SVB Asset Management Economic Book Q4 2012

SVB Asset Management Economic ReportFourth Quarter 2012

2

Table of Contents Thoughts from our CIO pg 3

Overview pg 4

GDP pg 5

Employment pg 7

The Housing Market pg 9

Consumption pg 11

Inflation pg 13

Monetary Policy pg 15

Fiscal Cliff pg 16

Deficit pg 17

Social Security pg 18

TARP pg 19

U.S. Debt pg 20

World Debt Guide pg 21

Yield Compression pg 22

Investment Performance pg 23

U.S. Corporate Bonds pg 24

Banking Sector pg 25

Industrial Sector pg 29

Global Trade pg 30

FX pg 31

Regulatory Environment pg 32

Thoughts from our CIO pg 3

Overview pg 4

GDP pg 5

Employment pg 7

The Housing Market pg 9

Consumption pg 11

Inflation pg13

Monetary Policy pg 15

Fiscal Cliff pg 16

Deficit pg17

Social Security pg 18

TARP pg 19

U.S. Debt pg 20

World Debt Guide pg 21

Yield Compression pg 22

Investment Performance pg 23

U.S. Corporate Bonds pg 24

Banking Sector pg 25

Industrial Sector pg 29

Global Trade pg 30

FX pg 31

Regulatory Environment pg 32

3

Thoughts from our CIO Approaching the Oasis After four years wandering the desert, it seems the economy has found an oasis. Whether from reduced uncertainty in today’s post-election world or from shear frustration associated with multiple years of disappointing activity, economic actors are moving forward once again. Viewed over a decade’s worth of data, many of the upturns are hazy and difficult to see. In fact, some would argue we are only seeing a mirage and that real activity will be restated away in future quarters. But given such broad based confirmation of positive action, this is extremely unlikely. No, the oasis we are seeing is real, as outlined in the remainder of this booklet. The question is how long will the cool, refreshing drink of consumer purchases, homebuyer activity, and manufacturing upturns last? The Fed would have you believe four years of zero interest rates and $2 trillion of balance sheet growth (with open-ended growth to come) is the cause of the current respite. Legislators would argue the tens of thousands of pages of stimulus, support, and reform packages that have been passed are the cause. More rational observers would argue for a combination of the two. In any case, it is difficult for me to believe this watering hole will last very long because the fundamental changes we’ve seen in the economy are not likely to support long-term growth. A Fed that continues to scrape the bottom of its bag of tricks and a legislature that is unable to have even civil exchanges over fiscal policy will only lead to greater uncertainty later in the quarter.

The “victory” over 2012’s fiscal cliff will be short-lived, and another kick of the can likely coming in March will only create more cause for concern. Economists are predicting 2013 growth anywhere from slightly negative to positive 3 percent. Such confusion about the size of the oasis is, in itself, a great uncertainty that works against solid, consistent growth.

Joe Morgan, Chief Investment Officer

4

Overview • GDP growth picked up considerably in the third quarter, printing at 3.1 percent, however the effects of hurricane Sandy on the final quarter’s activity remains

to be seen. • Job growth has been about the most consistent indicator over the last two years, even though it continues to run slightly sub-par. Interestingly, wage growth

picked up in the second half of 2012, perhaps an early indicator of employment strength in 2013. • The housing market emerged from the shadows in the fourth quarter as indications of both home building and home sales activity increased. Unfortunately,

there remains the overhang of millions of foreclosed (or forecloseable) home loans in the shadows as well as a difficult home financing market. • Consumption growth has been steady, along with job growth, and an elevated stock market is helping support consumer sentiment even after considering

recent setbacks over the fiscal cliff. • Inflation remains a non-event for most as Core PCE has been restrained below the Fed’s 2 percent target. Oil and food prices are much more volatile,

primarily affecting developing nations who effectively import America’s monetary policy by tying their currencies to the dollar. • The U.S. deficit has moved front and center recently, though spending cut conversations in Washington haven’t really even begun. Long and arduous

discussions are a commodity in the capital, however the coming debate – if it includes health care entitlements – will likely stand out. If it doesn’t, such discussions will be viewed as another kick of the can.

• TARP is finally winding down and will end with little cost to the government overall. Of course the goal of this program was never profitability, but confidence in

the markets – which it surely achieved.

• Yields in the marketplace remain depressed. Many talk of rising yields as investors shift back into risky assets such as stocks, however it is unlikely we’ll see yield spikes in the near future – certainly so long as the Fed continues to expand its balance sheet by $85 billion per month.

• Recent year’s corporate bond issuance is could continue at near-record pace, assuming bond investors remain skeptical about higher yields in the near future.

5

GDP Modestly Recovering GDP1

Source: 1 Bureau of Economic Analysis (BEA) 2Congressional Budget Office (CBO), SVB Asset Management. Note: 1 GDP values shown in legend are % change vs. prior quarter annualized.

Components of GDP1 Gross Domestic Investment2

• The latest round of Treasury purchases is intended to replace Operation Twist which expired at the end of the year

• The additional quantitative easing aims to keep rates low in the long end and support economic growth

• Growth in 3Q 2012 was more than twice the 1.3% growth rate in 2Q 2012

• Superstorm Sandy and "fiscal cliff" uncertainty weighed heavily on consumer and business minds could likely hold back growth

• The biggest boost to 3Q expansion came from factors that may be short-lived, including upturns in private inventory investment and federal government spending

-50.0%

0.0%

50.0%

100.0%

150.0%

Consumption Government spending Investment ex-housing

Residential Net exports

-10.0%

-5.0%

0.0%

5.0%

10.0%

$0.0

$1.0

$2.0

$3.0

Trill

ions

Domestic business Households and institutions Federal State and local

6

GDP Modestly Recovering

Major factors contributing to the difference include:

• Slow growth in U.S. and strong growth in emerging markets

• Rebound from unusually weak investment during the recession

• Loss of wealth, weak confidence, a bigger decline in the share of national income going to labor

• Overbuilding during the housing boom, weak household formation

• A decline in defense purchases, slow

growth in tax revenues and federal grants

Source: Congressional Budget Office (CBO), Department of Commerce, Bureau of Economic Analysis.

Contributions to the Cyclical Variation in Real GDP, 12 Quarters Following Recession

(% difference from trough for components of real GDP as a ratio of potential GDP)

7

Employment Continuing to Heal Employment Landscape1

Source: 1, 2, 3 U.S. Bureau of Labor and Statistics (BLS), SVB AssetManagement, 3 National Bureau of Economic Research (NBER). Note: The underemployment rate U6 defined as persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months.

Full-Time Employment2

Long Term Unemployment3

• The unemployment rate dropped to 7.7% in November and then climbed back to 7.8% in December

• The U.S. added 155,000 jobs in December, as the economy seemingly shrugged off storm Sandy

• The number of long-term unemployed was little changed at 4.8 million in November. These individuals accounted for 40.1% of the unemployed

• The number of people employed part time, for economic reasons, were 8.2 million in November, was little changed over the month. These individuals were working part time either due to their hours been cut or because they were unable to find a full-time job

-15.0%

-5.0%

5.0%

15.0%

-1,000.0

-500.0

0.0

500.0

1,000.0

Thou

sand

s

Non-Farm Payroll (LHS) Unemployment Rate (RHS) U-6 (RHS)

0.0

5,000.0

10,000.0

100,000.0

105,000.0

110,000.0

115,000.0

120,000.0

125,000.0

Thou

sand

s

Thou

sand

s

Full Time Employment (LHS) Part Time for Economic Reasons (RHS)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Recession Period Unemployed 27 Weeks and Over

8

Employment Continuing to Heal Composition of U.S. Labor Force (Goods vs. Services)

Source: U.S. Bureau of Labor Statistics (BLS).

Wage Pressure

State and Local Government Employment U.S. Labor Force Participation Rate

63.0%

64.0%

65.0%

66.0%

67.0%

68.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Goods Producing Service Providing

4,400

4,600

4,800

5,000

5,200

5,400

12,000 12,500 13,000 13,500 14,000 14,500 15,000

Thou

sand

s

Thou

sand

s

Local government (LH) State government (RH)

0.0% 1.0% 2.0% 3.0% 4.0% 5.0%

3.0%

5.0%

7.0%

9.0%

11.0%

U.S. Unemployment Rate U.S. Avg Hourly Earnings Pvt Nonfarm payrolls

9

The Housing Market Key Economic Driver Home Sales & Supply

Source: National Association of Home Builders (NAHB), Census.gov, S&P, SVB Asset Management.

Housing Starts Home Prices - Indexed to 100

• The U.S. housing market continues to show expansion with rising home values, lower inventory overhang, and increased home sales nationwide

• As shown by the S&P/Case-Shiller national home price index, home values rose 4.3% in October, partially due to the home-buyer tax credit. This was the largest YoY increase in over two years

• Existing home supply fell in November to 4.8 months, the lowest level in more than seven years

• The improvement in housing has been additive to economic growth and growth is expected to continue in 2013

0.0

5.0

10.0

15.0

3.0

5.0

7.0

9.0

Hom

e S

uppl

y (m

onth

s)

Hom

e S

ales

(Mill

ions

)

Total Sales (new & existing) Existing Home Supply

0.0

0.5

1.0

1.5

2.0

2.5

Mill

ions

90

140

190

240

Case Schiller 20-City FHFA Purchase Median Home Price

10

The Housing Market Key Economic Driver Homeownership Rate

Source: Census.gov, National Association of Realtors, SVB Asset Management.

Housing Affordability Composite Index

Home Foreclosures - % of Total Loans

• Homeownership resumed its decline after remaining at 65.6% for two quarters of 2012. The homeownership rate fell to 65.3% in 3Q 2012

• U.S. home foreclosures fell to 4.07%, the lowest level since before the 2008-2009 mortgage meltdown

• Historically low mortgage rates have been driving record-high housing affordability numbers. Housing affordability is now coming off its high as asking prices have begun to rise faster than rents

62.0%

64.0%

66.0%

68.0%

70.0%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%

0.0%

5.0%

10.0%

15.0%

0.0

50.0

100.0

150.0

200.0

250.0

Affo

rdab

ility

Inde

x

Housing Affordability 30 Year Fixed Mortgage Rates

11

Consumption Too Many Uncertainties Consumer Sentiment - University of Michigan

Source: U.S. Bureau of Economic Analysis (BEA), Census.gov, University of Michigan / Thomson Reuters - Survey of Consumers, SVB Asset Management.

Retail & Food Services Sales Personal Consumption - % Change

• The University of Michigan indicator closed the year at 72.9, a five-month low. The index had risen to as high as 82.7 in November, but this was still below the 30-year average

• The drop in confidence heading into year-end was likely attributed to concerns over the fiscal cliff

• Auto sales rose 9% in December, capping off the best year for the industry since before the recession

• Personal consumption slowed to 1.5% and 1.6% in 2Q and 3Q 2012, respectively. This compares to growth of 2.4% in the first quarter

40.0

60.0

80.0

100.0

120.0

Average

-6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0%

$5.0

$10.0

$15.0

$20.0

$25.0

$250.0

$300.0

$350.0

$400.0

$450.0

Vehi

cle

Sal

es (M

illio

ns)

Ret

ail &

Foo

d S

ervi

ces

Sal

es (B

illio

ns)

Ex Autos Vehicle Sales

12

Consumption Too Many Uncertainties Personal Savings as a % of Disposable Income

Source: U.S. Bureau of Economic Analysis (BEA), Federal Reserve, SVB Asset Management.

Personal Income

Household Debt Payments vs. Debt Outstanding

• Savings rates as a percentage of disposable income fluctuated between 3.3%-4.1% during the year. Consumers are being more responsible with their finances post-recession, however we are off of the highs seen in 2008

• We are still not seeing any meaningful improvement in personal incomes. The largest gain in the second half of the year was a 0.6% MoM increase in November

• Overall U.S. consumer credit outstanding grew to an all-time record in October, primarily on the strength of student loans, auto loans and credit cards

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

-1.5% -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5%

Mon

thly

Per

cent

age

Cha

nge

-5.0%

0.0%

5.0%

10.0%

15.0%

8.0%

10.0%

12.0%

14.0%

Deb

t Out

stan

ding

(% c

hang

e Yo

Y)

Deb

t Pay

men

ts (%

of

disp

osab

le p

erso

nal i

ncom

e)

Debt Payments Debt Outstanding

13

Inflation In the Comfort Zone Component Distribution 2012

Source: U.S. Bureau of Economic Analysis (BEA), U.S. Bureau of Labor Statistics (BLS), SVB Asset Management.

Core PCE

Consumer Price Index Producer Price Index

-5.0%

0.0%

5.0%

10.0%

15.0%

% c

hang

e fro

m p

rior y

ear

CPI Ex Food & Energy CPI

-10.0% -5.0% 0.0% 5.0%

10.0% 15.0%

% c

hang

e fro

m p

rior y

ear

PPI Ex Food & Energy PPI

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

% c

hang

e fro

m p

rior y

ear

Core PCE Fed Target

CPI Components 12-month ChangeFood & Bev. 1.8%Housing 1.7%Apparel 1.2%Transportation 1.5%Medical Care 3.4%Recreation 1.4%Educ. & Comm. 1.5%Other 1.5%Headline CPI 1.8%Less:

Energy -4.1%Food 0.2%

Core CPI 1.9%

40.7%

17.4%

15.1%

7.1%

6.7%

6.0%

3.0% 4.0% Housing

Transportation

Food & Bev.

Medical Care

Educ. & Comm.

Recreation

Apparel less footwear

Other

14

Inflation In the Comfort Zone Wage Growth: Average Hourly Earnings

Source: U.S. Bureau of Labor Statistics (BLS), U.S. Energy Information Administration (EIA), University of Michigan / Thomson Reuters - Survey of Consumers, SVB Asset Management.

Crude Oil - Spot & Futures

Univ. of Michigan Survey of Inflation Expectations

• Inflation continues to take a back seat as measures point to a stable inflationary environment. Furthermore, both short-term and longer-term inflation expectations remain fairly steady

• Falling energy prices along with a stagnant labor market have been the main drivers of low inflation. The consumer price index saw its first decline in six months in November as energy prices dropped

• Facing little threat of inflation, the Fed continues its easy monetary policy through low interest rates and additional quantitative easing measures

1.5%

2.5%

3.5%

4.5%

5.5%

1 Year Ahead 5-10 Year Ahead

$0.0

$50.0

$100.0

$150.0

Pric

e pe

r Bar

rel

Crude Oil Crude Oil Futures

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Ann

ual P

erce

ntag

e C

hang

e

15

U.S. Generic Government Yields Total Assets of Federal Reserve

Source: Federal Reserve, SVB Asset Management.

Monetary Policy How Far Can You Go?

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

Bill

ions

Pre-QE1 QE1 Pre-QE2 QE2 OT Pre-OT

16

Fiscal Cliff On the Edge

The Agreement

• Permanent extension of Bush-era tax rates for individuals with income up to $400k and $450k for couples

o Permanent maximum 15% tax rate for dividend income and LT capital gains for same income levels

o Higher incomes will be taxed at 20%

• Estate tax rates for estates worth up to $5mil

• Permanent fix to AMT

• Two-month delay of sequester

• One-year extension of unemployment benefits

Outlook

• Further debate on debt ceiling, entitlement reform, scheduled spending cuts, tax code reforms, etc.

• The Fiscal Cliff agreement temporary removed economic growth headwinds but does not completely remove them.

• Financial markets will remain volatile

Debt Ceiling vs. Debt Outstanding

Source: Bloomberg and SVB Asset Management

$6.0

$8.0

$10.0

$12.0

$14.0

$16.0

$18.0

Trill

ions

Debt Ceiling Debt Outstanding

17

-$8.0

-$6.0

-$4.0

-$2.0

$0.0

$2.0

$4.0

$6.0

$8.0

Trill

ions

2001 Baseline Projections 2011 Status

35.0%

9.0%

8.0%

48.0% Events between 2007 and 2009

Nondefense spending since 2009

Defense spending since 2009

Revenue loss since 2009

Deficit Bill Coming Due

Since 1969, the U.S. government has recorded a surplus in only five years with four of those from 1998-2001. Up until the global financial crisis, the annual deficits were much smaller in comparison to GDP. That ratio, however, has climbed significantly since 2009 when the deficit reached $1.4 trillion. The combination of two wars (Afghanistan and Iraq) and substantial revenue loss have considerably altered CBO projections. The CBO in 2001 had predicted a steady yearly surplus for the next decade, but that never materialized. Together, events that occurred before January 2009 and the precipitous decline in tax revenues account for about 83% of the difference between what the 2012 deficit actually is and what it was expected to be five years ago.

Source: Congressional Budget Office (CBO), Center for American Progress. 1 Congressional Budget Office (CBO), 2 This material was created and published by the Center for American Progress (www.americanprogress.org).

Changes in Deficit Projections Since January 20011

Factors Responsible for Fiscal Deterioration2

Cum

ulat

ive

Sur

plus

Cum

ulat

ive

Def

icit

In January 2001, CBO projected cumulative surpluses through 2011

However in 2011, the U.S. had a cumulative deficit of $6 trillion

Total impact on surplus through total legislative changes

Total impact on surplus through economic

and technical changes

18

Social Security How to Sustain it?

Total Social Security outlays in 2012 were $773 billion - one-fifth of federal spending.

Over the next decade, spending will exceed dedicated tax revenues, on average, by about 10 percent.

Spending relative to income will continue to increase to the point that outlays will shift from scheduled to payable benefits around 2040.

The drop in benefits paid at that time will be a little more than 1 percent of GDP.

These estimates change from time to time, but the underlying problem remains: today’s entitlements are unsupportable in the medium term future.

Source: Congressional Budget Office (CBO). 1,2 Of the 56 million people who currently receive Social Security benefits, about 70% are retired workers or their spouses and children, and another 11% are survivors of deceased workers - all of those beneficiaries receive payments through Old-Age and Survivors Insurance (OASI). The other 19% of beneficiaries are disabled workers or their spouses and children and they receive Disability Insurance (DI) benefits.

The 2012 Long-Term Projections for Social Security As a % of GDP

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

Outlays (with Scheduled Benefits) Tax Revenues Outlays (with Payable Benefits)

Actual

Projected

19

TARP Breaking Even…

TARP (Troubled Asset Relief Program) helped to stabilize the financial system from collapse and restart the markets that provided mortgage, auto, student, and business loans. The government program that began in 2009 has been winding down, with many of the beneficiaries paying back much of the original loan. As of November 30, 2012, American taxpayers have recovered nearly 91% of the TARP funds disbursed. Overall, the government is now expected to at least break even on its financial aid from principal and interest payments. A substantial part of the program came with a competitive rate of return.

Source: U.S.Treasury, as of January 4, 2013.

TARP Tracker

Total Authorized Funds ($ billions)

$68

$80

$245 $27 $46

$235

AIG Investments

Auto Inductry Investments

Bank Investment Programs

Credit Market Programs

Housing Programs

Cancelled

$68 $80

$245

$19

$50 $41

$268

$16

$0

$50

$100

$150

$200

$250

$300

AIG Investments

Auto Industry Investments

Bank Investment Programs

Credit Market Programs

Bill

ions

Funds Disbursed Funds Recovered

91% of funds disbursed have been recovered as of December 2012

Bank Investment Programs have added surplus to the result

To strengthen the Housing markets, TARP introduced the two central programs, Making Home Affordable (MHA) and the Hardest Hit Fund (HHF). MHA permanently reduces mortgage payments to affordable levels for qualifying borrowers, while HHF helps those states hardest hit by home price declines and high unemployment to develop locally-tailored foreclosure prevention solutions

The deadline for MHA has been extended by a year through December 2013, also conforming the extended deadline for the Home Affordable Refinance Program (HARP)

In the surplus zone

20

U.S. Debt Demand Remains Broad Despite Debt Ceiling

U.S. Treasuries continue to be a deep source of liquidity and has retained its safe-haven status despite the political theatrics surrounding the debt limit that lead a downgrade by S&P of U.S. Treasuries to AA+ from AAA in 2011. About 45 percent of Treasuries are held by public entities. While China remains the largest investor of U.S. Treasuries, its holdings have declined since peaking in July 2011. The widening of the U.S.-China trade deficit through 2012 indicates China may have diversified its foreign reserves away Treasuries. Meanwhile, Japan and OPEC countries steadily increased their Treasury investments. The difficult political process in reaching a tax policy comprise at the end of 2012 indicates upcoming debt limit discussions will be just as tenuous, and may compel other rating agencies to downgrade U.S. credit ratings. Any downgrade will have de minimal impact on Treasury demand. Note: 1 Includes Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, UAE, Algeria, Gabon, Libya and Nigeria

2 Includes Bahamas, Bermuda, Cayman Islands, Netherlands Antilles, British Virgin Islands and Panama.

Source: Treasury.gov. Data as of 31st October 2012.

Major Foreign Holders of Treasury Securities

$622 $52 $58 $59 $59 $64 $65 $75 $76 $93 $94

$117 $133 $137 $139

$165 $194 $202

$255 $259 $266

$1,135 $1,162

0 200 400 600 800 1,000 1,200 1,400

Others Turkey

Thailand India

Mexico Germany

Canada France

Norway Ireland

Singapore U.K.

Belgium Hong Kong

Luxembourg Russia

Switzerland Taiwan

Brazil Caribbean Banking Centers

Oil Exporters Japan China

Billions

1

2

21

World Debt Guide Rising Debt Levels Prompting Action

A combination of contracting economic output, increasing demand for government support, and escalating sovereign borrowing have contributed to rising debt levels as a percentage of GDP in many developed countries. The impact of rising debt levels have been inconsistent. In Japan, evolving demographic trends have lead to structural deflation, while rising commodity prices have supported a strengthening Canadian dollar despite higher debt levels. Investors have tagged some countries with higher interest rates to express worries over future debt servicing capabilities. This has pushed many developed countries to confront their own balance sheets and may lead to additional contractions in spending to reduce leverage.

Source: Bloomberg, SVB Asset Management.

Debt as a % of GDP

OVERALL DEBT % of GDP, latest • Over 100 • 75 – 99 • 50 – 74 • 0 - 49

8% 34%

44% 51%

54% 68% 69%

81% 85% 86% 87%

121% 206%

0% 50% 100% 150% 200% 250%

Russia South Korea

China India Brazil U.S.

Spain Germany

Britain France

Canada Italy

Japan

22

Yield Compression Financials Tighten

Source: SVB Asset Management, Bloomberg

Government Credit

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

U.S. Treasury Bill /Notes (Q3) U.S. Agency DN/Bonds (Q3)

U.S. Treasury Bill /Notes (Q4) U.S. Agency DN/Bonds (Q4)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

A-1/P-1 CP (Q3) Ind Bonds - A Rated (Q3)

Fin Bonds - A Rated (Q3) A-1/P-1 CP (Q4)

Ind Bonds - A Rated (Q4) Fin Bonds - A Rated (Q4)

23

Investment Performance Reward for Risk

Source: Bloomberg, BoAML, Morgan Stanley

Benchmark Performance

Ticker 2012 2011 2010 2009 2008 2007Short Benchmarks 3-Month Treasury Bill G0O1 0.111 0.103 0.126 0.207 2.057 5.004 3-Month Citi/Salomon CD SBMMCD3 0.307 0.289 0.310 0.822 3.442 5.448 6-Month Treasury Bill G0O2 0.171 0.268 0.365 0.579 3.582 5.607 6-Month Cit/Salomon CD SBMMCD6 0.488 0.389 0.437 1.611 3.756 5.459 1-yr Treasury Bill G0O3 0.204 0.496 0.792 0.813 4.746 5.948 Treasury 1-3 yr Treasury G1O2 0.434 1.554 2.348 0.785 6.609 7.317 3-5 yr Treasury G2O2 1.577 6.229 5.695 -0.672 12.153 9.836

Corporate/Govt (A Rated and Above)

1-3 yr Corp/Govt B110 1.188 1.527 2.641 2.766 5.184 6.981 3-5 yr Corp/Govt B210 3.077 5.479 5.925 2.958 6.174 8.324 Agencies 1-3 yr Agencies G1P0 0.847 1.536 2.338 2.189 7.034 6.735 3-5 yr Agencies G2P0 2.588 5.290 4.900 3.223 8.971 8.261 Municipals - Tax Exempt 1-3 yr Prere U1AF 0.520 1.800 0.923 3.189 5.875 4.710 3-7 yr Prere U2AF 1.539 4.951 2.087 5.345 7.992 5.390 Auto Asset Backed Securities ABS, Autos, Fixed Rate, (1.45yrs) R0U0 2.291 1.689 3.077 14.845 -0.682 5.723 Dow Jones Industrial Average INDU 7.257 5.544 11.023 3.116 -33.762 6.432 S&P 500 SPX 13.405 2.110 12.783 23.454 -38.486 3.530 NASD CCMP 15.906 -1.799 16.910 43.888 -40.541 9.812 MSCI World Index MXWO 13.184 -7.615 9.262 27.283 -42.081 7.093 CRB Index (Commodities) CRY -3.372 -8.264 15.430 23.563 -39.450 16.679

24

Corporate-Bond Issuance

Corporate bond sales surpassed 2009’s all-time high of $3.89 trillion to reach $3.9 trillion in 2012. Corporate Treasurers are rushing to lock-in historically low interest rates.

U.S. Corporate-Bond Yields, %

Corporate borrowing costs continue to trend lower due to factors such as easy monetary policy and strong investor demand.

Source: Bloomberg, SVB Asset Management.

U.S. Corporate Bonds Insatiable Demand

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Investment grade High Yield

$166

$94

$162

$98

$166

$64 $72

$59

$80 $74

$119

$133

$151

$175

$77

$112

$88

$111 $101

$183

$142

$179

$0.0

$30.0

$60.0

$90.0

$120.0

$150.0

$180.0

$210.0

Bill

ions

2011 2012

25

Banking Sector Climbing Out of Abyss

Benign markets and strong economies resulted in commercial banks’ ROAE exceeding 15 percent prior to the crisis. Crisis took a toll on the returns, leaving commercial banks with negative ROAE.

With easy money and relatively calmer markets, commercial banks are reporting healthier ROAE. The U.S. Banks ROAE reached to over 7.5 percent in first three quarters of 2012.

Uncertain times ahead and continued low interest rate environment may result in stagnated ROAE growth.

It is unlikely that the U.S. commercial banks will return to ROAE exceeding 15 percent any time soon.

Source: Federal Reserve and SNL Financial.

Effect of Federal Funds Rate on Commercial Banks’ Return on Average Equity

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

U.S. Banks ROAE (%) Federal Funds Rate (%)

26

Banking Sector Climbing Out of Abyss

Source: Federal Deposit Insurance Corporation (FDIC).

FDIC Quarterly Bank Net Income/(Loss)

U.S. banks’ performance continues to stabilize and is supported by a decline in loss provisions, albeit in a persistently low interest rate environment.

-$40,000.0

-$30,000.0

-$20,000.0

-$10,000.0

$0.0

$10,000.0

$20,000.0

$30,000.0

$40,000.0

Mill

ions

27

Banking Sector Climbing Out of Abyss Delinquency Rates

Source: Federal Reserve.

Lending Standards

Source: Federal Reserve, SVB Asset Management.

Net percent of banks reporting tighter lending standards

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

Rel

axed

Con

serv

ativ

e

Commercial & Industrial loans Commercial Real Estate Loans

Residential Mortgage Loans Prime

Sub-Prime Non Traditional

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

All

bank

s, s

easo

nally

adj

uste

d

Residential Consumer Loans

Commercial and Industrial Loans Commercial

28

Banking Sector Climbing Out of Abyss

Source: S&P, Moody’s, Fitch & Bloomberg, January 4, 2013.

Rating Agencies’ U.S. Financials Upgrades and Downgrades

2012 Financial sector downgrades have outpaced upgrades, but number of rating actions from S&P, Moody’s and Fitch is moderate compared to 2009. Hazy outlook in 2013 with economic and regulatory uncertain.

0

500

1,000

1,500

2,000

2,500

3,000

Upgrades Downgrades

29

Industrial Sector Cautiously Optimistic

Source: S&P, Moody’s, Fitch & Bloomberg, January 4, 2013.

Rating Agencies’ U.S. Industrials Upgrades and Downgrades

2013 should see minimal rating actions in the industrial sector subject to shareholder and financial policies as well as the recovering U.S. economy.

0

50

100

150

200

250

300

350

400

Upgrades Downgrades

30

Exports vs. World GDP

Export levels are normalizing towards its long-term trend. Global trade remains a fundamental growth story.

Exports as % of GDP, 2011

While exports grew in 2011, long-run imbalances in export levels remain, perpetuating trade imbalances.

Source: The World Bank, SVB Asset Management.

Global Trade Fundamental Growth Intact

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Exports of Goods & Services (YoY %) World GDP (YoY %)

31

FX Central Bank Policies Debasing Volatility in the Euro Persists

European financial policies have proved insufficient to generate growth and squelch debt worries. Euro underperformance to reflect unresolved economic weakness.

The U.S. Dollar Index Measures the General Value of the USD

The dollar retains safe-haven status despite debasement from easing monetary policy. Economic outperformance may prove supportive for dollar firming.

Source: Bloomberg, SVB Asset Management.

50

60

70

80

90

100

110

120

130

€0.75

€0.85

€0.95

€1.05

€1.15

€1.25

€1.35

€1.45

€1.55

€1.65

€1.75

32

Regulatory Environment Rocky Road Ahead

Source: SVB Asset Management

Amendments to SEC 2a-7 rule have been in place for more than two years now. Key changes included more restrictive maturity limits, higher credit quality standards and establishment of new daily and weekly liquidity requirements.

The SEC failed to push through a second round of reforms in August 2012.

In November 2012, FSOC submitted request for public comments on additional money funds reform. FSOC highlighted that if SEC doesn’t take actions for further reform, FSOC may step in by designating certain funds as SIFI.

Floating NAV by SEC

• Real-time mark to market level valuation • Most of the money fund industry is not in favor

OR

Capital Buffer and Redemption Restriction by SEC

• Cushion against liquidity and credit risk • Goal: to minimize the risk or disorderly run • Uncertain about the form or amount of buffer • Could drive further consolidation and work against the investor

objective of liquidity

OR

SIFI’s Designation by FSOC

• Inclusion of certain money funds as SIFI* • Could be subject to heightened regulation by Federal Reserve

*SIFI: Systemically Important Financial Institutions FSOC: Financial Stability Oversight Council

Potential MMF Reform Proposals as of 4Q2012

Potential Reforms can be a combination of above measures.

33

Our Team

Portfolio Managers Minh Trang, CFA [email protected] Paula Solanes [email protected] Renuka Kumar [email protected] Jose Sevilla [email protected] Head of Credit Research Melina Hadiwono, CFA [email protected]

Credit and Risk Sook Kuan Loh, CFA [email protected] Tim Lee, CFA [email protected] Kyle Balough [email protected] Silicon Valley Bank Partners Priyanka Raju Kelly Caviglia Girish Mallya

Managing Director Jeff Schnitz [email protected] Chief Investment Officer Joe Morgan, CFA [email protected] Head of Portfolio Management Ninh Chung [email protected]

Our Team

SVB Asset Management 555 Mission Street, Suite 900 San Francisco, CA 94105

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©2013 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of FDIC and Federal Reserve System. SVB>, SVB>Find a way, SVB Financial Group, and Silicon Valley Bank are registered trademarks. SVB Asset Management, a registered investment advisor, is a non-bank affiliate of Silicon Valley Bank and member of SVB Financial Group. Products offered by SVB Asset Management are not FDIC insured, are not deposits or other obligations of Silicon Valley Bank, and may lose value. B_SAM-12-12609 Rev. 01-18-2013 1012-0177