Monthly Investment Outlook

September 2012

U.S. Economy: Still Growing, But Few Signs Of Improvement

In the United States economic data continues to Private Payrolls Diffusion Index point to an economy that is still growing, but at a sluggish pace. The jobs report for August came in below expectations.
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The unemployment rate in the U.S. decreased slightly down to 8.1%, but the decline was attributable to individuals dropping out of the labor force, as opposed to an expanding pace of hiring.

At this point we do not expect a new recession this year, but we believe growth in the U.S. economy will remain stagnant for the remainder of 2012. Policy uncertainty is likely to remain a damper on economic activity. Businesses are looking for regulatory and policy clarity on a variety of outcomes.
This Includes: The U.S. Presidential Election, U.S. "Fiscal Cliff", Health Care Reform, and Taxes

At present, we feel it is unlikely that there will be progress made on these topics until the conclusion of the election in November.
Source: FactSet Research Systems 4% 1 U.S. Nonfarm Payrolls increased by 96,000 in August versus consensus expectation for an increase of 135,000 (Source: FactSet)

Please See Important Disclosure On Final Page

80 70 60 50 40 30
Payrolls diffusion index shows broad 20 weakness in hiring 10 throughout industries

0
20-peS 30-naJ 30-yaM

30-peS 40-naJ 40-yaM 240-peS 250-naJ 1 M50-yaM 1 J50-peS 1 S60-naJ 0 M60-yaM 0 J60-peS 0 S70-naJ 9 M70-yaM 9 J70-peS 9 S80-naJ 8 M80-yaM 0-peS J0-na 0-ya 0-pe 1-na 1-ya 1-pe 1-na 1-ya 1-pe 1-na 1-ya Source: FactSet Research Systems, U.S. Department of Labor *Shaded areas indicate recession periods The payrolls diffusion index is the percentage of industries with employment increasing, plus one-half of the industries

with unchanged employment. A reading of 50 indicates an equal balance between industries with increasing and decreasing employment.

In Spite Of Modest Improvement, U.S. Jobs Showing

500

Few Signs Of Sustained Strength

12% Monthly Change In Nonfarm Payrolls (Thousands of Persons) - Left Scale US % Unemployment Rate - Right Scale -900 Source: FactSet Research Systems 11% 300 10% 100 9% -100 8% -300 7% -500 6% -700 5% 2

U.S. Policy: Election Takes Center Stage, Fiscal Cliff Looms

The possible election outcomes create two very different sets of policy paths; each party
80%

and candidate has a unique perspective on

70%

Iowa Electronic Markets: Implied Odds of Presidential Election Winner policy questions that remain unanswered at present.
60% 50%

Regardless of the election outcome, we believe that it will be a positive for business confidence once there is final clarity on the
40% 30% 20%

direction of key policy issues.

10% 0%

Democrat 2012 (Obama) Republican 2012 (Romney) While polling data indicate a close Presidential election, futures markets imply a 66% chance that President Obama will be re-elected

Unfortunately, there remains the overhang of Fiscal Cliff at year end and the possibility that
Source: Iowa Electronic Markets *Data available at. http://tippie.uiowa.edu/iem/ The Iowa Electronic Markets (IEM) are real-money futures contracts available via the leaders in Washington fail to reach a compromise to prevent a variety of automatic tax increases and spending cuts that are scheduled to take place at year end.

The expectation is that left unchecked it

University of Iowa College of Business. Contract payoffs are determined by the outcome of the U.S. Presidential Election. Uniquely different from standard political polls, IEM futures participants are voting with both their opinion and their pockets, and it behooves them to use the best available information to make an informed and maximumlikelihood decision. CBO 2013 Economic Forecast Scenarios The Congressional Budget Office (CBO) is a nonpartisan agency that provides economic data and forecasts to Congress. The CBO baseline projections assume the U.S. goes over the Fiscal Cliff, would halt any economic recovery in the United States. but the CBO also provides an alternative scenario forecast for 2013.

 As it pertains to the Fiscal Cliff, if nothing happens, everything changes.

10%

2013: Unemployment Rate

9.1%
2% 9% 1%

2013 GDP Growth

9%

1.7% Baseline Scenario: Assumes

8% that no action is taken to prevent 8% Fiscal Cliff; tax cuts expire and spending cuts as currently scheduled go into effect. Unemployment benefits extension and payroll tax cut both expire. Alternative Scenario: Assumes that most tax cuts are extended and automatic spending cuts do not take effect. Both the payroll tax cut and 7% current extension of unemployment benefits would expire. 'Fiscal Cliff' Baseline Source: Congressional Budget Office -1%

-0.5%
'Fiscal Cliff' Baseline Alternative Fiscal Scenario

Please See Important Disclosure On Final Page

0% 8% Alternative Fiscal Scenario 3

Europe: Potential For More Printing Eases Crisis Temporarily

In recent months the European Central Bank has pledged to take aggressive measures to help stem the regions debt crisis. It has committed to utilize its ability to print Euros to help ease the immediate pressures that are facing countries such as Spain. The Eurozone countries have a complex policy process for formalizing any final decision on this subject. It remains unclear whether the European Central Bank (ECB) will actually be able to deliver on its promise of more support to ailing countries. If the ECB is able to proceed with more support it will help to provide a boost to stabilizing the near-term crisis. A long-term durable solution is dependent on sustained improvement in the regions economic growth, which remains in question. As it stands today, the debt crisis has dragged most of Europe into recession.
Additional Printing By ECB Could Aid Crisis 3,500,000.00
3,000,000.00

European Central Bank Assets

2,500,000.00

(Millions of Euro)
2,000,000.00 1,500,000.00 1,000,000.00 Source: FactSet Research Systems 30%

Eurozone Unemployment: A Deepening Crisis

25%

Eurozone (All Member Countries) France

20%

Germany Italy 15% Spain

10% 5% 0% 20-p 30-n 3 S M S Source: FactSet Research Systems

Please See Important Disclosure On Final Page

4 4 M S 5 5 M S 6 6 M S 7 7 M S 8 8 M S 9 9 M S 0 0 M S

1 1 M S 2 J 0-ya 30-p 0-nJ 0-ya 40-p 0-nJ 0-ya 50-p 0-nJ 0-ya 60-p 0-nJ 0-ya 70-p 0-nJ 0-ya 80-p 0-nJ 0-ya 90-p 1-nJ 1-ya 01-p 1-nJe a e a e a e a e

a e a e a e a e a 1-ya 11-pe 1-naJ 21-yaM 4

Stock Market:
In spite of the slow economic backdrop, the S&P 500 has risen over 15% thus far in 2012.
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Markets have responded positively to the U.S. Federal Reserves announcement for a 3rd round of monetary stimulus (Quantitative Easing, QE3).

Each subsequent round of QE has produced a smaller market response and a diminishing boost to the broader economy.
We believe the long-term effectiveness of Quantitative Easing is highly questionable. Recent experiences have proven that these measures can temporarily cover-up the symptoms of an ailing economy, but cannot cure it.

History suggests equity markets are likely to move higher initially as QE3 gets underway, but the election is just eight weeks away and the risk of the fiscal cliff at year end has the potential to create turmoil. Last year the political standoff over the federal debt ceiling shocked the markets and the S&P 500 plunged 11% in 10 trading days.
The precedent set by last years debt ceiling standoff would indicate that there is at least a realistic possibility that Congress may fail to reach agreement in addressing the fiscal cliff by year end. QE2
1 As of 9/13/2012 145 140 Federal Reserve 135 Balance Sheet Assets 130 S&P 500 - Price Performance 125 *Indexed to 100 120 115 110 105

100 95 Sep-09 Feb-10 Jul-10 Dec-10 May-11 Oct-11 Mar-12 Aug-12 Source: FactSet Research Systems 1500

S&P 500 Index in 2011 & YTD in 2012

2011 2012
1100 Source: FactSet Research Systems, Goldman Sachs Portfolio Strategy Research *As of 9/13/2012 S&P 500 Index: An index commonly used to gauge the U.S. broad equity market. It is a capitalization weighted index of 500 widely held common stocks within the U.S. broad equity market. Please See Important Disclosure On Final Page 2012 1450 Election and 1400 Fiscal Cliff 1350 1300

???
1250

2011 Debt 1200 Ceiling Crisis

1150 5

Bond Market & Inflation:

Government bond yields have risen recently after hitting record lows, resulting in modestly negative returns for core bonds over the past month.
1

The Federal Reserve recently indicated that it expects to hold shortterm policy rates near zero until 2015.
We expect bond yields to remain at an overall low level over the near-term. We believe this means a continued environment of low yields and meager returns for fixed- income investments.

At present, we expect the soft economy will keep inflation pressure subdued near or below historical averages. Unfortunately, the current rate of inflation which we feel will continue exceeds the yields that are presently available for short and intermediate maturity government and corporate bonds. (I.E. Negative Real Yields)
1 Between 8/13/2012 9/12/2012 the total return to the Barclays U.S. Aggregate bond index was -0.1% Barclays U.S. Aggregate Bond Index: A market capitalization weighted bond index of U.S. dollar- denominated investmentgrade fixed-income securities. This is often viewed as a proxy for the broad U.S. bond market of investment grade issues.

10 Year U.S. Treasury - Nominal Yield

Source: FactSet Research Systems *As of 9/12/2012 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0%

5 Year Implied Inflation Expectations

Average: 1.9%
3.5% 2.5%

1.5% 0.5% -0.5% -1.5% -2.5% Jan-03 MJun-03 O ar-12Nov-03 M ct-11Apr-04 D ay-11Sep-04 J ec-10Feb-05 F ul-10Jul-05 S eb-10Dec-05 A ep-09May-06 N pr-09Oct-06 J ov-08Mar-07 J un-08Aug-07 an-08 Source: FactSet Research Systems *5 year implied inflation expectations is the yield on a 5 year nominal U.S. Treasury bond less the yield on a 5 year inflation-indexed U.S. Treasury bond (TIPS) 6 Aug-12

Summary:
Positives:
U.S. economy still growing, but at a frustratingly slow rate. Potential for monetary stimulus in Europe could help ease nearterm crisis. Inflation remains subdued.

Negatives:
Slow growth in jobs not likely to show improvement during 2012. QE3 stimulus by the U.S. Federal Reserve is unlikely to be effective in curing economic woes. We expect little to no progress by political leaders prior to the election that could substantially help economy. Risk of Fiscal Cliff looms, no indication yet that politicians will take action to prevent Fiscal Cliff Debt crisis in Europe still lacking credible long-term solution. Please See Important Disclosure On Final Page
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Disclosures: United Capital Financial Advisers, LLC (United Capital) provides advice and makes recommendations based on the specific needs and circumstances of each client. For clients with managed accounts, United Capital has discretionary authority over investment decisions. Investing involves risk and clients should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. The information contained in this newsletter/email is intended for information only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. Please contact your financial adviser with questions about your specific needs and circumstances. Follow United Capital To follow our weekly insights and thoughts, subscribe to the United Capital blog www.unitedcp.com/blog
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