Financial Markets – Update, Outlook and Challenges

John Augustine, CFAChief Investment Strategist

Fifth Third Bank

April, 2010

2

2

Fifth Third Overview

* As of 4Q09** Fortune magazine, March 16, 2009

$113 billion assets - #13 nationally*

1,309 banking centers

2,358 ATMs

16 affiliates in 12 states

Fifth Third Bank has been dedicated to serving the needs families and businesses for more than 150 years

Top 10 Superregional Bank for 8 consecutive years**

Naples

Raleigh

Cincinnati

FlorenceLouisville

Lexington

Nashville

Atlanta

Augusta

Orlando

Tampa

Naples

Raleigh

Charlotte

Huntington

PittsburghCleveland

Columbus

Toledo

Detroit

Grand Rapids

Traverse City

Chicago

Evansville

Jacksonville

Indianapolis

St. Louis

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Lines of Business

Commercial Banking

Branch Banking

Consumer Lending

Investment Advisors

4

*Reflects only Fifth Third Securities managed assets associated with Fifth Third Private Bank, and does not reflect all assets managed through Fifth Third Securities, a wholly owned subsidiary of Fifth Third Bank.

Focus on Investment Advisors…

5

I. Surprisingly strong rebound…

6

'59 '61 '63 '65 '67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09-20-20

-15-15

-10-10

-5-5

00

55

1010

1515

2020

OECD

US

(% 1YR) Composite Leading indicators, Trend Adjusted - OECD Total (% 1YR) Leading Index Total, 1996=100, SA - United States Recession Periods - United States

Leading economic indicators show strongest global recovery in 25+ years…

Source = Factset

7

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '0866

68

70

72

74

76

78

80

82

84

86

3

4

5

6

7

8

9

10

11

12

Capacity Utilization (R)

UnemploymentRate (L)

Unemployment Rate Total, Percent, SA - United States (Right)Capacity Utilization Total index, Percent, SA - United States (Left)Recession Periods - United States

Unemployment rate topped last October…

Source = Factset

8

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '090%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

5,500

6,000

6,500

7,000

7,500

8,000

8,500

9,000

9,500

10,000

Savings Rate (R)

Spending ($ trillions)

Personal Saving Rate, Percent, Annual Rate, SA - United States (Left)Personal Consumption Expenditures (AR, bil. chain 2000 $) (Right)Recession Periods - United States

Consumer spending & saving increasing…

Source = Factset

9

'85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '0900

200200

400400

600600

800800

1,0001,000

1,2001,200

1,4001,400

Corp. Profits

National Income, Corporate Profits with IVA & CCAdj, Profits After Tax with IVA & CCAdj, Bil. $ - United States Recession Periods - United States

US corporate profits recovering…

Source = Factset

10

Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr8080

100100

120120

140140

160160

180180

200200

220220

240240

260260

BC Agg Bond

Gold

CRB Index

ML High Yield Bond

MSCI EAFES&P 500

MSCI Emerg Mkts

Russell 2000

S&P REIT

Asset Class Returns - Since March 9, 2009

Capital markets rebuilding…April 23, 2010

Source = Factset

1

2

11

II. So what happened?

12

'46 '49 '52 '55 '58 '61 '64 '67 '70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '0900

1,0001,000

2,0002,000

3,0003,000

4,0004,000

5,0005,000

6,0006,000

7,0007,000

8,0008,000

9,0009,000

US Federal Government Debt Outstanding

USD Bil. % Change vs Year Ago

Debt outstanding - Federal government, D.3 - United States

Federal Government went all-in…

Source = Factset

13

7/07 10/07 1/08 4/08 7/08 10/08 1/09 4/09 7/09 10/09 1/10 4/1000

11

22

33

44

55

66

2yr Treasury

10yr Treasury

Government Benchmarks 10 year, Yield, Percent, Close - United States Government Benchmarks 2 year, Yield, Percent, Close - United States

Interest rates stayed low…

Source = Factset

14

Commodity prices dropped…

7/07 10/07 1/08 4/08 7/08 10/08 1/09 4/09 7/09 10/09 1/10 4/10150150

200200

250250

300300

350350

400400

450450

500500

CRB Index

Average

Reuters/CRB RJ/CRB Index, USD, Close - World (AVG) Reuters/CRB RJ/CRB Index, USD, Close - World

Source = Factset

15

Inflation went below average…

Source = Factset

'85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09-3-3

-2-2

-1-1

00

11

22

33

44

55

66

77

CPI

Average

(% 1YR) CPI All items, 1982-84=100, SA - United States (AVG , % 1YR) CPI All items, 1982-84=100, SA - United States Recession Periods - United States

16

'00 '01 '02 '03 '04 '05 '06 '07 '08 '0970

80

90

100

110

120

130

140

150

160

170

USA Exports (US$ Bil) Launch full data release

Current Trade Deficit = , High: , Low:

U.S. Exports

Exports gained traction…

Source = Factset

17

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '088

10

12

14

16

18

20

22

24

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Housing Starts (R)

Vehicle Sales (L)

Motor Vehicles Total vehicle sales, Number of, Annual Rate, SA - United States (Left)Housing Starts 1 unit, Number of, Annual Rate, SA - United States (Right)Recession Periods - United States

Domestically - things just fell too far…

Source = Factset

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II. What’s on our mind now?

19

Themes we see developing this year…

1. Economic growth could surprise to the upside.

2. Private sector risks falling, public sector risks rising.

3. US recovery is now leading in the developed world, but lagging the emerging world.

4. Stocks and corporate bonds should handily outperform Treasuries and cash.

5. Policymakers need to keep their focus on the 10’s.

I. Keeping the Dow above 10,000.

II. Keeping the unemployment rate below 10%.

III. Moving the federal budget deficit back below 10% of GDP.

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Challenges – Tensions are still very prevalent…

1. Government relationship with business & financial markets remains tense:

1. Regulatory policy – current focus on healthcare & financial sectors, broader issue of labor vs. capital vs. taxes

2. Fiscal policy – deficit spending & tax rates rising

3. Monetary policy – Fed methodically removing stimulus: selling its $1.4 trillion of excess bond holdings, then raising fed funds rate.

4. Corporate ownership – unwinding government ownership in autos, insurance, mortgages and banks

2. Main Street and S&P 500 companies continue to be at odds.

I. The latter benefits from global recovery and the former struggles with the high US unemployment rate.

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Potential outcomes of government debt rising???1. Economic growth slows.

• Commodity markets need to adjust downward.

2. Currency volatility increases.

• Currencies are the stock price of countries.

3. Business formation slows.

• Unemployment stays higher, longer.

4. Big companies get bigger…looking for growth.

• Dividends rise, but eventual onslaught of the global trustbusters.

5. Tax rates rise.

• Capital flows to lower tax rate countries.

6. Geopolitical risks rise.

• Gold keeps its bid; Emerging Markets try to manage investment flows.

7. Sovereign bond-pickers market.

• Bond-by-bond portfolio review.

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'05 '06 '07 '08 '09600

800

1,000

1,200

1,400

1,600

1,800

60

65

70

75

80

85

90

95

100

105

110

82.94

S&P 500

S&P 500 Index Forward Earnings Estimates

Standard & Poors 500 Composite Index, Price Return, USD, Close - United States (Left)Standard & Poors 500 Index, 12 Months Forward Index EPS, USD, End of Period - United States Top_Down

$94.69- 2011

$107.82- 2012

S&P 500 earnings rising sharply…

Source = Factset/Bloomberg

23

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09$14$14

$16$16

$18$18

$20$20

$22$22

$24$24

$26$26

$28$28

$30$30

$32$32

S&P 500 DPS

S&P 500 - Dividends per Share - Indicated Annual Rate

S&P 500 dividends rising again…

Source = Factset

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Invest Lend Defend

Large cap domestic

SMID domestic

Overseas developed

Overseas emerging

Commodities

REITs

US Government/Agency

Overseas Government

Municipal

High Grade Corporate

Low Grade Corporate

Preferred Stock

Current capital allocation themes…

Money Markets

Bank Deposits

Gold

TIPS

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Solving Financial Complexity

Scope of Investor Focus

Time

Initial Accounts

Initial Accounts

Asset Allocation

Asset Allocation

Financial Manageme

nt

Financial Manageme

nt

Fixed Income Securiti

es

International

Equities

Domestic

Equities

Cash

Alternative Assets

Insuran

ce

Trust & Estate

Planning

Investment Strategy

Tax & Liability

Management

Financial

Planning

Checking Account

401k Plan

IRA Accoun

t

Savings Account

Investments

John Augustine, CFAChief Investment Strategist

Fifth Third Private Bank513-534-3256

John.Augustine@53.comwww.53.com

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Important Information

Dow Jones Industrial Average: The most widely used indicator of the overall condition of the stock market, a price-weighted average of 30 actively traded blue chip stocks, primarily industrials. S&P 500: Widely regarded as the best single gauge of the U.S. equities market, this world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy.  U.S. Treasury Bills: Direct debt obligations issued and backed by the “full faith and credit” of the United States government (i.e. timely payment of principal and interest is guaranteed) and are issued with maturities of three months to six months in denominations beginning at $1,000.  GDP (Gross Domestic Product): The total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports.  Treasury Bonds: Treasury bonds are debt instruments of the U.S. government issued in minimum denominations of $1000. Considered to be long term investments, Treasury bonds have maturities of 10 years or longer. Treasury bonds carry the lowest degree of risk and are the benchmark against which all other types of bonds are measured. Although their market value fluctuates, they are considered to be the safest of bonds due to the fact that they are secured by the full faith and credit of the U.S. government.  MSCI Emerging Markets Index Fund (EEM): The iShares MSCI Emerging Markets Index Fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of publicly traded securities in emerging markets, as represented by the MSCI Emerging Markets Index. Russell 2000: The Russell 2000 Index measures the performance of the 2000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. MSCI EAFE (Europe, Australia and Far East): The MSCI EAFE index is a market-capitalization-weighted index of 21 non-U.S., industrialized country indexes, and is widely accepted as a benchmark for international stock performance.

The S&P REIT: Tracks the performance of U.S. Real Estate Investment Trusts. The REIT Composite consists of 100 REIT’s chosen their liquidity and importance in representing a diversified real estate portfolio.

Gold: Quoted as U.S. Dollars per Troy Ounce.

The CRB/Reuters Futures Price Index: An equal-weighted geometric average of commodity price levels relative to the base year average price.

Fifth Third Private Bank is a division of Fifth Third Bank offering banking, investment and insurance products and services. Fifth Third Bancorp provides access to investments and investment services through various subsidiaries. Investments and Investment Services:

 

Are Not FDIC Insured Offer No Bank Guarantee May Lose Value

Are Not Insured By Any Federal Government Agency Are Not A Deposit 

Insurance products made available through Fifth Third Insurance Agency, Inc.