Global Investment n Strategy - NYUpages.stern.nyu.edu/~ekerschn/pdfs/readingsemk/EMK... · look “over the valley” of weak earnings in first half of 2002, ... UBS Warburg web site

Market Commentary December 2 , 2001Global

GlobalInvestment

Strategy

Edward M. Kerschner, CFA+1 212 713 2448

[email protected]

2002 Global Outlookn Uncertainty: Not knowing whether we will experience another terrorist attack, a

short recession, or a protracted recession, investors have been wracked byuncertainty. In truth, uncertainty is unlikely to go away quickly. But, exceptingthe decade of the nineties, uncertainty has been much the norm.

n U.S.:

— Profit Picture: Similar to the pattern observed in 1991, we expect investors tolook “over the valley” of weak earnings in first half of 2002, to strong growthin second half of next year. We estimate 2002 S&P 500 operating EPS at$51.00.

— Valuation: Given most plausible normal EPS and interest rate inputs tovaluation models, stocks continue to look attractive. Year-end 2002 S&P 500normal value is still 1570.

— Value?: “Normal” earnings can be lowered $10+ and stocks would still beneutral-to-slightly attractive on a P/E basis, and very attractive versus bondsand cash. And, if “normal” earnings did fall by $10, it is likely that interestrates would also move lower—further supporting equities in asset allocationrelationships.

n Europe: Like the U.S., European valuation is very compelling. Earnings +0% to+5% in 2002. Earnings downgrades / upgrades ratio at comparable level to late1998, likely to have bottomed. Cyclically-adjusted valuations look attractiveboth in absolute terms and relative to bonds.

n Japan: Japan is mired in a state of no/low growth, although there are somemodest signs of slow change. Most likely scenario is the status quo. It’sparticularly unlikely that vigorous economic reform will be introduced; lessunlikely that a financial crisis will force a sharp decline, followed by a policyshift, followed by a soundly-based market recovery.

Highlights continue on page 2

Subject PageUncertainty.................................................. 3

Markets

U.S. ............................................................. 4

Value and Uncertainty................................. 5

Value?......................................................... 6

Europe ....................................................... 8

Japan ......................................................... 9

Subject PageThematics

In Sync ...................................................... 10

Europe United............................................ 11

U.S.: The Gray Wave................................ 13

Information Age......................................... 14

Transformers............................................. 15

GiganTechs............................................... 17

Booms and Busts...................................... 19

Climbing the Wall of Worry........................ 20

Highlighted Stocks .................................... 21

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our research products are availableover third-party systemsprovided or serviced by:

Bloomberg, First Call, I/B/E/S, IFIS,Multex, QUICK and Reuters

UBS Warburg is abusiness group of UBS AG

2002 Global Outlook December 2, 2001

2 UBS Warburg LLC

n In Sync: UBS Warburg economists are forecasting world real GDP growth of3¾% in 2003, up from 1¾% in 2002. Although average growth in 2002 is low,the recovery is expected to start in mid-year, with the second half much strongerthan the first. This would be the first globally synchronized economic recoverysince the early 1980s. Owing to past excesses (i.e., over-investment in capitalgoods), recoveries in individual economies will not be notably strong. However,by occurring in unison across the globe they will drive an impressive recovery inworld growth.

n Europe United: The introduction of euro notes on January 1, 2002 will addgenuine pricing transparency to the “single market.” Big differentials in growthrates between countries will force governments to compete to attract new capital.Over the coming decades the number of workers will decline and the number ofdependents will rise. This will encourage more liberal labor laws and EUenlargement. The number of EU members could nearly double if the nationswanting to join are all allowed in.

n U.S.: The Gray Wave: The aging baby boomer is the fastest growingdemographic. Thanks to a muted global business cycle, low inflation, greaterproductivity and improved longevity, consumers will earn more over the courseof an expanded lifetime of work. Beneficiaries include: selected growth retailers,leisure and financial services firms.

n The Information Age: The building block of the Information Age over the pastquarter century has been the semiconductor. But, when did the revolutionactually start? Changing business structures define each new age. The greatestgains in labor productivity have been the result of changes to the division oflabor. In the Information Age, the division of labor moves from the worker to theentire organization.

n Transformers: “Structure,” as much as macro factors (industry, sector, etc.), willdetermine success in the Information Age. Winners will be those companies thatfocus on their “core competency” or facilitate others to focus on their “corecompetency.” Transformers are moving from bureaucratic,vertically/horizontally integrated organizations to organizations where non-coreoperations are divested and horizontal support functions are outsourced.

n GiganTechs: Massive consolidation in the tech sector will lead to the emergenceof a small number of “GiganTechs” over the next five to 10 years. GiganTechsare companies that will dominate the technologies and platforms of majorsegments of the DNE (Digitally Networked Ecosystem).

Thematics


3 UBS Warburg LLC

UncertaintyIn truth, uncertainty is unlikelyto go away quickly. And,excepting the decade of thenineties, uncertainty has beenmuch the norm.

The last “new war” was theCold War, which was ultimatelywon with a new weapon:information.

5/1/60 —U2 Incident

10/16/62 —Cuban Missile Crisis

11/22/63 —JFK Assassination

KOREA VIETNAM

Berlin Wall

Time, November 20, 1989


4 UBS Warburg LLC

U.S.:The Profit PictureS&P 500 EPS

OperatingEPS

Changeyr/yr

Q1 ’00 13.74 20.4Q2 ’00 14.72 15.5Q3 ’00 14.38 10.8Q4 ’00 13.58 -2.22000 $56.42 10.6%Q1 ’01 12.34 -10.1Q2 ’01 11.83 -19.6Q3 ’01e 10.63 -26.1Q4 ’01e 10.20 -24.92001E $45.00 -20.2%Q1 ’02e 11.22 -9.1Q2 ’02e 12.20 3.2Q3 ’02e 13.23 24.8Q4 ’02e 14.35 40.62002E 51.00 13.3%

(Elimination of goodwill amortization adds$4.00 to ’02 operating EPS.)

In recessionary years whencommodity prices are weaksales tend to lag GDP; duringboom years the reverse is true.

Capacity utilization vs. changein the S&P Industrials netmargin has 0.7 R-squared.

Good, Bad or Ugly?n Good: Clear victory over

terrorism presages return inconsumer confidence. Sales+6% plus a margin recoveryproduces +22% EPS.

n Bad: U.S. nominal GDPgrowth 2.4%, lowest since1958. Sales only +2.0%.Lower capacity utilizationleads to lower margins aswell. But, by 2H, sales andmargin improvementproduces +20 to +40% EPSgrowth.

n Ugly: Terror continues andeconomic activity isnegatively impacted. EPS -10%.

U.S.: ValuationVery attractive on a P/E basis,very attractive relative to bondsand cash. Liquidity is verypositive; earnings power mildlynegative.

S&P 500 EPSQuarterly year-over-year percent change

-40-30-20-10

01020304050%

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001E 2002E

n/a

Nominal GDP Growth Versus S&P Industrials Sales GrowthRolling four quarter year-over-year change

-4-202468

101214%

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001E 2002E

Sales Growth YoY Nominal GDP Growth

Capacity Utilization and S&P Industrials Net MarginMargin calculated using quarterly operating EPS for S&P Industrials

2.53.03.54.04.55.05.56.06.57.07.5%

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001E 2002E707274767880828486%

Capacity utilization(line, right scale)

Net Margin(bars, left scale)

3QE

S&P 500 Operating EPS Rebounds When Sales Growth Reaccelerates: Three Scenarios for 2002

Sales Growth (LHS) Earnings Growth (LHS) Margin (RHS)

-20

-10

0

10

20

30%

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001E 2002E0123456789%

2002: Three ScenariosUglyBadGood

Stock Market Gauges*—November 30, 2001

vs Bonds vs CashP/E Liquidity EPS

+

0

-

-19%

+22% 90% 96% +445 bp

*0 represents a neutral stock market gauge. The closer the bar to + the more attractive stocks are. The closer the bar to - the more unattractive stocks are.


5 UBS Warburg LLC

Value andUncertaintyUnder virtually any “normal”inputs, stocks look compellinglyattractive.

Assuming rates back up ifcurrent projected “normal”earnings remain, stocks stilllook very attractive.

Arbitrarily reducing “normal”S&P EPS from $56 to $50, andthe case for equities remainsvery strong.

“Normal” earnings can belowered $10+ and stocks wouldstill be at worst neutral/slightlyattractive on a P/E basis. And if“normal” earnings did fall by$10, it is likely that interestrates would also move lower—further supporting equities inasset allocation relationships.

Stock Market Gauges*—2002 Normal EPS = $55, T-Bill +50 bp, Bond +10 bp

+20%


+

0

-

87% 91% +395 bp

-19%

Stock Market Gauges*—2002 Normal EPS = $50, Current T-Bill and Bond yield

+13%


+

0

-

87% 95% +445 bp

-??%

Stock Market Gauges*—2002 Normal EPS = $45, T-Bill -50 bp, Bond -10 bp

+3%


+

0

-

86% 97% +495 bp

-??%

Stock Market Gauges*—2002 Normal EPS = $40, T-Bill -100 bp, Bond -20 bp

-9%


+

0

-

86% 98% +545 bp

-??%

*0 represents a neutral stock market gauge. The closer the bar to + the more attractive stocks are. The closer the bar to - the more unattractive stocksare. Assumes bond yields move 1bp for each 5 bp in T-bills.


6 UBS Warburg LLC

Value?

How to Spot aCheap MarketIt is extremely naive to comparethe P/E of stocks today to theaverage of the recent past , giventhe completely different interestrate and inflation environmentthat exists today.

The S&P 500 P/E was 14.7x, onaverage, for the past threedecades…

…but the yield on the 20-yearU.S. Treasury bond was 8½%,on average, for the past threedecades. Today, the 20-yearTreasury bond yield is 5¼%.

And the inflation rate was 4½%,on average, for the past threedecades. Today, inflation hasreturned to its “normally” lowlevel—the 250-year averageinflation rate is 1½%.

The S&P 500 dividend payoutratio was 45%, on average, forthe past three decades. But asthe role of the dividend haslessened in importance, thepayout rate has fallen.

To compare the current P/Ewith the recent historicalaverage, when stock valuationshad to reflect 4½% inflation andcompete with 8¼% bond yields,is naive. It is also naive toignore the fact that the recenthistorical average P/E reflectedearnings and dividend growththat had been limited by highdividend payout rates andcorrespondingly low earningsretention rates.

S&P 500 P/EP/E on trailing EPS

0

5

10

15

20

25

30

35

1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

1970 - 2000 Average 14.7x

Interest RatesYield on the 20-year constant maturity issue

0%

4%

8%

12%

16%

1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

1970 - 2000 Average 8.4%

Wholesale Prices in the U.S.Rolling 10-year CAGR, annually

-10%

-5%

0%

5%

10%

1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

1970-2000 Average = 4.4%

S&P Dividend Payout RatioS&P dividend as percentage of EPS

0%

20%

40%

60%

80%

100%

1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

1970 - 2000 Average 45%


7 UBS Warburg LLC

Value?As investors have been willingto be rewarded more in the formof capital gains and less in theform of dividends, companiesretain more earnings to reinvestand grow and/or shrink theshare base. The S&P 500normal payout ratio hasdeclined.

Today’s normal payout ratio of28% and normal P/E of 28xsuggest a normal dividend yieldof 1%.

A higher retention rate booststhe market’s real growth ratei.e., projected secular growthrate less inflation.

Throughout the 1990s, asdisinflationary pressures spread,the expected rate of inflationdeclined steadily, and the P/E ofthe market expanded. Today,with inflation back at its long-run historical average of around2% concomitant with a higherreal and nominal growth rate,the normal S&P 500 P/E is 28x.

S&P 500 Normal and Actual Payout Ratio

20%

30%

40%

50%

60%

70%

1962 1967 1972 1977 1982 1987 1992 1997 2002

Actual

Normal

S&P 500 Normal and Actual Dividend Yield

0%

1%

2%

3%

4%

5%

6%

7%

1962 1967 1972 1977 1982 1987 1992 1997 2002

Actual

Normal

S&P Real Growth Rate

0%

1%

2%

3%

4%

5%

6%

1962 1967 1972 1977 1982 1987 1992 1997 2002

S&P 500 P/EP/E on normalized EPS and calculated normal P/E

5

10

15

20

25

30

35

1962 1967 1972 1977 1982 1987 1992 1997 2002

PE on Normalized EPSCalculated Normal PE


8 UBS Warburg LLC

Europe:The Profit PictureUBS Warburg estimatesearnings will be –5% to –10%in 2001 and +0% to +5% in2002.

Earnings downgrades / upgradesratio at comparable level to late1998, likely to have bottomed.

Cyclically-adjusted valuationslook attractive both in absoluteterms and relative to bonds.

Europe: ValuationCurrently gauges areunambiguously positive.

European EPS IndexQuarterly year-over-year percent change

-20%

-10%

0%

10%

20%

30%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001e 2002e

% of European Earnings Estimates Revised Up Minus % Revised Down

-20

-10

0

10

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

*

* 2001 Q4 through October

Cyclically-Adjusted P/E

6

10

14

18

22

26

30

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Cyclically-Adjusted Bond Earnings Yield Ratio

0.60.70.80.91.01.11.21.31.41.51.6

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Stock Market Gauges— November 29, 2001

-1.66

-0.80

-1.68-2.04

-2.13-3

-2

-1

0

1

2

Composite Economics Valuation Liquidity Momentum

*0 represents a neutral stock market gauge. The closer the bar to - the more attractive stocks are. The closer the bar to + the more unattractive stocks are.


9 UBS Warburg LLC

Japan

Muddling ThroughJapan is mired in a state ofno/low growth.

There are some modest signs ofslow change:

n M&A activity is low butaccelerating, there have beenmore share buybacks, andstock option schemes havebecome more prevalent.

But:

n Bankruptcies have beenslowly rising, but are notmeaningfully higher than thelevel reached in the 1980s.

n Unemployment rate hasfinally risen above 5%, but itis still relatively low afterremaining in a very narrowrange for two years.

n Passive domestic playersA big part of the lack ofcatalyst for change is thatJapan's debt market isdomestically owned,implying that thegovernment will be able tocontinue to issue debtindefinitely.

n ¥ stronger than deservedLocal conviction aboutunderlying strength of yen isan important part of whysignificant currencydepreciation is beingresisted.

n Foreigners bullishForeigners have periodicbursts of bullishness aboutthe stock market. Foreignershave been net buyers sincethe 1980s.

n Locals cautious57% of household financialassets are in cash. Yen cashand bonds are deemed safebecause the currency is seenas intrinsically strong.

Most likely scenario iscontinued muddle-through.It’s particularly unlikely thatvigorous economic reform willbe introduced;even less unlikelythat a financial crisis will forcea sharp decline, followed by apolicy shift, followed by asoundly based market recovery.

Japan GDPYear over year percent change

-4%

-2%

0%

2%

4%

6%

8%

1980 1985 1990 1995 2000 2005

Changing Corporate Behavior

0

500

1000

1500

2000

2500

3000

1990 1992 1994 1996 1998 2000

M&AStock Option

Buyback

2002

BankruptciesYen, Billions (RHS)

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

0

5000

10000

15000

20000

25000No. of cases (LHS) Total amount of debt

(RHS)

1980 1985 1990 1995 2000 2005

Unemployment Rate

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1

2

3

4

5

6%Job offers to applicants rate (SA, LHS)

Unemployment rate (SA, RHS)

1985 1990 1995 20001980 2005

Bond market ownershipOther financial intermediaries

25%

Insurance,

19%

Depository corporations25%

Central bank11%

Domestic nonfinancialsector 6%

pension funds

Yen/US$ exchange rate

50

100

150

200

250

300

350

400

70 75 80 85 90 95 00

Feb73: Floating rate system

1978-79: 2nd oil crisis

Sep85: Plaza Accord

Feb87: Louvre Accord

Apr95: Below Y80/US$

05

Net Foreign Buying of Stockmarket

-1750

-1250

-750

-250

250

750

1250

1750

90 91 92 93 94 95 96 97 98 99 00 01-30%

-20%

-10%

0%

10%

20%

30%

02

Foreign buying (4 week MA) TOPIX 3-month % change

Household Financial Assets

Currency and deposits55%

Bonds2%

Stocks7%

Insurance reserves19%

Japan’s Glide Path: Reform Signposts

What must be done Signposts

Banks foreclose hopeless borrowers, don’t to extend poor credit Bankruptcy rate increases significantlyRedeployment of labor into growth industries Unemployment trend rises sharplyGovernment encourages loan loss write-off/banks restructuring Nationalization/merger of weaker banksCapital market pressure on companies to maximize returns Foreign takeovers, buybacks, cross-holding salesSolve aging demographic problems Loosening immigration policyStimulate domestic activity, encourage international investment Yen undergoes sustainable depreciation


10 UBS Warburg LLC

In Sync

The First SynchronizedGlobal Recovery inTwo DecadesIn the most recent recovery (theearly 1990s) growth was notglobally synchronized. Whilethe U.S., the U.K. and someother economies slipped intorecession, growth stayed strongin Japan as its financial bubblepeaked and growth acceleratedin Europe with Germanreunification. Subsequently theU.S. and U.K. recovered, butthe bubble burst in Japan andrecession hit continentalEurope.

Whether recoveries aresynchronous matters for stockselection. In strongsynchronized recoveries,economically sensitive sectorshave tended to outperform. Thisphase has typically started threeto six months before theeconomy turns, with almost halfthe outperformance occurring inthose early months before therecovery. By contrast, in non-synchronized recoveries of theearly 1990s the cyclical sectorsdid not outperform—at least notuntil the recovery had beenrunning for about 18 months.

In the stronger recoveries,earnings growth of the cyclicalsectors is much greater, puttingthem in a position to outpacethe earnings of the more stablesectors. Alternatively, therelatively weak growth thatoccurs in non-synchronousrecoveries leaves the earningsgrowth of the cyclical sectorstrailing that of steadier sectors,until the recovery eventuallybecomes more robust.

Real GDP Growth: U.S., EU and JapanShaded areas denote the first 18 months of global economic recovery

-5%

0%

5%

10%

15%

70 75 80 85 90 95 00 05

US

Europe (including UK) Japan

Real GDP Growth: OECD AreaShaded areas denote the first 18 months of global economic recovery

-2%

0%

2%

4%

6%

8%

70 75 80 85 90 95 00 05

4 quarter ended, line

quarterly, bar

MSCI World Performance in Recoveries

1973 1974 1975 1976 19771981 1982 1983 1984 1985 1990 1991 1992 1993

130120110100908070605040

Mid - 1970s Early - 1980s Early - 1990s

Recovery Begins

Recovery Begins

Recovery Begins

Early 2000s

2000 2001 2002 2003

Recovery Begins

Cyclical Sectors Relative to Defensive Sectors Share Price Performance in Recoveries

1973 1974 1975 1976 19771981 1982 1983 1984 1985 1990 1991 1992 1993

120

110

100

90

80

70

60

Mid - 1970s* Early - 1980s Early - 1990s

Recovery BeginsRecovery Begins

Recovery Begins

Early - 2000s

2000 2001 2002 2003

Recovery Begins

*Cyclicals exclude Basic Industries

Cyclical Sectors Relative to Defensive Sectors Earnings Performance in Recoveries

1973 1974 1975 1976 19771981 1982 1983 1984 1985 1990 1991 1992 1993

110

100

90

80

70

60

50

40

Mid - 1970s* Early - 1980s Early - 1990s

Recovery Begins

Recovery Begins

Recovery Begins

2000 2001 2002 2003

Early -2000s

Recovery Begins


11 UBS Warburg LLC

Europe United1. New currency:

The introduction of euro noteson January 1, 2002 will addgenuine transparency to the“single market” for the firsttime.

Under fixed exchange rates ofBretton Woods system prior to1973, French and Germaninflation rates were highlycorrelated, but industrialproduction growth wasminimally correlated. PostBretton Woods correlation ofinflation fell, while IPincreased. As two countriesforged a closer bond betweentheir exchange rates from 1985to 1995 (and particularly in lastfive years), correlation ofeconomic activity has fallen andinflation has increased again.Such trends should continue,with inflation rates acrossEurope converging andeconomic activity diverging.

2. Governments andcorporations in the newcompetitive Europe:

Bigger differentials in growthrates between countries forcegovernments to compete toattract new capital.

Tax rates have come down butthere is more to be done,particularly in relatively hightax France and Germany.

Personal tax rates are in linewith U.S. levels but the incomeat which the top rate kicks in is5.7 times higher in New Yorkthan in the EU.

European companies have in thepast been primarily dependenton bank financing.

Much corporate restructuringhas already been done.Profitability has risen sharply as% of GDP. Returns on equityand returns on invested capitalhave also been at record levels.

Currency

…

⇒

Correlation of Inflation & Industrial Production: France & Germany 1961-01

-0.6-0.4-0.20.00.20.40.60.81.0

1961-73 1974-1984 1985-1995 1996-2001

IP CPI

EU15 Effective Marginal Tax Rates 1998-2001

0 5101520253035%

FranceGermany

AustriaItaly

UKNetherlands

LuxembourgBelgium

DenmarkSpain Portugal

EU averageFinland

Sweden IrelandGreece

19982001

Top Level of Income Tax and Income at Which Top Rate Applies

25

35

45

55

65

75

0

100,000

200,000

300,000

AustriaBelgium

Denmark GreeceIreland

ItalyPortugal

SpainSweden Finland

Denmark FranceGermany Luxembourg

Netherlands UKEU Avg

USA (NY)

Top Personal Tax Rate Income Top Rate Begins

Euro Area and U.S. Financial Markets (1999 as % of GDP)

Euro Area USA

Bank Assets 175 99

Of which Loans to Corporations 45 13

Debt Securities 99 166

Of which issued by corporations 7 29

Of which issued by banks 36 47

Stock Market Capitalization 90 180

Capital Share of GDP 1975-98

2628303234363840

75 77 79 81 83 85 87 89 91 93 95 97

USEU15

Japan

ROE and ROIC Minus Bond Yields 1980-99

-4%

-2%

0%

2%

4%

6%

8%

10%

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99

ROE - bond yieldROIC - bond yield

80


12 UBS Warburg LLC

Europe UnitedThere will be more cross borderM&A, increased use of venturecapital and increased relianceon financial markets.

3. Consumers: Older and bigger

Over coming decades thenumber of workers will declineand the number of dependentswill rise. This will encouragemore liberal labor laws and EUenlargement.

The number of EU memberscould nearly double if thenations wanting to join are allallowed in.

Consumers are facing moves todefined contribution rather thandefined benefits in a number ofareas including pensions andhealth care.

M&AEuro, billion

0

2,000

4,000

6,000

8,000

10,000

1995 1996 1997 1998 1999 2000 2001

Cross-Border

Domestic

Private Equity Funds Raised and InvestedEuro, billion

198919901991199219931994199519961997199819992000

Funds raisedAmount invested

5101520253035404550

02001

The Aging European Baby Boomer% change by age, European population 2000–2010

-20%

-5%

10%

25%

40%

Under 5- 10- 15- 20- 25- 30- 35- 40- 45- 50- 55- 60- 65- 70- 75- 80+14 19 24 2995 34 39 44 49 54 59 64 69 74 79

European Union Membership Estimated Entry—2004:Czech Republic

Cyprus

Estonia

Hungary

Poland

Slovenia

European Mutual Funds AssetsEuro billion

010002000300040005000600070008000

1975 1980 1985 1990 1995 2000

N/A

EquitiesBonds, Money Mkt and Cash

U.S. Mutual Funds AssetsEuro billion

0

10002000300040005000600070008000

1975 1980 1985 1990 1995 2000

EquitiesBonds, Money Mkt and Cash

European Pension Fund Allocation

010203040506070%

1975 1980 1985 1990 1995 2000

Equities

Bonds

N/A

U.S. Pension Fund Allocation

010203040506070%

1975 1980 1985 1990 1995 2000

Equities

Bonds


13 UBS Warburg LLC

U.S.:The Gray WaveWhile economic conditions areweak today, they are not nearlyas weak as in prior downturns.At under 8.0%, the misery indexis currently lower than thelevels been in 88% of the last360 months.

The Aging Baby Boomer is thefastest-growing demographic.

When asked what baby boomerswill do when they retire, only37% said that they would notwork.

Reason why they will workduring retirement is more oftentied to the belief that work isenjoyable (34%) than becausethey need the money (30%).

Given these factors, as well asincreased life expectancy,“senior” participation ratesshould continue to rise.

The way we were:

n Home. “Gray wave” owntheir houses already.

n Car. Car ownership rates areat an all-time high.

n Clothing. Apparel sales as apercentage of retail saleshave been plunging.

The way we are now:

n Quality vs. QuantitySales of premium-qualityretailers have outpacedgeneral department stores.

n Intangibles vs. TangiblesAmericans are increasinglyhiring others to providepersonal services.

n Time vs. MoneyIncreasingly more short oftime than money.

n CocooningHeightened national anxietylikely encouragingconsumers to stay home tosave money, as well as stayup-to-date on the latest news.

Misery IndexSum of unemployment rate and inflation rate

0%

5%

10%

15%

20%

25%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

Demographics% change by age U.S. population 2000–2010

-20-10

0102030405060%

Gen Y

Aging Boomers

SeniorSeniors

Under 5- 10- 15- 20- 25- 30- 35- 40- 45- 50- 55- 60- 65- 70- 75- 80+14 19 24 2995 34 39 44 49 54 59 64 69 74 79

Plans at RetirementWon't work

Same occupation at reduced hours, pay

Start business

different job

Same occupation at same hours, pay

Full-time different job

37%

11%

21%

13%

3%

12%

Part-time

Why Work After Retirement

34%30% 28%

0

20

40%

Enjoyment Money Challenge

% of Men in Labor Force Age 55–64

60

6570

758085

9095%

60 65 70 75 80 85 90 95 00 05 10

Home Car ClothingHomeownership Rates

62

63

64

65

66

67

68%

1960 1970 1980 1990 2000 2010

Registered Autos Per Driver

1960 1970 1980 1990 2000 20100.5

0.6

0.7

0.8

0.9

1.0

1.1Apparel Sales as % of Retail Sales

4.0

4.5

5.0

5.5

6.0

6.5%

1960 1970 1980 1990 2000 2010

Quality vs. Quantity Intangibles vs. TangiblesPremium Retailers vs.General Department Store Sales

50

100

150

200

250

300

350

93 94 95 96 97 98 99 00 01

TIF, JWN, SKS, FD, COH

S, JCP, MAY, DDS, KSS

02

Aggregate Trailing 4Q: 1992 3Q = 100

Time vs. Money CocooningPercent PreferringMore Time Than More Money

40%

45%

30

35

40

45

50%

1996 2000

Real Consumption Expenditures—Purchased Food and Beverage

25%

30%35%

40%

45%50%

55%

60%65%

70%75%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Food & Alcohol for

Purchased Meals & Beveragesflat

flat

Off-Premise Consumption

(Restaurants)

(Supermarket, Grocer, Discount Club, etc.)

flat


14 UBS Warburg LLC

The Gray Wave

Globally ConnectedConnection to Internet willbecome 24/7 at home, at work,in between.

In Europe and Japan, “wirelessdigital data” services such asSMS and i-mode, which allowusers to send text messages andoffer wireless access to theInternet, are gaining popularity.

Information AgeThe building block of theInformation Age over the pastquarter century has been thesemiconductor.

When Did theRevolution start?

America: At Home on the Internet% who Access Internet from home

40%

56%

0%

15%

30%

45%

60%

75%

July 2000 February 2001

Europe: Short Message ServiceTotal number of global users (millions)

0100200300400500600700

1999 2000 2001 2002e 2003e 2004e 2005e

Avg 1 msg /

Avg 25 msg / user / day

user / day

Japan: NTT DoCoMo Sub Growthsubs in millions (bars) and % i-mode

0

10

20

30

40

50

2000 2001 2002e 2003e0%

25%

50%

75%

100%

Information Power—“Moore’s Law”Number of transistors per chip (thousands)

1

10

100

1,000

10,000

100,000

1,000,000

10,000,000

2.3 K6 K

29 K134 K

275 K

1 M3.2 M

4.5 M

7.5 M

1 G

14.0 M

1970 1975 1980 1985 1990 1995 2000 2005e 2010e 2015e

Turing’s Relay-Based MachineCracked the Nazi Enigma Code

Mechanical Calculating DevicesUsed in the 1890 U.S. Census

Vacuum Tube ComputerPredicted the Election of Eisenhower

Transistor-Based MachinesUsed in the First Space Launches

Integrated Circuit Based PCUbiquitous today

What’s Next?n Three-Dimensional Chips?

n Nanotube Circuitry?

n Optical Computing?

n Crystalline Computing?

n DNA Computing?

n Quantum Computing?


15 UBS Warburg LLC

Transformers

Changing businessstructures define theage

“The greatestimprovement in theproductive powers oflabor . . . seem tohave been the effectsof the division oflabor.”An Inquiry into the Nature andCauses of the Wealth of Nations,Adam Smith, 1776

In the Information Age, divisionof labor moves from the workerto the entire organization.

Because it leads to a finercorporate division of labor, withcompanies doing only what theydo best, and doing it on a globalbasis, this transformation willlikely lead to an acceleration ofeconomic growth, similar towhat occurred during thetransition from the AgriculturalAge to the Industrial Age.

The Agrarian EconomyCraftsman — Sole proprietor: All-in-one – buyer, manufacturer, seller

The Industrial EconomyAssembly line— Specialization of function of the individual

The Information EconomyTransformers— Outsource all functions except core competency

ProductivityPer Capita GDP Growth

0.3%

1.8%

3.0%

0.00.5

1.01.5

2.0

2.53.03.5%

Agricultural Industrial Information

Virtual Corporation


16 UBS Warburg LLC

Transformers

“Info Utility” IndustryJust as in the early 20th century,electric utilities permitted firmsand households to “outsource”the age-old function of powergeneration . . .

. . . so in the early 21st centuryis the Internet making itpossible to outsource anotherage-old function: informationmanagement.

OutsourcingOne way for a company toprotect its core competency is toassiduously focus on it whileoutsourcing non-coreoperations. The Internet makesit much easier to coordinateinternal operations with servicesprovided by outsiders.

R&DFirms must invest continuouslyin technology, either throughheavy, in-house R&D orincreasingly by buying thetechnological expertise ofsmaller firms.

AdvertiseInformation Age can meaninformation overload.Successful advertising will“push” at the consumer in anage of “pull technology” bymaking advertising part ofcontent or the content itself,rather than simply surroundingseparate content.

Skills ShortageBeneficiaries of the skillsshortage include human capitalmanagement firms—“skillsbrokers.” Ongoing workertraining/education will remedythe skills shortage.

Penetration of Electricity and the InternetInternet penetration plotted for the period 1995-2002E, electricity for the period 1900-1950

0102030

405060708090

100%

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49Year

U.S. Internet

U.S electricity

Global Internet

Outsourcing:

Ø Technology

Ø Manufacturing

Ø Finance

Ø Energy

Ø Corporate Administration

Research & Development SpendingAs a percentage of GDP

2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 20101950 1955

Advertising Spending as a Percentage of GDPWith recessions shaded

1.6%

1.8%

2.0%

2.2%

2.4%

2.6%

2.8%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Percentage of Workers Who Are Skilled% 25+ years over completed high school or college

0

20

40

60

80

100%

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010


17 UBS Warburg LLC

GiganTechsThe Future ofTechnology

n A Friendlier Interface

User-friendliness is critical ifcomplex technologies are togain mass acceptance. Just asthe first round of Graphic UserInterfaces (GUIs) madepersonal computers much lessintimidating for the averageuser and web browserspopularized the Internet, . . .

. . . Human User Interfaces("HUIs") will revolutionize theway that we interact withtechnology and help tounobtrusively meld high-techinto even more aspects of ourlives.

n Digitally NetworkedEcosystem

The Digitally NetworkedEcosystem (DNE) is a globallyinterconnected infrastructure ofnetworks (wide area networks,metropolitan area networks,local area networks, personalarea networks), servers anddevices (PCs, mobile phones,cars, etc.). In the same way thatDNA is the building block ofthe human body, the DNE willbe the building block of the newInformation Age.

1. Customer Empowerment

Customers are becomingempowered to demand uniqueproducts that satisfy theirspecific needs.

This contrasts with customers’experience in both the earlyIndustrial Age (push model) andthe middle Industrial Age(advanced push model) and thelate Industrial Age introductionof the “Pull Model.” TheInformation Age brings thedevelopment of theInteractive Pull Model.

User InterfaceMS-DOS

Graphic User Interface (GUI)Windows XP

Number of Internet Users, WorldwideMillions

0

100

200

300

400

500

600

90 91 92 93 94 95 96 97 98 99 00 01E

Release of Netscape 3.0

“Please book dinner in thatItalian restaurant I ate in lasttime I was in London, make it

two hours after I land, forthree people.”

“Your f l ight is 30 minutes late,so I booked a table for you

and your two guests at Tony’sfor 9:00pm. I emailed your

guests and informed them.”

DNE –Digitally Networked Ecosystem

Push Model

Wholesaler Retailer Customer

Manufacturerpromotesproduct toWholesaler

Wholesalerpromotesproduct to

Retailer

Retailerpromotesproduct toCustomer

Manufacturer

Advanced Push Model

Product

Demand

Manufacturer

Wholesaler

Customer

Retailer

Promotion

Pull Model

Wholesaler Retailer

Product

Demand

Product

Demand

Promotion

CustomerManufacturer

Interactive Pull Model

Manufacturer

Wholesaler

Customer

Retailer

Product

Demand

Promotion

Supplier 1

Supplier 2

Supplier 3

Product

Demand


18 UBS Warburg LLC

GiganTechsThe Future ofTechnology2. Mass CustomizationAdvances in supply-chainmanagement technology havefacilitated the trend towardsmass customization.

3. Technology PenetrationMass customization leads todeeper tech penetration

4. FragmentationAs companies strive to offer masscustomization, this invariablyleads to fragmentation.

5. ConsolidationThe companies that first gaincritical mass will be in a strongposition to establish thedominant technology in thatsector. Once customers on awide scale have adopted thosedominant technologies, marketshare should quicklyconsolidate in the hands of theleaders, as the fragmented sub-segments converge onto theirtechnologies.

Personalized Content Personalized Sneakers Personalized Food

Automotive Electronics Chip CountAverage per car

0

200

400

600

800

1,000

1,200

1,400

1995 2000 2005E

Partial UNIX Evolution

UNICS UNIX v1 UNIX v61BSD

1969

SunOS 1.0 Sun Solaris 1.0

1990

HP-UX HP-UX 1.0

AIX 1

NeXSTEP

Minix 1.0 Linux 0.01

Mac OSX Server 1.0

V7M ULTRIX

1980 2001

Mert RT1.0

Wollongong

UNIX v4

Linux 2.0 Linux 2.4.7

Linux 2.0.39

Linux 2.3.51

Linux 2.2.19

Linux 2.1

AOL Time Warner Applied Materials

Celestica China Mobile

Cisco Flextronics

IBM Intel

Microsoft Nokia

NTT DoCoMo Qwest Communications

Sony Taiwan Semiconductor

Texas Instruments Vodafone


19 UBS Warburg LLC

Booms and Busts

In the past 30 years, prior to therecent tech boom, there havebeen 10 significant sector“booms” globally.

The 10 boom episodes wereinfluenced by advent of newtechnology, regulatory or policychanges, or surplus liquidity.Three were part of the late-80sJapanese bubble.

On average, these 10 boomsectors outperformed the marketby over 150% in the two-yearperiod before their share pricepeaks. Since its peak,technology shares have fallenmuch more than the averagesector in the “bust” period.

The high valuation oftechnology relative to themarket has also declined furtherthan average bust episodes inthe past . . .

. . . as has earnings growthrelative to the market.Technology shares peaked sixmonths after tech earningsgrowth peaked, partly supportedby central banks puttingliquidity into the system in therunup to the year 2000.

Sector Booms in the Past 30 Years – (Standard Deviation of Global Sector 12-month returns)

0%

10%

20%

30%

40%

50%

60%

70%

1970 1975 1980 1985 1990 1995 2000

Real estate

Shipping

Gold

EnergyData processing

Construction

Financial services

Information

Technology

SteelGold

Aerospace

Sector Booms, 1970 to 2000

Sector Catalyst for Boom Sector Catalyst for BoomReal Estate (1972-73)

Advent of REITs, low interest ratesand rising inflation made propertyyields attractive

Data Processing (1982-83)

Introduction of IBM personalcomputer; computers becamemainstream in business

Shipping (1973)

Closure of Suez Canal, high demandfor oil shipping, and the 1960s sawtanker technology improvements

Financial Services (1986-87)(Japanese bubble)

Deregulation of Japanese capitalmarkets and a halving of Japaneseinterest rates in 1986-97

Gold (1973-74)

Dollar devaluation, high inflation,low gold supply drove gold prices up

Construction/Housing(1985-89)(Japanese bubble)

Low interest rates, inflated real estateprices saw a boom in construction

Aerospace (1975-79)

Gov’t spending on defense, taxbreaks for aerospace, and highdevelopment risk a barrier to entry

Steel (1988-89)(Japanese bubble)

Strong demand as economy surged,Japanese steel company assetsinflated by real estate bubble

Gold (1979-80)

Political uncertainty in Middle East,low supply, eroding dollar pushedgold to record $850/oz

Info Technology (1999-00)

Y2K bug, popularity of Internet,mobile communications, corporatespending on hardware & software

Energy (1979-80)

Middle East oil price rises, majorcompanies cutting delivery by up to45%

Relative Sector Performance—Months From Relative Performance Peak

80

130

180

230

-36 -32 -28 -24 -20 -16 -12 -8 -4 0 +4 +8 +12 +16 +20 +24 +28 +32 +36 +40 +44 +48 +52 +56 +60

Average of sector booms Information Technology (Feb-97 to Oct-01)

Relative Price-to-Book Ratio—Months From Relative Performance Peak

50100

150200

250300350

-36 -32 -28 -24 -20 -16 -12 -8 -4 0 +4 +8 +12 +16 +20 +24 +28 +32 +36 +40 +44 +48 +52 +56 +60


EPS Growth Differential—Months From Relative Performance Peak

-9000

-4000

1000

6000

-36 -32 -28 -24 -20 -16 -12 -8 -4 0 +4 +8 +12 +16 +20 +24 +28 +32 +36 +40 +44 +48 +52 +56 +60


bps


20 UBS Warburg LLC

Climbing theWall of Worry

After falling off thecliff of complacency1920s: During pro-business‘20s, President Coolidge’sappointee to Federal TradeCommission branded FTC “apublicity bureau to spreadsocialistic propaganda.”

1966-1980: BW article“Soaring—and then some”cited among “lessons” of recentexperience “fact” that U.S. was“not perpetually chained to abusiness cycle,” and “well ableto exceed its historical growth.”

2000: Investors claim “newnew industrials” cannot bevalued by traditional metricssuch as P/E multiples, but withnew metrics: price-to-sales,revenues per customer, profitper customer, etc.

1932: Post-Depression Fear.Unemployment was nearly 25%,industrial production was halfof its 1929 rate and currencyand coins (gold) were beinghoarded by terrified Americans.

1950-66: Investors viewedfavorable developments of1940s (real GNP grew fasterthan in 1920s, industrialproduction ran at twice its1935-1939 average) withnervous skepticism. Of majorconcern was fear that a newdepression would strike onceWWII demobilization wascompleted.

1981: Inflation! OPEC couldpretty much name its price andit seemed that the governmenthad simply given up the fightfor price stability.

Climbing the Wallof Worry—Again2001: Even before 9/11 theWall of Worry began to appear.

“Cliffs of Complacency”

The “New” Era of the 1920s—DJIA down 89%

1966-1980—The New “New Era”—DJIA down 27%

Ladies’ Home Journal, August 1929 Business Week, July 16, 1966 Business Week, November 2, 1968

March 2000: The “New” New Economy—Nasdaq falls 70% from March 2000 high

Amazon.com Stock Price Jumps-- What Else Is New?

December 17, 1998

Big Idea Turns Priceline'sFounder Into a Billionaire

April 1, 1999

“Walls of Worry”

Terror and Opportunity in the 1930s—DJIA up 372%

The Bull Market of the Fearful Fifties—DJIA up 405%

New York Times, October 25, 1929 Fortune, March 1948 Business Week, May 1957

1981—Inflation to Accelerate Indefinitely—S&P 500 +1261% in two decades ending December 1999

August 13, 1979 November 3, 1980

2001: A Tech Led Deceleration Followed by Terrorist Attack

March 26, 2001 September 15, 2001


21 UBS Warburg LLC

The Gray Wave—Bed Bath & Beyond,Citigroup, Coach, Coca-Cola,Fifth Third Bancorp,FleetBoston Financial,Freddie Mac,Hartford Financial,Hershey Foods, Home Depot,J.P.Morgan Chase, Kohl’s,PNC Bank, Staples,U.S. Bancorp, Wal-Mart,Walgreen and Wells Fargo.

Information Age—Adobe Systems,AOL Time Warner,Automatic Data Processing,BEA Systems,Check Point Software,Cisco Systems, Clear Channel,Electronic Arts, IBM, Intel,JDS Uniphase, Liberty Media,Microsoft, Nextel, Nokia,SAP, Scientific Atlanta,Taiwan Semiconductor,United Microelectronics,Viacom and Vodafone.

Transformers—America Movil,Bank of New York,El Paso Energy, PepsiCo,Quest Diagnostic andTMP Worldwide.

In Sync—Alcoa, AMR Corp,Dow Chemical, Lafarge,Nissan Motor andUnion Pacific.

n The Gray Wave: Thanks to a muted global business cycle, low inflation, greaterproductivity and improved longevity, consumers around the world will earn more overthe course of an expanded lifetime of work. Beneficiaries include: selected growthretailers, leisure and financial services firms.

n Information Age: The building block of the Information Age over the past quartercentury has been the semiconductor. But, when did the revolution actually start?Changing business structures define each new age. The greatest gains in laborproductivity have been the result of changes to the division of labor. In the InformationAge, the division of labor moves from the worker to the entire organization.

n Transformers: “Structure,” as much as macro factors (industry, sector, etc.), willdetermine success in the Information Age. Winners will be those companies that focuson their “core competency” or facilitate others to focus on their “core competency.”Transformers are moving from bureaucratic, vertically/horizontally integratedorganizations to organizations where non-core operations are divested and horizontalsupport functions are outsourced.

n In Sync: This will be the first globally synchronized economic recovery since the early1980s. Owing to past excesses (i.e. over-investment in capital goods), recoveries inindividual economies will not be notably strong. However, by occurring in unisonacross the globe they will drive an impressive recovery in world growth.

Current Highlighted Stocks list

Adobe SystemsAlcoaAmerica MovilAMR CorpAOL Time WarnerAutomatic Data ProcessingBank of New YorkBEA SystemsBed Bath & BeyondCheck Point SftwreCisco SystemsCitigroupClear ChannelCoachCoca-ColaDow ChemicalEl Paso Energy

Electronic ArtsFifth Third BancorpFleetBoston FinancialFreddie MacHartford FinancialHershey FoodsHome DepotIBMIntelJDS UniphaseJ.P. Morgan ChaseKohl’sLafargeLiberty MediaMicrosoftNextelNissan Motor

NokiaPepsiCoPNC BankQuest DiagnosticSAPScientific AtlantaStaplesTaiwan SemiTMP WorldwideUMCUnion PacificU.S. BancorpViacomVodafoneWal-MartWalgreenWells Fargo


22 UBS Warburg LLC

Appendix A

U.S. ValuationAs of 11/30/01:

Stock valuations arecompelling. Year-end 2002S&P 500 normal value is 1570.

P/E valuation +22% is veryattractive.

Stock-bond probability 90%.

Stock-cash probability 96%.

Liquidity is very positive.

Earnings power is currentlynegative and will remainnegative in 2002 with operatingearnings below S&P 500normal EPS.

S&P 500 Price

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 50

100

250

500

1,000 1,600

P/E Valuation (Percent appreciation potential to normal value)

-30

-15

0

15

30

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

Probability of Stocks Outperforming Bonds

0

25

50

75

100

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

Probability of Stocks Outperforming Cash

0

25

50

75

100

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

Liquidity (13-week T-bill; year over year [100] basis points change [inverted])

-5.0

-2.5

+0.0

+2.5

+5.0

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

Earnings Power (Operating S&P 500 EPS percent deviation from normal EPS)

-50

-25

0

25

50

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02


23 UBS Warburg LLC

Appendix B

Europe Valuation

Composite timing indicator,which brings together top-downmodels (Economics, Valuations,Liquidity, Momentum), at alevel near its strongest Buysignal in the last 20 years.

Macro indicator combines thelead indicator, oil prices,interest rates and the exchangerates.

Macro Indicator is modestlypositive, but well off troughseen in early 2000.

Valuation indicator considersthe 12-month changes in boththe bond earnings yield ratioand the P/E ratio relative totheir historical volatility.

Although off its peak, ValuationIndicator at a level near its mostpositive Buy signal since 1987-88.

Liquidity is examined usingequity returns relative to broadmoney growth.

European equity marketscurrently show a strongpossibility of a liquidity-drivenmarket rally.

Price momentum is simply the12-month change in theEuropean equity market.

Momentum Indicator on parwith the worst declines seenover the last decade, exceedingonly the falls in 1990 and 1987,neither of which provedsustainable.

European Equity Market IndexJan ’81 = 100

50

100

250

500

1,000

1,750

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Composite Equity Market Timing ModelTiming Indicator: # of standard deviations away from mean

-2

-1

+0

+1

+21980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

EconomicsMacro Indicator

-2

-1

+0

+1

+21980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

ValuationEuropean Market Valuation Indicator

-3

-2

-1

+0

+1

+2

+31980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

LiquidityLiquidity Indicator

-3

-2

-1

+0

+1

+2

+31980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

Price MomentumMomentum Indicator

-3

-2

-1

+0

+1

+2

+31980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002


24 UBS Warburg LLC

SourcesPage 4 – The Profit PictureS&P 500 EPS: First Call, UBS Warburg estimatesNominal GDP Growth Versus S&P Industrials Sales Growth: S&P, DRICap. Utilization & S&P Ind. Net Margin: S&P, DRI, UBS Warburg LLCS&P 500 Oper. EPS Rebounds: Compustat, First Call, UBS Warburg LLCStock Market Gauges: UBS Warburg LLC

Page 5 – Value and UncertaintyAll Charts: UBS Warburg LLC

Page 6 – Value?S&P 500 P/E: DRIInterest Rates: DRIWholesale Prices in the U.S.: DRIS&P Dividend Payout Ratio: DRI

Page 7 – Value?S&P 500 Normal and Actual Payout Ratio: DRI, UBS Warburg LLCS&P 500 Normal and Actual Dividend Yield: DRI, UBS Warburg LLCS&P Real Growth Rate: UBS Warburg LLCS&P 500 P/E: DRI, UBS Warburg LLC

Page 8 – Europe: The Profit PictureEuropean EPS Index: Datastream% of European earnings Estimates: IBESCyclically-Adjusted P/E: UBS Warburg LLCCyclically-Adjusted Bond Earnings Yield Ratio: UBS Warburg LLCStock Market Gauges: UBS Warburg LLC

Page 9 –JapanJapan GDP: BloombergChanging Corporate Behavior: RECOF, Nikkei, UBS WarburgBankruptcies: Tokyo Shokoh Research, BloombergUnemployment Rate: BloombergBond market ownership: Bank of JapanUS$/Yen exchange rate: BloombergNet Foreign Buying of Stockmarket: BloombergHousehold Financial Assets: Bank of JapanJapan’s Glide Path: Reform Signposts: UBS Warburg LLC

Page 10 – In SyncReal GDP Growth: US, EU, and Japan: Datastream, UBS Warburg LLCReal GDP Growth: OECD Area: Datastream, UBS Warburg LLCMSCI World Performance in Recoveries: MSCI, Datastream and UBSWarburg LLCCyclical Sectors Relative To Defensive Sectors Share Price Performance InRecoveries: MSCI, Datastream and UBS Warburg LLCCyclical Sectors Relative To Defensive Sectors Earnings Performance InRecoveries: MSCI, Datastream and UBS Warburg LLC

Page 11 – Europe UnitedCorrelation of Inflation & Industrial Production: France & Germany1961-01: OECD, UBS Warburg LLCEU15 Effective Marginal Tax Rates 1998-2001: Baker & McKenzie, UBSWarburg LLCTop Level of Income Tax and Income at which Top Rate applies: Baker &McKenzie, UBS Warburg LLCEuro Area and US Financial Markets: UBS Warburg LLCCapital Share of GDP 1975-98: OECD, DatastreamROE and ROIC minus bond yields 1980-99: UBS Warburg LLC

Page 12 – Europe UnitedM&A: M&A, UBS Warburg LLCPrivate Equity Funds Raised, Invested: European Venture Capital Assoc.The Aging European Baby Boomer: Census BureauMutual Funds Assets: FEFSI, ICI, UBS Warburg LLCPension Fund Allocation: William Mercer, US Federal Reserve

Page 13 – The U.S.: The Gray WaveMisery Index: DRIDemographics: DRIPlans at Retirement: UBS Warburg LLC/GallupWhy Work After Retirement: UBS Warburg LLC/Gallup% of Men in Labor Force Age 55–64: DRI, Bureau of Labor StatisticsHomeownership rates: DRIRegistered autos per driver: Census BureauApparel sales as % of retail sales: DRIQuality vs. Quantity: StockValPercent preferring more time than more money: Wall Street Journal,Roper Starch WorldwideReal Consumption Expenditures: DRI

Page 14 – The U.S.: The Gray WaveAmerica: At Home on the Internet: UBS Warburg LLC/GallupEurope: Short Message Service: Ovum, ARC groupJapan: NTT DoCoMo sub growth: Company ReportsInformation Power—“Moore’s Law”: Intel

Page 15 –TransformersProductivty: John J. McCusker and Russell R. Menard, The Economy ofBritish America, 1607-1789 (Chapel Hill, N.C., 1985), 55-57. HistoricalStatistics of the United States (Washington, 1975), 8, 224. United Nations,The Sex and Age Distribution of the World Populations: the 1996 Revision(New York, 1997), 836-839. See also Phyllis Deane and W. A. Cole, BritishEconomic Growth, 1688-1959: Trends and Structures (Cambridge, 1967),280, 329-331; Lance Davis and Stanley Engerman, “The Economy of BritishNorth America: Miles Traveled, Miles Still to Go,” William and MaryQuarterly, 3rd Ser., Vol. 56 (1999), 21; Thomas Weiss, “U.S. Labor ForceEstimates and Economic Growth, 1800-1860,” in Robert E. Gallman andJohn Joseph Wallis, eds., American Economic Growth and Standards ofLiving before the Civil War (Chicago, 1992), 27.

Page 16 – TransformersPenetration of Electricity and the Internet: IDC, UBS Warburg LLCResearch & Development spending: DRIAdvertising Spending as a Percentage of GDP: DRIPercentage of Workers Who Are Skilled: DRI

Page 17 – GiganTechs:Company Reports, Paul Bunne Communications, UBS Warburg LLC

Page 18 - GiganTechsAutomotive Electronics Chip Count: Semico ResearchPartial UNIX Evolution: UBS Warburg LLC and Company Reports

Page 19 – Booms and BustsSector Booms in the Past 30 Years: MSCI, UBS Warburg LLCSector Booms, 1970 to 2000: UBS Warburg LLCRelative Sector Performance: UBS Warburg LLCRelative Price-to-Book Ratio: UBS Warburg LLCEPS Growth Differential: UBS Warburg LLC

All other sources are UBS Warburg LLC unless otherwise noted


25 UBS Warburg LLC

Additional information available upon request.

Prices of companies mentioned as of November 30, 2001:Adobe Systems Inc 1 ADBE $32.08Alcoa Inc. AA $38.60AMR Corp 2 AMR $21.36America Movil AMXL.MX 7.98PAOL Time Warner Inc. 14 AOL $34.90Automatic Data Processing ADP $55.46Bank of New York Co. Inc. BK $39.24BEA Systems 1 BEAS $16.79Bed, Bath & Beyond 1 BBBY $32.47Check Point Software 1 CHKP $38.30Cisco Systems Inc. 1,14 CSCO $20.45Citigroup 2,14 C $47.90Clear Channel Communications 2 CCU $46.73Coach Inc COH $33.00Coca-Cola Co. KO $46.96Dow Chemical 14 DOW $37.50El Paso Corporation 14 EPG $44.50Electronic Arts Inc. 1 ERTS $60.46Fifth Third Bancorp 1 FITB $60.09FleetBoston Financial FBF $36.75Freddie Mac 2,14 FRE $66.17Hartford Financial Services 2 HIG $59.20Hershey - A HSY $65.46Home Depot HD $46.66IBM 2,14 IBM $115.59Intel Corp 1 INTC $32.66J.P. Morgan Chase & Co 2,14 JPM $37.72JDS Uniphase Corporation 1,2,11 JDSU $10.08Kohl's Corp KSS $67.85Lafarge Corp. 2 LAFP.PA 102.50€Liberty Media Corp 14 LMCA $13.15Microsoft Corp 1 MSFT $64.21Nextel Communications, Inc. 1,2,14 NXTL $10.72Nissan Motor 7201.TK 608.00¥Nokia Corp NOK1V.HE 25.82€PepsiCo Inc. PEP $48.63PNC Bank PNC $57.95Quest Diagnostic Inc. 2 DGX $61.76SAP SAPG.DE 138.10€Scientific-Atlanta Inc SFA $26.89Staples Inc 1 SPLS $17.60Taiwan Semiconductor 2 2330.TW 73.00NT$TMP Worldwide 1,2 TMPW $41.29Union Pacific 2 UNP $55.05Utd Microelectronics UMC 39.50NT$US Bancorp USB $18.98Viacom B 2,14 VIAB $43.65Vodafone 14,122 VOD.L 180.00pWal-Mart Stores WMT $55.15Walgreen Co. WAG $33.00Wells Fargo & Co. 34 WFC $42.80

1. UBS Warburg LLC and/or one of its affiliates makes a market in the securities of this company.2. UBS Warburg LLC, UBS PaineWebber Inc. and/or one of their affiliates has acted as a manager/co-manageror placement agent in underwriting securities of this company or one of its subsidiaries in the past three years.11. Within the last 36 months, UBS Bunting Warburg Inc. and/or its affiliated companies have acted as co-manager or an underwriter of an equity or debt offering or have provided financial advice to this company.14. Securities, or derivatives thereof, of this company, are owned either directly by the securities analyst coveringthe stock or indirectly by his/her household family members.34. UBS Warburg LLC, UBS PaineWebber Inc. and/or one of their affiliates is acting as manager/co-manager orplacement agent in underwriting securities of this company.122. UBS Warburg Ltd. is advising Vodafone with regard to the restructuring of J-Phone Group wireless units.


26 UBS Warburg LLC

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27 UBS Warburg LLC

Global Investment StrategyEuropeIan HarnettGeorgina ChanSaul HenryAlex IonsPhilip Pashov

GEMMark PreciousMary CurtisSimon Whitten

USEdward KerschnerThomas DoerflingerMichael GeraghtyMichael KrauseJeremy Zirin

Global Investment Strategy LocationEdward Kerschner New York (Chief Global Strategist)Tony Brennan LondonWilliam Dinning LondonThomas Doerflinger New YorkMichael Geraghty New YorkCrystal Horwood LondonWalter Kemmsies LondonMichael Krause New YorkKenneth Liew LondonJeremy Zirin New York

Global Quantitative Research LocationAlan Scowcroft LondonMark Bulsing LondonIan Francis LondonManoj Kothari LondonJames Sefton LondonStephen Wright London

Global Group Strategists and Global Sector Co-ordinators LocationAerospace Paul Ruddle LondonAirlines Andrew Barker LondonAutos Saul Rubin New YorkBanks Chris Ellerton LondonBasic Materials Peter Hickson LondonBeverages Philip Morrisey LondonBuilding materials Mark Stockdale LondonChemicals Andrew Cash New YorkCommunications Technology Nikos Theodosopoulos New YorkConsumer Non-Cyclical David Rabinowitz New YorkEnergy Alan MacDonald LondonFixed Line/Wireless Simon Thorpe LondonForest Products Denis Christie LondonHousehold Products Suzanne Siebel LondonMedia Christopher Dixon New YorkPharmaceuticals Jeff Chaffkin New YorkRailroads Andrew Fitchie New YorkShipping Andreas Vergottis LondonSteel Yasuhiro Yamaguchi London

Technology Philip Coburn New YorkTelecommunications Uberto Ferrari LondonUtilities Lawson Steele London

AsiaIan McLennanMiranda MaJames Spence

Australia & New ZealandSakthi SivaIan PurdyAnthony Rohrlach

UKDarren WinderGerard LanePaul Michael

Global Valuation Group LocationSteve Cooper LondonZhen Deng New YorkPeter Suozzo Hong KongGillian Sutherland London

Global Asset Allocation LocationLarry Hatheway StamfordJeffrey Palma Stamford

Latin AmericaDamian Fraser

Customized Research LocationJulie Hudson LondonShirley Knott LondonTom Newman London

South AfricaHerald van der Linde

CanadaGeorg VasicGarry Cooper

Tobacco Jonathan Leinster London

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