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Third-Quarter 2012Market Overview

Economic Summary: Third-Quarter 2012

• Milestones– The Federal Reserve (the Fed) initiates quantitative easing aimed at

mortgages, job creation– European Central Bank (ECB) plans unlimited bond-buying program– Spain prepares to seek rescue funding from eurozone– Presidential campaign heats up ahead of November elections– Abrupt $3 drop in oil prices triggers CFTC inquiry– German court clears way for European Stability Mechanism– Treasury’s AIG stock sale nets taxpayers $12.4 billion profit– European parliament panel backs high-frequency trading restrictions– Paul Ryan picked by Romney as vice presidential candidate– Fiscal cliff looms, as election nears

Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results.

S&P 500 Index and Dow Jones Industrial Average: Third Quarter of 2012

Indices are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

Stock Price Averages: Dow Jones 30 Industrials, NYSE

Standard & Poor's 500 Stock Price Index

OCTSEPAUGJULJUN11

MAYAPRMARFEBJANDECNOVSources: Dow Jones, Wall Street Journal /Haver Analytics

13000

12500

12000

11500

11000

10500

1425

1350

1275

1200

1125

1050

Stock Price Averages: Dow Jones 30 Industrials, NYSE

Standard & Poor's 500 Stock Price Index

OCTSEPAUGJULJUN12

MAYAPRMARFEBJANDECNOVOCTSources: Dow Jones, Wall Street Journal /Haver Analytics

14250

13500

12750

12000

11250

10500

1500

1425

1350

1275

1200

1125

1050

Economic Themes

• Housing• Credit and banking• Fixed income• Employment• Consumer behavior• Business and manufacturing activity

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results.

CoreLogic National House Price Index% Change - Year to Year NSA, Jan-00=100

1-family homes sold/1-family homes for sale

12111009080706050403Source: Haver Analytics

20

10

0

-10

-20

3.5

3.0

2.5

2.0

1.5

1.0

0.5

Housing: Prices and Supply

Housing: Homes Foreclosed

Civilian Unemployment Rate: 16 yr +

Homes Foreclosed % of Total

1211100908070605040302010099Source: Haver Analytics

10

8

6

4

2

12

10

8

6

4

2

0

r = 0.83

Housing: Prices and Supply

Rental Vacancy Rate: United States

%

1005009590858075706560Source: Census Bureau /Haver Analytics

12

10

8

6

4

12

10

8

6

4

Housing: Price-to-Rent Ratio

Price-to-rent ratio

SA

100500959085Source: Haver Analytics

112500

105000

97500

90000

82500

75000

67500

112500

105000

97500

90000

82500

75000

67500

Credit and Banking

TED Spread

12111009080706Source: Haver Analytics

5

4

3

2

1

0

5

4

3

2

1

0

Credit and Banking continued

Delinquency Rate: Commercial & Industrial LoansDelinquency Rate: Real Estate Loans

Delinquency Rate: Credit Cards

1005009590Sources: Federal Reserve Board /Haver Analytics

7

6

5

4

3

2

1

12

10

8

6

4

2

0

Fixed Income

Past performance is no guarantee of future results.

High Yield Spread

BOA ML HY Master - 10-year US Treasury

1211100908Source: Haver Analytics

24

20

16

12

8

4

0

24

20

16

12

8

4

0

Fixed Income continued

Past performance is no guarantee of future results.

Corporate Spread

ML Corporate Master 10-15 yr) - (10-year US Treasury)

1211100908Source: Haver Analytics

6.00

5.25

4.50

3.75

3.00

2.25

1.50

6.00

5.25

4.50

3.75

3.00

2.25

1.50

Fixed Income continued

Past performance is no guarantee of future results.

10-Year Treasury %

BofA Merrill Lynch Mortgages: 30 - year%

OCTSEPAUGJULJUN12

MAYAPRMARFEBJANDECNOVSources: WSJ, BoAML /Haver

2.8

2.4

2.0

1.6

1.2

0.8

2.8

2.4

2.0

1.6

1.2

0.8

Announcement

Employment

Source: Commonwealth Asset Management/Bloomberg

Employment continued

Civilian Unemployment Rate: 16 yr +

1211100908070605040302Source: Bureau of Labor Statistics /Haver Analytics

10

9

8

7

6

5

4

10

9

8

7

6

5

4

Employment continued

Average Weekly Hours: Total Private Industries

SA, Hrs

12111009080706Source: Bureau of Labor Statistics /Haver Analytics

34.8

34.6

34.4

34.2

34.0

33.8

34.8

34.6

34.4

34.2

34.0

33.8

Employment continued

Source: BLS/Commonwealth Investment Research

Business and Manufacturing Activity

ISM Mfg: PMI Composite Index

SA, 50+ = Econ Expand

10050095Source: Institute for Supply Management /Haver Analytics

67.5

60.0

52.5

45.0

37.5

30.0

67.5

60.0

52.5

45.0

37.5

30.0

Business and Manufacturing Activity continued

ISM Nonmanufacturing: NMI Composite Index

SA, 50+=Increasing

11100908070605040302Source: Institute for Supply Management /Haver Analytics

65

60

55

50

45

40

35

65

60

55

50

45

40

35

Strong move!

Gross Domestic Product% Change - Year to Year SAAR, Bil.$

Labor Index(Proprietary)% Change - Year to Year

100500959085Source: Haver Analytics

16

12

8

4

0

-4

-8

16

12

8

4

0

-4

-8

Business and Manufacturing Activity continued

Europe – Housing in Spain

Apr-95

Nov-95

Jun-9

6

Jan-9

7

Aug-97

Mar-98

Oct-98

May-99

Dec-99

Jul-0

0

Feb-01

Sep-01

Apr-02

Nov-02

Jun-0

3

Jan-0

4

Aug-04

Mar-05

Oct-05

May-06

Dec-06

Jul-0

7

Feb-08

Sep-08

Apr-09

Nov-09

Jun-1

0

Jan-1

1

Aug-11

Mar-12

0

500

1000

1500

2000

2500

Spain’s Home Price Index

Source: Banco de Espana/Commonwealth Investment Research

8.3% YoY decline

Conclusions

• Job growth was strong in the third quarter; unemployment fell to 7.8 percent.

• The U.S. economy remained strong despite the European crisis.• Inflation is not a large concern, for now.• ISM moved back into positive territory.• Dividend sectors, especially REITs, are relatively expensive. • Decreased savings and credit expansion could create a tailwind

for the economy. • Home prices continue to move higher.• Interbank lending tensions eased, creating a favorable

credit environment.

Looking Forward . . .

• Key themes to monitor– Employment improvement necessary for sustained recovery– Earnings season for the third quarter (beat or miss estimates?)– Impact of quantitative easing on housing market– European debt crisis: is it time to starting deploying capital,

given valuations?– Direction of ISM and Labor indices over coming months– Iranian sanctions and Middle East tensions– Election results and impact on taxes– Fiscal cliff: is it overdone?– Housing market recovery

Disclosure

Investing involves risks, including loss of principal amount invested due to market fluctuations. All indices are unmanaged, and investors cannot invest directly in an index. Past performance is not indicative of future results. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The Bank of America Merrill Lynch US Corporate Index tracks the performance of U.S. dollar-denominated investment-grade corporate debt publicly issued in the U.S. domestic market. The Merrill Lynch Municipal Master Index tracks the performance of U.S. dollar-denominated investment-grade tax-exempt debt publicly issued by U.S. states and territories, and their political subdivisions, in the U.S. domestic market. The Bank of America/Merrill Lynch High Yield Master II Index tracks the performance of U.S. dollar-denominated below-investment-grade corporate debt publicly issued in the U.S. domestic market. International investing involves special risks such as currency fluctuation and political instability. The commodities industries can be significantly affected by commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions.