3qstronger Economy and Market in the Second Half v10 On24

8/3/2019 3qstronger Economy and Market in the Second Half v10 On24

1/78

Stronger Economy and Marketin the Second Half

Byron R. WienVice Chairman, Blackstone Advisory Partners L.P.

Tel: 212.583.5055Email: [email protected]

If you would like to receive future monthly market commentary publications by Byron Wien,please email [email protected].


2/78

The Ten Surprises of 2011

1. The continuation of the Bush tax cuts coupled with

the extension of unemployment benefits has putall working Americans in a better mood. Real

Gross Domestic Product rises close to 5% in 2011

driven by improved trade and capital spending inaddition to stronger retail sales. Unemployment

drops below 9%


3/78

The Ten Surprises of 2011

2. The prospect of increasing Federal budget deficits

and rising government debt finally begins to weighon the bond market. The yield on the 10-year U.S.

Treasury approaches 5% as foreign investors

become more demanding. Spreads with corporatefixed income securities narrow


4/78

The Ten Surprises of 2011 (Contd)

3. Encouraged by renewed economic momentum the

Standard & Poors 500 rises close to its old high of1500. A broad range of sectors participate, but

telecommunications and utilities lag. With

earnings improving, valuations seem low andindividual investors return to equities for the first

time since the financial crisis. Merger and

acquisition activity becomes intense and the

market reaches a blow-off euphoria. Stocks correctin the second half as interest rates rise


5/78


4. Although inflation remains benign, the price of

gold rises above $1600 as investors across theworld place more of their assets in something they

consider real. Sovereign wealth funds of

countries with significant dollar reserves alsobecome big buyers. Hedge funds keep thinking the

price rise is becoming parabolic and sell their

positions and some even short the metal but gold

keeps climbing and they scramble back in


6/78


5. Worried about inflation and excessive growth, the

Chinese decide to use their currency as a policytool. They manage the value of the renminbi

aggressively to keep the growth of the economy

below 10% and to prevent consumer prices fromincreasing above the 4%5% range. The move is

viewed as a precursor to the world-wide adoption

of a basket including the renminbi as an alternative

to the use of the dollar as the principalreserve currency


7/78


6. Rising standards of living in the developing world

seriously increase the demand for agriculturalcommodities. The price of corn rises to $8.00,

wheat to $10.00 and soybeans to $16.00.

Commodities become a component of more

institutional portfolios


8/78


7. The housing situation improves. Although the

inventory of unsold homes remains high, theoversupply is drawn down substantially,

contrasting with an increase in 2010. The Case-

Shiller gradually heads higher and housing starts

exceed 600,000


9/78


8. Continuing demand from the developing world and

a failure to bring onstream new supply causes theprice of oil to rise to $115 per barrel. The higher

price at the pump fails to discourage driving,

increase sales of hybrid vehicles or cause Congress

to initiate conservation measures


10/78


9. Frustrated by the lack of progress against the

Taliban and the corruption of the Karzaigovernment, President Obama concludes that

whenever American troops return home,

Afghanistan will once again become a tribal state

ruled by warlords. He accelerates the withdrawal

of most military personnel to the end of 2011.

Coupled with the pullout of forces in Iraq, this will

leave the Middle East without a major Westernpresence in the face of rising fears of terrorism


11/78


10. Under duress Angela Merkel leads the way in European

financial reform. The weaker countries, having pledgedto cut their budget deficits in half by 2014, are provided

additional transitional aid by the European Union (with

Germanys backing) and the International Monetary

Fund as long as they implement their austerityprograms, increase some taxes and still show modest

growth. The European financial crisis becomes less of a

concern. The policies put in place prove psychologically

satisfying to the financial markets but harmful in thelonger term because they are palliative and do not

represent solutions


12/78

Radical Asset Allocation

Asset Class % Reasoning

High quality multinational growth

stocks

10% Ten to fifteen times earnings 2.5% yield. Reasonable growthEmerging markets equities

Brazil, China, India, etc.

20% Five to ten percent growth over the next five years.Reasonable valuations. Volatile

Hedge Funds all strategies 20% Satisfactory positive performance in good markets; lessdownside in bad markets

Private Equity 10% Strong return on capital over investment period

Real Estate 10% Limited new construction. Increasing value for existingproperties

Gold 5% Insurance against financial calamityOther commodities 5% Rising standard of living in the developing worldHigher yielding Fixed Income 20% Exceptional returns. Wide spread with Treasurys. Limited

downside if no recession occursU.S. Treasury Securities 0% Rapid monetary expansion, weak currency, heavy borrowing

should lead to higher rates

Cash 0% Above allocations can be trimmed to provide reserves


13/78

What are the major issues facing investors today?

1. Growth in the United States

a. Housing overhang

b. High unemployment

c. Debt ceiling and budget deficits in the United States

2. Emerging market inflation

3. Recovery in Japan

4. European credit crisis5. Slowdown in China because of a housing bubble or

some other factor


14/78

Why the Economy is Not as Bad as It Looks


15/78

7th Quarter Following Recession End Y/Y% (Real)

________________________________________________

Source: ISI Group.

ResInvestment ConsumerSpending GovtSpending NonresInvestment

1976:4Q 25.8% 5.4% -1.4% 7.4%

1984:3Q 8.1% 4.7% 2.2% 19.2%

1992:4Q 13.1% 4.7% 1.9% 8.8%

2003:3Q 10.2% 3.2% 2.3% 2.6%Avg 14.3% 4.5% 1.3% 9.5%

2011:1Q -2.3% 2.7% 0.2% 9.5%


16/78

____________________________________________

Source: Ned Davis Research.

NDR Crowd Sentiment Poll

S&P 500 Composite Index

600

800

1,000

1,200

1,400

1,600

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

NDR Crowd Sentiment Pool

51.8

63.2

45.5

38.337.4

57.0

38.9

57.1

71.364.970.3

50.1

51.0

62.9

66.558.5

66.367.3

60.2

69.1

55.0

69.6

47.7

59.667.8

53.0

61.3

35.538.4

46.3

62.9

45.7

60.4

55.7

52.8

57.952.8

49.6

55.0

57.1

68.9

68.7

0

20

40

60

80

100

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Extremes Generated when SentimentReading:Rises above 61.5% = Extreme OptimismDecline below 55.5% = Extreme Pessimism

Sentiment must revenue by 10percentage points to signal anextreme in addition to the aboveextreme levels being reached.

Arrows represent extremes in optimism andpessimism. They do not represent buy and sellsignals and can only be known for certain (andadded to the chart) in hindsight

Average Value Of Indicator At:Optimistic Extreme (down arrows)= 67.9Pessimistic Extreme (up arrows)= 46.5Average Spread Between Extremes= 21.4

S&P500 Gain / Annum When:12/01/1995 04/25/2011

Extreme Optimism (Bearish)

Extreme Pessimism (Bullish)

NDR Crowd

Sentiment Poll is:

Gain/

Annum% of Time

Above 61.5 1.2 38.2

Between 55.5 and 61.5 5.0 21.0

55.5 and Below 9.5 40.8

Daily Data 8/02/20007/05/2011

7/05/2011 = 59.5


17/78

U.S. Consumer Sentiment (U of Mich)

________________________________________________

Source: ISI Group.

(May 74.3)

0

20

40

60

80

100

120

1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011


18/78

Economy is Improving Slowly

________________________________________________

Source: Monticello Associates.

(1,000)

(800)

(600)

(400)

(200)

0

200

400

600

1990 1993 1996 1999 2002 2005 2008 2011

Nonfarmpayrolls3-monthaverage

0%

2%

4%

6%

8%

10%

12%

mployment

Nonfarm payrolls 3-month average Employment

U.S. EmploymentReal GDP QoQAnnual (%)

-7.5%

-5.0%

-2.5%

0.0%

2.5%

5.0%

7.5%

2002 2003 2005 2006 2008 2009 2011


19/78

A Pick-Up in Job Openings, but probably not enough

____________________________________________

Source: Strategas Research Partners.

(in thousands)

2,000

3,000

4,000

5,000

6,000

2000 2002 2004 2006 2008 2010


20/78

________________________________________________

Source: Ned Davis Research.* Sale of property, tax benefits from stock options, exchange rate effect, extraordinary rate effect, extraordinary financing items, and combined financing and

investing activities.


21/78

________________________________________________

Source: ISI Group.

U.S. Private Hours Worked(QoQ % A.R.)2011:2Q 3.8% e

U.S. Unemployment Rate(Unemployed for 27 Weeks or Longer)May: 4.0%

(12%)

(10%)

(8%)

(6%)

(4%)

(2%)

0%

2%

4%

6%

2006 2007 2008 2009 2010 2011

0

1

2

3

4

5

1970 1975 1980 1985 1990 1995 2001 2006 2011

A Really Dark Spot: Long-term unemployment is 2x the

average of its previous peaks, creating a pool of workers

who will have trouble ever finding another job.

A Bright Spot: The last time hours worked surged this much,

real GDP was +5.4%.


22/78

Unemployment Rate for Various Education Levels

0

3

6

9

12

15

18

Jan-00 Apr-01 Jul-02 Oct-03 Jan-05 Apr-06 Jul-07 Oct-08 Jan-10 May-11


23/78

S&P 500 TTM P/E with Long-Term Average

5x

10x

15x

20x

25x

30x

'50 '60 '70 '80 '90 '00 '10

15.8x

14.4x

________________________________________________

Source: Strategas Research Partners LLC.


24/78

P/Es of Stocks, Bonds, and Cash

____________________________________________


Average S&P 500 Trailing P/E byDecade

Average Bond P/E by Decade(100/10-year treasury yield)

Average House P/E by Decade(U.S. Median Home Price/Median Rent)

11.7x

19.5x20.1x

14.6x

12.5x

18.1x

0x

5x

10x

15x

20x

25x

60s 70s 80s 90s 00s Current

9.9x

15.5x

23.1x

33.7x

21.1x

13.6x

5x

10x

15x

20x

25x

30x

35x


17.9x

18.7x

21.8x

16.2x

11.0x

15.2x

5x

10x

15x

20x

25x



25/78

15%

16%

17%

18%

19%

20%

21%

1998 1999 2001 2002 2004 2005 2006 2008 2009 2011

S&P 500 Profitability

Return on EquityOperating Margins

15%

17%

19%

21%

23%

25%

27%

29%

1998 1999 2001 2002 2004 2005 2006 2008 2009 2011________________________________________________


It doesnt get better than this

Comeback from here

Comeback from here

Probably unrealistic


26/78

Private Equity Activity

____________________________________________


Total US corporate divestitures M&A Activity(In billions)

Carve-outs have outperformed in J.P. MorganLBO Composite(Multiple of invested capital as of 4Q 10)

% of

Total

Market 45% 39% 38% 30% 31% 40% 47% 41% 47% 53%

268 276

395416

552

784

590

408

541

219

0

100

200

300

400

500

600

700

800

900

2002 2003 2004 2005 2006 2007 2008 2009 2010 1Q

'11

1.x

1.6x

0.0x

0.2x

0.4x

0.6x

0.8x

1.0x

1.2x

1.4x

1.6x

1.8x

Non-carve-outs Carve-outs


27/78

Real Broad Trade-Weighted Exchange Value of the US$

____________________________________________


60

80

100

120

140

Jan-73 Apr-77 Jul-81 Oct-85 Jan-90 Apr-94 Jul-98 Oct-02 Jan-07 Apr-11


28/78

(70)

(60)

(50)

(40)

(30)

(20)

(10)

0

Q4 1994 Q3 1997 Q2 2000 Q1 2003 Q4 2005 Q3 2008 Q2 2011

U.S. Real Trade Deficit 4 Qtr.Avg.

________________________________________________

Source: ISI Group.

(2011:1Q: -48.2)


29/78

US Corporate Profits Sourced From the Rest of the World

____________________________________________


(% of GDP)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

1948 1955 1962 1969 1976 1983 1990 1997 2004 2011


30/78

(2)

0

2

4

6

8

10

12

14

Q3

1949

Q1

1955

Q3

1960

Q1

1966

Q3

1971

Q1

1977

Q3

1982

Q1

1988

Q3

1993

Q1

1999

Q3

2004

Q1

2010

U.S. Productivity 10 Qtr. %

________________________________________________

Source: ISI Group.

(2011:1Q 9.1%)


31/78

Mfg Compensation per Hour in $ (BLS) U.S. and Germany

________________________________________________

Source: ISI Group.

$0

$10

$20

$30

$40

$50

$60

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Mfg Compensation per Hour in $ (BLS) U.S. Mfg Compensation per Hour in $ (BLS) Germany

Germany 2011: $46.3e

US - 2011: $34.7e


32/78

CAPEX Capital Spending-Led Recovery

________________________________________________

Source: ISI Group.

Rail Car Orders (RSI) S.A. by ISIRail Car Orders 2011: 1Q: 33795

U.S. Real Capex Eqp Y/Y%U.S. Real Capex Eqp & Software 2011: 1Q: 14.7%

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

Q1

1987

Q1

1991

Q1

1995

Q1

1999

Q1

2003

Q1

2007

Q1

2011

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Q1

1987

Q1

1991

Q1

1995

Q1

1999

Q1

2003

Q1

2007

Q1

2011


33/78

U.S. REAL AND NOMINAL CONSUMER SPENDING

________________________________________________

Source: ISI Group.

$8,000

$9,000

$10,000

$11,000

$12,000

2005 2006 2007 2008 2009 2010 2011

U.S. Real Consumer Spending U.S. Nominal Consumer Spending

Real Apr $9497.7 Nominal Apr $10773


34/78

U.S. Banks' Willingness to Make Consumer Loans

________________________________________________

Source: ISI Group.

-$80

-$60

-$40

-$20

$0

$20

$40

$60

$80

Q3

1966

Q2

1969

Q1

1972

Q4

1974

Q3

1977

Q2

1980

Q1

1983

Q4

1985

Q3

1988

Q2

1991

Q1

1994

Q4

1996

Q3

1999

Q2

2002

Q1

2005

Q4

2007

Q3

2010

2011:2Q: 28.8%


35/78

U.S. Consumer Net Worth

________________________________________________

Source: ISI Group.

$30

$40

$50

$60

$70

Mar-98 Jun-01 Sep-04 Dec-07 Mar-11

2011: 1Q $55.6 e

S&P 1300

S&P 1300


36/78

U.S. Total Bank Loans plus Securities Held Outright at the Fed

________________________________________________

Source: ISI Group.

$7.0

$7.5

$8.0

$8.5

$9.0

$9.5

Jan-07 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Oct-09 Mar-10 Aug-10 Jan-11 Jun-11

May 18 $9.23

Growth Problem


37/78

Fed Balance Sheet

____________________________________________


31% is mortgage backed securities

$2,856.4

$1,000

$1,500

$2,000

$2,500

$3,000


38/78

Goldman Sachs Commodity Index

________________________________________________

Source: ISI Group.

0

100

200

300

400

500

600

700

800

900

1,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


39/78

U.S. CPI Y/Y%

________________________________________________

Source: ISI Group.

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Jan-

1992

Oct-

1993

Jul-

1995

Apr-

1997

Jan-

1999

Oct-

2000

Jul-

2002

Apr-

2004

Jan-

2006

Oct-

2007

Jul-

2009

Apr-

2011

(Apr 3.1%)


40/78

0%

1%

2%

3%

4%

5%

Jan-92 Feb-94 Apr-96 Jun-98 Aug-00 Sep-02 Nov-04 Jan-07 Mar-09 Apr-11

Avg Hourly Earnings: Prod & Nonsupervisory Y/Y% Core CPI Y/Y%

Average Hourly Earnings vs. Core CPI

____________________________________________



41/78

U.S. House Price Index (Case-Shiller)

(2.5%)

(2.0%)

(1.5%)

(1.0%)

(0.5%)

0.0%

0.5%

1.0%

1.5%

2.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

(M/M % Jan: -0.2%)

________________________________________________

Source: ISI Group.


42/78

Total Vacant Housing Units

(Units in thousands)

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Mar-85 Nov-87 Jun-90 Jan-93 Aug-95 Mar-98 Nov-00 Jun-03 Jan-06 Aug-08 Mar-11

____________________________________________


+4 million excess homes------------------


43/78

Taxes and Government Spending

________________________________________________


-10%

-8%

-6%-4%

-2%

0%

2%

4%

6%

1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011

(60.0-year Average = -1.5% of GDP)

Deficit as a % of GDP

Surplus as a % of GDP3/31/11 = -8.6%

(Quarterly Data, 3/31/473/31/11)

10%

15%

20%

25%

30%

1947 1954 1961 1968 1975 1982 1989 1997 2004 2011

Government Spending as a % of GDP Taxes as a % of GDP

Government Spending as a % of GDP

(60.0-year Average = 19.6% of GDP)3/31/11 = 25.0%

Taxes as a % of GDP

(60.0-year Average = 18.0% of GDP)

3/31/2011 = 16.5%

Diminishing Returns from Debt-Financing by Decade


44/78

g g y12/31/1949 3/31/2011

____________________________________________


(1) Last 5.25 years using most recent data available.

($ in billions)

Date RangeDecade Change

inDebtDecade Change

in GDPDebt /GDP

12/31/1949 12/31/1959 $337.6 $248.0 1.36

12/31/1959 12/31/1969 $752.1 $491.3 1.53

12/31/1969 12/31/1979 $2,785.2 $1,654.9 1.68

12/31/1979 12/31/1989 $8,562.8 $2,922.3 2.93

12/31/1989 12/31/1999 $12,549.6 $4,026.0 3.12

12/31/1999 12/31/2009 $26,876.7 $4,669.6 5.76

12/31/2005 03/31/2011(1) $11,324.4 $2,094.7 5.41


45/78

Would You Want Your Member of Congress to Vote for Raising the Debt Ceiling?

15%

46%

40%

33%

26%

40%

21%

70%

8%0%

20%

40%

60%

80%

Yes No Don't Know

GOP Indep Dems

(Gallup, 5/58)

________________________________________________


b h f


46/78

Contribution To Change In Deficit Since 2007

Nondefense

Discretionary

Spending

Defense

Social

Security

Medicare

Medicaid

Economically

Sensitive

Entitlements

Non-

Economically

Sensitive

Entitlements

Revenue

____________________________________________

Source: CBO and ISI Group.

f d d i l bli i


47/78

Unfunded Entitlement Obligations

____________________________________________


Vs. Public Debt in Europe(TN, as of 2004 / 2005)

Vs. Public Debt in U.S.($TN, as of 2004 / 2005)

1.4

9.19.3

7.7

5.1

2.6

2.0

0.40.30.7

1.1

1.5

0

2

4

6

8

10

France Germany U.K. Italy Netherlands Spain

Current Public Debt Future Entitlement Shortfalls (PV)

73.40

9.02

0

10

20

30

40

50

60

70

80

U.S.

Public Debt Future Entitlement Shortfalls (PV)

Previous Government Shutdowns were not Major Events for the


48/78

Federal Debt Outstanding(Monthly, $TN)

7

9

11

13

15

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Debt Limit Total Public Debt Subject to Limit

Markets, but this one Might Be

Last Click 3/24:

$14.2 TN

Federal Reserve % Purchase of Treasury Debt Issuance, 4 Mo. Rolling

-15%

0%

15%

30%45%

60%

75%

'09 '10 '11

QE1: Fed purchased 40% of

Treasury debt at its peak

QE2: Fed purchased 70% of

Treasury debt since November

____________________________________________


M k QE2 L h d


49/78

Markets QE2 Launched

____________________________________________

Source: ISI Group.

QE1

S&P increase before QE1 +15%

S&P 1 year later +47%

QE2

S&P increase before QE2 +17%

S&P 1 year later ???

was 24% on July 1st

M j F i H ld f U S T S iti


50/78

Major Foreign Holders of U.S. Treasury Securities

________________________________________________


2%

23%

3%

20%

27%

7%

4%

3%

3%

3%

5%

China

1,145

Japan

908

U.K.

325

OPEC

222

Brazil

194

Taiwan

156

Russia

128

Hong Kong

122

Switzerland

112

All Others

1,013

Caribbean

155

Chi Th Bi Shift


51/78

China The Big Shift

________________________________________________


Net Purchases of U.S. Bonds and Hard Assets($ in billions)

$0

$20

$40

$60

$80

$100

2005 2006 2007 2008 2009 2010E

Net Purchases of U.S. Bonds Hard Assets


52/78

A Look At The European Financial Crisis

S S i E l t P bl


53/78

Severe Spain Employment Problem

____________________________________________

Source: ISI Group.

Youth Unemployment Rates 15-24 Years-Olds, 2009Q4

9.7

10.2

11.9

19.1

19.8

25.1

25.2

29.1

31.9

43.0

18.8

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0

Japan

Germany

Australia

OECD

USA

UK

Italy

France

Ireland

Slovak Rep.

Spain

Eurozone The Strong Have Lent to the Weak


54/78

Eurozone The Strong Have Lent to the Weak

________________________________________________

Source: BIS. ISI Group.

Bank Foreign Public and Private Loans(% Nominal GDP (2010: 2Q)

Greece Ireland Italy Portugal Spain Total

France 2.0% 1.4% 14.6% 1.0% 5.3% 24.3%

Netherlands 0.5% 2.3% 5.4% 0.6% 9.1% 17.9%

Germany 1.0% 3.4% 4.7% 1.1% 5.3% 15.5%U.K. 0.6% 6.6% 2.9% 1.0% 4.8% 15.9%

U.S. 0.4% 0.2% 0.3% 1.0%

Germany Outperforming the Rest of Europe


55/78

Germany Real GDPGermany Real GDP 2011: 1Q

Eurozone ex Germany Real GDPEurozone ex Germany Real GDP 2011: 1Q

Germany Outperforming the Rest of Europe

____________________________________________

Source: ISI Group.

$2,050

$2,100

$2,150

$2,200

$2,250

$2,300

$2,350

Q1 2005 Q3 2006 Q1 2008 Q3 2009 Q1 2011

$5,000

$5,100

$5,200

$5,300

$5,400

$5,500

$5,600

Q1 2005 Q3 2006 Q1 2008 Q3 2009 Q1 2011

+7.3%

+2.2%

Greece Structural Problems Make Recovery Even More Difficult


56/78

Greece Structural Problems Make Recovery Even More Difficult

____________________________________________

Source: ISI Group.

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

Q2

2002

Q4

2003

Q2

2005

Q4

2006

Q2

2008

Q4

2009

Q2

2011

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Q1

2005

Q1

2006

Q1

2007

Q1

2008

Q1

2009

Q1

2010

Q1

2011

Greece Italy Eurozone

Portugal Germany Spain

Greece Nominal GDP Y/Y%2011:1Q: -4.5%

Government Debt % GDP

GermanyPortugal

Eurozone

Italy

Greece

Spain


57/78

The Rest of the World

Global Growth


58/78

Global Growth

EM Employment Now 83% of World Employment

________________________________________________

Source: ISI Group.

Population Billions

2011E

Emerging 6.0

India 1.2

China 1.4

Other Emerging 3.4

Developed 1.0

World 7.0

Global Growth


59/78

Global Growth

________________________________________________

Source: ISI Group.

________________________________________________

Source: ISI Group.

Developing Economies Gaining Share of World GDP

17.9%

8.6%

1.1%

0.6%

0.9%

1.8%

2.5%

1.2%

2.6%

7.9%

13.8%5.3%3.8%

3.9%

25.1%

21.9%

0.5%

0.5%0.5%

1.0%

0.8%

Developing

Economies

U.S.

Japan

Germany

U.K.FranceItaly

Other

Developed

BrazilRussia

India

China

Korea

Mexico

Indonesia

Turkey Saudi Arabia

PolandSouth Africa

Other Developing

Taiwan

8.8%

5.8%

0.6%0.7%

0.7%

34.1%

24.6%

3.8%

3.7%4.6%

14.7%

10.8%

2.7%2.1%

8.5%

2.1%

0.7%0.7%

0.9%

2.1%

1.5%

Emerging

Economies

U.S.

Japan

Germany

U.K.

France

Italy

Other

Developed

BrazilRussia

India

China

KoreaMexico

Indonesia

TurkeySaudi Arabia

Poland

Iran

Other Developing

Taiwan2009 Nominal GDP

1995 Nominal GDP

Japan


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Japan MFG PMI May 51.3% Japan Nominal Retail Stores Sales IndexApr 97.1

Japan

____________________________________________

Source: ISI Group.

$25

$30

$35

$40

$45

$50

$55

$60

Jan-07 Feb-08 Mar-09 Apr-10 May-11

$92

$94

$96

$98

$100

$102

$104

Jan-07 Feb-08 Mar-09 Apr-10 May-11

Signs Brazil Slowing


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Signs Brazil Slowing

____________________________________________

Source: ISI Group.

Brazil Business Confidence (CNI)(2011: 1Q 60.0)

Brazil Consumer Confidence (GVF)(Apr 118.2)

90

100

110

120

130

Jan-

06

Jul-

06

Jan-

07

Jul-

07

Jan-

08

Jul-

08

Dec-

08

Jun-

09

Dec-

09

Jun-

10

Dec-

10

Jun-

11

40

50

60

70

80

Mar-

06

Sep-

06

Feb-

07

Aug-

07

Jan-

08

Jul-

08

Dec-

08

Jun-

09

Nov-

09

May-

10

Oct-

10

Mar-

11

EM Economy CPIs


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EM Economy CPIs

________________________________________________

Source: ISI Group.

Latest 3 Mo. % A.R.

Vietnam 33.2%

Russia 6.2%

China 4.4%

Brazil 7.9%

Hong Kong 7.0%

Korea 0.4%

Turkey 14.8%

Emerging Economies Short Rates


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Emerging Economies Short Rates

____________________________________________

Source: ISI Group.

4%

5%

6%

7%

8%

9%

10%

Jan-03 Dec-03 Oct-04 Aug-05 Jun-06 Apr-07 Feb-08 Dec-08 Oct-09 Aug-10 Jun-11

May 27 5.42%

India


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India

____________________________________________

Source: ISI Group.

0%

5%

10%

15%

20%

25%

Q1

1998

Q1

2000

Q1

2002

Q1

2004

Q1

2006

Q1

2008

Q1

2010

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

2000 2003 2005 2008 2011

India Nominal GDP Y/Y% 2010:4Q: 17.4% India Repo Rate Apr 12: 6.75%

China Industrial Production


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China Industrial Production

____________________________________________

Source: ISI Group.

0

100

200

300

400

500

600

700

800

900

Jan-

1998

Mar-

1999

Jun-

2000

Aug-

2001

Nov-

2002

Jan-

2004

Apr-

2005

Jun-

2006

Sep-

2007

Nov-

2008

Feb-

2010

May-

2011

Apr: 822.7

China Consumption and Investment as Percentage of GDP


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China Consumption and Investment as Percentage of GDP

30%

40%

50%

60%

1978 1983 1988 1993 1998 2003 2008

Household Consumption Investment

________________________________________________


China Percent of World GDP


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China Percent of World GDP

24.89%28.97%

22.31%

32.96%

17.10%

11.06%

8.83%

4.59%

5.14%

5.24%

4.66%

4.63%

4.80%

5.20%6.95%

7.83% 11.15%

11.77% 15.16%

15.60%

16.16%

16.75%

16.81%

17.48%

22.68%2

5.45%

0%

5%

10%

15%

20%

25%

30%

35%

0001 1000 1500 1600 1700 1820 1870 1900 1913 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2003 2004 2005 2006 2007 2008

________________________________________________


Eye on Copper and China


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Eye on Copper and China

____________________________________________


Copper(US$/lb)

China Shanghai Index(1990 = 100)

250

300

350

400

450

500

Jan-

10

Feb-

10

Apr-

10

Jun-

10

Aug-

10

Sep-

10

Nov-

10

Jan-

11

Mar-

11

Apr-

11

Jun-

11

1,000

2,000

3,000

4,000

5,000

6,000

Nov-

06

Apr-

07

Sep-

07

Feb-

08

Jul-

08

Dec-

08

May-

09

Oct-

09

Mar-

10

Aug-

10

Jan-

11

Jun-

11

China represents 9.4% of the World Gross Domestic Product but:


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China represents 9.4% of the World Gross Domestic Product but:

53.2% Cement

47.7 Iron ore

46.9 Coal

45.4 Steel

46.4 Pork

37.2 Eggs

28.1 Rice

24.6 Soybeans

China Real GDP, Y/Y%


70/78

China Real GDP, Y/Y%

____________________________________________

Source: ISI Group.

0%

2%

4%

6%

8%

10%

12%

14%

16%

Q1

1998

Q1

1999

Q1

2000

Q1

2001

Q1

2002

Q1

2003

Q1

2004

Q1

2005

Q1

2006

Q1

2007

Q1

2008

Q1

2009

Q1

2010

Q1

2011

2011: 1Q: 9.7%

China Yuan


71/78

China Yuan

____________________________________________

Source: ISI Group.

6.4

6.5

6.6

6.7

6.8

6.9

7.0

Jan-

2009

Mar-

2009

Jun-

2009

Sep-

2009

Nov-

2009

Feb-

2010

May-

2010

Jul-

2010

Oct-

2010

Jan-

2011

Mar-

2011

Jun-

2011

May 30 6.483


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Some Thoughts about the Price of Oil

Oil Supply / Demand OutlookChange in Oil Demand by Region, 20082030


73/78

Change in Oil Demand by Region, 2008 2030

____________________________________________

Source: ExxonMobils 2010 Energy Outlook; Bank of America Merrill Lynch.

All of the growth in global oil demand comes from non-OECD, with China contributing

42%, India contributing 19%, the Middle East 17% and other emerging Asian economies

most of the rest

Crude Oil Iran has 9% of Worlds Reserves 3% of Production


74/78

________________________________________________

Source: BP Statistical Review. Strategas Research Partners LLC.

0%

5%

10%

15%

20%

25%

Saudi

Arabia

Iran Iraq Kuwait Venezuela UAE Russia Libya Kazakhstan Nigeria

%world reserves %World Production

Oil Supply / Demand OutlookChange in Oil Demand by Region, 20082030


75/78

g y g ,

____________________________________________

Source: Bank of America Merrill Lynch, IEA World Energy Outlook 2009.

All of the growth in global oil demand comes from non-OECD, with China contributing

42%, India contributing 19%, the Middle East 17% and other emerging Asian economies

most of the rest

8.6

3.9

3.5

1.8

1.3

0.8

0.7

-1

-1

-1.2

(2) 0 2 4 6 8 10

China

India

Middle East

Other Asia

Latin America

Africa

E. Europe / Eurasia

OECD North America

OECD Europe

OECD Pacific

Mmbl/d

Disclaimer


76/78

The views expressed in this commentary are the personal views of Byron Wien of Blackstone Advisory Partners L.P.(together with its affiliates, Blackstone) and do not necessarily reflect the views of Blackstone itself. The views

expressed reflect the current views of Mr. Wien as of the date hereof and neither Mr. Wien nor Blackstoneundertakes to advise you of any changes in the views expressed herein.

Blackstone and others associated with it may have positions in and effect transactions in securities of companiesmentioned or indirectly referenced in this commentary and may also perform or seek to perform investmentbanking services for those companies. Blackstone and/or its employees have or may have a long or short positionor holding in the securities, options on securities, or other related investments of those companies.Investment concepts mentioned in this commentary may be unsuitable for investors depending on their specificinvestment objectives and financial position. Where a referenced investment is denominated in a currency otherthan the investor's currency, changes in rates of exchange may have an adverse effect on the value or price of orincome derived from the investment.

Tax considerations, margin requirements, commissions and other transaction costs may significantly affect theeconomic consequences of any transaction concepts referenced in this commentary and should be reviewedcarefully with one's investment and tax advisors. Certain assumptions may have been made in this commentary asa basis for any indicated returns. No representation is made that any indicated returns will be achieved. Differingfacts from the assumptions may have a material impact on any indicated returns. Past performance is notnecessarily indicative of future performance. The price or value of investments to which this commentary relates,directly or indirectly, may rise or fall. This commentary does not constitute an offer to sell any security or thesolicitation of an offer to purchase any security.

To recipients in the United Kingdom: this commentary has been issued by Blackstone Advisory Partners L.P. andapproved by The Blackstone Group International Partners LLP, which is authorized and regulated by the FinancialServices Authority. The Blackstone Group International Partners LLP and/or its affiliates may be providing or mayhave provided significant advice or investment services, including investment banking services, for any companymentioned or indirectly referenced in this commentary. The investment concepts referenced in this commentarymay be unsuitable for investors depending on their specific investment objectives and financial position.This commentary is disseminated in Japan by The Blackstone Group Japan KK and in Hong Kong by The BlackstoneGroup (HK) Limited.


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Q&A


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Stronger Economy and Marketin the Second Half

Byron R. WienVice Chairman, Blackstone Advisory Partners L.P.

Tel: 212.583.5055Email: [email protected]

If you would like to receive future monthly market commentary publications by Byron Wien,please email [email protected].

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