200pm David Rosenberg

2006 Macro & Market Outlook: 

2006 Macro & Market Outlook April 2006 Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Important disclosures at the end of this presentation. David A. Rosenberg Chief North American Economist

Major Conclusions: 

2 Major Conclusions *Asset allocation courtesy of Richard Bernstein, ML US Strategist. Source: Merrill Lynch • U.S. Real GDP forecast: ~3.0% in 2006 from 3.5% in 2005; ~2.5% in 2007 • Jobless rate forecast up to 5.3% by end of ‘06 from ~5.0%; ~5.5% in 2007 • Inflation: ~3.5% now; ~1.0% by year-end—will we be talking about deflation again? • Risk of Fed overshoot. Q4 easing? • Bond market view: bull steepener in 2006 H2 • Asset Mix: 45% bonds, 40% stocks, 15% cash* • Dollar outlook: weaker in 2006H2/2007 • Risks: BoJ, Avian Flu, Election, Protectionism, Housing Market

Treasury Yield Curve Flattens—Next Move?: 

Treasury Yield Curve Flattens—Next Move? 10-Year minus 2-Year Treasury Note Yield (basis points) Shaded regions represent periods of US recession. Source: Federal Reserve Board, Merrill Lynch ? 3

A Look Back At Past Periods When The Yield Curve Inverted: 

A Look Back At Past Periods When The Yield Curve Inverted (using 3-month T-bill to 10-year T-note yield spread) Source: Federal Reserve Board, Merrill Lynch 4

Estimated Recession Probabilities For Probit Model Using Yield Curve Spread: 

Estimated Recession Probabilities For Probit Model Using Yield Curve Spread *Estimated recession probabilities using the 3-month/10-year yield curve spread. Source: Federal Reserve Bank of New York, Merrill Lynch Estimated Recession Probabilities and Yield Spread We are here today (20-25% prob.) A year ago (5% prob.) Mid-’05 (10% prob.) 5

Leading Indicators Pointing To Softer US Growth Ahead: 

Leading Indicators Pointing To Softer US Growth Ahead (year/year % change) Source: Bureau of Economic Analysis, Bureau of Labor Statistics, The Conference Board, Merrill Lynch Real GDP vs. Conference Board’s Coincident/Lagging Indicators Nonfarm Payrolls vs. Help-Wanted Index 6 Nonfarm Payrolls (lhs) Help-Wanted Index (rhs) Real GDP (rhs) Conf. Board’s Coincident/Lagging Indicators (lhs)

These Forward Looking Indicators Are Pointing In The Same Direction: 

These Forward Looking Indicators Are Pointing In The Same Direction (year/year % change) Source: Census Bureau, National Association of Home Builders, Merrill Lynch 7 Nondefense Capital Goods Ex. Aircraft New Orders (year/year % change) NAHB Six Month Expectations in Sales of New Single-Family Homes Index (all good = 100)

Slide8: 

8 Balance Sheet Improvement In Business Sector *Liquid assets divided by short-term liabilities Source: Federal Reserve Board, Merrill Lynch (percent) Corporate Liquidity Ratio* Corporate Debt-to-Net Worth Hovering around 45-year high

Strength In “CapExports”: 

Strength In “CapExports”

US GDP Sector Shifts: Exports and Capex Take The Lead In 2006 & 2007: 

10 US GDP Sector Shifts: Exports and Capex Take The Lead In 2006 & 2007 (annual % change) *Using housing starts. (F) denotes Merrill Lynch estimate. Source: Bureau of Economic Analysis, Merrill Lynch

Savings Rate By Country, Which One Sticks Out?: 

11 Savings Rate By Country, Which One Sticks Out? *As of January 2006. **As of January 2006. ***As of 2004Q1. Source: Haver Analytics, OECD, Merrill Lynch Personal Saving Rate (2004 data except where noted: percent)

Change of Guards: US Decelerating, Germany and Japan Accelerating: 

12 Change of Guards: US Decelerating, Germany and Japan Accelerating Source: OECD, Merrill Lynch OECD Leading Economic Indicators (year/year % change)

Global Growth*: Who’s Up, Who’s Down: 

Global Growth*: Who’s Up, Who’s Down *2005 =3.4%, 2006: 3.5%; Ex. US: 2005 =3.2%, 2006 = 3.8% **Merrill Lynch Estimates Source: Merrill Lynch Global Accelerators (65% share) 13 Real GDP** (% change) Global Decelerators (35% share)

Think Globally…Above TrendGrowth in ’06; Below in ‘07: 

14 Think Globally…Above Trend Growth in ’06; Below in ‘07 Red bars represent Merrill Lynch estimates: 2006=3.5%, 2007=2.9% Source: OECD, Merrill Lynch Global GDP Growth (annual % change)

Fed Outlook: 

Fed Outlook Policy Overshoot Inflation > Growth Flat Curve Risk Appetite To Subside Bernanke Is No “Dove”

Capitulation On The Fed?: 

Capitulation On The Fed? 16 *Futures + Options: 30-Day Fed Funds: Reportable Noncommercial Short Positions Source: COT, Merrill Lynch Net Speculative Short Position of Fed Funds Futures & Options* (contracts) Record Net Short!

High Fed Funds Rate Calibrates; Low Bond Yields: 

High Fed Funds Rate Calibrates; Low Bond Yields 17 Real* Fed Funds Rate Real* 10-year T-note Yield (percentage points) *Deflated by the year-over-year growth in the core PCE price index. Source: Bureau of Economic Analysis, Federal Reserve Board, Merrill Lynch 10-year average 10-year average

Core Inflation Metrics Have Peaked & Rolled Over: 

Core Inflation Metrics Have Peaked & Rolled Over (year/year % change) *As of January 2006, unless otherwise noted. **As of December 2005. **Unit labor costs as of 2005Q4. Source: Bureau of Labor Statistics, Merrill Lynch 18

A Chronology of Global Tightening Cycles: 

A Chronology of Global Tightening Cycles 19 Global Overnight Rates Source: Haver Analytics, Bloomberg, Merrill Lynch United States Australia New Zealand U.K. Canada Norway Korea Denmark Switzerland Euroland Sweden Now on hold

Monetary Policy Can Diverge Extensively: 

Monetary Policy Can Diverge Extensively 20 Source: Haver Analytics, Bloomberg, Merrill Lynch BoJ Overnight Rate vs. Fed Funds Rate Bundesbank Base Rate vs. Fed Funds Rate (percent)

Labor Market Dynamics: 

Labor Market Dynamics

Unemployment Rate Maybe Higher Than You Think: 

Unemployment Rate Maybe Higher Than You Think US Jobless Rates (percent) Official Jobless Rate 22 With Discouraged Workers With Marginally Attached Workers All Inclusive Unemployment Rate U-3: headline jobless rate; U-4: Total unemployed plus discouraged workers, as a % of labor force plus discourage workers; U-5: Total unemployed, plus discouraged workers, and all other marginally attached workers as a % of labor force plus discourage workers and all other marginally attached workers; U-6: Total unemployed plus discouraged workers, plus all marginally attached workers, plus total employed part time for economic reasons, as a % of labor force plus all marginally attached workers. Source: Bureau of Labor Statistics, Merrill Lynch

Global Unemployment Rate North of 7.0% : 

Global Unemployment Rate North of 7.0% Unemployment Rates (as a % of the labor force) Source: Haver Analytics, CIA Factbook, World Bank, Merrill Lynch United States 23 World ex. US

How Can It Be That The US Economy Is At Full Employment?: 

How Can It Be That The US Economy Is At Full Employment? Wages & Salaries as a share of Nominal GDP (percent) Source: Bureau of Labor Statistics, Bureau of Economic Analysis, Merrill Lynch Full employment here 24

Strike Activity In The USA Moribund: 

Strike Activity In The USA Moribund Workers Involved in Work Stoppages as a % of the Labor Force (percent) Source: Bureau of Labor Statistics, Merrill Lynch Stagflation Era 25

Most Unusual (and Disinflationary) Cycle on Record: 

Most Unusual (and Disinflationary) Cycle on Record

GDP & Consumer Spending During An Economic Expansion: 

GDP & Consumer Spending During An Economic Expansion (average annual % change) Source: Bureau of Economic Analysis, Merrill Lynch Real GDP Real PCE 27

Productivity Growth & Labor Costs During An Economic Expansion: 

Productivity Growth & Labor Costs During An Economic Expansion (average annual % change) Productivity Unit Labor Costs Source: Bureau of Economic Analysis, Merrill Lynch 28

Employment and Wage Growth During An Economic Expansion: 

Employment and Wage Growth During An Economic Expansion (average annual % change) *Deflated by PCE price index. Source: Bureau of Labor Statistics, Merrill Lynch Nonfarm Payrolls Real Wages & Salaries* 29

Profits & Business Investment During An Economic Expansion: 

Profits & Business Investment During An Economic Expansion (average annual % change) Real Pre-tax Corporate Profits* Fixed Nonres. Investment *Deflated by the nonfinancial corporate business deflator. Source: Bureau of Economic Analysis, Merrill Lynch 30

Capital Spending as a Share of Profits vs. Corporate Bond Yields: 

Capital Spending as a Share of Profits vs. Corporate Bond Yields (percent) Capex as a % of Corporate Profits (4-quarter moving average: rhs) Baa Corporate Bond Yield (12-month moving average: lhs) Source: Bureau of Economic Analysis, Federal Reserve Board, Merrill Lynch 31

Change In Mfg CapU Rates & Profits Are Keys For The Capex Outlook: 

Change In Mfg CapU Rates & Profits Are Keys For The Capex Outlook Source: Bureau of Economic Analysis, Federal Reserve Board, Merrill Lynch Capex vs. Manufacturing CAPU Capex vs. Corporate Profits (year/year % change) 32

Capital Spending Intentions Are Receding: 

Capital Spending Intentions Are Receding Philadelphia Fed Mfg. Survey Special Question on Capex Spending* (% planning to increase business spending over the next 6 to 12 months) *January 2006 survey. How do you expect your firm’s spending on new plant and equipment to change over the next six to 12 months relative to your actual spending over the past 12 months? Source: Federal Reserve Board of Philadelphia, Merrill Lynch 33

What Consumer Inflation Looks Like During An Economic Expansion: 

What Consumer Inflation Looks Like During An Economic Expansion (average annual % change) Source: Bureau of Labor Statistics, Merrill Lynch Total CPI CPI ex. Food & Energy With $60/bbl oil! 34

Global Core Inflation Measures ... Low Everywhere: 

Global Core Inflation Measures ... Low Everywhere (year/year % change: as of January 2006) *As of 2005Q4. **Using Core PCE Price Index. Source: Haver Analytics, Bloomberg, Merrill Lynch 35

Global Core CPI Inflation* Slips Below 2%: 

Global Core CPI Inflation* Slips Below 2% 36 (annual % change) *Represented by OECD countries. Core inflation defined as all items CPI less food and energy. Source: OECD, Merrill Lynch

Inflation Volatility Back To Levels Last Seen In The ’50s: 

Inflation Volatility Back To Levels Last Seen In The ’50s Range (% change) Gap between Min and Max (bps) Source: Bureau of Labor Statistics, Merrill Lynch Total CPI ex. Food & Energy (average annual) 37

Real Bond Yields Back To 1950s Level: 

Real Bond Yields Back To 1950s Level Source: Bureau of Labor Statistics, Federal Reserve Board, Merrill Lynch Real 10-year Yield (bps: average annual) Total CPI (annual % change) 10-year Treasury note yield (percent) Nominal 10-year Yield and Total CPI (average annual) 38

Profit Margins and P/E Ratios Back To 1950s Levels: 

Profit Margins and P/E Ratios Back To 1950s Levels *Corporate profits with inventory valuation and capital consumption adjustments. Source: Bureau of Economic Analysis, Standard & Poor’s, Merrill Lynch S&P 500 P/E Ratio (based on four-quarter trailing earnings) Profit Margins (pre-tax corporate profits*/GDP: %) 39

Consumer & Housing Vulnerable: 

Consumer & Housing Vulnerable Depleted Savings Rate Expected To Rise Debt Treadmill House Price Correction?

Will The Tireless Consumer Ever Run Out of Gas?: 

Will The Tireless Consumer Ever Run Out of Gas? Real Consumer Spending (quarter/quarter % change, annualized) Source: Bureau of Labor Statistics, Merrill Lynch 41

U.S. Debt-to-Income Ration Rose As Much In The Past 5-years As It Did in the Previous 15-years: 

U.S. Debt-to-Income Ration Rose As Much In The Past 5-years As It Did in the Previous 15-years Household Debt-to-Income Ratio (percent) Source: Federal Reserve Board, Merrill Lynch 42

Caveat Emptor Whenever Anything Approaches 140% of GDP: 

Caveat Emptor Whenever Anything Approaches 140% of GDP (as a percent of GDP) Source: Federal Reserve Board, Merrill Lynch Household Real Estate Assets Household Equity Holdings 155% 140% 43

Savings Rate Plunged As Home Prices And MEW Soared: 

Savings Rate Plunged As Home Prices And MEW Soared “X” Marks The Spot Total Mortgage Cashouts ($ billions) (E) Denotes estimate; (F) Denotes Freddie Mac forecast. Source: Bureau of Economic Analysis, Census Bureau, Freddie Mac, Merrill Lynch Average New Single-Family Home Price (000s dollar: rhs) Personal Saving Rate (percent: lhs) 44 E F F

Consumer and Overall Economic Picture With & Without the Decline in the Savings Rate: 

Consumer and Overall Economic Picture With & Without the Decline in the Savings Rate (percent) Source: Bureau of Economic Analysis, Merrill Lynch Personal Consumption Expenditure Real GDP Actual Without Savings Rate Decline Actual Without Savings Rate Decline 3.5% 2.0%+ 45

Housing Affordability Slides: 

Housing Affordability Slides Debt-Service Payment Ratio* At A Record High (%) *As a share of personal disposable income. Household debt service ratio, which includes rent and auto leases. Source: National Association of Realtors, Federal Reserve Board, Merrill Lynch First-Time Homebuyer Affordability At A 20-Year Low 46

Speculative Real Estate Pressures Subsiding: 

Speculative Real Estate Pressures Subsiding University of Michigan Consumer Sentiment Survey (reasons to buy a house: prices are going up and it’s a good investment: %) Source: University of Michigan, Merrill Lynch 47

Percentage Saying Home Prices Have Crowded Them Out At A 25-Year High: 

Percentage Saying Home Prices Have Crowded Them Out At A 25-Year High University of Michigan Consumer Sentiment Survey (reasons not to buy a house: high prices: percent) Source: University of Michigan, Merrill Lynch 48

Housing Demand Indicators Rolling Over: 

Housing Demand Indicators Rolling Over Source: University of Michigan, National Association of Home Builders, Merrill Lynch UofM Home Buying Conditions Index NAHB Housing Market Index Lowest level since April ‘03 Lowest reading in 15 years 49

Housing Starts Averaging North of Two-Million Units: 

Housing Starts Averaging North of Two-Million Units Housing Starts (000s units, annualized) Source: Census Bureau, Merrill Lynch Starts have averaged over 2 million units for last 11-months! 50

Unsold Housing Inventory Hit New Highs: 

Unsold Housing Inventory Hit New Highs (year/year % change) (000s units) Total* Single-Family Homes Available for Sale Fastest Pace on Record Record High 51 *Existing plus new single-family homes. Source: Census Bureau, National Association of Realtors, Merrill Lynch

Months’ Supply Of Homes Rising : 

Months’ Supply Of Homes Rising New Single-Family Homes Months’ Supply (months) Highest in over 10 years Source: Census Bureau, National Association of Realtors, Merrill Lynch 52

New Home Prices Clearing Weakening: 

New Home Prices Clearing Weakening New Single-Family Homes Sold Price Index Source: Census Bureau, Merrill Lynch 53 (quarter/quarter % change: lhs) (year/year % change: rhs)

Real Home Prices Are 20%+ Above Long-Term Trendline: 

Real Home Prices Are 20%+ Above Long-Term Trendline *House price index deflated by total CPI index Source: Bureau of Labor Statistics, OFHEO, Merrill Lynch Real Home Prices* (ratio) 54

Slide55: 

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