Macro Advisor Snapshot

Dashboard
June, 2013

Dashboard Eurozone
Eurozone data suggest cyclical trend has stopped deteriorating
Industrial production has steadily improvedthough concentrated in GER/FRA Composite PMI at best levels since Mar12 with new orders stabilizing Broad sentiment at 12 month highs Political shift to less austere fiscal policy will lessen drag on economy

Still, tight monetary policy and strong euro will hinder the recovery
High real interest rates in struggling EZ economies are counterproductive Much hoped for export growth faces strong currency headwinds

European equities are inexpensiveperhaps for a reason.

European stocks at record discount to US High unemployment and tight monetary policy will constrain domestic demand Sectors reliant on depressed consumer (discretionary/telecoms) justifiably cheap Euro bank sector may be way to position for eventual cyclical upturn

Iron Harbor Capital info@iharborcap.com www.iharborcap.com

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Collecting and processing the vast amount of relevant data that determine global trends is the great challenge of executing a global allocation (macro) strategy. In order to produce high quality returns, an investment team needs an established procedure for collecting data, converting it into information, and then forming investment themes based on that information. Our economic databaseDashboardconsists of twenty countries and another twenty individual global economic data series. Dashboard is the foundation of our primary research effort and a key input that Chris Nicholson, CFA and I use in our investment process. In Open MarketDashboard, we will present regular snapshots of the trends on which we are focusing. This series will complement our other research efforts by providing investors with a short-form summary of themes and ideas that will impact global investment trends over time.

Gravelle Pierre, CFA

Figure 1. Headline Activity Showing Signs of Life

Rear-view GDP looks awfulbut leading indicators signal 2H13 turn.
EZ GDP % YoY (LHS) EZ LEI (RHS) 4.0 101.0 2.0 2.0 4.0

Percent 6.0

Index Value 103.0

Percent 6.0

The Good, the Bad and the Ugly.

0.0

99.0

0.0

-2.0 97.0 -4.0

-2.0 GER GDP % YoY FRA GDP % YoY ITA GDP % YoY

-4.0

-6.0 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13

95.0

-6.0 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13

Source: Eurostat, OECD Notes: Q1 EZ GDP slowed more quickly on weaker household demand and gross capital formation. Record high unemployment dragging retail sales lower. Exports soft but added 0.1 ppt to GDP. Cap formation was ugly, but recent IP/PMI suggest turnaround. Euro area CLI above 100 for first time since Nov 2011suggests activity is again expanding.

Source: Eurostat Notes: GER activity positive on back of pvt consumption. Buba lowered growth expex but outlook has become brighter. FRA/ITA missing on hshld consumption, exports, and investment. Budget constraints/social benefits make econ growth critical. Shift from austerity may help over 12-18months.

Index Value 115

Industrial output shows small flicker of life

Percent 10.0

Percent 15.0 10.0 5.0

...and gains traction across the Big Three.

110

5.0

0.0 105 -5.0 100 -10.0 95 EZ IP 6mma (LHS) % YoY (RHS) 90 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 -20.0

0.0 -5.0 -10.0 -15.0

-15.0

Ger IP % YoY -20.0 -25.0 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Fra IP % YoY Ita IP % YoY

Source: Eurostat Notes: EZ IP higher for 3 straight monthsthe 6mma again moving higher for first time since May 11. Capgoods solid, consumer goods weak.

Source: Eurostat Notes: Big 3 improving with GER/FRA IP at 6 month highs and ITAs decline slowing. High interest rates & credit crunch make ITA a slow turn.

Figure 2. Confidence Stepping Higher

PMI survey data points to steady gains in sentiment. Index Value
65 60 55 50 45 40 35 30 Jan-07 Jan-09 Jan-11 Jan-13 EZ PMI Mftr EZ PMI Svcs 30 Jan-07 Jan-09 Jan-11 Jan-13

Record spring flooding likely to drag on German sentiment. Index Value

65 60 55 50 45 40 35 Ger PMI Mftr Ger PMI Svcs

Source: Markit Notes: 3rd consecutive monthly rise in composite PMI, best level since Mar12. New orders stabilizing, mftr orders/inventory ratio at 2yr high. EZ ex GER/FRA seeing weakest rate of decline for 2 years. PMI jobs still skidding lower. Overall, downturn appears to be easing.

Source: Markit Notes: Latest GER Composite PMI points to declining new orders and 2nd consecutive fall in employment. Watch upcoming data for impact of 2013 flooding.

Index Value 65 60 55 50 45 40 35 30 Jan-07

France scores the biggest PMI gains.

Index Value 65 60 55 50 45 40

Italian new orders driving confidence.

Fra PMI Mftr Fra PMI Svcs

35 30

Ita PMI Mftr Ita PMI Svcs

Jan-09

Jan-11

Jan-13

Jan-07

Jan-09

Jan-11

Jan-13

Source: Markit Notes: FRA composite PMI best in 10 months. New orders better but jobs contracting. Overall conditions weak but pace of decline slowing.

Source: Markit Notes: A slower decline in mftr PMI suggests broader activity finding a base. Strong gains in new orders and employment, though still sub-50.

Figure 3. Price Pressures Under Control

CPI lower on oil/food prices.expectations stable.
EZ CPI % YoY ECB Policy Rate

Percent 5.0

Higher labor costs and weak activity book-end EZ price pressures. Percent
5.0 4.0 3.0 GER CPI % YoY FRA CPI % YoY ITA CPI % YoY

4.0

3.0 2.0 2.0 1.0 1.0 0.0 0.0 -1.0 -2.0 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13

-1.0 Jan-03

Source: Eurostat, Bloomberg Notes: ECB states inflation to remain subdued over medium term and expectations well-anchored in line with inflation goal of below, but close to, 2%. According to ECB Pres Draghi, low inflation is not, by itself, bad. CPI lower on food/oil prices, less regulation and new techno deflation. ECB rate policy incapable of solving for high unemployment.

Source: Eurostat Notes: GER infl ticking higher on wage hikes (amid low unemployment) and higher weather-related food prices. At the opposite end, domestic prices in FRA/ITA are lower on very weak domestic activityausterity measures and high unemployment dampening hshld spending and capping price pressure.

Percent 5.0 4.0 3.0

High real rates in struggling economies will delay Eurozone recovery.

Percent 2.5

10yr breakevens substantially below ECBs 2% inflation target.

2.0 2.0 1.0 1.5 0.0 -1.0 -2.0 Jan-03 GER 10yr Real FRA 10yr Real ITA 10yr Real Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 1.0 Jun-09 FRA 10yr B/E Jun-10 Jun-11 Jun-12 Jun-13 GER 10yr B/E

Source: Bloomberg, our calculations Notes: Best illustration of why Europe is such a disaster. FRA/ITA need lower real rates. ECB believes that structural reforms will drive real rates lower.

Source: Bloomberg Notes: Shrinking breakevens question stability of expectations. Worst case perfect storm of higher rates/lower CPI create good entry points into linkers.

Figure 4. Export Trend Bears Close Attention

ECB counting on strong rebound in exports Billion EUR Percent
170.0 160.0 150.0 20.0 140.0 130.0 0.0 120.0 110.0 100.0 -20.0 90.0 80.0 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 -30.0 -20.0 -30.0 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 -10.0 -10.0 0.0 10.0 10.0 Ex-EU Exports 6mma (LHS) % YoY (RHS) 20.0 30.0 30.0

Percent 40.0

.a weaker Euro would help.

Ex-EU GER Exports % YoY Ex-EU FRA Exports % YoY Ex-EU ITA Exports % YoY

Source: Eurostat Notes: June Eurostaff forecasts pin activity upturn on exports driven by better external demand. IMF/WB/OECD are each calling for decent emerging market growth in 2013/2014. US looks betterif Abenomics works in Japan, there may be reason for optimism.

Source: Eurostat Notes: Unlike Spain, where exports are propping up the economy, the rest of the Big-4 are languishing. This is the key chart to watch.the ECB is betting on better external growth to spark demand because

Percent 14.0

With unemployment frighteningly high

Index Value 120.0

sentiment will be slow to rebound.

12.0 100.0 10.0

8.0 80.0 6.0 Eurozone GER FRA ITA 60.0 Mar-05 Mar-07 Mar-09 Mar-11 Mar-13 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 EZ Econ Sent GER Econ Sent FRA Econ Sent ITA Econ Sent

4.0 Mar-03

Source: Eurostat Notes: ...the drag on domestic demand from low consumer/biz sentiment, weak labor market, and pvt sector deleveraging will diminish only gradually.

Source: Euro Commission Notes: EC survey covers industry, consumers, construx and retail. Showing recent improvement6mma at 7m high. ECB/staff forecasts cite gains repeatedly.

Figure 5. Equity Valuations Cheap for a Reason

Valuations across Europe still look reasonable.

Index 800 700 600 500

Index 14000 12000 10000 8000

400 6000 300 200 100 0 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 4000 STOXX 600 (Actual) P/E of 26 P/E of 21 P/E of 16 2000 0 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13 DAX (Actual) P/E of 22 P/E of 17 P/E of 12

Source: Bloomberg Notes: Forward P/E at 12.7not expensive compared to SPX at 14.7. Eurozone shares were down 4ppt more than US equities in June.biggest underperformance since Apr12 when Euro collapse expectations were high. With cyclically adjusted P/Es at all time wides to US, concern is EZ is cheap for a reason.

Source: Bloomberg Notes: DAX forward at 11.6, also not expensive. Across the EZ, sectors with the biggest discount to US in terms of fwd P/Es are consumer discretionary, telecoms, utilities.

Index 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Jan-04

CAC 40 forward PE fairly priced.

CAC (Actual Level) P/E of 20 P/E of 16 P/E of 12

$/EUR 1.65 1.55 1.45 1.35 1.25 1.15 1.05 0.95

Euro remains overvalued.

$/EUR $/EUR PPP

Jan-06

Jan-08

Jan-10

Jan-12

Jan-03

Jan-05

Jan-07

Jan-09

Jan-11

Jan-13

Source: Bloomberg Notes: CAC forward at 11.8. With EZ in midst of hard recession, attractive sectors (consumer staples/IT) at premium to US, industrials only at small discount.

Source: Bloomberg Notes: In Feb, with EUR near 1.3700, Draghi signaled that EUR strength could influence policy response. We expect the EUR capped at 1.3800 on the top.

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Gravelle Pierre is the Founder and Chief Portfolio Manager of Iron Harbor. gpierre@iharborcap.com Jacqueline Hayot is the Chief Operating Officer of Iron Harbor. jhayot@iharborcap.com Christopher Nicholson is the Senior Portfolio Strategist of Iron Harbor. cnicholson@iharborcap.com Eva Yun is the Senior Markets Analyst of Iron Harbor. eyun@iharborcap.com

The views expressed herein are for information purposes only and ARE NOT intended as trading or investment recommendations. Iron Harbor Capital Management IS NOT a Commodities Trading Advisor and IS NOT offering these views as investment advice or as a solicitation for investment.