EFTA00595686.pdf

Global Investment Opportunities Group (GIO) J.P. Morgan Investment Themes Jeanne Sun February 14, 2012 (212J 622 2646 NEW TRADE IDEA: Implications of Cheap Natural Gas We believe cheap natural gas in the US is creating attractive longer-term investment opportunities, particularly around the liquid natural gas (LNG) supply chain as the commodity continues to globatize. Demand for natural gas is steadily increasing across the world due to rising energy needs, the search for cleaner energy alternatives, coal plant retirements, and nuclear power concerns. However, natural gas supply remains concentrated (40% comes from Russia and the US) and due to the difficulties in transporting the commodity, natural gas pricing can vary significantly across different geographies. With North American natural gas trading at 70-80% discounts to Japanese and UK markets, we believe efforts to close this gap will drive continued growth in the LNG industry. We encourage investors to build exposure across the LNG supply chain for the long term: E&Ps, pipelines, liquefaction sites, and shippers. JPMorgan research estimates that the number of countries with LNG import capabilities will rise from 25 at the end of 2011 to 48 by the end of 2015 creating as much as $1 trillion in CAPEX spending for the Equipment & Services industry through 2018. The North American market alone has 7 LNG export projects in the approval process and is expected to come online in 2015-2016. As these LNG sites are built.. and pipeline companies should benefit (from higher natural gas prices and increased volumes) as well as shippers and ship builders from the need to transport the LNG to markets with limited domestic access. Additionally, there is a near term opportunity in US-based chemical and fertilizer companies which use natural gas and its derivatives as major inputs. These companies are experiencing a competitive advantage over their non-US counterparts and are able to manage their margins better. Location, schedule and scale of new liquefaction capacity tn kr *. Source: JPMorgan End Users Fertilizer and Chemical Companies Liquefaction E&C firms focused on global energy projects Pipelines MLPs Exploration & Production Shale investments near LNG sites'investments Investment Products: Not FDIC Insured • No Bank Guarantee • May Lose Value EFTA00595686 GIO Investment Themes J.P.Morgan CLOSING TRADE IDEA: LONG INDONESIAN RUPIAH We are closing our long Indonesia Rupiah trade as we see limited upside in the currency outside of carry as we are now within 1% of JPMS LLC's forecast of 9,000 by mid-year 2012. Over the two years since we recommended the Rupiah, investors have benefited from 5-6% of carry annually plus 3% currency appreciation. CLOSING TRADE IDEA: LONG AIRLINE STOCKS We are closing our long airline stocks trade. Since we initiated the trade, airline stocks have declined 14% driven first by a 40% rise in oil prices and then as oil retreated, concerns of a slowing economy. Bookings in the space remain strong and the consolidating industry continues to support improved pricing power. However, with two of the risks we highlighted having played out, a labor-negotiation driven bankruptcy filing, and Europe driven slowdown concerns, we believe it is time to throw in the towel and close this trade out. IMPORTANT INFORMATION This presentation and the material contained herein is not a product of the.. Morgan Research Department not a research report, although it may refer to a research report ce research analyst. This presentation should be reviewed in conjunction with U.S. research published by . Morgan Securities. LLC to the extent that such research exists. The opinions and ideas expressed herein do not take into account individual client ciarnstances. objectives and needs. Transactions in any securities that may be referenced herein may not be suitable for al investors. This presentation has been prepared for information purposes only. Nothing in this material is intended to be a solicitation for any product or service offered by a Morgan's Private Bank or any of its affiliates. Information contained herein has been obtained from sources believed to be reliable but we do not guarantee its accuracy or completeness and accept no responsibility for any tired or consequential losses arising from its use. The views and strategies described herein may not be suitable for all investors. This i,formation is not intended as an offer or solicitation for the purchase or sale of any friancial instilment and is being provided merety to illustrate a particular investment strategy. Past performance Is no guarantee of future results. Investment Products: Not FDIC Insured - No Bank Guarantee - May Lose Value 2 EFTA00595687 GTO Investment Themes J.P.Morgan OUTSTANDING TRADE IDEAS Trade Rationale Risks Levels Update Long High Yield • Market is currently pricing in high • Double dip in the HY CDX Spread: • IB expects YE CDX.HY default expectations relative to economy driving higher , Jan•5.2010: 485 bps spread at 550bp. continue to history and JPMS LLC defaults or default hold and opportunistically expectations of 2%. expectations • Current: 566 bps add High Dividend Stocks • High dividend yielding stocks to • Liquidity/credit crisis Spread between 500 • Remains a core part of benefit from investors searching sparking additional Dividend Yield 8 5Y equity exposure and for yield. dividend cuts. Investment Grade Bond valuation remains attractive • Gap between dividend yields and Yields: versus lixed income bond yields are tighter than • Jan-5.2010: -1.44% • Focus on underperforming historical levels and near historical • Current: -0.55% stocks/sectors peaks making stocks cheap to bonds on a relative basis. Buy Brazil Inflation • Current inflation breakevens are • Earlier than expected Brazil 2013 Inflation • Brazil's CB rate cuts are Linked Bonds likely low given need for large Central Bank tightening Breakeven: likely to continue to pressure infrastructure investments. keeping inflation low • Jan•5-2010: 5.4% inflation upwards • Political noise around upcoming • Elections • Current: 5.55% • Inflation surprised to the elections likely to create entry • Double dip in the global upside in Jan '12 points. economy • Central Bank comments indicate pushing out of rate hike allowing inflation to run. Long Korean Won • Capital account surplus. • Double dip in global JPYKRW: • Korea have expanded • Leverage to economic recovery. economy • Jan.5.2010: 12.44 currency swap lines from $13b to $70b. signaling • Performance has lagged other • Current: 14.32 willingness to combat a EUR emerging market currencies. USDKRW: debt crisis spillover • Jan-5.2010: 1140.50 • Targeting 1040 by Dec '12 • Current: 1123.78 • Korea's indicators look strong with strong current account surplus Long Brazil Equities • Strong outlook for economic • Volatility likely to iShares MSCI Brazil • Valuations remain cheap: growth. Increase with elections • Feb.26.2010: 68.37 P/BV < 2008 lows and • Support from commodities this fall. dividend yields +4% • Current: 67.77 exposure. • Valuations at the higher • Strong GDP expected: 5.7% • Upward earnings revisions. end of historical ranges. in 4O12 • Inflation/policy tightening concerns. Long Russian Ruble • Improving current account and • High correlation to oil. USD/RUB • Resilient Brent prices and strong GDP growth expected. • CBR managing the • Apr-26-2010: 29.11 stronger than expected • Fund flows improving driven by currency appreciation. domestic demand, risk tilted • current: 30.07 to the upside high yields and constructive FX outlook. • Flow momentum for RUB • JPMS LLC forecasting 27.23 by among the strongest in EM year end. • GDP growth is expected to expand by 3.5% yoy • Political risks remain Note: Current levels are as of Feb 14, 2012. Investment Products: Not FDIC Insured - No Bank Guarantee - May Lose Value 3 EFTA00595688 GIO Investment Themes J.P.Morgan Trade Rationale Risks Levels Update Long EuroStoxx 50 • Attractive levels as has • Liquidity crisis or double Euro&mot 50 DIvkiend • Expect 2012 to be a volatile Dividends underperformed broad equity dip recession in Europe. Futures year for the 2013 EuroStoxx markets. • Regulatory risk affecting 2012 Contracts: 50 Div future contract, but • Limited downside from current financial institutions. continues to price in a • Jun-9-2010: 89 significant cushion to JPM levels which are pricing in full • Index composition risk. elimination of bank and insurance • Current: 116.40 estimates company dividends. 2013 Contracts: • JPM forecasts 124 for 2013 • Consensus estimates for • Oct-14-2010: t05 contracts EuroStoxx 50 dividends are 120 • Current: 103.9 for 2012 and 124 for 2013. Long Telecom • Large CAPEX Investments are • Consumer recession. Bloomberg US Telecom Equipment Stocks likely required to support growth in • New technology or Equipment Index (Internet Mobility) mobile internet usage entry of low cost • Oct-13-2010: 44.07 • Smarlphones and tablets are competitor. • Current: 58.24 expected to grow at 3050% CAGRs over the next 3 years. • Increased data usage on mobile devices such as smartphones and tablets. Long Emerging • Strong demand for natural • Increased supply of Global Natural Markets Inflation resources and agricultural goods commodities. Resources Index driven by growing middle classes • Sharp slowdown in • Mar-30.2011: 4068 in Emerging Markets. Emerging Markets • Current: 3607 • Recent weather related supply economic activity. disruptions adding to upward pressure on commodity prices. Long Infrastructure • Expecting Engineering and • Global growth slows Russell 2000 Engineering • Private-sector strength Stocks Construction backlog to continue , c ommodity price & Contracting Services expected to offset public- to steadily build declines Growth Index sector headwinds • Global LNG trade requires Mar-31-2011: 788.97 • Worse than expected • E&C multiples still extensive infrastructure build out public-sector headwinds Current: 788.56 reasonable following Jan '12 • Strong CAPEX expectations for rally commodity companies Long Dated Muni • Muni to Treasury ratio should fall • Unpredictable response JPM Muni Total Return • Long-term issuances have in early 2012, but remain elevated of investors to: negative USD 20Y been low driving longer- vs. historic norms headlines and the Oct-04-2011: 260.53 dated mui yields to new lows • JPMS overweight essential economic response to fiscal consolidation Current: 266.36 service munis needed at the federal level Long Globalization of • Demand for natural gas steadily • Significantly lower oil to Henry Hub to Global LNG Natural Gas Increasing natural gas spread Feb-14-2012: • Significant differences in global • Regulatory issues Spread to Japan: 14.13 natural gas prices expected to Spread to UK: 6.66 drive globalization • JPMS LW estimates countries with LNG import capabilities will rise from 25 to 48 by the end of 2015 Note: Current levels are as of Feb 14, 2012. Investment Products: Not FDIC Insured - No Bank Guarantee - May Lose Value 4 EFTA00595689 GTO Investment Themes J.P.Morgan CLOSED TRADE IDEAS Trade Rationale Risks Levels Rationale for Closing Short Agency • Mortgage rates are tracing at • Fed continues to buy 6% Fannie Mae 30Y Given the move in spreads we Mortgages historically tight levels to US MBS but ends Mortgage Spread are dosing this trade as further Treasuries. purchases of • Jan-5.2010: 4 bp upside is likely to be limited and • Fed poised to end agency MBS Treasuries accompanied by further • Fed-25-2010: 16 bp government intervention. purchases at the end of March. 2.10 Yield Curve • Spread between 2Y and 10Y swaps • Fed remains low for Spread between 2Y and Profitability levels reached as Flattener are near historic highs much longer than 10Y swaps: pullback in risk drove a rally in expected • Jan-5-2010: 256 bps long term rates. Fed is expected • Expectations for Fed tightening should drive sell off in 2Y bonds • Fed ends purchases • May-7-2010: 238 bps to maintain its "low for long' causing spread compression of US Treasuries or language but looking to re-enter the trade when posturing purchases do not changes. offset issuance Long Palladium • Strong demand and leverage to • Double dip Palladium: Reached JPMS LLC target of recovery in the global consumer. recession. • Jan-5.2010: 420 5450/oz. • Supply challenges due to frequent • Discovery of • Mar-4-2010: 456 production disruptions in Russia. additional supply outside of Russia. Long Turkish • Favorable valuation versus . Higher than expected MSCI Turkey (Local): Increasing uncertainty on political Equities Emerging Market equities. increases in inflation • Jan-5.2010: 794.548 front and market fundamentals. • Valuation re-rating from structurally or interest rates. Likely to trade in line with the • Jun-9.2010: 778.537 region. lower inflation and interest rates. • Failure to sign IMF • Signing of IMF standby agreement stand by agreement. MSCI Turkey (USD): could be a catalyst. • Jan-5.2010: 549 • Upgraded to BB in February. • Jun-9.2010: 493 Long Temporary • Temporary hiring has rebounded • Temp hiring 1500 HR 8 Profitability levels reached as Unemployment strongly and set to turn positive. deteriorates. Employment Services temporary employment turned • Temp hiring recovery typically leads • Double-dip Index: positive on year over year basis • Feb-26-2010: 59.55 and recommended closing overall employment. recession. positions due to lack of near term • Attractive valuation vs. prior • Increase in hiring • Mar-23.2010: 67.04 catalysts and valuations that were expansions. costs due to political / already pricing in improving regulatory changes. temporary employment picture. Long Chilean Rates • Chilean interest rates are expected • Strong copper prices Receive fixed 1Y CLP Rates have declined about 30 to rise due to higher inflation (strong supported by China rates 1Y forward basis points and further decline is copper prices). or solid global • Feb-26-2010: 4.34% limited given consensus policy • 1Y swaps increase expected over recovery. rate expectations. • Jun•9.2010: 4.09% the next year is 2x expected policy • Strong local growth rate increase. driving higher • Tightening by China could reduce inflation." need to raise rates in Chile. Short Chinese Rates • Inflation / overheating concerns . Benign inflation in 1Y CNY Swaps Rates: Rates likely to remain low for the driving policy tightening. China. • Feb-264010: 2.27% near term given slowdown in • Tightening came earlier than • Slow down in growth economic data. accommodative • Aug-2-2010: 2.10% government, and policy measures investment community expected. or double dip recession driving 5Y CNY Swaps Rates: addressing pockets of inflation in • Strong growth should also lead to certain industries. higher rates. further stimulative • Feb-264010: 3.74% government actions. • Aug-2-2010: 2.91% Investment Products: Not FDIC Insured - No Bank Guarantee - May Lose Value 5 EFTA00595690 GIO Investment Themes J.P.Morgan Trade Rationale Risks Levels Rationale for Closing Long Indonesia • Strong fundamentals with trade and • Government IDR Limited upside outside of carry Rupiah current account surpluses. intervention. • Feb-26.2010: 9,343 • Benefiting from commodities • Return of political • Feb-14.2012: 9,049 exposure. instability. • JPMS LLC target: USD-IDR of 8.650 by year end. 10Y Swap Spread • Swap spreads much tighter than • Correction to 10Y Swap Spreads Market corrected. Widener historical levels with 10 year swap historical norms can • Mar•30.2010: -5 bps spreads dipping into negative take a long time. territory for the first time recently. • May-7-2010: 5 bps • Swap spreads • Very short term trade on technical become more rebound. negative. Long Palladium • Demand remains strong with • Pullback in auto Palladium: Reached JPMS LLC target of improving auto sales in the US, demand. • May-4-2010: 515 $600/oz. China, and Brazil. • Discovery of a new • Oct-14-2010: 600 • Supply remains constrained. mine. • JPMS LLC forecasting an average price of $600/oz for 4010. Long EuroStoxx 50 • Attractive levels as has • Liquidity crisis or EuroStoxx 50 Dividend Extended shorter term contracts Dividends underperformed broad equity double dip recession Futures to longer maturity contracts markets. in Europe. 2011 Contracts: • Limited downside from current levels • Regulatory risk • Jun•9.2010: 93 which are pricing in full elimination of affecting financial bank and insurance company institutions. • Oct-14-2010: 114 dividends. • Index composition • Consensus estimates for EuroStoxx risk 50 dividends are 122 for 2011 and 135 for 2012. Long Airline Stocks • Seasonal benefit from buying in • Double dip recession NYSE Airlines Index Stocks hurt by higher oil prices Septembe00ctober and selling in • Nov-17-2010: 48.70 and weakening confidence in the • High oil prices April/May economy. Recent fleet orders coupled with weak , Feb.14.2012: 40.61 • Structural benefits from improved economy also bring into question cost discipline, increasing revenues management discipline. • Decline in bookings. and pricing power. and plans to delayer balance sheets Investment Products: Not FDIC Insured - No Bank Guarantee - May Lose Value 6 EFTA00595691