Year-to-date through August 5, the portfolio fell 5.6%, vs. a drop of 4.6% in the S&P 500 on a capital appreciation basis.

Cisco Systems Cliffs Natural Resource Coach Computer Sciences CSG Systems Intl CVS Caremark Dell DreamWorks Animation Express Scripts ExxonMobil FedEx Fifth Third Bancorp Fiserv GameStop General Mills Gilead Sciences Google Harris Hewlett-Packard

CSCO 5 CLF COH CSC 5 3 5

MSCC 5 MPWR 5 MYL NICE 5 4

CSGS 5 CVS DELL 3 5

ORCL 5 PM 3

DWA 2 ESRX 5 XOM 4 FDX FITB FISV GME GIS GILD 4 5 5 5 2 5

GOLD 5 RS RIO 5 5

RDS.A 5 TMO TRV 4 3

WMT 4 WDC 5 XRX 5

GOOG 5 HRS HPQ 5 5

Master List issue. See definitions on page 2.

Performance calculations do not take into account reinvestment of dividends, capital gains taxes, or brokerage commissions and fees. If the foregoing had been factored into the portfolios investment performance, it would have been lower. This performance calculation also does not take into account timing differences between the portfolio selections and purchases made based on those selections by actual investors. Over certain periods, the portfolio incurred losses and over time the portfolio is expected to continue to pose a risk of negative investment returns. Because the portfolio has a high turnover rate, we believe it is best suited for tax-deferred accounts such as IRAs and is less suited for other accounts. Investors should seek financial advice before investing based on the portfolio. This portfolio does not address the specific investment objectives, financial situation, and particular needs of any person. Stocks in the portfolio will not be suitable for all investors. Past performance is not a valid indicator of future results. Source: S&P Equity Research.