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                                              Wealth Management Research                   13 June 2011




UBS Weekly Guide
More turbulence ahead

    We see the potential for additional near term choppiness       Mike Ryan, CFA, Chief Investment Strategist
     amid another heavy economic release calendar,                  mike.ryan@ubs.com
     appearances by several senior Fed officials including
     Chairman Bernanke and the ongoing stalemate over
     funding for another bailout for Greece.                        Contents                                              Page

    However, with sentiment toward risk assets having              Feature article                                        1
     turned decidedly negative and bonds outperforming              Buy the “favorite five” currencies on dollar           5
     stocks over the past month and a half, equity markets          rallies
     appear oversold. In the absence of materially weaker
                                                                    Our Best Ideas at a Glance                             6
     than expected economic data releases and/or additional
     fallout from the Eurozone, equity markets appear poised        Review/Preview of the Financial Markets                7
     for something of a modest relief rally this week.              Earnings Calendar                                      8
    Any sustained recovery in equity markets will still require    Key Economic Indicators                                9
     confirmation that: (1) the economic recovery remains on
                                                                    Strategy and Performance                              10
     track; (2) the earnings impact from the soft patch will be
     both modest and transitory; and (3) the policy mix is still    Reports of Note Published in the Last Week            11
     supportive of growth and risk taking.


Choppy and sloppy
The S&P 500 fell another 2.2% for the week ending June 10th,
                                                                    Fig. 1: Stocks have fallen for six consecutive
marking the sixth consecutive weekly decline in equity prices –
                                                                    weeks, still remain up 1% for the year
the longest such losing streak in nearly a decade (see figure 1).   S&P 500 year to date
The principal catalysts behind the most recent drop in equity
                                                                     1400
markets included: another round of weaker than expected
economic release data; a less than rosy assessment of cyclical
                                                                     1350
growth prospects from Fed officials; growing concerns over
fiscal, monetary and regulatory policy risks in the US; and          1300
lingering fears of both a deepening and broadening of the
Eurozone debt crisis. We see the potential for additional            1250
choppiness in the week ahead amid another heavy economic
release calendar, appearances by several senior Fed officials        1200
including Chairman Bernanke and the ongoing stalemate over                  Jan   Feb   Mar      Apr    May         Jun   Jul
funding for another bailout for Greece. Concerns over the                                        S&P 500
pending conclusion of QE2, the rapidly approaching deadline
for extending the debt ceiling and the economic fallout from        Source:Bloomberg, UBS WMR, as of 10 June 2011
the implementation of financial regulatory reform (i.e., Dodd
Frank) only serve to add to the market’s current jittery state.
But following the steady stream of bad news over the past


This report has been prepared by UBS Financial Services Inc. (UBS FS).
Please see important disclaimer and disclosures at the end of the document.
UBS Weekly Guide


several weeks, markets are now better positioned to weather
both softer economic data and persistent policy uncertainties.
As our chief equity strategist, Jeremy Zirin, points out, the
equity risk premium (stocks earnings yield less the real bond
yield) stands near levels not seen since the middle of last            Fig. 2: The equity risk premium stands at its
summer – the last time an economic soft patch unnerved                 highest level since last summer
                                                                       Equity risk premium — earnings yield less the real bond yield
financial markets (see figure 2). While the size of the equity risk
premium alone should not be used as a market timing tool, it            10%
does offer insight into both the relative return prospects across        8%
asset classes as well as potentially oversold market conditions.
With sentiment toward risk assets having turned decidedly sour,          6%
and bonds sharply outperforming stocks over the past month               4%
and a half, equity markets are overdue for a rebound. So in the
absence of materially weaker than expected economic data                 2%
releases and/or additional fallout from the Eurozone, equity             0%
markets appear poised for something of a modest relief rally                1985      1990      1995      200        200     2010
this week.                                                                            ERP - earnings yield less real bond yield

Proof points                                                           Source:Bloomberg, UBS WMR, as of 10 June 2011
Still, any sustained recovery in equity markets (and risk assets in
general) will hinge upon more than just the absence of bad
news. Market participants will require confirmation or “proof
points” that: (1) the economic recovery remains on track; (2)
the earnings impact from the soft patch will be both modest
and transitory; and (3) the policy mix is still supportive of
growth and risk taking. But this will likely take some time. The
effects of the earthquake and associated tsunami in Japan on
the global supply chain will continue to negatively impact the
                                                                       Fig. 3: Companies have been able to consistently
economic data for some weeks. Our economics team recently
                                                                       beat consensus forecasts over the last two years
reduced growth estimates for the second quarter to reflect the         Percentage of S&P 500 companies beating consensus earnings
fallout from Japan. Although oil prices have pulled back from          estimates
their recent cyclical highs, it will take a while before this begins
                                                                        12%
to ease pressures upon the consumer. Keep in mind also that
the tightening of monetary policy by emerging market central            10%
bankers has begun to impact economic activity more tangibly.
                                                                         8%
While we view this as a healthy transition towards a more
sustainable pace of growth, signs of a slowdown in the                   6%
developing world are likely to be greeted cautiously in the near
term when coupled with the structural challenges confronting             4%
developed nations.                                                       2%

The most important factor for equity markets remains the                 0%
outlook for corporate profits. Keep in mind that earnings have                 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11
been the one consistent bright spot in what has been an
                                                                       Source:Factset, UBS WMR, as of 10 June 2011
otherwise sluggish and uneven recovery process. Through a
combination of aggressive cost cutting and moderate revenue
growth, companies have been able to consistently beat analyst
estimates for each of the past eight quarters (see figure 3). But
the prospects for continued above consensus profits are more
limited with analysts having recently ratcheted up earnings
estimates. Although we remain confident in our forecast for
$100 in earnings for the S&P 500 for 2011 and $108 for 2012,
the risks are have become increasingly symmetrical. In the lull
between Q1 and Q2 earnings seasons, there may well be a
number of cuts in analyst estimates as companies offer more
conservative guidance. This will likely keep markets volatile until
Q2 earnings season actually gets underway and corporate CFOs


                                                                                    Wealth Management Research 13 June 2011            2
UBS Weekly Guide


offer validation that the supportive profit picture remains intact.

No stick, no carrot
Turning our attention finally to the monetary policy outlook,         Fig. 4: Tactical deviations across asset classes
many view the Fed as being caught “between a rock and a hard          Deviations from benchmark (9-12 month time horizon)
place.” Because while additional stimulus could well provoke a
further acceleration in price pressures globally, a premature                Equity
tightening of policy would almost certainly weigh more heavily
upon a domestic economy already working its way through a              Fixed Income
pretty rough soft patch. But after reflecting a bit upon Fed
Chairman Bernanke recent appearance at the International                        Cash

Monetary Conference in Atlanta, Georgia and the release of the
                                                                       Commodities
Beige Book, it struck us that the Fed’s current policy dilemma
has less to do with “rocks and hard places” and more to do                         –––    ––          –          n      +       ++     +++
with “sticks and carrots.”                                                          Underweight                               Overweight

                                                                      Source:UBS WMR, as of 12 June 2011
The Fed must try to move toward a more normalized policy              Note: Deviation from Benchmark Labels: + = moderate
stance over time – but will have to do so without adding to the       overweight, ++ = overweight, +++ = strong over-weight, n =
already stiff economic headwinds. This means that while there         neutral, - = moderate underweight, -- = underweight, --- = strong
is unlikely to be a “QE3” in the offing, Fed officials will still     underweight, n.a. = not applicable.
need to take a decidedly deliberate and pragmatic approach to         For the interpretation of the suggested tactical deviations from
both shrinking a bloated balance sheet and raising interest           benchmark, please see the most recent Investment Strategy Guide.
rates. This offers something of a “mixed bag” for risk assets
and reinforces the notion that the recent bout of choppy
market conditions will persist for the near term. We still have a
preference for both equity and credit (see figure 4). However,
periods of underperformance are to be expected in the near
term as the economy negotiates through the current soft patch.

Comfort level
In his prepared remarks in Atlanta, Chairman Bernanke once
again expressed his frustration with the pace of the economic
recovery. While the Chairman cited the severe supply chain
disruptions associated with the earthquake in Japan as the
primary catalyst behind the most recent slowing of growth, he
continued to focus upon the sluggish pace of job creation as
                                                                      Fig. 5: May’s employment report was
the biggest intermediate challenge to the economy. These
                                                                      disappointing
concerns have certainly been validated by both the increase in
                                                                      US non-farm payrolls
weekly unemployment claims and the disappointing payroll
report for May (see figure 5). Although the recent increase in            600
inflation has also been something of a concern for                        400
policymakers, there is little evidence that price pressures are           200
                                                                            0
becoming more broadly-based and/or deeply entrenched. Since
                                                                        (200)
much of the increase in inflation is linked to higher food and
                                                                        (400)
energy prices, recent signs of a moderation in commodity prices         (600)
suggest that inflationary risks will ease.                              (800)
                                                                       (1000)
This is where the “stick” part comes in. With employment                     2000       2002   2004       2006   2008       2010   2012
growth running well below what is typically seen at this part of
                                                                                                  US non-farm payrolls
the business cycle, the Fed has little incentive to go out and
raise interest rates anytime soon. Bernanke emphasized that           Source: Bloomberg, UBS WMR, as of 10 June 2011
until and unless job creation strengthens materially, the Fed will
need to retain an accommodative policy approach. At the same
time, fears that the Fed may be feeding into a global
inflationary trend should begin to abate. Bernanke went to
great lengths in his formal remarks to dismiss the notion that
Fed policy is behind the inflation surge in emerging markets,
citing instead the demand-driven surge in commodity prices. So
as overall price pressures begin to moderate along with food


                                                                                       Wealth Management Research 13 June 2011               3
UBS Weekly Guide


and energy costs – partly as a result of the economic soft patch
– any pressure on the Fed to “reign in” policy will ease as well.
This offers policymakers a great deal of latitude to maintain the
current easy policy conditions for an extended period of time.
While our economics team is still calling for an initial rate hike
during the first quarter of 2012, it well may be that the Fed
remains sidelined even longer.

But what Chairman Bernanke didn’t say in Atlanta may be every
bit as important as what he did say. With QE2 drawing to a
close at the end of this month, there has been a fair amount of
speculation over whether or not the Fed will initiate some new
purchase program to help both bolster the economy and
support risk assets. Evidence that the economy has decelerated
during the current quarter – coupled with the recent pullback in
equity markets – has only served to reinforce this view in some
quarters. While Bernanke noted that the Fed would continue its
existing policy of reinvesting principal payments from maturing
securities to maintain the Fed’s balance sheet at current levels,
he offered no indication that a new phase of monetary stimulus
was anywhere in the works. He pointed out that monetary
policy cannot be a “panacea” – suggesting that QE3 isn’t on
the table given the current set of macro, market and liquidity
conditions. In short, market participants will need to find a
comfort level that the current policy mix will be adequate to
promote a gradual improvement in cyclical conditions and
adequate support for risk assets because there don’t appear to
be any more carrots in the offing either.




                                                                     Wealth Management Research 13 June 2011   4
UBS Weekly Guide


Buy the “favorite five” currencies on dollar rallies
While our forecasts project that the                       worth      looking    beyond     the
US dollar will again rally against                         traditional main currencies, yet for
many of the major currencies, we                           many investors emerging markets
think the Greenback will likely lose                       can be too volatile or have too few
purchasing power over the long                             investment opportunities to justify
term. In the short term an end to                          a major portfolio allocation. We
the Federal Reserve’s additional                           believe the Canadian dollar,
quantitative easing, decent US GDP                         Australian dollar, Swedish krona,
growth in the second half of 2011                          Norwegian krone and the Swiss
and persistent concern about the                           franc are attractive from a long-
structural integrity of the Eurozone                       term economic perspective. The
could help the dollar. However, the                        NOK and CAD show a strong
long term fiscal burdens and                               correlation to oil prices coupled            Katherine Klingensmith,
continued problems in real estate                          with strong domestic economies,              Strategist
market are among some of the                               while the AUD is linked to demand
                                                                                                        Constantin Vayenas,
major challenges to the US. The                            from China, coal and base metals.
                                                                                                        Analyst
other main currencies – the euro,                          The franc (CHF) does well in times
Japanese yen and British pound all                         of financial and economic stress,
also face troubles with government                         and Switzerland offers a strong
debt and low growth.                                       domestic economy. Sweden (SEK)
                                                           has resource constraints so is quick
We think short term rallies in the                         to see inflation and higher interest
US dollar should be used to                                rates; additionally, the currency is
diversify dollar-based portfolios.                         linked to a healthy domestic stock
The dollar is currently weak,                              market. All of these countries have
making these and many other                                strong public balance sheets and
currencies expensive for US                                export bases. Australia offers the
investors. We do, however,                                 highest interest rates, which has
suggest adding fundamentally                               been one reason for its especially
sound international investments as                         sharp appreciation over the past
opportunities arise. We think it is                        year.




Fig. 1: Favorite five very strong versus four big curencies                 Fig. 2: Favorite five seeing faster growth recovery
USD, EUR, GBP, JPY vs. CHF, NOK, SEK, AUD, CAD real exchange rates          USD, EUR, GBP, JPY vs. CHF, NOK, SEK, AUD, CAD GDP growth
130                   Real effective exchange rate                                                      GDP growth
                                                                             6%
125
120                                                                          4%
115
                                                                             2%
110
105                                                                          0%
100
                                                                             -2%
 95
 90                                                                          -4%

 85                                                                          -6%
 80
  Jan-00     Jan-02      Jan-04       Jan-06      Jan-08       Jan-10        -8%
                                                                               Apr-01     Apr-03      Apr-05       Apr-07         Apr-09   Apr-11
                             AVG G4      AVG F5                                                       AVG G4     AVG Fav 5


Source: Thomson Reuters, UBS WMR, as of 1 June 2011                         Source: Thomson Reuters, UBS WMR, as of 1 June 2011




                                                                                                   Wealth Management Research 13 June 2011          5
UBS Weekly Guide


Our Best Ideas at a Glance
The following list represents investment strategy recommendations that we believe will provide attractive
opportunities over the next 9-12 months.


Asset Classes      Preference for Equities over Bonds

Currencies         Preference for British Pound (GBP) and minor currencies, in particular the Swedish Krona
                   (SEK), the Norwegian Krona (NOK), the Canadian dollar (CAD), as well as selected Asian
                   emerging market currencies.

Equities           International markets

                    Select Emerging Market equities, especially China, Brazil and Taiwan

                    UK equities

                   Within US equities

                    Information Technology: in particular hardware and equipment, semis

                    Consumer Staples: in particular companies with emerging markets exposure, especially
                         within household products, personal care and beverages

                    Healthcare: in particular drug distributors

                    Within Financials: insurers

                    Within Industrials: mid/late cycle end market capital goods companies

                    Within Materials: chemicals and industrial gas

                    Within Energy: oilfield services

                    Within Consumer Discretionary: auto suppliers, restaurants, lodging

                    Within Telecom: wireless towers & data centers

                    Preference for Growth over Value stocks

Fixed Income       Within US dollar Fixed Income

                    High Yield Corporate bonds

                    Investment Grade BBB-rated Corporate bonds

Commodities        We see upside potential for crude oil, gold, platinum, selected base metals and agricultural
                   commodities.




                                                                             Wealth Management Research 13 June 2011   6
UBS Weekly Guide



Review/Preview of the Financial Markets
Review         In the past week, the US trade      quarter-over-quarter                  Non-mortgage           consumer
6 June – 10    balance for April grabbed a lot     annualized for the second             credit continued to rise in
June           of attention, as it narrowed        quarter of 2011, but highlight        April, although it was still
               significantly from revised USD      the upside risk to that forecast.     driven by government-led
               46.8 billion (bn) to USD                                                  student         loans.      This
               43.7bn. While export growth         Other US economic data                notwithstanding, the apparent
               remained solid at 1.3%              releases     were     generally       stabilization bodes well for a
               month-over-month         (m/m),     dismissive of a deeper or more        less fragile consumer sector.
               imports fell by 0.4% m/m due        prolonged growth soft patch.
               to      Japan-related    supply                                           Consumer               sentiment
               disruptions. At face value, the     The     Beige     Book,    with       indicators continued to send
                                                   information     from     Federal
               narrowing implies a boost to                                              mixed signals, with the
                                                   Reserve     business    contacts
               2Q11 real Gross Domestic            compiled through 27 May,              IBD/TIPP economic optimism
               Product (GDP) growth of             showed a less pronounced              index rising in early June week
               about 2 percetange points at        deceleration in real activity         versus early May. However,
               an annual rate. However,            than the May Institute for            the daily Rasmussen index and
               slower imports imply less           Supply Management (ISM)               monthly Conference Board
               inventory accumulation as well      surveys and labor market              have not rebounded yet from
               as     weaker      consumption.     report suggested. The reported        their drops in March/April.
               Additionally, import growth         stated that “economic activity
               will likely pick up again by        generally continued to expand         Thomas Berner, CFA, Economist
               June, as supply disruptions are     since the last report, though a
               already fading. We, therefore,      few districts indicated some
               keep our current real GDP           deceleration.” This was only a
               growth forecast of 2.5%             marginally weaker tone than
                                                   the prior Beige Book.


Preview        The week ahead should offer         Whether          the      inflation   with the growth message of
13 June – 17   some relief in the data             moderation        will   be      an   the national ISM index. The
June           regarding price pressures from      important driver for a rebound        Philly Fed prints a bit weaker at
               the past surge in the price of      in consumer sentiment remains         3.9 in May. However, also here
               oil. Producer and consumer          to be seen. We expect it to be        we don’t expect much change
               prices were likely depressed by     and         forecast        further   and forecast a level of 4 in
               falling energy prices in May.       improvement in the University         June. While we think that the
               We expect the Producer Price        of       Michigan       consumer      Japan-related             supply
               Index (PPI) for finished goods      sentiment index from 74.3 in          disruptions will be transitory,
               to rise a moderate 0.1% m/m,        May to preliminary 75 in June.        June manufacturing climate
               with core PPI a stronger but        In our view, and improvement          data will possibly not reflect
               still moderate 0.2%. In similar     in consumer and/or business           that yet.
               fashion, the Consumer Price         sentiment will be crucial to
               Index (CPI) will likely flat, but   support our view of a                 The Conference Board index of
               core CPI up 0.2% m/m in May.        temporary growth soft patch in        leading indicators will likely
               In both cases, the moderation       the first half of 2011.               rise 0.5% m/m in May. Given
               in monthly increases should                                               the        current        debate
               not suffice to reverse earlier      The timely Empire State and           sourrounding the depth and
               upward trends in y/y rates.         the Philly Fed manufacturing          length of the current growth
               That said, we expect these          climate indexes will likely show      slowdown,        the     leading
               uptrends to be moderate due         little change in June. We             indicators will likely get more
               to still ample resource slack in    forecast 11 for the Empire            attention than usual.
               the economy.                        index, after 11.9 in May. At
                                                   this level it is roughly consistent   Thomas Berner, CFA, Economist


                                                                                Wealth Management Research 13 June 2011      7
UBS Weekly Guide


Earnings Calendar
The Earnings Calendar provides publicly announced reporting dates and times of companies covered by Wealth
Management Research Americas. Reporting dates and times are subject to change by the reporting companies.


                                                                                                        Analyst
                                                                                   WMR-A Covering       Contact
Date             Ticker   Company              Reporting Period   Time (EST)       Analyst              Information
                                               Q4 2011 Earnings
                          Darden                                                   Alexandra            212-713-
14-JUN-2011      DRI                           Release            Unspecified
                          Restaurants, Inc.                                        Mahoney              2825
                                               (Projected)
                                               Q1 2012 Earnings                    Alexandra            212-713-
14-JUN-2011      BBY      Best Buy Co., Inc.                      8:00am
                                               Release                             Mahoney              2825
                          Amerigo              Q1 2011 Earnings                                         212-713-
14-JUN-2011      ARG                                              Before Market    Andrew Sutphin
                          Resources Ltd.       Release                                                  3646
                                               May 2011 Sales
                                                                                                        212-713-
15-JUN-2011      PGR      Progressive Corp     and Revenue        After Market     Michael Dion
                                                                                                        3825
                                               Release
                                               Q2 2011 Earnings
                                                                                   Alexandra            212-713-
16-JUN-2011      CCL      Carnival Corp.       Release            Unspecified
                                                                                   Mahoney              2825
                                               (Projected)
                                               Q1 2011 Earnings                                         212-713-
18-JUN-2011      KR       Kroger                                  10:00 am         Sally Dessloch
                                               Release                                                  9667




                                                                           Wealth Management Research 13 June 2011    8
UBS Weekly Guide



Key Economic Indicators

Date                  Indicator                                  Time (EST)       Unit       Consensus       UBS Est.        Previous

                      Retail Sales (May)                                                          -0.4%          -0.8%            0.5%
14-Jun-11                                                        8:30 AM          m/m
                      Retail Sales excluding Autos (May)                                           0.3%          -0.2%            0.2%
14-Jun-11                                                        8:30 AM          m/m
                      Producer Price Index (PPI, May)                                              0.0%              0.1%         0.8%
14-Jun-11                                                        8:30 AM          m/m
                      Core PPI excl. Food & Energy (May)                                           0.2%              0.2%         0.3%
14-Jun-11                                                        8:30 AM          m/m
                      Business Inventories (Apr)                                                   1.0%              0.8%         1.1%
14-Jun-11                                                        10:00 AM         m/m
                      Consumer Price Index (CPI, May)                                              0.1%              0.0%         0.4%
15-Jun-11                                                        8:30 AM          m/m
                      Core CPI (May)                                                               0.2%              0.2%         0.2%
15-Jun-11                                                        8:30 AM          m/m
                      Empire State (Jun)                                                            13.0              11.0         11.9
15-Jun-11                                                        8:30 AM          index
                      Industrial Production (May)                                                  0.3%              0.0%         0.0%
15-Jun-11                                                        9:15 AM          m/m
                      Capacity Utilization (May)                                                  77.0%         76.8%            76.9%
15-Jun-11                                                        9:15 P AM
                      Housing Market Index (Jun)                                                       16              16               16
15-Jun-11                                                        10:00 AM         index
                      Jobless Claims (Jun 4)                                                       419 k             420 k        427 k
16-Jun-11                                                        8:30 AM          level
                      Housing Starts (May)                                                         540 k             570 k        523 k
16-Jun-11                                                        8:30 AM          level
                      Current Account Balance (Q1)                                           -$126.0 bil -$125.5 bil         -$113.3 bil
16-Jun-11                                                        8:30 AM          level
                      Philadelphia Fed (Jun)                                                          7.0              4.0          3.9
16-Jun-11                                                        10:00 AM         index
                      U. of Michigan Sentiment (June)                                               74.5               76          74.3
17-Jun-11                                                        9:55 AM          index
                      Leading Indicators (May)                                                     0.2%              0.5%        -0.3%
17-Jun-11                                                        10:00 AM         m/m

Source: Bloomberg & UBS estimates, as of 10 June 2011.
In developing the WMR quarterly forecasts, WMR economists worked in collaboration with economists employed by UBS Investment
Research (INV). All remaining forecasts were developed by economists employed by INV. INV is published by UBS Investment Bank. Forecasts
and estimates are current only as of the date of this publication and may change without notice.

m/m = month-over-month, q/q = quarter-over-quarter, k = thousand, bn = billion, y/y = year-over-year, mn = million




                                                                                          Wealth Management Research 13 June 2011            9
UBS Weekly Guide


Asset Class Strategy & Performance                                          Equity Region Strategy & Performance
                   Extended         Market Returns                                                 Strategy*              Market Returns
                     Asset
                                                                                                                    MTD          YTD           2010
                   Allocation
                   Strategy*     MTD    YTD     2010                        US Equity                    n         -4.4%        3.5%           16.9%
US Equity              +        -4.4% 3.5% 16.9%                              S&P 500                   n.a.       -4.1%        3.4%           15.1%
Non-US
                       —        -2.6% 3.8%      9.4%                          DJIA                      n.a.       -3.5%        5.9%           14.1%
Developed Equity
Emerging Market                                                               Nasdaq                    n.a.       -5.3%        1.6%           18.0%
                       +        -2.1% 0.5% 19.2%
Equity
                                                                            EMU**                        —         -1.8%       11.2%           -3.4%
US Fixed Income        —         0.2%   3.2%    6.5%
Non-US Fixed                                                                UK                           +         -2.5%        6.0%           8.8%
                      ——         0.9%   6.1%    4.9%
Income                                                                      Japan                        —         -1.9%        -7.9%          15.6%
Cash (USD)             +         0.0%   0.1%    0.1%                                                                n.a.         n.a.
                                                                            Other Developed              —                                      n.a.
Commodities            n         0.1%   2.7% 16.8%
Total return indices in USD: Russell 3500, MSCI EAFE & Canada, MSCI         Emerging
                                                                                                        ++         -2.1%        0.5%           19.2%
Emerging Markets, BarCap US Aggregate, BarCap Global Aggregate ex-USD,      Markets
Citigroup 3-month T-bill, DJ UBS                                            Total return indices in USD: S&P 500, DJIA, Russell 3500, MSCI for non-US.
                                                                            Price return indices in USD: Nasdaq
US Equity Sector Strategy & Performance
                                                                            Equity Size, Style Strategy & Performance
                     Sector                           Market Returns
                   Strategy* Weekly                                                                  Style                Market Returns
                                                   MTD      YTD     2010
                                                                                                   Strategy*        MTD          YTD           2010
Cons. Discr.           —            -2.2%         -4.7%     3.5%   27.7%
Cons. Staples         ++            -1.0%         -3.1%     7.2%   14.1%    Large-Cap Value              —         -4.2%        3.6%           15.5%
Energy                 —            -0.4%         -2.9%    10.2%   20.5%
                                                                            Large-Cap
Financials             n            -2.6%         -5.8%    -6.1%   12.1%                                ++         -4.2%        3.8%           16.7%
                                                                            Growth
Healthcare             +            -0.3%         -1.8%    13.1%    2.9%
Industrials            n            -2.2%         -5.0%     3.3%   26.7%    Mid-Cap                      n         -5.0%        4.9%           25.5%
IT                    +++           -3.2%         -5.2%    -0.6%   10.2%    Small-Cap                    n         -6.5%        1.6%           26.9%
Materials              n            -1.3%         -4.2%    -0.5%   22.2%
                                                                            REITs                        —         -4.8%        8.6%           27.9%
Telecom               ——            -2.7%         -4.4%     3.7%   19.0%
Utilities             ——            -0.7%         -2.0%     7.0%    5.5%    Total return indices in USD: Russell
Total return indices in USD: S&P 500 sector indices                         Regional Indicators
US Dollar Fixed Income Strategy & Performance                               2011 Consensus S&P 500 EPS                                  USD 100
                             Strategy*               Market Returns         2011 UBS WMR S&P 500 EPS                                    USD 100
                                                   MTD     YTD      2010    2012 Consensus S&P 500 EPS                                  USD 113
Treasuries                        —                0.3%    2.9%     5.9%
                                                                            2012 UBS WMR S&P 500 EPS                                    USD 108
TIPS                              —                0.4%    5.5%     6.3%
Agencies                          —                0.1%    2.1%     4.7%    UBS WMR 2011 year-end S&P 500 target                          1410
Inv. Grade Corporates             +               -0.1%    4.1%     9.5%    Price to earnings+                                            12.4x
High Yield Corporates             +               -0.7%    5.2%    15.1%
                                                                            Price to book value+                                           2.2x
Preferred Securities              +               -0.7%    4.9%    13.7%
Mortgages                         —                0.4%    3.2%     5.7%    +Consensus 12-month forward estimates, as of 10 June 2011.
Emerging Markets                  n                0.6%    4.2%    12.5%    Total return performance as of close of business on 9 June 2011.
Municipals                       n.a.              0.5%    4.8%     2.3%
Total return indices in USD: BAS / Merrill Lynch                            Please note these important color designations:
                                                                                                                      Indicates +/- change in most
Bond Regions Strategy & Performance                                                   +                        –
                                                                                                                      recent update
                             Strategy*               Market Returns
                                                                            *Please see the scale in the Appendix and the most recent Investment
                                                   MTD     YTD      2010    Strategy Guide for an interpretation of the tactical deviations and an
US                               +                 0.2%    3.2%     6.5%    explanation of the corresponding benchmark allocation. **EMU = European
EMU**                            n                 0.9%    9.0%    -4.5%    Monetary Union and is comprised of European countries that have adopted
UK                               +                -0.6%    7.5%     4.6%    the Euro as their currency.
Japan                           ——                 1.7%    1.5%    17.5%
Other                            +                  n.a.    n.a.     n.a.
  Total return indices in USD: Barclays Capital



                                                                                                     Wealth Management Research 13 June 2011             10
UBS Weekly Guide


Reports of Note Published in the Last Week
Friday, 10 June     Asia Pacific economics: New Zealand dollar - patience will be rewarded
                    Soaring global food prices and improving terms of trade have helped turn New Zealand's
                    trade balance into surplus, a structural shift which is likely to keep buoying the New
                    Zealand dollar (NZD). Healthy fiscal conditions also offer underlying support. Any
                    setbacks in the value of the NZD should provide buying opportunities, unless global
                    optimism weakens drastically.

Thursday, 9 June    Global economy: ECB signals rate increase
                    As we have been expecting, the European Central Bank (ECB) has left its refinancing rate
                    unchanged. Mr. Trichet described monetary policy as accommodative and used the
                    terms "strong vigilance," which supports our call for a rate increase on July 7.

Wednesday, 8 June   UK equities: Fair value or fantasy?
                    UK revenue growth expectations barely match UK inflation; analysts are cautious and
                    appear to follow regional macro outlooks. Likewise margins are not forecast to improve
                    significantly over current levels - we stress test these assumptions. Ex-financials and
                    materials UK equities remain good value. Commodity price forecasts matter more to the
                    UK market than GDP estimates.

Wednesday, 8 June   Asia ex Japan currencies: High inflation drives Asian currency appreciation
                    Inflation in Asia is likely to remain uncomfortably high. With further advances in
                    commodity prices and narrowing spare capacity, inflation pressure in the region is set to
                    broaden. To counter-balance mounting price pressures, we expect Asian central banks to
                    keep up their currency appreciation. The Chinese Yuan Renminbi and Malaysian Ringgit
                    offer defensive investors an attractive return profile, with moderate levels of volatility. For
                    investors with greater tolerance for currency volatility, the Korean Won and Indonesian
                    Rupiah are our best picks on a total return basis.

Wednesday, 8 June   UBS research focus: Inflation - The next wave takes shape
                    In The Decade Ahead, 6 February 2011, we concluded that US inflation will likely
                    accelerate during the decade. We build on this discussion by assessing inflation risk from
                    a global perspective. We shed light on how inflation arises and what its associated costs
                    and mechanisms are, as well as discuss relevant scenarios for future price developments
                    and derive investment recommendations from these.
Wednesday, 8 June   US economics: Weak May data likely temporary
                    The objective of this report is to review the technical conditions of the more established,
                    actively traded domestic Exchange-Traded Funds (ETFs) that track an underlying index or
                    aim to represent a particular sector or industry. We then correlate this report with our
                    broader macro market and sector analyses. In this review, we provide updates on various
                    technical indicators including 10-week and 30-week moving averages, intermediate-term
                    trends and important technical support and resistance levels. We try to identify potential
                    trading/investment opportunities and downside risks in various key domestic markets.
                    The following are technical commentaries, and not necessarily Buy or Sell
                    recommendations. Note: All last sale prices are as of 03 June 2011.

Tuesday, 7 June     Emerging Market Economics: Egypt’s Deteriorating Finances
                    Even though spreads on Egypt’s sovereign bonds have widened markedly, we would
                    advise investors to avoid buying them at this point. We expect the Egyptian pound to
                    come under depreciation pressure, and would avoid investing in Egyptian money market
                    instruments. We expect the valuation discount of Egyptian equities to widen and the
                    market to trade at a substantial discount to the MSCI Emerging Markets index over a
                    prolonged period of time.




                                                                          Wealth Management Research 13 June 2011     11
UBS Weekly Guide


Tuesday, 7 June           Valuation Report: Mind the gap
                          Corporate bonds generated positive total returns in May as the strong rally in Treasuries
                          bolstered performance of both investment grade and high yield bonds. As we have
                          discussed in the past, we believe that at current low yields, the directionality of credit
                          spreads is largely a function of interest rates, with credit spreads unlikely to tighten
                          further until there is a backup in rates. Accordingly, credit spreads widened a touch in
                          recent weeks – a move that we see driven by exceedingly low yields, rather than any
                          deterioration in fundamentals.
Monday, 6 June            US Equities Utilities: Monthly – Macro Rotation
                          Utilities have powered higher, outperforming the S&P 500 by almost 300 basis points in
                          the last month driven by falling treasury yields and a rotation into defensive sectors. The
                          good returns have been driven by better sentiment, not higher earnings expectations.
                          However, going forward, we believe this outperformance is unsustainable as the
                          economic recovery proves durable and bond yields reverse their decline. We increasingly
                          see better value in the unregulated power generators.


Monday, 6 June            Dividend Ruler Stock List: June Update
                          The 10-year treasury bond yield has rapidly declined to under 3.00% from 3.75% in early
                          February. Lower bond yields increase the relative attractiveness of dividend paying stocks.
                          With the S&P 500 dividend yield at 2.0%, the current 1.06% yield differential between
                          bonds and stocks is lower than 97% of monthly observations over the past 30 years. Our
                          recent US sector strategy changes—increasing allocations to Consumer Staples and
                          Healthcare—enhances the attractiveness of our dividend ruler stocks list. Consumer
                          Staples and Health Care represent over one-third of our list due to their healthy
                          combination of current dividend yield and historical dividend growth and consistency.


Monday, 6 June            Arab countries in transition: The demographics of MENA
                          One of the fundamental drivers of change in societies – demographics – will continue to
                          make its impact felt in North Africa and the Middle East (MENA) for years to come. A
                          process towards greater political pluralism is under way, but will take time, and a wide
                          range of outcomes is likely. The prospect of reform and growth should attract investment
                          in the medium term, but the region faces hurdles, including structural weaknesses and
                          skills shortages.


To access these reports please contact your Financial Advisor or access the reports via online services.




                                                                               Wealth Management Research 13 June 2011   12
UBS Weekly Guide


Appendix




Scale for tactical deviation charts – Performance and Strategy tables
Symbol Description/Definition
            moderate overweight vs.                      moderate underweight vs.                                    Neutral, i.e. on
      +                                            –                                                        n
            benchmark                                    benchmark                                                   benchmark
     ++     overweight vs. benchmark              ––     underweight vs. benchmark                         n/a       not applicable
                                                         strong underweight vs.
    +++     strong overweight vs. benchmark      –––
                                                         benchmark
The overweight and underweight recommendations represent tactical deviations that can be applied to any appropriate benchmark
portfolio allocation. They reflect WMR’s short- to medium-term assessment of market opportunities and risks in the respective asset
classes and market segments. The benchmark allocation is not specified here. Please see the most recent Investment Strategy Guide for
definitions/explanations of benchmark allocation. They should be chosen in line with the risk profile of the investor. Note that the
Regional Equity and Bond Strategy is provided on an unhedged basis (i.e., it is assumed that investors carry the underlying currency risk
of such investments). Thus, the deviations from the benchmark reflect our views of the underlying equity and bond markets in
combination with our assessment of the associated currencies.
Source: UBS WMR, All market performance data is from Bloomberg data as of date listed on top of this document, using representative
indices and is provided for information only.




                                                                                           Wealth Management Research 13 June 2011          13
UBS Weekly Guide


Disclaimer
In certain countries UBS AG is referred to as UBS SA. This publication is for our clients’ information only and is not intended as an offer, or a
solicitation of an offer, to buy or sell any investment or other specific product. It does not constitute a personal recommendation or take into
account the particular investment objectives, financial situation and needs of any specific recipient. We recommend that recipients take financial
and/or tax advice as to the implications of investing in any of the products mentioned herein. We do not provide tax advice. The analysis
contained herein is based on numerous assumptions. Different assumptions could result in materially different results. Other than disclosures
relating to UBS AG, its subsidiaries and affiliates, all information expressed in this document were obtained from sources believed to be reliable
and in good faith, but no representation or warranty, express or implied, is made as to its accuracy or completeness. All information and
opinions are current only as of the date of this report, and are subject to change without notice. This publication is not intended to be a
complete statement or summary of the securities, markets or developments referred to in the report.

Opinions may differ or be contrary to those expressed by other business areas or groups of UBS AG, its subsidiaries and affiliates. UBS Wealth
Management Research (UBS WMR) is written by Wealth Management & Swiss Bank and Wealth Management Americas. UBS Investment
Research is written by UBS Investment Bank. The research process of UBS WMR is independent of UBS Investment Research. As a consequence
research methodologies applied and assumptions made by UBS WMR and UBS Investment Research may differ, for example, in terms of
investment horizon, model assumptions, and valuation methods. Therefore investment recommendations independently provided by the two
UBS research organizations can be different.
The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and other constituencies
for the purpose of gathering, synthesizing and interpreting market information. The compensation of the analyst(s) who prepared this report is
determined exclusively by research management and senior management (not including investment banking). Analyst compensation is not
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At any time UBS AG, its subsidiaries and affiliates (or employees thereof) may make investment decisions that are inconsistent with the opinions
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                                                                                                   Wealth Management Research 13 June 2011              14
UBS Weekly Guide


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© UBS 2011. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.




                                                                                                Wealth Management Research 13 June 2011             15

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Ubs Weekly Guide 6 13 11

  • 1.  Wealth Management Research 13 June 2011 UBS Weekly Guide More turbulence ahead  We see the potential for additional near term choppiness Mike Ryan, CFA, Chief Investment Strategist amid another heavy economic release calendar, mike.ryan@ubs.com appearances by several senior Fed officials including Chairman Bernanke and the ongoing stalemate over funding for another bailout for Greece. Contents Page  However, with sentiment toward risk assets having Feature article 1 turned decidedly negative and bonds outperforming Buy the “favorite five” currencies on dollar 5 stocks over the past month and a half, equity markets rallies appear oversold. In the absence of materially weaker Our Best Ideas at a Glance 6 than expected economic data releases and/or additional fallout from the Eurozone, equity markets appear poised Review/Preview of the Financial Markets 7 for something of a modest relief rally this week. Earnings Calendar 8  Any sustained recovery in equity markets will still require Key Economic Indicators 9 confirmation that: (1) the economic recovery remains on Strategy and Performance 10 track; (2) the earnings impact from the soft patch will be both modest and transitory; and (3) the policy mix is still Reports of Note Published in the Last Week 11 supportive of growth and risk taking. Choppy and sloppy The S&P 500 fell another 2.2% for the week ending June 10th, Fig. 1: Stocks have fallen for six consecutive marking the sixth consecutive weekly decline in equity prices – weeks, still remain up 1% for the year the longest such losing streak in nearly a decade (see figure 1). S&P 500 year to date The principal catalysts behind the most recent drop in equity 1400 markets included: another round of weaker than expected economic release data; a less than rosy assessment of cyclical 1350 growth prospects from Fed officials; growing concerns over fiscal, monetary and regulatory policy risks in the US; and 1300 lingering fears of both a deepening and broadening of the Eurozone debt crisis. We see the potential for additional 1250 choppiness in the week ahead amid another heavy economic release calendar, appearances by several senior Fed officials 1200 including Chairman Bernanke and the ongoing stalemate over Jan Feb Mar Apr May Jun Jul funding for another bailout for Greece. Concerns over the S&P 500 pending conclusion of QE2, the rapidly approaching deadline for extending the debt ceiling and the economic fallout from Source:Bloomberg, UBS WMR, as of 10 June 2011 the implementation of financial regulatory reform (i.e., Dodd Frank) only serve to add to the market’s current jittery state. But following the steady stream of bad news over the past This report has been prepared by UBS Financial Services Inc. (UBS FS). Please see important disclaimer and disclosures at the end of the document.
  • 2. UBS Weekly Guide several weeks, markets are now better positioned to weather both softer economic data and persistent policy uncertainties. As our chief equity strategist, Jeremy Zirin, points out, the equity risk premium (stocks earnings yield less the real bond yield) stands near levels not seen since the middle of last Fig. 2: The equity risk premium stands at its summer – the last time an economic soft patch unnerved highest level since last summer Equity risk premium — earnings yield less the real bond yield financial markets (see figure 2). While the size of the equity risk premium alone should not be used as a market timing tool, it 10% does offer insight into both the relative return prospects across 8% asset classes as well as potentially oversold market conditions. With sentiment toward risk assets having turned decidedly sour, 6% and bonds sharply outperforming stocks over the past month 4% and a half, equity markets are overdue for a rebound. So in the absence of materially weaker than expected economic data 2% releases and/or additional fallout from the Eurozone, equity 0% markets appear poised for something of a modest relief rally 1985 1990 1995 200 200 2010 this week. ERP - earnings yield less real bond yield Proof points Source:Bloomberg, UBS WMR, as of 10 June 2011 Still, any sustained recovery in equity markets (and risk assets in general) will hinge upon more than just the absence of bad news. Market participants will require confirmation or “proof points” that: (1) the economic recovery remains on track; (2) the earnings impact from the soft patch will be both modest and transitory; and (3) the policy mix is still supportive of growth and risk taking. But this will likely take some time. The effects of the earthquake and associated tsunami in Japan on the global supply chain will continue to negatively impact the Fig. 3: Companies have been able to consistently economic data for some weeks. Our economics team recently beat consensus forecasts over the last two years reduced growth estimates for the second quarter to reflect the Percentage of S&P 500 companies beating consensus earnings fallout from Japan. Although oil prices have pulled back from estimates their recent cyclical highs, it will take a while before this begins 12% to ease pressures upon the consumer. Keep in mind also that the tightening of monetary policy by emerging market central 10% bankers has begun to impact economic activity more tangibly. 8% While we view this as a healthy transition towards a more sustainable pace of growth, signs of a slowdown in the 6% developing world are likely to be greeted cautiously in the near term when coupled with the structural challenges confronting 4% developed nations. 2% The most important factor for equity markets remains the 0% outlook for corporate profits. Keep in mind that earnings have 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 been the one consistent bright spot in what has been an Source:Factset, UBS WMR, as of 10 June 2011 otherwise sluggish and uneven recovery process. Through a combination of aggressive cost cutting and moderate revenue growth, companies have been able to consistently beat analyst estimates for each of the past eight quarters (see figure 3). But the prospects for continued above consensus profits are more limited with analysts having recently ratcheted up earnings estimates. Although we remain confident in our forecast for $100 in earnings for the S&P 500 for 2011 and $108 for 2012, the risks are have become increasingly symmetrical. In the lull between Q1 and Q2 earnings seasons, there may well be a number of cuts in analyst estimates as companies offer more conservative guidance. This will likely keep markets volatile until Q2 earnings season actually gets underway and corporate CFOs Wealth Management Research 13 June 2011 2
  • 3. UBS Weekly Guide offer validation that the supportive profit picture remains intact. No stick, no carrot Turning our attention finally to the monetary policy outlook, Fig. 4: Tactical deviations across asset classes many view the Fed as being caught “between a rock and a hard Deviations from benchmark (9-12 month time horizon) place.” Because while additional stimulus could well provoke a further acceleration in price pressures globally, a premature Equity tightening of policy would almost certainly weigh more heavily upon a domestic economy already working its way through a Fixed Income pretty rough soft patch. But after reflecting a bit upon Fed Chairman Bernanke recent appearance at the International Cash Monetary Conference in Atlanta, Georgia and the release of the Commodities Beige Book, it struck us that the Fed’s current policy dilemma has less to do with “rocks and hard places” and more to do ––– –– – n + ++ +++ with “sticks and carrots.” Underweight Overweight Source:UBS WMR, as of 12 June 2011 The Fed must try to move toward a more normalized policy Note: Deviation from Benchmark Labels: + = moderate stance over time – but will have to do so without adding to the overweight, ++ = overweight, +++ = strong over-weight, n = already stiff economic headwinds. This means that while there neutral, - = moderate underweight, -- = underweight, --- = strong is unlikely to be a “QE3” in the offing, Fed officials will still underweight, n.a. = not applicable. need to take a decidedly deliberate and pragmatic approach to For the interpretation of the suggested tactical deviations from both shrinking a bloated balance sheet and raising interest benchmark, please see the most recent Investment Strategy Guide. rates. This offers something of a “mixed bag” for risk assets and reinforces the notion that the recent bout of choppy market conditions will persist for the near term. We still have a preference for both equity and credit (see figure 4). However, periods of underperformance are to be expected in the near term as the economy negotiates through the current soft patch. Comfort level In his prepared remarks in Atlanta, Chairman Bernanke once again expressed his frustration with the pace of the economic recovery. While the Chairman cited the severe supply chain disruptions associated with the earthquake in Japan as the primary catalyst behind the most recent slowing of growth, he continued to focus upon the sluggish pace of job creation as Fig. 5: May’s employment report was the biggest intermediate challenge to the economy. These disappointing concerns have certainly been validated by both the increase in US non-farm payrolls weekly unemployment claims and the disappointing payroll report for May (see figure 5). Although the recent increase in 600 inflation has also been something of a concern for 400 policymakers, there is little evidence that price pressures are 200 0 becoming more broadly-based and/or deeply entrenched. Since (200) much of the increase in inflation is linked to higher food and (400) energy prices, recent signs of a moderation in commodity prices (600) suggest that inflationary risks will ease. (800) (1000) This is where the “stick” part comes in. With employment 2000 2002 2004 2006 2008 2010 2012 growth running well below what is typically seen at this part of US non-farm payrolls the business cycle, the Fed has little incentive to go out and raise interest rates anytime soon. Bernanke emphasized that Source: Bloomberg, UBS WMR, as of 10 June 2011 until and unless job creation strengthens materially, the Fed will need to retain an accommodative policy approach. At the same time, fears that the Fed may be feeding into a global inflationary trend should begin to abate. Bernanke went to great lengths in his formal remarks to dismiss the notion that Fed policy is behind the inflation surge in emerging markets, citing instead the demand-driven surge in commodity prices. So as overall price pressures begin to moderate along with food Wealth Management Research 13 June 2011 3
  • 4. UBS Weekly Guide and energy costs – partly as a result of the economic soft patch – any pressure on the Fed to “reign in” policy will ease as well. This offers policymakers a great deal of latitude to maintain the current easy policy conditions for an extended period of time. While our economics team is still calling for an initial rate hike during the first quarter of 2012, it well may be that the Fed remains sidelined even longer. But what Chairman Bernanke didn’t say in Atlanta may be every bit as important as what he did say. With QE2 drawing to a close at the end of this month, there has been a fair amount of speculation over whether or not the Fed will initiate some new purchase program to help both bolster the economy and support risk assets. Evidence that the economy has decelerated during the current quarter – coupled with the recent pullback in equity markets – has only served to reinforce this view in some quarters. While Bernanke noted that the Fed would continue its existing policy of reinvesting principal payments from maturing securities to maintain the Fed’s balance sheet at current levels, he offered no indication that a new phase of monetary stimulus was anywhere in the works. He pointed out that monetary policy cannot be a “panacea” – suggesting that QE3 isn’t on the table given the current set of macro, market and liquidity conditions. In short, market participants will need to find a comfort level that the current policy mix will be adequate to promote a gradual improvement in cyclical conditions and adequate support for risk assets because there don’t appear to be any more carrots in the offing either. Wealth Management Research 13 June 2011 4
  • 5. UBS Weekly Guide Buy the “favorite five” currencies on dollar rallies While our forecasts project that the worth looking beyond the US dollar will again rally against traditional main currencies, yet for many of the major currencies, we many investors emerging markets think the Greenback will likely lose can be too volatile or have too few purchasing power over the long investment opportunities to justify term. In the short term an end to a major portfolio allocation. We the Federal Reserve’s additional believe the Canadian dollar, quantitative easing, decent US GDP Australian dollar, Swedish krona, growth in the second half of 2011 Norwegian krone and the Swiss and persistent concern about the franc are attractive from a long- structural integrity of the Eurozone term economic perspective. The could help the dollar. However, the NOK and CAD show a strong long term fiscal burdens and correlation to oil prices coupled Katherine Klingensmith, continued problems in real estate with strong domestic economies, Strategist market are among some of the while the AUD is linked to demand Constantin Vayenas, major challenges to the US. The from China, coal and base metals. Analyst other main currencies – the euro, The franc (CHF) does well in times Japanese yen and British pound all of financial and economic stress, also face troubles with government and Switzerland offers a strong debt and low growth. domestic economy. Sweden (SEK) has resource constraints so is quick We think short term rallies in the to see inflation and higher interest US dollar should be used to rates; additionally, the currency is diversify dollar-based portfolios. linked to a healthy domestic stock The dollar is currently weak, market. All of these countries have making these and many other strong public balance sheets and currencies expensive for US export bases. Australia offers the investors. We do, however, highest interest rates, which has suggest adding fundamentally been one reason for its especially sound international investments as sharp appreciation over the past opportunities arise. We think it is year. Fig. 1: Favorite five very strong versus four big curencies Fig. 2: Favorite five seeing faster growth recovery USD, EUR, GBP, JPY vs. CHF, NOK, SEK, AUD, CAD real exchange rates USD, EUR, GBP, JPY vs. CHF, NOK, SEK, AUD, CAD GDP growth 130 Real effective exchange rate GDP growth 6% 125 120 4% 115 2% 110 105 0% 100 -2% 95 90 -4% 85 -6% 80 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 -8% Apr-01 Apr-03 Apr-05 Apr-07 Apr-09 Apr-11 AVG G4 AVG F5 AVG G4 AVG Fav 5 Source: Thomson Reuters, UBS WMR, as of 1 June 2011 Source: Thomson Reuters, UBS WMR, as of 1 June 2011 Wealth Management Research 13 June 2011 5
  • 6. UBS Weekly Guide Our Best Ideas at a Glance The following list represents investment strategy recommendations that we believe will provide attractive opportunities over the next 9-12 months. Asset Classes Preference for Equities over Bonds Currencies Preference for British Pound (GBP) and minor currencies, in particular the Swedish Krona (SEK), the Norwegian Krona (NOK), the Canadian dollar (CAD), as well as selected Asian emerging market currencies. Equities International markets  Select Emerging Market equities, especially China, Brazil and Taiwan  UK equities Within US equities  Information Technology: in particular hardware and equipment, semis  Consumer Staples: in particular companies with emerging markets exposure, especially within household products, personal care and beverages  Healthcare: in particular drug distributors  Within Financials: insurers  Within Industrials: mid/late cycle end market capital goods companies  Within Materials: chemicals and industrial gas  Within Energy: oilfield services  Within Consumer Discretionary: auto suppliers, restaurants, lodging  Within Telecom: wireless towers & data centers  Preference for Growth over Value stocks Fixed Income Within US dollar Fixed Income  High Yield Corporate bonds  Investment Grade BBB-rated Corporate bonds Commodities We see upside potential for crude oil, gold, platinum, selected base metals and agricultural commodities. Wealth Management Research 13 June 2011 6
  • 7. UBS Weekly Guide Review/Preview of the Financial Markets Review In the past week, the US trade quarter-over-quarter Non-mortgage consumer 6 June – 10 balance for April grabbed a lot annualized for the second credit continued to rise in June of attention, as it narrowed quarter of 2011, but highlight April, although it was still significantly from revised USD the upside risk to that forecast. driven by government-led 46.8 billion (bn) to USD student loans. This 43.7bn. While export growth Other US economic data notwithstanding, the apparent remained solid at 1.3% releases were generally stabilization bodes well for a month-over-month (m/m), dismissive of a deeper or more less fragile consumer sector. imports fell by 0.4% m/m due prolonged growth soft patch. to Japan-related supply Consumer sentiment disruptions. At face value, the The Beige Book, with indicators continued to send information from Federal narrowing implies a boost to mixed signals, with the Reserve business contacts 2Q11 real Gross Domestic compiled through 27 May, IBD/TIPP economic optimism Product (GDP) growth of showed a less pronounced index rising in early June week about 2 percetange points at deceleration in real activity versus early May. However, an annual rate. However, than the May Institute for the daily Rasmussen index and slower imports imply less Supply Management (ISM) monthly Conference Board inventory accumulation as well surveys and labor market have not rebounded yet from as weaker consumption. report suggested. The reported their drops in March/April. Additionally, import growth stated that “economic activity will likely pick up again by generally continued to expand Thomas Berner, CFA, Economist June, as supply disruptions are since the last report, though a already fading. We, therefore, few districts indicated some keep our current real GDP deceleration.” This was only a growth forecast of 2.5% marginally weaker tone than the prior Beige Book. Preview The week ahead should offer Whether the inflation with the growth message of 13 June – 17 some relief in the data moderation will be an the national ISM index. The June regarding price pressures from important driver for a rebound Philly Fed prints a bit weaker at the past surge in the price of in consumer sentiment remains 3.9 in May. However, also here oil. Producer and consumer to be seen. We expect it to be we don’t expect much change prices were likely depressed by and forecast further and forecast a level of 4 in falling energy prices in May. improvement in the University June. While we think that the We expect the Producer Price of Michigan consumer Japan-related supply Index (PPI) for finished goods sentiment index from 74.3 in disruptions will be transitory, to rise a moderate 0.1% m/m, May to preliminary 75 in June. June manufacturing climate with core PPI a stronger but In our view, and improvement data will possibly not reflect still moderate 0.2%. In similar in consumer and/or business that yet. fashion, the Consumer Price sentiment will be crucial to Index (CPI) will likely flat, but support our view of a The Conference Board index of core CPI up 0.2% m/m in May. temporary growth soft patch in leading indicators will likely In both cases, the moderation the first half of 2011. rise 0.5% m/m in May. Given in monthly increases should the current debate not suffice to reverse earlier The timely Empire State and sourrounding the depth and upward trends in y/y rates. the Philly Fed manufacturing length of the current growth That said, we expect these climate indexes will likely show slowdown, the leading uptrends to be moderate due little change in June. We indicators will likely get more to still ample resource slack in forecast 11 for the Empire attention than usual. the economy. index, after 11.9 in May. At this level it is roughly consistent Thomas Berner, CFA, Economist Wealth Management Research 13 June 2011 7
  • 8. UBS Weekly Guide Earnings Calendar The Earnings Calendar provides publicly announced reporting dates and times of companies covered by Wealth Management Research Americas. Reporting dates and times are subject to change by the reporting companies. Analyst WMR-A Covering Contact Date Ticker Company Reporting Period Time (EST) Analyst Information Q4 2011 Earnings Darden Alexandra 212-713- 14-JUN-2011 DRI Release Unspecified Restaurants, Inc. Mahoney 2825 (Projected) Q1 2012 Earnings Alexandra 212-713- 14-JUN-2011 BBY Best Buy Co., Inc. 8:00am Release Mahoney 2825 Amerigo Q1 2011 Earnings 212-713- 14-JUN-2011 ARG Before Market Andrew Sutphin Resources Ltd. Release 3646 May 2011 Sales 212-713- 15-JUN-2011 PGR Progressive Corp and Revenue After Market Michael Dion 3825 Release Q2 2011 Earnings Alexandra 212-713- 16-JUN-2011 CCL Carnival Corp. Release Unspecified Mahoney 2825 (Projected) Q1 2011 Earnings 212-713- 18-JUN-2011 KR Kroger 10:00 am Sally Dessloch Release 9667 Wealth Management Research 13 June 2011 8
  • 9. UBS Weekly Guide Key Economic Indicators Date Indicator Time (EST) Unit Consensus UBS Est. Previous Retail Sales (May) -0.4% -0.8% 0.5% 14-Jun-11 8:30 AM m/m Retail Sales excluding Autos (May) 0.3% -0.2% 0.2% 14-Jun-11 8:30 AM m/m Producer Price Index (PPI, May) 0.0% 0.1% 0.8% 14-Jun-11 8:30 AM m/m Core PPI excl. Food & Energy (May) 0.2% 0.2% 0.3% 14-Jun-11 8:30 AM m/m Business Inventories (Apr) 1.0% 0.8% 1.1% 14-Jun-11 10:00 AM m/m Consumer Price Index (CPI, May) 0.1% 0.0% 0.4% 15-Jun-11 8:30 AM m/m Core CPI (May) 0.2% 0.2% 0.2% 15-Jun-11 8:30 AM m/m Empire State (Jun) 13.0 11.0 11.9 15-Jun-11 8:30 AM index Industrial Production (May) 0.3% 0.0% 0.0% 15-Jun-11 9:15 AM m/m Capacity Utilization (May) 77.0% 76.8% 76.9% 15-Jun-11 9:15 P AM Housing Market Index (Jun) 16 16 16 15-Jun-11 10:00 AM index Jobless Claims (Jun 4) 419 k 420 k 427 k 16-Jun-11 8:30 AM level Housing Starts (May) 540 k 570 k 523 k 16-Jun-11 8:30 AM level Current Account Balance (Q1) -$126.0 bil -$125.5 bil -$113.3 bil 16-Jun-11 8:30 AM level Philadelphia Fed (Jun) 7.0 4.0 3.9 16-Jun-11 10:00 AM index U. of Michigan Sentiment (June) 74.5 76 74.3 17-Jun-11 9:55 AM index Leading Indicators (May) 0.2% 0.5% -0.3% 17-Jun-11 10:00 AM m/m Source: Bloomberg & UBS estimates, as of 10 June 2011. In developing the WMR quarterly forecasts, WMR economists worked in collaboration with economists employed by UBS Investment Research (INV). All remaining forecasts were developed by economists employed by INV. INV is published by UBS Investment Bank. Forecasts and estimates are current only as of the date of this publication and may change without notice. m/m = month-over-month, q/q = quarter-over-quarter, k = thousand, bn = billion, y/y = year-over-year, mn = million Wealth Management Research 13 June 2011 9
  • 10. UBS Weekly Guide Asset Class Strategy & Performance Equity Region Strategy & Performance Extended Market Returns Strategy* Market Returns Asset MTD YTD 2010 Allocation Strategy* MTD YTD 2010 US Equity n -4.4% 3.5% 16.9% US Equity + -4.4% 3.5% 16.9% S&P 500 n.a. -4.1% 3.4% 15.1% Non-US — -2.6% 3.8% 9.4% DJIA n.a. -3.5% 5.9% 14.1% Developed Equity Emerging Market Nasdaq n.a. -5.3% 1.6% 18.0% + -2.1% 0.5% 19.2% Equity EMU** — -1.8% 11.2% -3.4% US Fixed Income — 0.2% 3.2% 6.5% Non-US Fixed UK + -2.5% 6.0% 8.8% —— 0.9% 6.1% 4.9% Income Japan — -1.9% -7.9% 15.6% Cash (USD) + 0.0% 0.1% 0.1% n.a. n.a. Other Developed — n.a. Commodities n 0.1% 2.7% 16.8% Total return indices in USD: Russell 3500, MSCI EAFE & Canada, MSCI Emerging ++ -2.1% 0.5% 19.2% Emerging Markets, BarCap US Aggregate, BarCap Global Aggregate ex-USD, Markets Citigroup 3-month T-bill, DJ UBS Total return indices in USD: S&P 500, DJIA, Russell 3500, MSCI for non-US. Price return indices in USD: Nasdaq US Equity Sector Strategy & Performance Equity Size, Style Strategy & Performance Sector Market Returns Strategy* Weekly Style Market Returns MTD YTD 2010 Strategy* MTD YTD 2010 Cons. Discr. — -2.2% -4.7% 3.5% 27.7% Cons. Staples ++ -1.0% -3.1% 7.2% 14.1% Large-Cap Value — -4.2% 3.6% 15.5% Energy — -0.4% -2.9% 10.2% 20.5% Large-Cap Financials n -2.6% -5.8% -6.1% 12.1% ++ -4.2% 3.8% 16.7% Growth Healthcare + -0.3% -1.8% 13.1% 2.9% Industrials n -2.2% -5.0% 3.3% 26.7% Mid-Cap n -5.0% 4.9% 25.5% IT +++ -3.2% -5.2% -0.6% 10.2% Small-Cap n -6.5% 1.6% 26.9% Materials n -1.3% -4.2% -0.5% 22.2% REITs — -4.8% 8.6% 27.9% Telecom —— -2.7% -4.4% 3.7% 19.0% Utilities —— -0.7% -2.0% 7.0% 5.5% Total return indices in USD: Russell Total return indices in USD: S&P 500 sector indices Regional Indicators US Dollar Fixed Income Strategy & Performance 2011 Consensus S&P 500 EPS USD 100 Strategy* Market Returns 2011 UBS WMR S&P 500 EPS USD 100 MTD YTD 2010 2012 Consensus S&P 500 EPS USD 113 Treasuries — 0.3% 2.9% 5.9% 2012 UBS WMR S&P 500 EPS USD 108 TIPS — 0.4% 5.5% 6.3% Agencies — 0.1% 2.1% 4.7% UBS WMR 2011 year-end S&P 500 target 1410 Inv. Grade Corporates + -0.1% 4.1% 9.5% Price to earnings+ 12.4x High Yield Corporates + -0.7% 5.2% 15.1% Price to book value+ 2.2x Preferred Securities + -0.7% 4.9% 13.7% Mortgages — 0.4% 3.2% 5.7% +Consensus 12-month forward estimates, as of 10 June 2011. Emerging Markets n 0.6% 4.2% 12.5% Total return performance as of close of business on 9 June 2011. Municipals n.a. 0.5% 4.8% 2.3% Total return indices in USD: BAS / Merrill Lynch Please note these important color designations: Indicates +/- change in most Bond Regions Strategy & Performance + – recent update Strategy* Market Returns *Please see the scale in the Appendix and the most recent Investment MTD YTD 2010 Strategy Guide for an interpretation of the tactical deviations and an US + 0.2% 3.2% 6.5% explanation of the corresponding benchmark allocation. **EMU = European EMU** n 0.9% 9.0% -4.5% Monetary Union and is comprised of European countries that have adopted UK + -0.6% 7.5% 4.6% the Euro as their currency. Japan —— 1.7% 1.5% 17.5% Other + n.a. n.a. n.a. Total return indices in USD: Barclays Capital Wealth Management Research 13 June 2011 10
  • 11. UBS Weekly Guide Reports of Note Published in the Last Week Friday, 10 June Asia Pacific economics: New Zealand dollar - patience will be rewarded Soaring global food prices and improving terms of trade have helped turn New Zealand's trade balance into surplus, a structural shift which is likely to keep buoying the New Zealand dollar (NZD). Healthy fiscal conditions also offer underlying support. Any setbacks in the value of the NZD should provide buying opportunities, unless global optimism weakens drastically. Thursday, 9 June Global economy: ECB signals rate increase As we have been expecting, the European Central Bank (ECB) has left its refinancing rate unchanged. Mr. Trichet described monetary policy as accommodative and used the terms "strong vigilance," which supports our call for a rate increase on July 7. Wednesday, 8 June UK equities: Fair value or fantasy? UK revenue growth expectations barely match UK inflation; analysts are cautious and appear to follow regional macro outlooks. Likewise margins are not forecast to improve significantly over current levels - we stress test these assumptions. Ex-financials and materials UK equities remain good value. Commodity price forecasts matter more to the UK market than GDP estimates. Wednesday, 8 June Asia ex Japan currencies: High inflation drives Asian currency appreciation Inflation in Asia is likely to remain uncomfortably high. With further advances in commodity prices and narrowing spare capacity, inflation pressure in the region is set to broaden. To counter-balance mounting price pressures, we expect Asian central banks to keep up their currency appreciation. The Chinese Yuan Renminbi and Malaysian Ringgit offer defensive investors an attractive return profile, with moderate levels of volatility. For investors with greater tolerance for currency volatility, the Korean Won and Indonesian Rupiah are our best picks on a total return basis. Wednesday, 8 June UBS research focus: Inflation - The next wave takes shape In The Decade Ahead, 6 February 2011, we concluded that US inflation will likely accelerate during the decade. We build on this discussion by assessing inflation risk from a global perspective. We shed light on how inflation arises and what its associated costs and mechanisms are, as well as discuss relevant scenarios for future price developments and derive investment recommendations from these. Wednesday, 8 June US economics: Weak May data likely temporary The objective of this report is to review the technical conditions of the more established, actively traded domestic Exchange-Traded Funds (ETFs) that track an underlying index or aim to represent a particular sector or industry. We then correlate this report with our broader macro market and sector analyses. In this review, we provide updates on various technical indicators including 10-week and 30-week moving averages, intermediate-term trends and important technical support and resistance levels. We try to identify potential trading/investment opportunities and downside risks in various key domestic markets. The following are technical commentaries, and not necessarily Buy or Sell recommendations. Note: All last sale prices are as of 03 June 2011. Tuesday, 7 June Emerging Market Economics: Egypt’s Deteriorating Finances Even though spreads on Egypt’s sovereign bonds have widened markedly, we would advise investors to avoid buying them at this point. We expect the Egyptian pound to come under depreciation pressure, and would avoid investing in Egyptian money market instruments. We expect the valuation discount of Egyptian equities to widen and the market to trade at a substantial discount to the MSCI Emerging Markets index over a prolonged period of time. Wealth Management Research 13 June 2011 11
  • 12. UBS Weekly Guide Tuesday, 7 June Valuation Report: Mind the gap Corporate bonds generated positive total returns in May as the strong rally in Treasuries bolstered performance of both investment grade and high yield bonds. As we have discussed in the past, we believe that at current low yields, the directionality of credit spreads is largely a function of interest rates, with credit spreads unlikely to tighten further until there is a backup in rates. Accordingly, credit spreads widened a touch in recent weeks – a move that we see driven by exceedingly low yields, rather than any deterioration in fundamentals. Monday, 6 June US Equities Utilities: Monthly – Macro Rotation Utilities have powered higher, outperforming the S&P 500 by almost 300 basis points in the last month driven by falling treasury yields and a rotation into defensive sectors. The good returns have been driven by better sentiment, not higher earnings expectations. However, going forward, we believe this outperformance is unsustainable as the economic recovery proves durable and bond yields reverse their decline. We increasingly see better value in the unregulated power generators. Monday, 6 June Dividend Ruler Stock List: June Update The 10-year treasury bond yield has rapidly declined to under 3.00% from 3.75% in early February. Lower bond yields increase the relative attractiveness of dividend paying stocks. With the S&P 500 dividend yield at 2.0%, the current 1.06% yield differential between bonds and stocks is lower than 97% of monthly observations over the past 30 years. Our recent US sector strategy changes—increasing allocations to Consumer Staples and Healthcare—enhances the attractiveness of our dividend ruler stocks list. Consumer Staples and Health Care represent over one-third of our list due to their healthy combination of current dividend yield and historical dividend growth and consistency. Monday, 6 June Arab countries in transition: The demographics of MENA One of the fundamental drivers of change in societies – demographics – will continue to make its impact felt in North Africa and the Middle East (MENA) for years to come. A process towards greater political pluralism is under way, but will take time, and a wide range of outcomes is likely. The prospect of reform and growth should attract investment in the medium term, but the region faces hurdles, including structural weaknesses and skills shortages. To access these reports please contact your Financial Advisor or access the reports via online services. Wealth Management Research 13 June 2011 12
  • 13. UBS Weekly Guide Appendix Scale for tactical deviation charts – Performance and Strategy tables Symbol Description/Definition moderate overweight vs. moderate underweight vs. Neutral, i.e. on + – n benchmark benchmark benchmark ++ overweight vs. benchmark –– underweight vs. benchmark n/a not applicable strong underweight vs. +++ strong overweight vs. benchmark ––– benchmark The overweight and underweight recommendations represent tactical deviations that can be applied to any appropriate benchmark portfolio allocation. They reflect WMR’s short- to medium-term assessment of market opportunities and risks in the respective asset classes and market segments. The benchmark allocation is not specified here. Please see the most recent Investment Strategy Guide for definitions/explanations of benchmark allocation. They should be chosen in line with the risk profile of the investor. Note that the Regional Equity and Bond Strategy is provided on an unhedged basis (i.e., it is assumed that investors carry the underlying currency risk of such investments). Thus, the deviations from the benchmark reflect our views of the underlying equity and bond markets in combination with our assessment of the associated currencies. Source: UBS WMR, All market performance data is from Bloomberg data as of date listed on top of this document, using representative indices and is provided for information only. Wealth Management Research 13 June 2011 13
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  • 15. UBS Weekly Guide to clients of UBS Bank, S.A. by UBS Bank, S.A., a bank registered with the Bank of Spain. UAE: This research report is not intended to constitute an offer, sale or delivery of shares or other securities under the laws of the United Arab Emirates (UAE). The contents of this report have not been and will not be approved by any authority in the United Arab Emirates including the UAE Central Bank or Dubai Financial Authorities, the Emirates Securities and Commodities Authority, the Dubai Financial Market, the Abu Dhabi Securities market or any other UAE exchange. UK: Approved by UBS AG, authorised and regulated in the UK by the Financial Services Authority. A member of the London Stock Exchange. This publication is distributed to private clients of UBS London in the UK. Where products or services are provided from outside the UK they will not be covered by the UK regulatory regime or the Financial Services Compensation Scheme. USA: Distributed to US persons by UBS Financial Services Inc., a subsidiary of UBS AG. UBS Securities LLC is a subsidiary of UBS AG and an affiliate of UBS Financial Services Inc. UBS Financial Services Inc. accepts responsibility for the content of a report prepared by a non-US affiliate when it distributes reports to US persons. All transactions by a US person in the securities mentioned in this report should be effected through a US-registered broker dealer affiliated with UBS, and not through a non-US affiliate. © UBS 2011. The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved. Wealth Management Research 13 June 2011 15