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Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.

Christine Clark: 212 448 6085 or cclark@convergex.com
Beth Reed: 212 448 6096 or breed@convergex.com

Morning Markets Briefing

Stocks were mixed Friday despite a batch of relatively positive earnings reports, as the Dow slipped 13
bps, while the S&P 500 added 24 bps, and the Nasdaq rose 80 bps. All 3 major US indices advanced
between 0.4% and 0.6% for the week. There was no major economic data released Friday, but St. Market Commentary: October 25th, 2010
Louis Fed President James Bullard’s comments Thursday fueled speculation the central bank will elect
A snapshot of the markets through the
to resume monetary easing at its next FOMC meeting in early November. The existing home sales
report is on tap for Monday, as well as earnings before the bell from Invesco and Lorillard and after the lens of ConvergEx.
close from Harris.

Rent to Own, and Everything In Between

Summary: When you combine entrenched economic malaise with technological innovation the outcome is often lasting societal change. Such a shift is currently
underway, as Americans reconsider the concept of “ownership.” For the Baby Boom and the generation after them this means reconsidering the risk/reward tradeoff of
home ownership. That will filter down to their children, who thanks to the Internet already think very differently about what it means to “own” a book, a song or a movie.
Moreover, this trend is very much a two way street. Technology, from streaming video to social networking, allows consumers to reclaim ownership of their time. The
world of finance is not immune, with everything from the rising popularity of precious metals to exchange traded funds benefiting from new concepts of what it means to
“own” financial assets.

My father was one of those “belt and suspenders” types of men who wanted to be prepared for anything and everything. That meant, among other things,
keeping a Rand McNally Road Atlas in the car at all times. This was odd, because he was also a tremendous creature of habit, so we rarely went anywhere where this
book would prove necessary. It was backseat reading material for me, but not much else. I did get pretty good at U.S. geography, though.

The Rand McNally Company proved to be one of the first examples of a well-known company to fail due to Internet-based competition. Pressure from the likes of
Mapquest (an early powerhouse on the Web) as well as the rising popularity of in-car GPS devices rendered the old road atlas obsolete. The company filed for bankruptcy
protection in 2003, despite ownership by usually savvy buyout experts AEA Investors. They had, ironically, bought the asset to leverage its brand name online. All this
happened before Google even went public, by the way – which makes it feel like ancient history even though it occurred less than a decade ago.

Since then, the list of once-essential household resources now made unnecessary by technology has only grown.

Market Commentary – Pages 1-4, Equities/Conferences & Earnings – Page 5, Fixed Income – Page 6, Options – Page 7, Exchange-Traded Funds/Indexes – Page 8, Social
Media & Internet Blogs Top Stories – Page 9 1

©2010 BNY ConvergEx Execution Solutions LLC. May not be redistributed without express permission. All rights reserved
Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.com
Christine Clark: 212 448 6085 or cclark@convergex.com
Beth Reed: 212 448 6096 or breed@convergex.com

• Encyclopedias and dictionaries. Who needs them? The resources of the Internet are at your disposal either at home or, increasingly, on the go.

• Compact discs and DVDs. When the CD came around in the late 1980s I sold all my records. Then when iTunes arrived, I ripped all my CDs and sold them. Now,
every album I have ever owned resides only on my laptop and I buy all my news music in digital form. If I want to watch a movie, I no longer need to buy or
rent a DVD. It streams on cable pay-per-view or over the Internet to my computer or iPad.

• For the generation entering grade/middle school now, the notion of owning a book may prove as foreign as buying a CD is to their older siblings. iPads,
Kindles, Nooks and other devices make a personal library a digital concept rather than a physical one. Video games – a business as large as motion pictures in the
U.S. – may go down the same path, with dedicated consoles one day as much of a relic as a Lord of the Rings DVD.

Turning to the parents of this digital generation, the notion of home ownership has gone from American dream to source of anxiety and stress. The financial
exposure inherent in borrowing 5-10x more than your annual after-tax income (or much more, in many cases) to buy an asset whose value gyrates with economic cycles
seems to be an increasingly outdated concept. Even if house prices stabilize at current levels – and that is a big “if” – millions of mortgages will still remain underwater
for years to come. Renting a house or apartment looks pretty good in comparison. In financial terms, the “put value” of renting – the ability to hand back the keys and
look for cheaper housing if real estate values fall – is an attractive calculus after the collapse of the housing market. If the Great Depression cast a pall around stock
investing that only lifted 30-40 years later, the 2008 financial crisis could well do the same for how Americans consider home ownership.

Casting a larger net around the topic, I can also make the case that the psychology of “ownership” with respect to investing and even currency has also
changed dramatically as a result of the financial crisis.

• At one end of the spectrum, “ownership” of capital has become understandably more risk averse and flowed into notionally safer fixed income
investments. One of the wealthiest guys I know once told me “You don’t want to have to make your money twice.” Yes, inflation erodes the value of these
“safer” investments, but right now the comfort of knowing that you will get your nominal investment back, with interested, trumps that concern. Whatever you
own, you will still own in the future.

• At the other end, capital has turned its back to some degree on money and sought out assets such as precious metals. That stems from the desire to own
something that is scarce, rather than currency which can be created by central banks. Owning “Money,” or any other asset, is only valuable if it is difficult to
acquire. For most of us, that means working for it. The fact that the Federal Reserve has created over a trillion dollars of new money with some relatively simple
journal entries puts a dent in the notion that money is a scarce resource. Investors are clearly disenchanted with that message and increasing look to truly scarce
assets to preserve their “ownership” of wealth.

Pulling the dramatic changes in equity markets into this “Changing face of ownership” construct is pretty easy as well.

Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.com
Christine Clark: 212 448 6085 or cclark@convergex.com
Beth Reed: 212 448 6096 or breed@convergex.com

• First, there is the 20-odd consecutive week outflow of money from domestic equity mutual funds. That has occurred despite a reasonably good
performance for U.S. stocks, a historical anomaly that signals a deeper trend. Risk aversion certainly plays a role, but given the mainstream media’s (the
television show 60 Minutes, for example) increasing focus on high frequency trading it is hard not to point to market structure as another reason for the outflows.
If most of the trades on U.S. equity exchanges are designed to hold stocks for seconds or minutes, why would long term owners of stocks feel comfortable with
the current system?

• The still growing popularity of exchange traded funds based on unmanaged indices is another effect of the change in ownership psychology. If an
investor is going to take risk, they are increasingly demanding that they control more of the process. The world of ETFs is still expanding at a rapid pace in terms
of new offerings, and that seems entirely consistent with the desire among owners of capital to directly target investments classes and have tick-by-tick
transparency and access to the assets they own.

Of course, there are many other winners from these changes in ownership psychology. Consumers, for example, have the chance to reclaim ownership of their time.
Consider the notion of “Prime Time,” the evening hours when television viewership is traditionally at its height. But as more consumers use everything from Hulu to
Google Video to portable products like tablet computers, that concept is loosing its relevance. Television doesn’t “own” 8-11 pm anymore. Consumers do. Social
networking is another huge time saver, allowing people to stay in touch with the goings-on of their friends/family in one place, rather than point-to-point
communications such as phone calls or emails. That makes Facebook by far the “stickiest” major website, with users spending half an hour, on average, on the site
(source: alexa.com).

It is easy to focus on the negatives inherent in such a large-scale shift of psychology, but that would miss the tremendous opportunities inherent in this change.
To use a historical analogy, the Great Depression was, of course, tremendously painful for millions of Americans. At the same time, this period time saw explosive growth
in radio, talking movies, advertising, as well as household conveniences such as refrigeration and automatic telephone exchanges. Tough economic times did not stifle or
derail innovation or new product adoption. Changes in the psychology of ownership stand to create a similar wave of new products and services.

Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.com
Christine Clark: 212 448 6085 or cclark@convergex.com
Beth Reed: 212 448 6096 or breed@convergex.com

Before the bell VZ (-1.4%) posted earnings and revenue that topped estimates, but profit was 7% below the year-ago level while revenue lagged by 3%.
Also prior to the open, IR (+1.0%), SLB (+5.4%) and HON (+1.2%) beat and/or matched net income and sales expectations, though HON’s earnings were
20% lower than Q3 2009 on a 9% boost in revenue. Dow component AXP (-3.2%) reported a 71% upside swing in profit after Thursday’s close on
increased cardholder spending and fewer write-offs of unpaid balances, but shares traded lower on Friday as average customer balances remained below
pre-recession levels. Meanwhile, in M&A news, CAT (-0.8%) announced it will buy German engine maker MWM for about $810 million in cash.

Important Earnings Today (with Estimates) From… S&P Futures

ƒ ADVS: $0.24 ƒ MAS: $0.10 ƒ SOHU: $0.90 One Day (High –1181.00; Low – 1173.25):
ƒ AMGN: $1.26 ƒ NS: $0.76 ƒ SNV: $-0.22
ƒ ACGL: $2.22 ƒ NVE: $0.75 ƒ TXN: $0.69
ƒ COG: $0.28 ƒ OLN: $0.36 ƒ WRB: $0.64
ƒ CR: $0.65 ƒ OMI: $0.49 Source: Bloomberg
ƒ EWBC: $0.21 ƒ RSH: $0.35
ƒ EW: $0.42 ƒ RGA: $1.66
ƒ HRS: $1.24 ƒ RCII: $0.55
ƒ IVZ: $0.35 ƒ ROP: $0.79

Important Conferences/Corporate Meetings Today:

Bank of America Merrill Lynch South African Investor-to-Corporate Conference - Johannesburg
Citi Australian Investment Conference – Sydney, AU

Three Day (High – 1186.25; Low – 1164.00):

Prior Day SPX (High – 1183.93; Low – 1178.99; Close – 1180.26):

Source: Thomson ONE

Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.com
Christine Clark: 212 448 6085 or cclark@convergex.com
Beth Reed: 212 448 6096 or breed@convergex.com


Treasuries fluctuated Friday, with benchmark yields ending 1 basis point higher, and yields on the long bond falling 3 bps. Investors speculated how much
debt the central bank may purchase if it engages in a second round of quantitative easing, following St. Louis Fed President James Bullard’s comments
Thursday that the Fed should buy $100 billion in Treasuries next month and then assess the need for additional purchases at subsequent FOMC meetings.
Meanwhile, next week the US will sell $35 billion in both 2- and 5-year notes, as well as $29 billion of 7-year debt and $10 of 5-year TIPS.

Source: Bloomberg Source: Bloomberg

Today’s Important Economic Indicators/Events (with Consensus):

ƒ Existing Home Sales (10:00am EST): 4.300M

Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.com
Christine Clark: 212 448 6085 or cclark@convergex.com
Beth Reed: 212 448 6096 or breed@convergex.com

SPX – Today the underlying index turned in one of the quietest days in recent memory. The index ended +0.2%, and the overall trading range was only 0.4% (-0.1% to +0.3%).
This remarkably quiet day induced a drop of 3% in implied volatility in SPX options, as measured by the VIX. The VIX has now seen a drop of about 16% since the beginning of
the month, reflecting the net decline in implied premiums. There were several notable trades today in loner dated SPX listed options in which investors took advantage of these
lower implied premiums. The September (2011) 1400 calls were bought about 30,000 times at $14.40 and the December (2012) 2000 calls were bought 15,000 times for $1.00.
There were similar trades in shorter dated activity as well. The November 1250 calls were bought over 14,000 time for $1.35 and the December 1275 calls were bought about
7,000 times at $2.60 and $2.70. There were also put buyers taking advantage of the lower premium levels such as the buyer of the November/December 1050 put spread @

ETF- The Market traded flat and options volume was subdued with broad-based products seeing mixed sentiment. In XLE (Energy) a buyer of 20,000 Dec 57 / 62 call spreads
emerged, while XRT (Retail) had volatility buyer through the Jan 44 calls 20,000 times delta neutral. We also note a trade in EWH (Hong Kong) as paper sold 15,000 Jun 20 calls to
buy 15,000 Jun 18 puts. Lastly, an investor got long volatility in GLD through buying 7,000 GLD Nov 128 puts delta neutral.


Rank 10/18/2010 10/19/2010 10/20/2010 10/21/2010 10/22/2010 30-Day Implied Vol
5 PTV PTV EFX MJN GENZ 17.81 Top 10 30-Day Implied Vol Bottom 10 30-Day Implied Vol
6 HSP BMC RSH EFX MJN 37.35 MKC 105.43% 32.21 CCE -85.47% 31.56
7 MJN MYL BMC SYMC RSH 41.64 PNW 83.56% 19.82 CPWR -53.55% 34.28
8 BMC VRSN MYL PTV MYL 36.28 MFE 29.25% 53.50 CA -37.24% 20.52
9 M HSP MJN CHRW SYMC 42.05 GENZ 28.74% 29.90 LEG -34.31% 34.02
10 IBM SYMC EBAY BMC CEPH 33.89 MSFT 25.27% 15.53 AYE -33.54% 37.44
11 AAPL CHRW TSS VAR Q 32.29 LH 24.02% 33.89 PBCT -31.34% 22.76
12 MDP EBAY HSP CA CHRW 24.96 XRX 21.06% 19.83 AMZN -31.04% 28.33
13 CA MJN K CEPH VAR 26.33 GIS 19.62% 39.13 EFX -27.92% 24.79
14 CHRW SJM CHRW MDP ORLY 28.85 ROP 18.40% 21.41 DRI -26.68% 32.50
15 SJM GENZ SYMC K MDP 36.98 V 17.31% 22.22 TROW -22.41% 25.07
17 TJX MDP MDP Q BMC 48.60
18 MYL CA VAR SJM K 18.06
20 VRSN ORLY VRSN AN HSP 28.88 We ranked the S&P 500 companies from the highest to lowest 30 day implied to
21 TSS HD NI ORLY TJX 25.30 historical volatility ratio. Above we identify the 10 most positive and negative
22 FRX CEPH AN CNP AN 33.41 movers.
24 IFF K PPL NI HRS 32.71 The table to the left represents the 25 highest 30 day implied to historical
volatility ratios within the S&P 500 companies. The green represents names
PPL VAR FIS PPL CA new to the list while the red represents names that have fallen out.
Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.com
Christine Clark: 212 448 6085 or cclark@convergex.com
Beth Reed: 212 448 6096 or breed@convergex.com

Exchange-Traded Funds/Indexes

Prior Day Peformance of Largest ETFs by Assets S&P 500 Sector ETFs
Name (Net Assets*) Ticker Category Daily Return Sector Ticker 1-Day Perf YTD Perf Sector Ticker 1-Day Perf YTD Perf
SPDRs SPY Large Blend 0.16% Energy XLE 0.58% 3.93% Telecomm IYZ 0.30% 9.54%
SPDR Gold Shares GLD N/A 0.19% Health XLV 0.03% 0.51% Technology XLK 0.33% 5.19%
iShares MSCI Emerging Markets Index EEM Diversified Emerging Mkts 0.07% Industrials XLI 0.03% 16.95% Consumer Discretionary XLY 0.63% 17.53%
iShares MSCI EAFE Index EFA Foreign Large Blend 0.12% Utilities XLU -0.65% 2.74% Financials XLF 0.03% 1.46%
iShares S&P 500 Index IVV Large Blend 0.22% Consumer Staples XLP 0.35% 8.84% Materials XLB -0.72% 3.94%
Prior Day Top Volume ETFs Currency ETFs
Name Ticker Category Shares Traded Currency Ticker 1-Day Perf YTD Perf Currency Ticker 1-Day Perf YTD Perf
SPDRs SPY Large Blend 94,516,301 Australian Dollar FXA 0.27% 9.15% Mexican Peso FXM 0.32% 5.61%
PowerShares QQQ QQQQ Large Growth 39,558,789 British Pound Sterling FXB -0.12% -3.18% Swedish Krona FXS 0.75% 7.76%
iPath S&P 500 VIX Short-Term Futures ETN VXX N/A 31,965,526 Canadian Dollar FXC -0.05% 2.09% Swiss Franc FXF -1.23% -0.94%
iShares MSCI Emerging Markets Index EEM Diversified Emerging Mkts 28,428,419 Euro FXE 0.04% -2.89% USD Index Bearish UDN 0.00% -0.40%
Financial Select SPDR XLF Specialty - Financial 26,968,779 Japanese Yen FXY -0.01% 14.04% USD Index Bullish UUP 0.00% -2.64%
Prior Day Top Performers VIX ETNs Fixed Income ETFs
Name Ticker Category Daily Return Name Ticker 1-Day Perf YTD Perf Bonds Ticker 1-Day Perf YTD Perf
Direxion Daily Semicondct Bull 3X Shares SOXL N/A 5.92% iPath S&P 500 VIX VXX -4.47% -62.34% Aggregate AGG 0.05% 5.15%
iPath DJ-UBS Cotton TR Sub-Idx ETN BAL N/A 4.37% Short-Term Futures ETN Investment Grade LQD 0.12% 7.71%
PowerShares Dynamic Networking PXQ Specialty - Technology 3.57% High Yield HYG 0.48% 2.78%
CurrencyShares Russian Ruble Trust SXRU N/A 3.52% iPath S&P 500 VIX VXZ -1.84% -1.29% 1-3 Year Treasuries SHY -0.02% 1.81%
PowerShares Dynamic Semiconductors PSI Specialty - Technology 3.29% Mid-Term Futures ETN 7-10 Year Treasuries IEF 0.03% 11.76%
20+ Year Treasuries TLT 0.68% 12.78%
ETF Ticker 1-Day Perf YTD Perf ETF Ticker 1-Day Perf YTD Perf
Gold GLD 0.19% 20.88% Crude Oil USO 1.84% -9.65%
Silver SLV 0.75% 37.61% EAFE Index EFA 0.12% 3.49%
Natural Gas UNG -1.66% -47.12% Emerging Markets EEM 0.07% 10.87%
SPDRs SPY 0.06% 6.17%

Major Index Changes:


ETFs in the Headlines and Blogs:

ƒ The Dividend ETF Comeback - http://www.etftrends.com/2010/10/the-dividend-etf-comeback/
ƒ ETF Securities Debuts Precious Metals ETF - http://www.etftrends.com/2010/10/etf-securities-debuts-precious-metals-etf/
ƒ Most Overbought ETFs - http://www.bespokeinvest.com/thinkbig/2010/10/21/most-overbought-etfs.html

Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.com
Christine Clark: 212 448 6085 or cclark@convergex.com
Beth Reed: 212 448 6096 or breed@convergex.com

Top Online Social Networking Stories

Latest Popular Digg.com Business News

ƒ Is Your Car Made in America? It’s Growing More Difficult to Tell - http://autos.aol.com/article/is-your-car-really-american/

Calculated Risk
ƒ Geithner calls for reducing trade imbalances - http://www.calculatedriskblog.com/2010/10/geithner-calls-for-reducing-trade.html
ƒ FOMC and QE2 - http://www.calculatedriskblog.com/2010/10/fomc-and-qe2.html
ƒ Hotel Performance: RevPAR up 9.4% compared to same week in 2009 - http://www.calculatedriskblog.com/2010/10/hotel-performance-revpar-up-94-

ƒ Currency Wars and (Macro) Competitiveness - http://www.econbrowser.com/archives/2010/10/currency_wars_a.html
ƒ Arguments against QE2 - http://www.econbrowser.com/archives/2010/10/arguments_again.html

The Big Picture

ƒ Mortgage Madness Linkfest - http://www.ritholtz.com/blog/2010/10/mortgage-madness-linkfest/
ƒ Foreclosure Nation - http://www.ritholtz.com/blog/2010/10/foreclosure-nation/

Macro Man
ƒ Twenty Ifs - http://macro-man.blogspot.com/2010/10/twenty-ifs.html
ƒ I bought a Chevy Vega, but I want it to be a Mercedes - http://macro-man.blogspot.com/2010/10/i-bought-chevy-vega-but-i-want-it-to-be.html

Bespoke Investment Group

ƒ Nasdaq and S&P 500 Golden Crosses - http://www.bespokeinvest.com/thinkbig/2010/10/21/nasdaq-sp-500-golden-crosses.html

Zero Hedge
ƒ Reading between the Lines of Netflix’s Ugly Earnings Report – An AOL Type Accounting Gimmick in the Making? -
ƒ WikiLeaks Prepares to Release “Largest Cache of Secret U.S. Documents in History” - http://www.zerohedge.com/article/wikileaks-prepares-release-largest-
ƒ Guest Post: China’s Naval Ambitions Spur New Regional Strategic Planning - http://www.zerohedge.com/article/guest-post-chinas-naval-ambitions-spur-

Nicholas Colas (Chief Market Strategist): 212 448 6095 or ncolas@convergex.com
Christine Clark: 212 448 6085 or cclark@convergex.com
Beth Reed: 212 448 6096 or breed@convergex.com


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