EFTA00601886.pdf

Global Investment Opportunities Group (GIO) J.P. Morgan Investment Themes Jeanne Sun March 16. 2012 NEW TRADE IDEA: Auto Replacement Cycle We believe investors should position themselves to benefit from an upcoming replacement cycle in the US auto sector. The depressed and below trend levels of US auto sales over the past three years as well as last year's production disruptions (earthquake in Japan) have created pent up demand which is now resulting in an acceleration in sales reports. Additionally, we are overdue for a replacement cycle as the last one was 12-13 years ago and is contributing to an ever aging fleet: Polk estimates the average car age is approaching 11 years, and we estimate that the average age of vehicles being retired is nearing 16 years. While some of this increase is due to technological advancements, we still expect the urgency to scrap old cars to increase as their maintenance costs rise, particularly when compared to historically low financing rates for new cars. We have recently begun to see confirmation that this replacement cycle is happening. While US auto sales have been slowly recovering since mid-2009, recent improvements in employment have supported better than expected auto demand and helped accelerate sales. In fact, auto sales in February were reported at 15 million (on a seasonally adjusted annualized rate) which was 1 million better than both expectations and already impressive January results. We expect this trend to continue alongside strong US payrolls and increasing consumer confidence. Lastly, the sector has seen improving pricing power given the large amounts of restructuring and capacity cuts over the past three years and we believe management teams are more focused on profitability than gaining market share, making now an opportune time to increase exposure to this sector. Risks: • Slowdown in US economic growth, particularly in employment. Implementation: • Original equipment manufacturers (OEMs) and auto parts suppliers with exposure to the US auto market and strong balance sheets. • Supply constrained commodities used in passenger vehicles such as palladium. • Please call you J.P. Morgan representative for specific implementation ideas. Auto Sales Increasing Average Age of Vehicles Increasing (Millions) -US Auto SAAR (years) Avg Age of All Cars 21 17 M—Estimated Avg Age of Retired Cars 15.6 15.9 16 14. 19 2009-2012 15 13.8 14.2 Average 14 13.2 12.7 2 17 13 12.0 1. m co 15 12 o • o d 11 a. a n ce o 10 0 of 13 os to 1:9 os co co "o3 03 6 9 m Previous Replacement 11 Cycle Average 8 7 9 1995 1997 2000 2003 2006 2009 2012 Source: Bloomberg Source: Bloomberg. Polk IMPORTANT INFORMATION This presentation and the material contained herein is not a product of the J.P. Morgan Research Department and is not a research report although it may refer to a research report or research analyst. This presentation should be reviewed in conjunction with U.S. research published by J.P. Morgan Securities. LLC to the extent that such research exists. The opinions and ideas expressed hereei do not take into account incividual 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 J.P. 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 direct or consequential losses arising from its use. The views and strategies described herein may not be suitable for all investors. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument and is being provided mere1y 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 EFTA00601886 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 High Yield default expectations relative to economy driving higher , j ab.5.2018: 485 bps Spreads to tighten -46bps history and JPMS LLC defaults or default from current levels to 570bps expectations of 2%. expectations • Current: 546 bps by YE-2012, continue to hold and opportunistically 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 5Yr equity exposure and for yield. dividend cuts. Investment Grade Bond valuation remains attractive • Gap between dividend yields and Yields: versus fixed income bond yields are tighter than • Jan•5.2010: 4.44% • Focus on underperforming historical levels and near historical • Current: .0.64% 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 , j as.5.2818. 5.4% inflation upwards • Political noise around upcoming • Elections • Current: 6.08% • 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 JPY/XRW: • 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: 13.49 willingness to combat a EUR emerging market currencies. USD/KRW: debt crisis spillover • Jan-5-2010: 1140.50 • Targeting 1090 by Dec '12 • Current: 1125.78 • Korea's indicators look strong with strong current account surplus, expect BOK to remain on hold through 2012 Long Brazil Equities • Strong outlook for economic • Volatility likely to iShares MSCI Brazil • Strong GDP expected: 5.7% growth. Increase with elections • Feb-26-2010: 68.37 in 4O12 • Support from commodities this fall. • Current: 67.56 • Government taking steps exposure. • Valuations at the higher toward market-friendly • Upward earnings revisions. end of historical ranges. reforms (i.e. Pension reform) • Inflation/policy tightening concerns. Long Russian Ruble • Improving current account and • High correlation to oil. USDIRUB • 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, current • Current: 29.25 account dynamic remains high yields and constructive FX outlook. strong • JPMS LLC forecasting 27.23 by • Flow momentum for RUB year end. among the strongest in EM • GDP growth is expected to expand by 3.5% yoy • Putin election seen as a positive Note: Current levels are as of Mar 16, 2012. Investment Products: Not FDIC Insured - No Bank Guarantee - May Lose Value 2 EFTA00601887 GIO Investment Themes J.P.Morgan Trade Rationale Risks Levels Update Long EuroStoxx 50 • Attractive levels as has • Liquidity crisis or double EuroStoxx 50 Dividend • 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: 117.30 estimates company dividends. 2013 Contracts: • JPM forecasts 122 for 2013 • Consensus estimates for • Oct-14-2010: 105 contracts EuroStoxx 50 dividends are 120 • Current: 105.80 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: 60.80 expected to grow at 30.50% CAGRs over the next 3 years. • Increased data usage on mobile devices such as smarlphones and tablets. Long Emerging • Strong demand for natural • Increased supply of S&P 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: 3575 • 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 , Commodity price & Contracting Services expected to offset public to steadily build declines Growth Index sector headwinds • Global LNG trade requires Mar-3t-2011: 788.97 • Worse than expected • E&C multiples still extensive infrastructure build out public-sector headwinds Current: 776.49 reasonable • Strong CAPEX expectations for 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. 266.53 dated mui yields to new lows • JPMS overweight essential economic response to fiscal consolidation Current: 253.67 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 Current: • JPMS LW estimates countries with LNG import capabilities will Spread to Japan: 14.51 rise from 25 to 48 by the end of Spread to UK: 7.14 2015 Auto Replacement • Pent up demand, industry • Slowdown in US DJ Auto & Part Titans 30 Cycle restructuring and aging U.S. autoeconomic growth. Index fleet particularly in Mar-16.2012: 389.75 • Improvements in employment and employment economic data • SAAR exceeding expectations Note: Current levels are as of Mar 16, 2012. Investment Products: Not FDIC Insured - No Bank Guarantee - May Lose Value 3 EFTA00601888 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 closing this trade as further Treasuries. purchases of • Jan•5.2010: -2 by 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 3450/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. Ukely to trade in line with the • Jun•9.2010: 778.537 region. lower inflation and interest rates. • Failure to sign IMF • Signing of IMF stand-by 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 S&P 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 ly CLP Rates have declined about 30 to rise due to higher inflation (strong supported by China rates tY forward basis points and further decline is copper prices). or solid global • Feb-26-2010: 4.34% limited given consensus policy • 111 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-26.2010: 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-26.2010: 3.74% government actions. • Aug-2-2010: 2.91% Investment Products: Not FDIC Insured - No Bank Guarantee - May Lose Value 4 EFTA00601889 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 LW target of improving auto sales in the US, demand. • May-42010: 515 $600/oz. China, and Brazil. • Discovery of a new • 0ct-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 September/October and selling in • High oil prices • Nov-17-2010: 48.70 and weakening confidenee in the economy. Recent fleet orders April/May 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 5 EFTA00601890