is the us recovery sustainable?is the us ... - deutsche bank€¦ · is the us recovery...

Is the US Recovery Sustainable?Is the US Recovery Sustainable?

Torsten Slok Ph DTorsten Slok, Ph.D.Chief International Economist

60 Wall StreetNew York, New York 10005

Tel: 212 250 2155

June 2011

Tel: 212 250 [email protected]

All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors Data is sourced from Deutsche Bank and subject companies Deutsche Bank does and seeks to do business with companies covered in its research reports Thus

Torsten Slok, [email protected] +1 212 250-2155

vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 007/05/2010

ConclusionWe will not see a double-dip: The issue is the speed of the recovery: normal = 6%,speed of the recovery: normal 6%, moderate = 3% – 4%, growth recession = 2% And the speed of the recovery is critical2%. And the speed of the recovery is critical for the Fed, rates, and equities.

6

Q/Q%, AR

6

Q/Q%, AR

.. .

Real GDP growth

Normal recovery

2

0

2

4

2

0

2

4

..........

Moderate recovery

Growth recession

-8

-6

-4

-2

-8

-6

-4

-2

.

Deutsche Bank 1Torsten Slok, [email protected] +1 212 250-2155

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2008 2009 2010 2011

Conclusion contd.Question: Why is the recovery weaker than normal?Answer: Still many imbalances in the housing and banking

t b l h t i d d f h h ldsectors = more balance sheet repair needed for households and banks. Weak housing market and falling home prices affects the recovery via three channels:affects the recovery via three channels: 1) negative impact on housing construction (and hence GDP growth), 2) negative impact on consumer spending (because of falling home prices), and 3) negative impact on banks’ balances (and hence their credit extension).Now add high commodity prices and supply problems in theNow add high commodity prices and supply problems in the auto industry – these are the sources of the soft patch.


Question: Why not a double dip?Conclusion contd.

Question: Why not a double-dip?Answer: Because investment in durable goods and structures has sunk to historically low levels, and excess stocks of cars, machinery, homes, offices,

d f t i h b d till b i d l ti t iand factories have been and are still being run down relative to a growing population and trend income. Over the next several years, spending on durables and structures has the potential to add an extra 5% to GDP, enough to

th ff t ibl b t ti l fi l t ti i d i th tmore than offset a possible substantial fiscal contraction coming during that period.

32 5

%

32 5

%Discretionary spending as share of GDP

27 5

30.0

32.5

27 5

30.0

32.5

Historical average

22 5

25.0

27.5

22 5

25.0

27.5

17 5

20.0

22.5

17 5

20.0

22.5


17.51947 1954 1961 1968 1975 1982 1989 1996 2003 2010

17.5

Near-term implications for investorsEconomic risks:- Soft patch in the economy – driven by commodity prices and auto supply disruptions Supply disruptions temporaryand auto supply disruptions. Supply disruptions temporary, commodity prices a more permanent problem. Expect more weak data in coming months.g

Event risks:- End of QE2 on June 30 is an event risk- Debt ceiling is an event risk; deadline August 2- Greece/European debt problems an ongoing event risk

Summary investment implications:- Risky assets and rates trending down near term. Going into 2012 i k t d t lik l t i


2012 risky assets and rates likely to rise.

Where has growth gcome from duringcome from during

this recovery?this recovery?


The business cycle is driven by cyclical components of GDP, but cyclical components only 20% - 25% of GDPy p y

45% y/y

45% y/y

35

45

35

45Cyclical components of GDP*

Non-cyclical components of GDP**

15

25

15

25

-5

5

-5

5

-25

-15

-25

-15

251948 1956 1964 1972 1980 1988 1996 2004

25

*Real residential investment, consumer durables, BFI and change in pvt. inventories**GDP minus real residential investment consumer durables BFI and change in pvt inventories


Source: BEA, DB Global Markets Research

GDP minus real residential investment, consumer durables, BFI and change in pvt. inventories

This diagram shows the cyclical components of GDP. During this recovery real estate (=the orange and red parts below)

ha e so far added er little to GDP gro thhave so far added very little to GDP growth.

(Composition of discretionary spending: 60‐yr average)

Business inventories

BFI Equipment& Software

NonresStructures

Consumer Durables

ResidentialInvestment

Durables

Key question: When will the existing housing market

Deutsche Bank 7Torsten Slok, [email protected] +1 212 250-2155 Source: BEA, DB Global Markets Research

US economy currently flying on one engine

Key question: When will the existing housing market be healthy enough to trigger builders to build

more buildings and hence contribute to GDP growth?

So far, this recovery has mainly been driven by consumer durables and capex

Discretionary spending (average since 2009 Q3)

Business inventories

Nonres structures

Residential Investment Consumer

DurablesDurables

BFI Equipment & SoftwareSoftware

Deutsche Bank 8Torsten Slok, [email protected] +1 212 250-2155 Source: BEA, DB Global Markets Research

What will drive growthWhat will drive growth going forward?going forward?


An important driver of growth during this recovery has been auto sales (i.e. the yellow slice on page 7 and 8). But now that we are back closer to normal the

question is how much more growth can come from this source, in particular given q g , p gwhere oil prices are.

Total light vehicle salesmln. units mln. units

Total light vehicle sales

20 0

22.5

20 0

22.5

17.5

20.0

17.5

20.0Per capita break even

12.5

15.0

12.5

15.0

7 5

10.0

7 5

10.0Scrappage rate

7.51999 2000 2001 2002 2003 2004 2006 2007 2008 2009 2010

7.5


Source: Haver Analytics, DB Global Markets Research

Another important driver of growth during this recovery has been capex (i.e. the green slice on page 7 and 8). But now that we are back closer to normal the question

is how much more growth can come from this source. Also, latest data starting to

BFI: Equipment & software% of GDP % of GDP

g , gpoint down.

9.8 9.8

% of GDP

8 3

9.0

8 3

9.0

7.5

8.3

7.5

8.3

6.8 6.8

6.01970 1976 1982 1988 1994 2000 2006

6.0Snap-back in production


Source: BEA, Haver Analytics, DB Global Markets Research

US H iUS Housing Outlook


Housing recovery expectations

When will the housing market recover? Survey of 2,018 US adults

April 2011 November 2010 % change

Already recovered1 5% 5% 0%Already recovered 5% 5% 0%

By the end of 2011 3% 10% -70%

2012 15% 27% -44%

2013 24% 24% 0%

2014 or later 54% 34% 59%

1The percentage of Americans who believed recovery would happen in 2010 during the November 2010 survey were bundled


Source: Trulia, RealtyTrac , DB Global Markets Research

The percentage of Americans who believed recovery would happen in 2010 during the November 2010 survey were bundled into the “Already Recovered” category in order to do a year-over-year comparison with the April 2011 survey. per month.

Flow of foreclosures trending down again

8

%

8

%Prime

% of loans going into foreclosure per quarter

7

8

7

8Prime: FRMPrime: ARMSub prime

Flow of foreclosures starting to trend down

5

6

5

6Sub primeSub prime: FRMSub prime: ARM

3

4

3

4Sub prime

1

2

1

2

0

1

98 99 00 01 02 03 04 05 06 07 08 09 10 110

1Prime


Source: MBA, DB Global Markets Research

Note: ARM=Adjustable Rate Mortgage, FRM=Fixed Rate Mortgage98 99 00 01 02 03 04 05 06 07 08 09 10 11

Foreclosures peaking this year

6

%

3000

Thous.Homes in foreclosure (ls)

Forecasts

5

6

2500

3000Foreclosure started (per qtr, ls)

Numbers of housing units in foreclosure (rs)

Forecasts

4 2000

2

3

1000

1500

1

2

500

1000

01979 1984 1989 1994 1999 2004 2009 2014

0

Peter HooperMay 2011

Deutsche Bank

15

Source: MBA, Datastream, DB Global Markets Research

Shadow inventory high but coming down

Current data

Number of mortgage loans outstanding and delinquency rates

Number of loans (mlns)

60+ day delinquency rate

Loans delinquent 60 + days (mlns)

Total 47.0 10.9% 5.1

Subprime 3.7 38.8% 1.4

Prime 43.2 8.5% 3.7

Agency 39.0 6.9% 2.7

Alt-A 2.2 26.3% 0.6

J bJumbo 1.5 11.7% 0.2

Option Arm 0.5 43.5% 0.2


Source: Loan Performance, DB Global Markets Research

Excess inventory is about 1mn homes

Thousands US total vacant housing units Thousands

y

12000 12000

8000

10000

8000

10000

Longer term trend

6000

8000

6000

8000

4000 4000

20001965 1971 1977 1983 1989 1995 2001 2007

2000

Deutsche Bank 17Torsten Slok, [email protected] +1 212 250-2155Source: Census, DB Global Markets Research

Liquidation rate is about 700k, i.e. it will take a bit more than a year to liquidate the excess inventory

2 5

mln

2 5

mlnNew home completions

Household formations

y q y

2.0

2.5

2.0

2.5Household formations

Household formations have turned down recently

1 0

1.5

1 0

1.5turned down recently

0.5

1.0

0.5

1.0

Historical averageHousehold formations

0 5

0.0

0 5

0.0

-0.51999 2001 2003 2005 2007 2009 2011

-0.5

Deutsche Bank 18Torsten Slok, [email protected] +1 212 250-2155Source: Census, DB Global Markets Research

In Nevada, almost 80% of all homeowners are underwater

50% to 99% equity 25% to 50% equity

5% to 25% equity 0% to 5% equity

Negative equity

100% 100%

Negative equity

60%

80%

60%

80%

40%

60%

40%

60%

20% 20%

0%

NV MI

AZ FL ID CA UT

GA R

I ILO

R AL

MD

WA

VA

NM

WV

OH

MN

MO

DC IN NJ

DE

WY WI

TN CT

KS

MS

MA

MT

NH

SC

NC KY

CO NY

PA H

ITX A

RM

EA

K IA OK LA VT

SD NE

ND

0%

Deutsche Bank 19Torsten Slok, [email protected] +1 212 250-2155Source: LoanPerformance, DB Global Markets Research

Negative equity will be a drag on the economy for years

Home prices have to grow 50% over the coming five years to reach their previous peak in 2016

Case-Shiller Composite 10: US NationalIndex Index

200

250

200

250Previous peak will be reached in 2016

if house prices grow by 10% yoy

150

200

150

200

House price index

100 100Pre-2000 trend

50 50

01987 1990 1993 1996 1999 2002 2005 2008 2011 2014

0


Source: S&P, DB Global Markets Research

According to Prof. Shiller’s data, real home prices are still 20% above their long-term average


Source: Robert J. Shiller “Irrational Exuberance”, , DB Global Markets Research

Home prices falling into 2012

FHFA house pricesyoy% SA yoy% SAA t l

10

15

10

15ActualDB model-based projection

5

10

5

10

0 0

-5 -5

-101984 1989 1994 1999 2004 2009 2014

-10


Source: DB Global Markets Research

US BankingUS Banking


Bank profitability leveling off

All FDIC institutions50

$ bln50

$ bln

Net operating income Securities gains/losses

30

40

30

40Net operating income Securities gains/losses

10

20

10

20

20

-10

0

20

-10

0

40

-30

-20

40

-30

-20

-50

-40

06 07 08 09 10 11-50

-40


Source: FDIC, DB Global Markets Research

Decrease in loan loss provisioning playing an important role

% of quarterly net operating

% of quarterly net operating

Trends in FDIC-insured institutions' income & expenses90

operating revenue*

90

operating revenue*

Noninterest expense

607080

607080

Noninterest expenseNoninterest incomeLoss provision

405060

405060

2030

2030

010

02 03 04 05 06 07 08 09 10 11010



02 03 04 05 06 07 08 09 10 11

Charge-offs mainly in real estate

All FDIC institutions: composition of net charge-offs: Q1 2011

All Other Loans &

Other Loans to Individuals, 8%

Loans & Leases, 4%

Commercial & Industrial, 10% Credit Cards,

34%

Real Estate, 44%



Mortgages, CRE and Construction loans account for 43% of bank loans…

Loan portfolio composition (Q1-2011)

Residential MortgagesAll other loans

20% g g24%

A i lt

Leases1%

20%

Credit cards9%

Agriculture1%

9%

Commercial real estate loans15%

Construction4%

Oth

Commercial & Industrial17%

15%

Deutsche Bank 27Torsten Slok, [email protected] +1 212 250-2155 Source: FDIC, DB Global Markets Research

Other consumer9%

Real estate prices have come down significantly

Index, Dec 2000 1

Index, D 2000 1

Commercial real estate index

2.0Dec 2000 = 1

2.0Dec 2000 = 1S&P Case-Shiller composite 20

1.6

1.8

1.6

1.8

1 2

1.4

1 2

1.4

1.0

1.2

1.0

1.2

0.82000 2002 2004 2006 2008 2010

0.8

Deutsche Bank 28Torsten Slok, [email protected] +1 212 250-2155 Source: S&P, MIT, DB Global Markets Research

Delinquency rates for CRE loans coming down from high levels

Loan delinquency rate at commercial banks

Consumer loans

12 5%

12 5%

C&I loansCommercial real estate loans

10.0

12.5

10.0

12.5

7.5 7.5

2.5

5.0

2.5

5.0

0.091 94 97 00 03 06 09

0.0


91 94 97 00 03 06 09

Source: FRB, DB Global Markets Research

Small banks have more commercial real estate loans than large banks

Real estate commercial loans$ bln $ bln

1700 1700Small dom chartered comml banksAdj. large dom. comml banks

1300

1500

1300

1500

900

1100

900

1100

500

700

500

700

300

500

Jun-2004 Jun-2006 Jun-2008 Jun-2010300

500


Source: FRB, DB Global Markets Research

Health of small and medium-sized banks is important for the macro economy

Total assets held by large domestic banks as % of total assets of all commercial banks

as % of total assets

as % of total assets

66

70

66

70

62

66

62

66

58 58

541985 1988 1991 1994 1997 2000 2003 2006 2009

54


Source: FRB, Census, DB Global Markets Research

Overall bank loans still not showing much sign of moving up

Bank assets % of total assets

% of total assets

60

70

60

70Securities Loans Cash

40

50

40

50

30

40

30

40

10

20

10

20

073 76 79 82 85 88 91 94 97 00 03 06 09

0

Deutsche Bank 32Torsten Slok, [email protected] +1 212 250-2155 Source: FRB, DB Global Markets Research

Consumer credit showing signs of life

60%

12%

Consumer credit (% y/y rs)

40

60

8

12Consumer credit (% y/y, rs)

(m/m AR, rs)

20 4

20

0

4

0

-40

-20

-8

-4

-602005 2006 2007 2008 2009 2010 2011

-12

Deutsche Bank 33Torsten Slok, [email protected] +1 212 250-2155 Source: FRB, DB Global Markets Research

2005 2006 2007 2008 2009 2010 2011

OilOil


A $15 “supply” premium in WTI

$/brl $/brl

100

120

$/brl

100

120

$/brlReal WTI oil price (2009=100) Fitted real oil price

Fitted ln (Oil Price) = 18.5 - 3.3*(LnTWI) + 0.07*(World GDP growth) S.E (0.63) (0.05)

80

100

80

100( ) ( )

Est sample period: 1990-2011R-squared = 63%

40

60

40

60

20

40

20

40

090 92 94 96 98 00 02 04 06 08 10

0



Impact of oil price shocks on GDP growth and inflation for year ahead

Mild oil shock Severe oil shock

y

Oil prices to stay above $110/brl Oil prices reach $150/brl$110/brl

GDP Inflation GDP Inflation

US -0.35 0.5 -1.75 2.6

Euro Area -0.5 0.4 -2.3 1.8

Japan 0 3 0 3 1 5 1 5Japan -0.3 0.3 -1.5 1.5

Total Developing countries -0.2 -1.0

Asia ex Japan -0.8 0.7 -4.0 3.5

World -0.4 -2.0



US OutlookUS Outlook SummarizedSummarized


Stock market contributing to household balance sheet repair

Index IndexCase-Shiller-20 home price index (ls)S&P 500 stock price index (rs)

220 1600S&P 500 stock price index (rs)

180

200

1200

1400

160

180

1000

1200

140

60

800

000

1202003 2005 2007 2009 2011

600


Source: DoL, BEA, DB Global Markets Research,

2003 2005 2007 2009 2011

The level of claims highly correlated with GDP growth

250

Thousands, inverted axis

6

% y/y

250

300

3504

6

350

400

450

2

450

500

550 -2

0

Initial jobless claims: 4wk average550

600

650-4

2Real GDP

650

7001990 1993 1996 1999 2002 2005 2008 2011

-6


Source: DoL, BEA, DB Global Markets Research,

Most job openings are in education and health services

Vacancy shareFraction of job openings, 3m

Fraction of job openings, 3m Manufacturing

25

p g ,MA

25

p g ,MA

gTrade, transportation and utilitiesEducation & health servicesGovt

15

20

15

20Construction

10

15

10

15

5 5

02001 2004 2007 2010

0


Source: JOLTS, DB Global Markets Research

Core PCE inflation still very low

yoy % yoy%

6 6

Core (ex food and

Dallas Fed trimmed-mean PCE

4 4Core (ex food and

energy)

2 2

0 0

-2 -2


Source: JOLTS, DB Global Markets Research1996 1998 2000 2002 2004 2006 2008 2010 2012

US outlook

The recovery since 2009Q3 has been driven mainly by a snap-back in the levels of production in consumer and producer durables (essentially auto sales and p p ( ycapex). Currently entering a soft patch because of auto supply disruptions and high commodity prices. But, soft patch likely to last less than six months. In 2012 the moderate recovery will continue. y

Two downside risks:1) High oil/commodity prices is a permanent shock and confidence deterioration

(=the “CNN effect”) could magnify the negative effect of oil on the economy(=the CNN effect ) could magnify the negative effect of oil on the economy. 2) Events are a risk: QE2 ending (June 30) and debt ceiling (Aug 2). One upside risk:1) Pent up demand for consumer and producer durables (i.e. capex and cars)

could come back faster and stronger.



Fed exit prospects

— Fed to complete $600bn QE2 at mid-year; QE3 very unlikely— Step 1: End MBS reinvestment and modify “extended period”— Step 2: repos and term deposits to mop up reserves

Step 3: Raise FFT and IOER; could be 3 months after Step 1— Step 3: Raise FFT and IOER; could be 3 months after Step 1— Step 4: Sell assets (MBS first) after Step 3 has begun— Timing and pace depend on inflation and employmentTiming and pace depend on inflation and employment

trends/prospects— Center of Committee needs to see core inflation (prospects)

i i / l di l S 1rising/unemployment trending lower to move to Step 1



Investment implications summarized

Fed outlook – Rate hike delayed

Soft patch delaying the Fed hike. Fed likely to hike in 2012H1.

Bond markets- Soft patch pushing rates down in the near term

Soft patch weighing on rates in the near term. But given auto supply disruptions are temporary the economy will get back on track going into 2012. Expect rates to rise on the other side of the soft patch.

term

Stock markets- QE2 and debt ceiling events

i h i th

Equities and risky assets could be under pressure as QE2 ends in June and the debt ceiling deadline (August 2) is approached. Going into 2012 the moderate recovery and the ongoing “hunt for yield and risk” bodes well for equitiesweigh in the near

termfor yield and risk bodes well for equities.

FX Expect a continued dollar decline as the Fed stays on hold. - USD down

Commodities- Downside risks

Chinese growth prospects continue to be key. Policymakers trying to slow growth to below trend; if successful, then commodity prices could come under pressure.Downside risks

risingy

Emerging markets- Risks of overheating

Many emerging markets are overheating and have inflation problems. Key is whether policymakers can generate soft landing. Commodity dependent EM may be more at risk given prospects of a slowdown in China.


overheating p ospects o a s o do C a


Torsten Slok, Ph.D.Chief International EconomistDeutsche Bank Securities, Inc.

Torsten Slok joined Deutsche Bank Securities in the fall of 2005 and is a senior member of the Global Economics Team. Mr. Slok’s Economics team was ranked No. 1 in fixed income research by

Institutional Investor in 2010. Slok currently serves as a member of the Economic Club of New YorkClub of New York Prior to joining the firm, Mr. Slok worked at the OECD in Paris in the Money and

Finance Division and the Structural Policy Analysis Division. Before joining the OECD he worked for four years at the IMF in the Division responsible for writing the World Economic Outlook and the Division responsible for China Hong Kong andWorld Economic Outlook and the Division responsible for China, Hong Kong, and Mongolia. Mr. Slok studied at University of Copenhagen and Princeton University. He has

published numerous journal articles and reviews on economics and policy analysis.


Deutsche Bank

Appendix 1

Important DisclosuresAdditional Information Available upon Request

For disclosures pertaining to recommendations or estimates made on securities other than the primary bj t f thi h l th t tl bli h d t i it l b lsubject of this research, please see the most recently published company report or visit our global

disclosure look-up page on our website at http://gm.db.com.

Analyst CertificationThe views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) In addition theThe views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, theundersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Torsten Slok


Deutsche Bank

Regulatory Disclosures

1. Important Additional Conflict Disclosures

A id f ithi thi t i t t fli t di l l b f d t htt // db / iti d thAside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the “Disclosures Lookup” and “Legal” tabs. Investors are strongly encouraged to review this information before investing.

2. Short-Term Trade Ideas

D t h B k it h l t ti h h t t t d id (k SOLAR id ) th tDeutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank’s existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.


3. Country-Specific Disclosures

Australia: This research, and any access to it, is intended only for “wholesale clients” within the meaning of the Australian Corporations Act.

EU countries: Disclosures relating to our obligations under MiFiD can be found at http://globalmarkets.db.com/riskdisclosures.

Japan: Disclosures under the Financial Instruments and Exchange Law: Company name – Deutsche Securities Inc. Registration number – Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, The Financial Futures Association of Japan. Commissions and risks involved in stock transactions – for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. T ti i f i t k l d t dditi l l t i f f i h fl t tiTransactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations.

New Zealand: This research is not intended for, and should not be given to, “members of the public” within the meaning of the New Zealand Securities Market Act 1988.

Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any, p p , , yappraisal or evaluation activity requiring a license in the Russian Federation.


Risks to Fixed Income Positionss s to ed co e os t o s

Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises ininflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to

i B i di hi li i l i (i l di h ireceivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currencyconversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates – these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track The choice of the proper fixing (or metric) is particularlyactual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differsfrom the currency in which the coupons to be received are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements.


GLOBAL DISCLAIMER

The information and opinions in this model were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). The information herein is believed to be reliable and has been obtainedfrom public sources believed to be reliable. Deutsche Bank makes no representation as to the accuracy or completeness of such information. Deutsche Bank may engage in securities transactions, on aproprietary basis or otherwise in a manner inconsistent with the view taken in this research report In addition others within Deutsche Bank including strategists and sales staff may take a view that isproprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Deutsche Bank, including strategists and sales staff, may take a view that isinconsistent with that taken in this research report. Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflectthe opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that anyopinion, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Prices and availability of financial instruments are subject to change without notice. This report is provided forinformational purposes only. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and aproduct of the analyst judgement. As a result of Deutsche Bank’s recent acquisition of BHF-Bank AG, a security may be covered by more than one analyst within the Deutsche Bank group. Each of theseanalysts may use differing methodologies to value the security; as a result, the recommendations may differ and the price targets and estimates of each may vary widely. Deutsche Bank has instituted a newpolicy whereby analysts may choose not to set or maintain a target price of certain issuers under coverage with a Hold rating. In particular, this will typically occur for "Hold" rated stocks having a market capsmaller than most other companies in its sector or region We believe that such policy will allow us to make best use of our resources Please visit our website at http://gm db com to determine the target pricesmaller than most other companies in its sector or region. We believe that such policy will allow us to make best use of our resources. Please visit our website at http://gm.db.com to determine the target priceof any stock. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own informed investment decisions. Stock transactions can lead to losses asa result of price fluctuations and other factors. If a financial instrument is denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the investment. Pastperformance is not necessarily indicative of future results. Deutsche Bank may with respect to securities covered by this report, sell to or buy from customers on a principal basis, and consider this report indeciding to trade on a proprietary basis. Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. In the U.S. thisreport is approved and/or distributed by Deutsche Bank Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In Germany this report is approved and/or communicated by Deutsche Bank AGFrankfurt authorized by the BaFin. In the United Kingdom this report is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange and regulated by the FinancialServices Authority for the conduct of investment business in the UK and authorized by the BaFin. This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by DeutscheSecurities Korea Co. This report is distributed in Singapore by Deutsche Bank AG, Singapore Branch, and recipients in Singapore of this report are to contact Deutsche Bank AG, Singapore Branch in respectSecurities Korea Co. This report is distributed in Singapore by Deutsche Bank AG, Singapore Branch, and recipients in Singapore of this report are to contact Deutsche Bank AG, Singapore Branch in respectof any matters arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who is not an accredited investor, expert investor or institutional investor (asdefined in the applicable Singapore laws and regulations), Deutsche Bank AG, Singapore Branch accepts legal responsibility to such person for the contents of this report. In Japan this report is approvedand/or distributed by Deutsche Securities Inc. The information contained in this report does not constitute the provision of investment advice. In Australia, retail clients should obtain a copy of a ProductDisclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Deutsche Bank AGJohannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10). Additional information relative to securities, other financial products or issuersdiscussed in this report is available upon request. This report may not be reproduced, distributed or published by any person for any purpose without Deutsche Bank's prior written consent. Please cite sourcewhen quoting.Copyright © 2011 Deutsche Bank AGpy g

This model is provided for the sole use of the recipient for internal purposes, redistribution of any nature is not permitted. WhileDeutsche Bank has taken all reasonable steps to ensure that the accompanying file is free of viruses and any other conditionswhich could damage the data, hardware or software with which it might be used, it is supplied on the basis that the recipientaccepts full responsibility for any consequences of use The accompany files do not constitute investment advice and Deutscheaccepts full responsibility for, any consequences of use. The accompany files do not constitute investment advice and DeutscheBank is not responsible for installing, maintaining or updating them. While Deutsche Bank has taken all reasonable care whencreating these models, it accepts no responsibility for any omissions or errors.


is the us recovery sustainable?is the us ... - deutsche bank€¦ · is the us recovery...

Documents