Investment Strategy Outlook

Investment Strategy Outlook May 2013 EQUITIES & THE T.I.N.A FACTOR – There Is No Alternative

Jason DeSena Trennert Managing Partner, Chief Investment Strategist Strategas Research Partners 52 Vanderbilt Ave., 8th Fl. New York, New York 10017 212-906-0133 jtrennert@strategasrp.com

STRATEGAS INVESTMENT OUTLOOK 2012 1QA 2.0 2.1 0.1

Real GDP Q/Q Pct. AR Core CPI Q/Q Pct. AR Fed Funds - End of Period F = Forecast; A = Actual

2QA 1.3 2.4 0.1

2013

3QA 3.1 1.6 0.1

4QA 0.4 1.7 0.1

1QA 2.5 2.1 0.1

2QF 2.0 1.0 0.1

2014

3QF 2.3 1.5 0.1

4QF 3.0 1.5 0.1

1QF 2.5 2.0 0.1

2QF 2.0 2.0 0.1

3QF 2.0 2.0 0.1

4QF 1.0 2.0 0.1

2013 S&P 500 Expected Value Table Odds

Economy

S&P Earnings

Expected Multiple

Implied S&P 500

Consensus Estimates

25%

Recession

$87.00

12x

1,044

55%

Muddle Through

$96.00

17x

1,632

2013

$111.03

20%

Upside Surprise

$112.00

18x

2,016

2014

$123.41

Expected Value:

1,562

Bottom Up

Strategas Earnings Estimates 2013

2012A

2014

Level

Y/Y

Level

Y/Y

Level

Y/Y

1Q 2Q 3Q

$24.24 $25.43 $24.00

7.4% 2.3% -5.1%

$22.75 $23.50 $24.00

-6.1% -7.6% 0.0%

$26.00 $26.00 $26.50

14.3% 10.6% 10.4%

4Q

$23.15

-2.4%

$25.75

11.2%

$27.50

6.8%

Year

$96.82

0.4%

$96.00

-0.8%

$106.00

10.4%

Recommended Sector Allocation Overweight Health Care Technology Energy

Market Weight Financials Industrials Staples

Underweight Discretionary Telecom Utilities

Materials

MAJOR INVESTMENT THEMES FOR 2013 1. Buying the Big Dip & the Transition Toward Cyclicals 2. Beggar-Thy-Neighbor Currency Policies 3. An M&A Boom 4. Remilitarization & The New Military Industrial Complex 5. Battle Royale: Private vs. Public Sector Strategas Research Partners – Investment Strategy

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PROFITS VULNERABLE BUT IT MIGHT NOT MATTER As 1Q earnings season kicks off, sales still look much weaker than profits. This is a potential problem given the fact that virtually all of the earnings gains from the market low in 2009 have come from an improvement in operating margins rather than robust top-line growth. There may be some sense in which financial analysts are making the opposite mistake that was made in the 1970s. In those days, high inflation masked weak real growth. Today, subpar but decent real growth may be masking nominal GDP at recession-like levels.

Revenue vs. Earnings: Market Low March 9, 2009 vs. Today S&P 500 Operating EPS (TTM) S&P 500 Sales Per Share (TTM) S&P 500 Ex-Financials EPS (TTM) S&P 500 Ex-Financials Sales Per Share (TTM) S&P 500 Operating Margin

2011A 2012A 2013 2014

Strategas Est. 96.44 96.82 96.00 106.00

3/9/09 49.51 1,042.5 64.6

Today 96.82 1,092.4 80.3

896.0

943.7

4.7%

8.9%

Bottom-Up Est. (First Call) 97.82 103.80 111.03 123.41

Growth Rate 15.1% 0.4% -0.8% 10.4%

Pct. Chg. 95.6% 4.8% 24.2% 5.3% 86.6%

Growth Rate 14.7% 6.1% 7.0% 11.2%

1Q 2013 Revenue & Earnings Scorecard (Source: First Call) % Beating 43% 70%

S&P 500 Revenues S&P 500 Earnings

% Missing 57% 21%

Surprise Factor -1% 5%

U.S. Nominal GDP Y/Y % Change

20

For the past 50 years, 4% nominal GDP growth has been associated with recession.

16

12 8 4 0

Grey bars indicate recession

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TOUGH TO MAKE THE CASE FOR NET MARGIN EXPANSION FROM HERE The data below suggest that a substantial portion of the expansion in net margins since 1Q 2009 has been driven by factors other than improved operating efficiency – particularly lower interest cost burdens. Unfortunately, it’s hard to imagine the interest rate environment getting much more favorable for companies from here, and operating margins are already rolling over.

S&P 500 Key Income Statement Items (Per Share) Sales Cost of Goods Sold SG&A Depreciation & Amort.

Interest Expense Income Taxes Net Income

2008 1042.5 715.2 183.7 49.8 41.7 23.4 18.7

2009 908.4 595.9 173.6 46.4 21.0 23.0 56.0

2010 962.7 615.1 181.0 46.1 19.5 33.2 80.2

2008 68.6% 17.6% 4.8% 4.0% 2.2% 1.8%

2009 2010 65.6% 63.9% 19.1% 18.8% 5.1% 4.8% 2.3% 2.0% 2.5% 3.4% 6.2% 8.3%

2011 2012 1052.8 1092.4 682.9 701.8 190.8 200.8 48.8 53.1 19.4 19.3 36.2 38.6 89.3 88.3

Chg from 2008 49.9 -13.5 17.1 3.3 -22.4 15.2 69.6

2011 64.9% 18.1% 4.6% 1.8% 3.4% 8.5%

Chg from 2008 (bps) -436.8 76.3 8.1 -223.3 128.9 629.1

As Percentage of Sales Cost of Goods Sold SG&A Depreciation & Amort.

Interest Expense Income Taxes Net Income

2012 64.2% 18.4% 4.9% 1.8% 3.5% 8.1%

*above data is index level and comes directly from S&P Compustat. Due to aggregation methodology, not all items sum as with an individual company income statement.

S&P 500 EBITDA Margin (LTM)

S&P 500 Net Income Margin (LTM)

20

10 8

18

6

16 4

14

2

12

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WATCHING LABOR’S SHARE OF INCOME FOR AN INDICATION OF PROFIT MARGINS 70%

Labor Share of Corporate GDP Labor down, profits up.

68%

66% 64% 62% 60% 59.1% 58%

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Corporate Profits as % GDP 14%

13%

12.7%

12%

11% 10% 9% 8% 7%

6% 5%

'47 '52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07 '12

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TOWER OF BABEL IN AGGREGATE EARNINGS ESTIMATES Answering an Existential Question: Just What are Earnings?

Comparison of Major U.S. Earnings Measures Measure

Description

Y/Y Growth 2009 2010

2007

2008

2011

2012

S&P As Reported EPS

Measures S&P 500 after-tax net income from continuing operations calculated using generally accepted accounting principles (GAAP) excluding discontinued operations and extraordinary items.

-18.8%

-77.5%

242.5%

51.8%

12.4%

-0.5%

S&P Operating EPS

Starts with As Reported EPS and adjusts it to exclude restructuring charges and unusual items. Pension expense is included. Consistent methodology applied across companies and sectors.

-5.9%

-40.0%

14.8%

47.3%

15.1%

0.4%

Thomson First Call Operating EPS

Calculates EPS for each S&P 500 company based on the methodology used by the majority of sell-side analysts for that company. Methodology (what is included vs. excluded in EPS) varies from one company to the next.

-3.5%

-23.1%

-7.1%

40.3%

14.7%

6.1%

Measures "income from current production" for all U.S. corporations, including private corporations and S NIPA After-Tax corporations. Expenses exclude bad Corporate Profits debts, depletion, and capital losses; receipts exclude income from dividends and capital gains.

-4.2%

-18.7%

11.4%

23.2%

2.2%

16.1%

First Call EPS vs. S&P EPS 120

First Call EPS tends to diverge from S&P EPS during tough times for earnings.

100 80

First Call

60 40

S&P

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EARNINGS & PRICE MOVE TOGETHER OVER THE LONG-TERM, BUT RELATIONSHIP IS WEAK FOR THOSE WITH SHORT HORIZONS S&P 500 Index vs. S&P 500 Operating EPS 1600

Price, left

CAGR S&P Price: 7.1% S&P EPS: 5.9%

1400 1200

120 100 80

1000

800

60

600

40

400 20

EPS, right

200 0

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S&P 500 Annual Price Return vs. EPS Growth 50% Correlation: 0.11

Price Return

25%

0%

-25%

-50% -50%

-25%

Strategas Research Partners – Investment Strategy

0% EPS Growth

25%

50%

7

IN THE ABSENCE OF PRO-GROWTH POLICIES, ECB REMAINS TOO TIGHT & THE EURO TOO STRONG

500

Assets on Central Bank Balance Sheets (Indexed to 100 in Jan-'07, Local Currency)

BOE

474 447

450 SNB

400

361

350

Fed

300 250

ECB

200

239

150

139 BOJ

100

50 Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

S&P 500 COMPANIES WITH HIGH EXPOSURE TO EUROPE S&P 500 Cos. Deriving More than 30 Pct of Sales from Europe* Pct Euro Company Sales Company CCE Coca-Cola Enterprises 100.0% EW Edwards Lifesciences NEM Newmont Mining 71.4% MRO Marathon Oil HAR Harman Intl 63.5% FOSL Fossil Inc. BWA BorgWarner 56.0% AVY Avery Dennison PCLN priceline.com 53.9% MMC Marsh & McLennan EA Electronic Arts 45.8% CELG Celgene Corp.

ALXN Alexion Pharma.

43.5% RDC Rowan Companies OI Owens-Illinois 42.0% BDX Becton Dickinson MCD McDonald's 40.3% NYX* NYSE Euronext PLL Pall Corp.

38.5% KFT Kraft Foods FSLR First Solar 38.1% BIIB Biogen Idec CCL Carnival 37.7% BAX Baxter International XYL Xylem 37.4% LIFE Life Technologies TAP Molson Coors Brewing 37.4% PCAR Paccar GILD Gilead Sciences 37.3% WAT Waters Corp.

JCI Johnson Controls 36.3% ITW Illinois Tool Works IVZ INVESCO 35.1% VAR Varian Medical Systems *NYX includes revenues generated in Asia in its Europe number, so European sales are overstated

Pct Euro Sales 34.2% 33.6% 33.4% 33.3% 33.1% 32.4% 32.4% 31.9% 31.9% 31.7% 31.7% 31.6% 31.4% 31.2% 31.0% 30.9% 30.3%

*based on information gathered in June 2012 from company filings Strategas Research Partners – Investment Strategy

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IN AN ERA OF FINANCIAL REPRESSION, EQUITIES ARE THE ONLY ALTERNATIVE WHAT IS FINANCIAL REPRESSION? 1) explicit or indirect caps or ceilings on interest rates, particularly on government debt; 2) creation of a captive domestic audience that facilitated credit to the government; 3) direct ownership of banks (China or India) or extensive management of financial institutions (Japan).

WHY FINANCIAL REPRESSION IS LIKELY TO CONTINUE: 1) The Fed sees housing as key to an economic recovery and staving off deflation.

2) The Fed bought a majority of the outstanding issuance of U.S. Treasuries last year.

3) With the weighted average cost of debt for the U.S. at a little more than 2% and 50% of the debt maturing in the next 3 years, interest expense and consequently the budget deficit would increase dramatically if the Fed stepped away from its purchases.

Fed Treasury Purchases as % Net Treasury Issuance 70%

62% 57%

60% 50% 40% 30% 20%

19%

15%

10% 0% '09

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FUNDING SHORT MEANS FED MUST STAY IN THE GAME The charts below might be considered Exhibit A in the case against the Dollar in favor of hard assets. The weighted average cost of U.S. debt outstanding is now 1.99%.

Funding long-term liabilities with short-term debt has never been a reliable financial strategy. Roughly 50% of U.S. debt matures within the next three years.

Real Yields: 10-Year U.S. Treasury Yield less CPI Y/Y 12%

10% 8% 6% 4%

2% 0%

-0.02%

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COULD IT ALL BE JUST ABOUT SUPPLY AND DEMAND? Recently, a banner headline in the FT read Global Pool of Triple A Status Sovereign Bonds Shrinks 60%. It made us wonder whether simple supply and demand dynamics were the Occam’s Razor explanation for the continuation of the rally and the outperformance of high-quality stocks. In addition to the paucity of triple-A rated sovereign debt, fewer companies are now listed on American exchanges than there have been in decades, and the average price of a stock in the S&P 500 is now at an all-time high. High nominal prices of stocks could also account, in part, for the lack of retail interest.

Number of Companies Listed on U.S. Exchanges (Sum of American SE, NASDAQ, NYSE) 9,500 8,823

9,000 8,500 8,000 7,500

7,000 6,500 6,000 5,500 5,000

4,916

Source: World Federation of Exchanges

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GLOBAL POOL OF TRIPLE A STATUS SOVEREIGN BONDS SHRINKS 60%

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Number of Issues in Merrill Lynch AAA-Rated Global Fixed Income Markets Index 5500 5000

The expulsion of the US, the UK and France from the “nine-As” club has led to the contraction in the stock of government bonds deemed the safest by Fitch, Moody’s and Standard & Poor’s, from almost $11tn at the start of 2007 to just $4tn now, according to Financial Times analysis.

4500

-Financial Times, 3/26/13

1000

4000 3500 Down -34% since high in 2007

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WHAT’S A PROPER MULTIPLE IF THE FED IS FIXING INTEREST RATES?

P/E Multiples Implied by Various Models Strategas P/E Model (w/ interest rates & CPI)

19.9x

Strategas P/E Model, Assuming 4% 10Y Treasury

18.8x

Fed Model (bond value for stock)

54.0x

Rule of 20 (20- Inflation Rate)

18.4x

Average Actual TTM P/E

27.8x 15.7x

2013 S&P 500 Expected Value Table Odds

Economy

S&P Earnings

Expected Multiple

Implied S&P 500

25%

Recession

$87.00

12x

1,044

$96.00

17x

1,632

$112.00

18x

2,016

Expected Value

1,562

55% 20%

Muddle Through Upside Surprise

Strategas Research Partners – Investment Strategy

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WITH THE PRICE OF THE AVERAGE STOCK ON THE S&P AT ALL-TIME HIGHS, ARE SPLITS MORE LIKELY? S&P 500 Average Stock Price 70 $64

65 60 55 50 45 40 35

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HIGHEST-PRICED STOCKS IN THE S&P 1500 Highest-Priced Stocks in the S&P 1500 (Top 25) NVR GOOG PCLN MA ISRG WPO AAPL AZO Y BH CMG NEU AMZN

NVR Google priceline.com MasterCard Intuitive Surgical Washington Post Apple AutoZone Alleghany Biglari Holdings Chipotle NewMarket Corporation Amazon.com

$1,046.8 $783.1 $693.3 $531.6 $490.0 $433.3 $423.2 $397.2 $381.7 $374.4 $328.0 $262.9 $255.5

Strategas Research Partners – Investment Strategy

BLK GWW EQIX IBM MTD BIIB CF REGN PCP VRTS PNRA VFC

BlackRock W.W. Grainger Equinix IBM Mettler-Toledo Intl Biogen Idec CF Industries Regeneron Pharma Precision Castparts Virtus Investment Panera Bread VF Corp.

$245.8 $222.0 $214.0 $209.4 $204.6 $193.3 $190.0 $185.4 $182.9 $178.8 $177.2 $169.1

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FIDUCIARIES MAY BE UNDERWEIGHT EQUITIES GIVEN CURRENT ACTUARIAL ASSUMPTIONS Pension Fund Asset Allocation (%)

Source: Milliman 2013 Pension Funding Study 65 60

Equity

55 50 45 41.2

40

38.0

35

Fixed Income

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Year 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

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Endowments Asset Allocation (Dollar-Weighted Average) Equities Fixed Income Alternatives Cash/Other 50% 23% 24% 2% 49% 21% 27% 2% 51% 17% 28% 4% 48% 17% 32% 3% 48% 15% 35% 2% 47% 13% 37% 2% 40% 13% 46% 1% 32% 13% 51% 4% 31% 12% 52% 5% 33% 10% 53% 4% 31% 11% 54% 4%

*Source: NACUBO-Commonfund Study of Endowments ('09-'12) and NACUBO Endowment Study ('02-'08)

Rolling 3-Year & 5-Year Returns: Treasuries vs. Equities vs. Hedge Funds

2012

3-Year Rolling Returns 10Yr S&P Hedge Treasury 500 Funds 8.8% 10.9% 3.5%

Strategas Research Partners – Investment Strategy

5-Year Rolling Returns 10Yr S&P Hedge Treasury 500 Funds 6.8% 1.7% 1.5% 14

GENTLEMEN, EVIDENTLY, PREFER BONDS 2006 to Mar-'13 Net Mutual Fund Flows (ICI, $BN)

$1,600

$1,322

$1,200

One wonders whether the average investor is using bond funds as a proxy for cash.

$800 $400

$115

$0 -$400 -$800

-$600 Domestic Equity

The public’s record in asset class love affairs has been less than stellar.

Emerging Markets Equity

Fixed Income

Net Equity Fund Flows minus Net Bond Fund Flows (3Mos MA, $US BN)

$60

Mar. ‘00

$40 $20

Mar-‘13

$0

-$0.9

-$20 Oct. ‘02

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Long-Term Government Long-Term Corporate Small-Cap Stocks Intermediate-Term Government Treasury Bills Inflation Large-Cap Stocks

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1970s

1980s

1990s

2000s

5.5 6.2 11.5 7.0 6.3 7.4 5.9

12.6 13.0 15.8 11.9 8.9 5.1 17.5

8.8 8.4 15.1 7.2 4.9 2.9 18.2

7.7 7.6 6.3 6.2 2.8 2.5 -0.9

*Compound annual returns by decade

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MONEY MARKET ASSETS BACK DOWN TO “NORMAL” LEVELS Money Market Assets as % of NYSE Market Capitalization

56% 48% 40% 32% 24% 16%

16.1%

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ARE BOND FUNDS BEING USED AS A PROXY FOR CASH? Bond Mutual Fund Assets as % of NYSE Market Capitalization

30%

The fuel for retail flows into stocks is much more likely to be from bond funds rather than money market funds.

25%

21.1%

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EXTRAORDINARY RELATIVE VALUE IN EQUITIES VS. TREASURIES AND CORPORATES S&P 500 Equity Risk Premium (Earnings Yield less 10-Year Treasury Yield, bps) 800 600 +2 standard deviations

472

400 +1 standard deviation

200 0

27

average

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-1 standard deviation

-400

-2 standard deviations

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S&P 500 Equity Risk Premium (Earnings Yield less Baa Corporate Bond Yield, bps) 600 400

+2 std deviations

200

188 +1 std deviation

0 -200

avg

-400

-1 std deviation

-600

-169

-2 std deviations

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FINANCIAL REPRESSION MAKES EQUITIES COMPELLING AS A SOURCE OF YIELD % of S&P 500 Stocks with Dividend Yields Greater than the 10-Year U.S. Treasury Yield 60%

55%

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40%

30%

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Real Yields: 10-Year U.S. Treasury Yield less CPI Y/Y 12%

10% 8% 6% 4%

2% 0%

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STILL-LOW COST OF CAPITAL MAKES HURDLE RATE EASIER TO SURPASS S&P 500 Return on Average Invested Capital 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%

7.7%

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S&P 500 Weighted Average Cost of Capital* 14%

12% 10% 8% 4.9%

6%

4% 2% 0%

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*Strategas approximation

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STRATEGAS’ SCREEN OF POTENTIAL BUYOUT TARGETS Strategas’ Screen of Potential Buyout Targets

Industrials

Sotheby's Buffalo Wild Wings Finish Line Gentex Hillenbrand Jos. A. Bank Clothiers Maidenform Brands True Religion Apparel Universal Electronics Darling International TreeHouse Foods Alpha Natural Resources Nabors Industries Brookline Bancorp First Financial First Niagara Hancock Holding Kilroy Realty Legg Mason People's United The Hanover Insur. Grp Natus Medical Endo Health Solutions Allscripts Healthcare NuVasive AGL Resources

Mkt Cap Sector (Mil) Company 2,474.6 AEGN Aegion 1,442.6 KFY Korn/Ferry Intl 907.4 OSK Oshkosh 2,857.9 RBC Regal-Beloit 1,541.2 SKYW SkyWest 1,153.0 TTEK Tetra Tech 456.9 URI United Rentals 746.0 UTIW UTi Worldwide 280.3 ESIO Electro Scientific 1,991.4 FARO FARO Technologies 1,951.7 HLIT Harmonic 1,876.5 IRF International Rectifier 4,794.2 IVAC Intevac 633.9 MSCC Microsemi 903.2 PAY VeriFone Systems 2,785.8 PKT Procera Networks 2,570.0 PRFT Perficient 3,792.2 SCSC ScanSource 3,502.1 VECO Veeco Instruments 4,147.5 ATI Allegheny Technologies 1,865.0 CBT Cabot 357.9 GEF Greif 3,412.9 KRA Kraton Performance Polymers 1,877.5 MTRN Materion 737.4 RGLD Royal Gold 4,714.2 STLD Steel Dynamics SWC Stillwater Mining X United States Steel Technology

Financials

Discretionary

BID BWLD FINL GNTX HI JOSB MFB TRLG UEIC DAR Staples THS ANR Energy NBR BRKL FFBC FNFG HBHC KRC LM PBCT THG BABY ENDP Healthcare MDRX NUVA Utilities GAS

Company

Materials

Sector

Mkt Cap (Mil) 915.2 853.7 3,492.1 3,280.1 647.4 1,843.0 4,877.0 1,520.1 321.2 595.4 619.2 1,411.3 106.7 1,904.9 3,797.0 327.2 347.6 818.9 1,234.2 3,554.9 2,365.4 2,297.1 854.7 569.1 4,744.2 3,433.1 1,682.5 3,220.4

Strategas Buyout Screen Parameters Universe Size Sales Growth

S&P 1500 Market cap is less than $5 billion.

Average sales growth over the last 3 years is greater than the sector average.

Management Efficiency ROE is less than the sector average.

Insider Ownership

Float as a percentage of total shares outstanding is greater than 95%.

Valuation

Price/Book is less than both the company's own 3-year average and the sector average.

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EUROPE LIKELY TO GET WORSE France’s “Pro-Growth” Strategy?

Hire 100,000+ public sector workers Reduce retirement age from 62-60 Raise Top Marginal Tax Rate to 75% Euro up +7.8% vs.

Dollar Since Draghi’s Speech

USD/EUR (Cost of 1 Euro in USD) 1.38

1.36 1.34 7/26: Draghi: "Believe me, it will be enough."

1.32 1.30 1.28

1.26 1.24 1.22 1.20 Jan-12

Apr-12

Jul-12

Oct-12

Jan-13

Apr-13

EU 27: Unemployment Rate SA, % 11.25

11.25

10.50

10.50

9.75

9.75

9.00

9.00

Current: 10.9%

8.25

8.25

7.50

7.50

6.75

6.75 00 01 02 03 04 05 06 07 08 09 10 11 Source: Statistical Office of the European Communities /Haver Analytics

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FOR INVESTORS IN EUROPEAN EQUITIES, SURVIVAL OF EURO IS SIMPLY NOT ENOUGH Non-Euro Europe Relative to Euro Europe Stocks Dec. 31, 1996 = 100

Index Components Eurozone:

Non-Euro Europe:

Austria Belgium Finland France Germany Greece Ireland Italy Netherlands Portugal Spain

Denmark Sweden U.K. Czech Republic Hungary Poland Switzerland Norway

170 160

150 140 130 120 110

Jan. 1st, 1999

Jan. 1st, 2001

Euro-Zone exchange rates fixed to Euro

Greece joins the Euro-Zone

100 90 Jan. 1st, 2002

80

Euro notes introduced

70 60

Data through 4/30/13

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EUROPE’S “MOST DANGEROUS POLITICIANS” FOR THE FUTURE OF THE EURO VIRTUALLY ALL YOUNGSTERS The German magazine Der Spiegel recently published its list of Europe’s most dangerous politicians when it comes to the future of the Euro.

What is striking is how young they all are in comparison to the political elites manning the ramparts of Euroland.

Save Silvio Berlusconi, these rabble rousers are all relatively young in comparison to the Euro’s staunchest defenders – Merkel (58), Draghi (65), and Monti (69).

Der Spiegel: Europe's 10 Most Dangerous Politicians 1.

Name Alexis Tsipras

Age 38

2.

Markus Söder

46

Bavarian Finance Minister

3.

Silvio Berlusconi

76

Former Italian Prime Minister

4.

Marine Le Pen

44

Leader of the Far-Right Front National in France

5.

Timo Soini

50

Leader of the True Finns Party, Member of European Parliament

6.

Alexander Dobrindt

42

7.

Nigel Farage

48

8.

Heinz-Christian Strache

43

General Secretary of Conservative Bavarian Christian Social Union (CSU) Leader of U.K. Independence Party (UKIP), Member of European Parliament Head of Austrian Freedom Party

9.

Geert Wilders

49

Head of the Dutch Freedom Party

10. Viktor Orbán

49

Hungarian Prime Minister

Strategas Research Partners – Investment Strategy

Position Leader of Greece's leftist Syriza party

22

FINANCIAL REGULATION STYMIEING MONETARY POLICY Dodd-Frank Rulemaking Progress 40%

37%

Of the 398 total rulemaking requirements, only 148 (37%) have been finalized.

35% 28%

30% 25% 20%

16%

16%

15%

10% 5%

3%

0% Finalized

Missed Deadline: Proposed

Missed Future Deadline: Deadline: Not Proposed Not Proposed

Future Deadline: Proposed

Source: Davis Polk, April 1, 2013

U.S. Money Velocity (Nominal GDP/M2) 2.2

2.1 2.0 1.9 1.8 1.7

1.6

1.54

1.5 '92

'94

'96

'98

'00

Strategas Research Partners – Investment Strategy

'02

'04

'06

'08

'10

'12

23

C&I LOANS UP MEANINGFULLY; HOUSEHOLD BORROWING STARTING TO FOLLOW SUIT Household Debt: Mortgages (Trillion $) $10

Household Debt: Home-Equity Loans (Trillion $)

+0.1% Q/Q in 4Q 2012

$9

$0.75 $0.65

$8

$0.55

$7

$0.45

$6

$0.35

$5

$0.25

$4

-1.7% Q/Q in 4Q 2012

$0.15

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

Household Debt: Auto Loans (Trillion $) $0.85

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

C&I Loans (SA, Trillion $) $1.6

+2.0% Q/Q in 4Q 2012

$0.80

$1.5

+1.0% M/M in Jan 2013

$1.4 $1.3

$0.75

$1.2

$1.1

$0.70

$1.0

$0.65

$0.9 $0.8

$0.60 '03

'04

'05

'06

'07

'08

'09

'10

'11

'12

Strategas Research Partners – Investment Strategy

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

24

IS THE MARKET FIGHTING THE FED OR ITS RESULTS? LEFT TAIL OUTCOME FOR MONEY VELOCITY REMAINS A CONCERN...

S&P 500 Commercial Banks Price-to-Book vs. Velocity of Money (Nominal GDP/M2) 2.2

3.5

2.1

3.0

Velocity, left

2.0

2.5

1.9

2.0

1.8

1.2x

1.5

1.7

1.0

1.6

0.5

1.5

0.0 '95

'00

'05

'10

…BANK NET INTEREST MARGINS STILL IN DECLINE U.S. Bank Net Interest Margin vs. Yield Curve (5yr-3m; bps) 5.0%

400

NIM, left

yld curve, right

300

4.5% 200

4.0%

100 0

3.5% -100 3.0%

-200 '84

'88

'92

'96

Strategas Research Partners – Investment Strategy

'00

'04

'08

'12

25

HOUSING IS BOTTOMING

S&P/Case-Shiller Home Price Index: Composite 20 220 200

Home prices improving

180

are

160 140 120 100 '00

'02

'04

'06

'08

'10

'12

U.S. Homes/Households Ratio

1.18 1.17 1.16 1.15

The ratio of homes/households is slowly returning to its long-term average.

1.14

1.13 1.12 '00

'02

'04

Strategas Research Partners – Investment Strategy

'06

'08

'10

'12

26

STRATEGAS’ LEADING INDICATOR OF MANUFACTURING (SLIM) SUGGESTS MANUFACTURING IS ON A PLATEAU Under the auspices of the former Chairman of the ISM, Strategas’ Director of Proprietary Surveys Norbert Ore has put together a monthly survey of both New Orders and Supplier Deliveries among 60 manufacturing companies in the country.

Generally speaking, our SLIM index is designed to be a good leading indicator for the broader ISM. SLIM New Orders Diffusion Index (SA) 70% 65%

60% 55% 50% 45%

New Orders Stall in April

48.6%

40% Jan-12 Mar-12 May-12 Jul-12

Sep-12 Nov-12 Jan-13 Mar-13

SLIM Supplier Deliveries Diffusion Index (SA) 58% 54% 50%

48.5%

46%

Deliveries Signal Weakening Demand

42% 38%

Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13

Strategas Research Partners – Investment Strategy

27

ENTITLEMENT REFORM NECESSARY When President Johnson first introduced Medicare as a part of his Great Society programs, the Administration was bold enough to make a 25-year forecast of its costs.

In 1966, it was estimated that Medicare would cost the country a little less than $9 billion in 1990. The program actually cost $98 billion that year – as Bob Uecker might say, “juuust a bit outside.” When asked recently on Charlie Rose’s show how they could have been so far off the mark, former Johnson advisor Joe Califano said that it wasn’t only inflation but also the inability to forecast technology that accounted for the missed estimate – no one could possibly forecast that, for instance, heart transplants would allow thousands of people with life threatening heart disease to live long and productive lives. While such innovations are undoubtedly life’s tender mercies, these same procedures allow people to consume other expensive and impossible-to-forecast medical advances ranging from arthroscopic surgery to Viagra. The lesson in all this

is that, without rationing, it is virtually impossible to handicap healthcare costs over the long-term, particularly in light of a new entitlement.

Medicare Cost, Projected Vs. Actual We found the Medicare(Nominal Actuary reportHI from when the program Benefits, $BN)was developed and the

cost estimate came nowhere close to the actual cost. Some argue new programs were added later to the program. That is exactly the point. As this program is implemented, 120 new programs will be added, increasing the cost. Even the prescription drug program, Actual Medicare which has private competition driving down cost, has exceeded costCost estimates. Pharma 100 is vehemently opposed to theCAGR Obama proposal to squeeze $75bn from the program Actual: 35.7% given the program’s potential future profits for the industry as the Baby Boomers retire.

80

Projected: 9.5% Proj + Inf: 15.6%

60

Projected Cost w/Inflation w/out

40 20 0 '66

'69

'72

'75

Strategas Research Partners – Investment Strategy

'78

'81

'84

'87

'90

28

U.S. MUST NOW RELY ON CAPEX & EXPORTS FOR GROWTH It has become part of the standard pabulum of economic commentators to say that consumer spending is 2/3 of the economy. That is indeed the long-term average, but it ignores the fact that consumer spending as a percentage of GDP actually peaked at roughly 71% in early 2011.

In a $15 trillion economy, the difference between 71% and 66% is significant and not easily corrected. It appears that growth for the U.S. must now come from capital spending and exports rather than consumer spending and government expenditures.

U.S. Consumption as % of GDP 72%

GDP = C + I + G + X

71%

70%

Hard to rely on C or G now.

68% 66%

Long-term Average: 65%

64% 62% 60%

'47

'54

'61

'68

'75

'82

'89

'96

'03

'10

Unemployment Rate: < HS Diploma: 25+ Years (SA, %) Unemployment Rate: HS Diploma, No College: 25+ Years (SA, %) Unemployment Rate: < Bachelor's Degree: 25+ Years (SA, %) Unemployment Rate: College Graduates: 25+ Years (SA, %) 16

16

Population Breakdown by Education (25 Years & Over, 2011)

< HS Diploma 12

12

12% 7% 8

8

6% 4

College Grads

4%4

0

Thous

% Total

Less than HS Diploma

25,040

12%

HS Grads, No College

61,911

31%

Less than Bach. Degree

53,250

26%

College Graduates

61,343

30%

201,543

100%

0 00 01 02 03 Sources: BLS /Haver

04

05

06

07

08

09

10

11

Strategas Research Partners â&#x20AC;&#x201C; Investment Strategy

12

13

29

NATURAL GAS & AMERICA’S POTENTIAL FOR A MANUFACTURING RENAISSANCE Natural Gas Prices - U.S. vs. Japan vs. Europe (USD/MMBtu) 20 Japan

16 Europe

12

8 U.S. (Henry Hub)

4

0 Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

U.S. Exports and Imports, Bil $ SAAR Exports of goods and services Exports of goods Foods, feeds, and beverages Industrial supplies and materials Capital goods, except automotive Automotive vehicles, engines, and parts Consumer goods, except automotive Other Exports of services

2Q $2,189 $1,551 $135 $491 $525 $150 $183 $66 $638

2012 3Q $2,199 $1,555 $150 $474 $534 $146 $183 $68 $644

4Q $2,191 $1,540 $136 $477 $523 $144 $184 $78 $651

2013 1Q $2,215 $1,558 $136 $488 $528 $147 $183 $75 $657

Imports of goods and services Imports of goods Foods, feeds, and beverages Industrial supplies, except petrol Petroleum and products Capital goods, except automotive Automotive vehicles, engines, and parts Consumer goods, except automotive Other Imports of services

$2,765 $2,312 $110 $291 $446 $559 $299 $520 $88 $453

$2,716 $2,261 $111 $290 $404 $546 $305 $518 $88 $455

$2,721 $2,270 $111 $287 $419 $546 $297 $528 $82 $451

$2,765 $2,305 $115 $295 $411 $555 $294 $543 $93 $460

TRADE GAP (Exports minus Imports)

($577)

($517)

($530)

($550)

Strategas Research Partners – Investment Strategy

Jan-13

There’s certainly upside potential for growth in the U.S. energy space: in the U.S. trade tables, imports of petroleum products are a substantial factor.

On the export tables, the line item isn’t even listed.

Changing this could definitely matter to U.S. GDP.

30

HOW TO PLAY IT Discussions with our clients yielded the following list of stocks as a good starting point for investors seeking to play U.S. energy independence. As macro people, we can’t vouch for these companies as investments, but we think the theme has legs.

A Sample of Ideas for Playing the Energy Independence Story Approach

Company Symbol Rosetta Resources ROSE Whiting Petroleum WLL Magnum Hunter MHR Range Resources RRC Gas & Oil Devon Energy DVN Producers Encana ECA EOG Resources EOG Contango Oil & Gas* MCF Exxon XOM Unit Corp.

UNT Basic Energy BAS Helmerich & Payne HP Halliburton HAL Service Schlumberger SLB Companies Cheniere Energy LNG National Oilwell Varco NOV Xylem XYL CARBO Ceramics CRR Vehicle Eqp. Cummins CMI Makers M&T Bank MTB Banks PNC PNC First Niagara FNFG CBI Engineering Chicago Bridge & Iron Cos. Fluor FLR Enterprise Products Partners EPD Kinder Morgan Energy Partners KMP Energy Plains All American Pipeline PAA MLPs** Magellan Midstream Partners MMP Energy Transfer Partners ETP

Mkt Cap ($Mil) 2,552.8 5,613.4 632.0 12,602.4 21,875.3 13,136.1 33,424.9 577.4 400,686.7 2,210.6 594.7 7,024.4 37,859.6 103,340.0 5,110.4 28,567.8 5,117.5 2,087.0

Forward P/E 11.6x 12.6x NA 59.7x 15.2x 37.8x 21.4x NA 11.1x 12.6x NA 12.4x 13.4x 16.3x NA 11.2x 14.6x 20.8x

Div Yield 0.00% 0.00% 0.00% 0.21% 1.48% 4.48% 0.61% 0.00% 2.55% 0.00% 0.00% 0.91% 1.23% 1.61% 0.00% 0.78% 1.70% 1.20%

21,841.7

13.2x

1.74%

13,215.1 33,175.2 2,863.1 5,709.5 9,833.4 51,583.9 22,265.9 18,280.0 11,388.4 14,245.9

12.2x 9.7x 10.9x 14.1x 14.5x 21.1x 34.3x 18.8x 22.8x 22.0x

2.73% 2.55% 3.94% 0.37% 1.06% 4.65% 5.95% 4.14% 3.98% 7.54%

*Strategas has developed non-deal roadshows for Contango in 2011 & 2012. **Five MLPs with highest weighting in Alerian MLP Index

Strategas Research Partners – Investment Strategy

31

DEMOGRAPHIC TRENDS SUGGEST SECULAR MULTIPLE EXPANSION MAY BE TOUGH TO ACHIEVE An interesting study from the San Francisco Fed suggests that demographic trends may continue to put pressure on price-earnings multiples. The m/o ratio (middle aged to older aged people) has had a surprisingly tight fit with multiples through the years.

S&P 500 P/E Ratio & "Middle/Old" Ratio 30x

2.20

Trailing P/E, left Ratio: Population aged 40-49 to population aged 60-69 (right)

2.00

25x

1.80 20x 1.60 15x 1.40

Census Projections, 2011-2050 10x

1.20

5x

1.00 '50

'60

'70

'80

'90

'00

'10

'20

'30

'40

'50

Based on SF Fed calculations

T R I I

axes egulation nterest rates nflation

Strategas Research Partners – Investment Strategy

All these factors were big tailwinds for multiple expansions in the ‘80s and ‘90s. It’s difficult to see any of these elements improving much from here.

32

HOW TO PLAY IT: A) EXPECT SHORTER BUSINESS CYCLES & GREATER VOLATILITY Real Gross Domestic Product % Change - Y ear to Y ear

SAAR, Bil. Chn. 2005$

Stock Price Index: Standard & Poor' s 500 Composite % Change - Y ear to Y ear

1941-43=10

16

60

1950s 12 40

8 20 4

There are historical periods in which recessions were much more common (eg, the 1950s).

Our concern is that if we see a slower trend growth rate in the U.S. economy, we will be perpetually closer to the recession condition of negative growth.

0 0

-4

-20 48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

U.S. Real GDP Growth Y/Y % 1947-2012

Historically, the U.S. economy has tended to either be expanding around potential growth (3%), or in a recession (-1%). A “flat” economy has generally been unstable. If potential growth in this expansion is slower (as we believe), we will be starting out closer to the “flat” economy – it may therefore be harder for economic growth to slow without tipping into recession (soft landings should become more rare).

History suggests it’s one way or the other now – 1% is an unstable position.

Strategas Research Partners – Investment Strategy

33

RELIANCE ON PUBLIC SPENDING LIKELY TO LEAD TO SECULARLY HIGHER VOLATILITY While they may be imperfect parallels, we believe the U.S. in the 1930s and Japan in the 1990s underscore a simple point – economies that become dependent upon public spending (as opposed to more traditional drivers of recovery like pent-up demand for consumer durables) tend to spawn greater volatility in their corresponding financial markets. In both cases, attempts to balance the budget via tax increases led to significant dislocations in stock prices as the “bill came due.”

Japan Nikkei 225 Index 40,000

7 Rallies: +62% Average

35,000

+34%

30,000

+56% +48% +34%

25,000

+62% +140%

20,000 15,000

+61%

10,000 5,000 '86

'88

'90

'92

'94

'96

'98

'00

'02

Strategas Research Partners – Investment Strategy

'04

'06

'08

'10

34

1970’s REDUX? Many of our clients and friends that have seen multiple cycles believe that over the next several years, the market will be reminiscent of the period following the ’73-’74 bear market. After an initial rally off the bottom, the major market indices marked time for several years. Increasingly we believe the investment landscape over the next several years will likely be bullish for real assets, neutral for stocks, and bearish for bonds.

Real Returns Across Asset Class (1975 to 1980) Gold

Large-Cap Stocks

Home Prices

T-Bills

Long-Term Corp. Bonds

Long-Term Govt. Bonds

12/31/1974

$1

$1

$1

$1

$1

$1

12/31/1975

$0.67

$1.28

$1.01

$0.97

$1.06

$1.00

12/31/1976

$0.61

$1.51

$1.03

$0.96

$1.19

$1.11

12/31/1977

$0.70

$1.31

$1.09

$0.95

$1.13

$1.03

12/31/1978

$0.91

$1.29

$1.16

$0.94

$1.05

$0.94

12/31/1979

$1.96

$1.38

$1.19

$0.93

$0.89

$0.82

% Return

96%

38%

19%

-7%

-11%

-18%

Commodity Exposure Outperformed Strategas Research Partners – Investment Strategy

Fixed Income Underperformed by a Wide Margin 35

(B) VIEW EQUITIES AS AN IMPORTANT PART OF YIELD The change in the dividend tax rate is likely to have a greater impact on the number of companies paying dividends than on the relative performance of dividend-paying stocks. Arguably the biggest change resulting from the 2003 tax cuts was that it halted the 25-year decline in the number of dividend-paying companies. A return to more discriminatory tax rates on dividends would likely stop cold any nascent move on the part of technology stocks, for instance, to initiate dividends. An important element of the recent tax changes is that rates on dividends and capital gains were equalized. Even if some companies reduce or even stop their dividends as a result, we’d expect still-high demand for a smaller number of payers to fuel a strong bid for dividend stocks.

Total Returns Before & After 1990 Dividend Tax Increase

Total Returns Before & After 1993 Dividend Tax Increase

Div Aristocrats S&P 500

-3M -1M +1M +3M -4.6% 3.3% 7.1% 15.2% -7.8% 1.3% 5.3% 12.7%

Div Aristocrats S&P 500

-3M -1M +1M +3M -1.1% -0.1% 3.2% 4.0% 2.2% 0.5% 3.0% 3.9%

Aristocrats Rel S&P

3.2% 2.0% 1.8% 2.5%

Aristocrats Rel S&P

-3.4% -0.6% 0.2% 0.0%

S&P 500 Dividend Aristocrats (25+ Years of Increased Annual Dividends) MMM ABT ABBV AFL APD ADM T ADP BCR BDX BMS BF.B CAH CVX CB CINF CTAS CLX

3M Co Abbott Laboratories AbbVie Inc. AFLAC Inc Air Products & Chemicals Archer-Daniels-Midland AT&T Automatic Data Proc Bard (C.R.) Becton, Dickinson Bemis Co Brown-Forman'B' Cardinal Health Inc Chevron Corp Chubb Corp Cincinnati Financial Cintas Corp Clorox Co

KO CL ED DOV ECL EMR XOM FDO BEN GPC GWW HCP HRL ITW JNJ KMB LEG LOW

Coca-Cola Co Colgate-Palmolive Consolidated Edison Dover Corp Ecolab Inc Emerson Electric Exxon Mobil Family Dollar Stores Franklin Resources Genuine Parts Grainger (W.W.) HCP Inc Hormel Foods Illinois Tool Works Johnson & Johnson Kimberly-Clark Leggett & Platt Lowe's Cos

Strategas Research Partners – Investment Strategy

MKC MCD MHP MDT NUE PNR PEP PPG PG SHW SIAL SWK SYY TROW TGT VFC WAG WMT

McCormick & Co McDonald's Corp McGraw-Hill Companies Medtronic, Inc Nucor Corp Pentair Ltd. PepsiCo Inc PPG Indus Procter & Gamble Sherwin-Williams Sigma-Aldrich Stanley Black & Decker Sysco Corp T.Rowe Price Group Target Corp VF Corp Walgreen Co Wal-Mart Stores

36

MUTUAL FUND FLOWS SUGGEST THAT THE DIVIDEND TRADE IS FAR FROM OVER-OWNED Outsized relative valuations for high-yielding sectors like Telecom and Utilities have led many to conclude that the dividend trade is over-owned. But paltry allocations to equities on the part of pensions and endowments, actual redemptions from income-oriented mutual funds over the past four and a half years, and low absolute valuations suggest that there may still be a long way to go as far as the dividend trade is concerned. Like many others, we are more interested in companies and sectors that can grow dividends (e.g., technology) than in those that already sport high yields.

S&P 500 Absolute & Relative Valuations, Dividend Yields (as of 4/18/13) Sector Utilities Telecom Staples Financials Discretionary Health Care

NTM P/E 16.3x 18.9x 16.9x 12.0x 16.2x 14.6x

Relative P/E 1.209 1.402 1.251 0.889 1.201 1.082

15-Year Avg Rel P/E 0.872 1.079 1.072 0.801 1.149 1.077

Ratio (sorted) 1.386 1.299 1.166 1.109 1.045 1.004

Dividend Yield 3.89 4.19 2.72 1.77 1.62 1.96

S&P 500

13.5x

1.000

1.000

1.000

2.19

Industrials Energy Materials Technology

13.4x 11.4x 12.7x 11.7x

0.997 0.845 0.941 0.868

1.020 0.878 0.985 1.342

0.977 0.962 0.956 0.647

2.41 2.27 2.51 1.84

Net Flows Into/Out-of Mutual Funds ($BN, ICI)

2008 2009 2010 2011 2012

Growth & Income ($31.9) ($14.3) ($27.2) ($32.3) ($18.7)

Income ($14.9) ($13.8) ($13.5) ($1.0) ($0.9)

Capital Appreciation ($105.3) ($11.4) ($56.4) ($105.4) ($137.0)

Sum

($124.5)

($44.0)

($415.6)

Strategas Research Partners â&#x20AC;&#x201C; Investment Strategy

Total Equity Total Bond ($233.8) $27.8 ($8.8) $375.9 ($38.7) $241.4 ($137.6) $124.7 ($153.2) $304.8 ($572.2)

$1,074.6

37

STAY THIRSTY (FOR DIVIDENDS) MY FRIENDS – STILL PLENTY OF RUNWAY FOR THE DIVIDEND TRADE Top 10 S&P 500 Dividend Yielders WIN PBI FTR

Windstream Pitney Bowes Frontier

Dividend Yield 11.7% 10.5% 10.1%

CTL EXC

CenturyLink Exelon

5.9% 5.8%

Ticker

Company

Top 10 S&P 500 Dividend Payers Ticker

Company

XOM Exxon AAPL Apple T GE CVX

Annual Divs ($Mil, Indicated) $10,193 $9,954

AT&T General Electric Chevron

$9,665 $7,882 $6,979

GRMN Garmin

5.4%

LO

Lorillard

5.4%

JNJ Johnson & Johnson MSFT Microsoft

$6,825 $6,701

RAI NEM MO

Reynolds American Newmont Mining Altria Group

5.2% 5.2% 5.1%

PFE PG VZ

$6,323 $6,141 $5,888

S&P 500 Dividend Payout Ratio

Dividend Contribution to Total Return Price Dividend Total Dividends Pct. Contribution Return Pct of TR Change

110 100

1930s

-41.9%

56.0%

14.1%

NA

90

1940s

34.8%

100.3%

135.0%

74.3%

80

1950s

256.7%

180.0%

436.7%

41.2%

70

1960s

53.7%

54.2%

107.9%

50.2%

60

1970s

17.2%

59.1%

76.4%

77.4%

50

1980s

227.4%

143.1%

370.5%

38.6%

40

1990s

315.7%

116.7%

432.4%

27.0%

2000s

-24.1%

15.0%

-9.1%

NA

Avg.

104.9%

90.6%

195.5%

51.5%

Strategas Research Partners – Investment Strategy

Pfizer Procter & Gamble Verizon

49.4 32.3

30 20 '36

'47

'58

'69

'80

'91

'02

'13

38

PLENTY OF ROOM TO INCREASE PAYOUTS It is axiomatic that dividends will comprise a larger portion of the market’s total return in periods in which multiples are contracting. Remarkably, dividends comprised 51.5% of the market’s total return since 1928 and provided the only return from stocks in the 1930s and in the 2000s. We believe the basic building blocks of earnings multiples can be accurately summed up in the acronym T-R-I-I – taxes, regulation, inflation, and interest rates.

No one wants to be overly gloomy, but it would be difficult to foresee a circumstance in which these basic building blocks could get much better. After all, 10-year Treasury yields are 1.7%, core inflation is right near the Fed’s target, the regulatory environment has been accommodative if not permissive, and marginal tax rates and taxes on capital gains and dividends are near historic lows.

Top 25 S&P 500 Non-Fin. Companies by Cash & ST Investments on the Balance Sheet Cash ($Mil.)

Sector

Cash ($Mil.)

Sector

GE

General Electric

Company

79,390

Industrials

MRK

Merck

16,141

Health Care

MSFT

Microsoft

63,040

Technology

ABT

Abbott Labs

15,174

Health Care

CSCO

Cisco

48,716

Technology

BA

Boeing

13,558

Industrials

GOOG

Google

48,088

Technology

DELL

Dell

12,777

Technology

F

Ford

33,837

12,415

Discretionary

PFE

Pfizer

32,708

Health Care

QCOM

QUALCOMM

12,374

Technology

ORCL

Oracle

30,676

Technology

HPQ

Hewlett-Packard

11,707

Technology

AAPL

Apple

29,129

Technology

AMZN

Amazon.com

11,448

Discretionary

AMGN Amgen

24,061

Health Care

IBM

IBM

11,129

Technology

CVX

Chevron

21,913

Energy

XOM

Exxon

9,923

Energy

JNJ

Johnson & Johnson

21,089

Health Care

NWSA

News Corp.

9,626

Discretionary

INTC

Intel

18,162

Technology

EBAY

eBay

9,408

Technology

16,551

Staples

KO Coca-Cola Source: Compustat; as of 4/18/13

S&P 500 Sector Telecom Utilities Staples Materials Industrials Energy S&P 500 Health Care Technology Financials Discretionary

Company

Discretionary CMCSA Comcast

Dividend Yield (sorted) 4.19% 3.89% 2.72% 2.51% 2.41% 2.27% 2.19% 1.96% 1.84% 1.77% 1.62%

Strategas Research Partners – Investment Strategy

Dividend Payout % of Total Index Ratio Dividends Paid 159% 68% 47% 42% 36% 24% 32% 32% 20% 22% 26%

6% 7% 14% 4% 11% 11% 100% 12% 15% 13% 9% 39

THE SHIELD FOR YIELD: STRATEGAS’ “THRIFTY FIFTY” INDEX U.S. Companies with Lowest 5-Year CDS Spreads (Top 50) – CDS data & screen as of 4/25/13 CDS Div Yld Payout

CDS Div Yld Payout

MRK

Merck

14.5

3.76

85.9

CB

Chubb

33.5

2.02

26.3

XOM DIS

Exxon Walt Disney

15.0 16.0

2.84 1.17

23.2 24.0

HD PFE

Home Depot Pfizer

33.8 33.8

2.13 3.28

38.3 62.9

MCD CVX

McDonald's Chevron

18.5 19.0

3.02 3.28

54.0 27.0

ZTS PG

Zoetis Procter & Gamble

33.8 34.5

0.00 3.09

NA 54.3

MMM HON

3M Honeywell Intl

19.5 21.8

2.40 2.22

37.5 40.0

KMB NWSA

Kimberly-Clark News Corp.

34.6 34.6

3.10 0.53

65.4 10.0

GOOG Google NSC Norfolk Southern

26.4 26.5

0.00 2.62

NA 35.1

TGT ED

Target ConEd

34.8 35.2

2.08 3.87

28.9 62.4

UNP JNJ

Union Pacific Johnson & Johnson

26.5 26.7

1.88 3.10

30.1 65.2

BWP CVS

Boardwalk Pipeline CVS

35.5 35.5

7.09 1.53

156.6 21.9

IBM D

IBM Dominion Resources

26.7 26.9

1.88 3.68

23.2 L 383.0 COP

Loews ConocoPhillips

35.5 36.1

0.56 4.33

22.1 44.7

BAX AEP

Baxter Intl American Electric Power

27.2 28.0

2.55 3.83

40.3 73.7

Kraft Foods Mondelez Intl

36.2 36.2

3.96 1.65

NA 114.9

UPS MSFT

UPS Microsoft

28.3 29.4

2.91 2.77

256.0 KO 43.9 GIS

Coca-Cola General Mills

36.5 36.5

2.67 3.01

53.9 46.4

BMY MCK

Bristol-Myers McKesson

29.8 30.0

3.50 0.74

155.7 COST 11.9 PX

Costco Praxair

36.9 38.4

1.14 2.12

173.1 40.3

DD CSX

E.I. DuPont CSX

30.9 31.5

3.36 2.47

68.0 30.9

MON XEL

Monsanto Xcel Energy

38.5 38.9

1.41 3.44

28.6 54.8

CL

Colgate-Palmolive

32.1

2.25

50.2

AMGN Amgen ORCL Oracle

38.9 38.9

1.78 0.71

25.8 16.5

39.0 39.5

1.37 3.05

14.8 47.2

KRFT MDLZ

U.S. Sovereign

32.5

DE LLY

Deere Eli Lilly

33.0 33.5

2.28 3.58

22.8 46.9

AET TXN

WMT

Wal-Mart

33.5

2.40

31.5

France Sovereign

Aetna Texas Instruments

St rat egas Thrifty Fif ty Rel Equal-Wtd S&P 500 25-Apr-2011 to 25-Apr-2013 (Dail y) 25-Apr-2011=100; Local

116

114 112 110

108 106

104 102

100

6/11 Source: StrategasRP

9/11

12/11

3/12

6/12

9/12

75.1

In a world starved for yield, companies with fortress-like balance sheets might be seen as proxies for previously unassailable sovereign debt.

In the immediate aftermath of the downgrade last year, 55 companies sported CDS spreads lower than those of Uncle Sam. This was the inspiration for our Thrifty Fifty basket.

12/12 3/13 ©FactSet Research Systems 2013

Strategas Research Partners – Investment Strategy

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THE GLOBAL “THRIFTY FIFTY” UNA NA NESN VX 6326 JP CNR CN NOVN VX 9437 JP 9432 JP 9020 JP 9022 JP 7751 JP 5108 JP 8725 JP 8766 JP 7911 JP 9531 JP CCL AU 8630 JP 6301 JP 7203 JP 7267 JP 1928 JP 2503 JP 005930 KS T CN 8802 JP 9005 JP 9007 JP 6503 JP 2914 JP 3402 JP 2502 JP SYNN VX SAN FP 3382 JP 6501 JP TLSN SS TEL NO 7011 JP 5201 JP 8031 JP FP FP AI FP BAS GR 8801 JP SHBA SS 8058 JP GSK LN 8053 JP SIE GR LIN GR

50 Non-U.S. Companies with Lowest 5-Year CDS Spreads (S&P Int'l 700) - as of 3/4/13 Company 5-Year CDS Div Yield Country Sector Unilever Nv-Cva 29.5 3.19 Netherlands Staples Nestle Sa-Reg 29.8 NA Switzerland Staples Kubota Corp 29.8 1.37 Japan Industrials Can Natl Railway 30.5 1.42 Canada Industrials Novartis Ag-Reg 31.3 NA Switzerland Health Care Ntt Docomo Inc 32.0 4.04 Japan Telecom Nippon Telegraph 32.0 3.49 Japan Telecom East Japan Rail 32.4 1.60 Japan Industrials Central Japan Rl 33.0 1.07 Japan Industrials Canon Inc 33.2 3.89 Japan Technology Bridgestone Corp 33.7 1.10 Japan Discretionary Ms&Ad Insurance 34.7 2.83 Japan Financials Tokio Marine Hd 34.7 1.99 Japan Financials Toppan Printing 34.9 2.88 Japan Industrials Tokyo Gas Co Ltd 35.1 1.90 Japan Utilities Coca-Cola Amatil 36.2 3.77 Australia Staples Nksj Hd 36.4 NA Japan Financials Komatsu Ltd 36.5 1.99 Japan Industrials Toyota Motor 38.3 NA Japan Discretionary Honda Motor Co 38.4 2.07 Japan Discretionary Sekisui House 38.8 2.05 Japan Discretionary Kirin Holdings C 40.4 2.09 Japan Staples Samsung Electron 40.4 NA South Korea Technology Telus Corp 40.7 3.43 Canada Telecom Mitsubishi Estat 40.7 0.48 Japan Financials Tokyu Corp 42.6 1.17 Japan Industrials Odakyu Elec Rail 42.7 0.71 Japan Industrials Mitsub Elec Corp 43.4 1.40 Japan Industrials Japan Tobacco 43.6 1.95 Japan Staples Toray Industries 45.4 1.75 Japan Materials Asahi Group Hold 45.5 1.23 Japan Staples Syngenta Ag-Reg 45.8 NA Switzerland Materials Sanofi 49.6 NA France Health Care Seven & I Holdin 49.7 2.29 Japan Staples Hitachi Ltd 49.7 1.94 Japan Technology Teliasonera Ab 49.8 NA Sweden Telecom Telenor Asa 49.9 NA Norway Telecom Mitsubishi Heavy 50.0 1.17 Japan Industrials Asahi Glass Co 50.0 4.24 Japan Industrials Mitsui & Co 50.3 3.71 Japan Industrials Total Sa 50.5 6.06 France Energy Air Liquide Sa 50.8 NA France Materials Basf Se 51.0 NA Germany Materials Mitsui Fudosan 51.1 0.90 Japan Financials Svenska Han-A 51.1 NA Sweden Financials Mitsubishi Corp 51.7 3.21 Japan Industrials Glaxosmithkline 52.1 5.03 Britain Health Care Sumitomo Corp 52.7 4.51 Japan Industrials Siemens Ag-Reg 53.7 NA Germany Industrials Linde Ag 54.5 NA Germany Materials

Strategas Research Partners – Investment Strategy

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