Lookout Report from S&P Valuation and Risk Strategies

Making The Case For Eight Consecutive Quarters Of Double-Digit Earnings Growth
Michael Thompson Managing Director Valuation and Risk Strategies (1) 212-438-3480 michael_thompson@standardandpoors.com Robert Keiser Vice President Valuation and Risk Strategies (1) 212-438-3540 robert_keiser@standardandpoors.com Lisa Sanders Director Valuation and Risk Strategies (1) 212-438-3291 lisa_sanders@standardandpoors.com

Although less than two weeks old, the third-quarter earnings season is shaping up to be a repeat of the second quarter, already suggesting that reported earnings will not break the seven-quarter streak of double-digit earnings growth. Although they were likely inspired by market concerns of a double-dip recession in the U.S. and threats of contagion stemming from the eurozone debt crisis, analysts may have underestimated the earnings power of U.S. companies. The Valuation and Risk Strategies (VRS) research team continues to expect slow GDP growth in 2011. As we said in the previous issue of the Lookout Report, if third-quarter earnings exceed analyst expectations--as they have for the past two years--we think the case for growth over recession will solidify. Heading into the third quarter, the Capital IQ mean estimate for S&P 500 companies declined sharply, with growth forecasts dropping from 17% at the beginning of the calendar quarter to 12.8% on Oct. 10, the day before Alcoa Inc.'s earnings unofficially launched the reporting

The Lookout Report provides cross-market and cross-asset views based upon the unique combined capabilities of S&P Valuation and Risk Strategies, S&P Index Services, Capital IQ, and S&P Leveraged Commentary and Data. Published by S&P's Valuation and Risk Strategies research group, the Lookout Report is a compendium of current data and forward looking insights from leading S&P market specialists. Key areas of focus and differentiation include aggregated corporate earnings, market and credit risk evaluation, capital market activity, index investing and proprietary data and analytics. Featuring interpretations of the investing horizon, the report previews the issues most likely to drive market expectations or cause a disturbance in the weeks ahead.

season (see chart 1). But after a few days, the growth estimate rebounded to 14.6% on Oct. 20, as 67% of companies from eight of 10 sectors reported earnings that exceeded expectations. On July 1, analysts expected the beleaguered financials sector to report third-quarter earnings growth of 14.4%, but then lowered their expectation to 0.8% on Oct. 10. Through Oct. 20, analysts have increased their growth estimate to 6.9% for this sector as firms such as Citigroup Inc. and Morgan Stanley reported better-than-expected results. We observed a similar pattern in growth estimates during the second quarter. On April 18, analysts expected year-over-year growth of 13.8%, which dropped to 13% ahead of the reporting season. However, earnings for S&P 500 firms had grown 19.2% by the end of the quarter. In another positive sign, third-quarter revenue growth estimates for S&P 500 firms have climbed to 10.6% on Oct. 20 from 9.7% on Oct. 11. According to Capital IQ, if third-quarter revenue continues to increase at this pace, it would mark the seventh consecutive quarter of growth in excess of 9%. The last time this happened began in the first quarter of 2004 and lasted through the third quarter of 2006, an 11-quarter stretch.

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Chart 1

The equity market had reacted guardedly to these developments. The S&P 500 Index closed at 1,215.39 on Thursday, up 1.7% since the earnings season began. However, the index rallied toward its highest level since August, last at 1,235.19, intraday Friday (see chart 2). McDonald's Corp.'s shares rose nearly 3% and Honeywell International Inc. climbed more than 5% after both companies reported bullish third-quarter earnings on Friday.
Chart 2

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We think if firms continue to report better-than-expected results, the index could get a further boost. Over the next two weeks, as the majority of companies report, we will have an even better sense of what the third quarter will ultimately bring.

Inside This Issue:
Economic And Market Outlook: Earnings In North America And Europe
Since the beginning of peak earnings season on Oct. 18, several U.S. companies have reported results that exceeded expectations, boosting estimates for the quarter to 14.6%, a 2% increase in just a week. Amid the uncertainty in Europe, however, consensus estimates were significantly lower for the typically economically sensitive sectors, including energy, materials, industrials, consumer discretionary, and financials.

S&P Index Equity Commentary: Consistency In Reporting Is Paramount
Firms and investors use different earnings calculations to evaluate different aspects of a business. For S&P Indices and S&P Capital IQ, accuracy is paramount, but so is consistency. A methodological approach to reporting earnings gives investors insight and allows them to better utilize the information.

Leveraged Commentary And Data: As The LBO Market Sags, Higher Equity Contributions Become Standard
Because of the current conditions in leveraged finance, outsized equity contributions have become necessary to play in today's leveraged buyout (LBO) market. Indeed, among the three large-cap LBOs that private equity firms have struck since Labor Day, contribution capital accounts for no less than 40% of total sources.

R2P Corporate Bond Monitor
Since the beginning of October, risk-reward profiles--as measured by average Risk-to-Price (R2P) scores--affirm the slowly improving trend that began in September in most sectors. Excluding the financials, telecommunication services, and utilities sectors in the U.S., and the health care and materials sectors in Europe, scores have increased across the board.

Market Derived Signal Commentary: France's Vulnerability Fans CDS Market Fears
We think France's CDS will remain vulnerable to market volatility and ongoing news about the debt crisis. And as long as the threat of a ratings action remains, the spread is likely to remain elevated. We will continue to monitor the spread for significant moves in either direction, but we would not be long the CDS at this time.

Capital Market Commentary: Weak IPO Equity Performance Sends Chills Across The Market
Only two domestic company IPOs, priced on a major U.S. exchange and excluding real estate investment trusts, funds, and banks, managed to be completed since mid-August. The scant quantity of deals, along with the fact that a majority of this year's IPOs are trading lower than their offer price, is likely sending chills across the IPO market.

S&P Index Commodity Commentary: Backwardation Into The Future
Commodity prices have recovered along with other risk assets at this early stage of the new quarter, following sharp declines in September.

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Economic And Market Outlook: Earnings In North America And Europe
North America
What a difference a week makes. At this point a week ago, expectations for third-quarter earnings growth hit the lowest point of the quarter. After analysts cut nearly 5% since the beginning of the calendar quarter, investors had concerns that the seven-quarter double-digit earnings growth streak was coming to an end. Analysts' expectations were at 17% on July 1 but bottomed at 12.3% on Oct. 1. Since the beginning of peak earnings season on Oct. 18, several companies have reported results that exceeded expectations, boosting estimates for the quarter to 14.6%, a 2% increase in just a week (see chart 3).
Chart 3

The financials sector in particular was hit hard by cuts to earnings estimates. At the beginning of the calendar quarter (July 1), analysts expected 14.4% growth, and on Oct. 12, the forecast implied a year-over-year decline of 1.4%. Within the sector, analysts expected the capital markets and insurance industries to post the most significant declines from third-quarter 2010, down 21% and 11.5%, respectively. Earnings-per-share estimates for some of the biggest names in the capital markets and diversified financials services industries fell significantly since the beginning of the quarter, led by Goldman Sachs Group Inc. ($3.00 decrease), JPMorgan Chase & Co. ($0.29), Morgan Stanley ($0.20), Citigroup Inc. ($0.17), and Bank of America Corp. ($0.08). With the exception of Goldman Sachs, each of these banks beat the Capital IQ estimates and reported growth from the year-ago period. In fact, of the 20 companies with the biggest upside surprises, nine were in the financials sector. Chart 4 details the 10 financial companies with the largest surprise factors so far this earnings season.
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Chart 4

Similarly, financials sector companies have posted some of the most sizable year-over-year growth rates, helping boost the current expected growth rate for the sector to 6.9%. In chart 5, nine of the 15 companies with the largest year-over-year earnings growth rates at this point in the reporting season are financials.
Chart 5

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It's not just financials that are outperforming expectations; 67% of companies have beaten the Capital IQ mean estimate. The strongest sectors are consumer staples sector (82% beat), followed by industrials (79%), and information technology (70%). We note that no companies from the telecom and utilities sectors have topped expectations (see chart 6).
Chart 6

Not only are companies beating on the bottom line, but we are seeing particularly strong revenue growth, currently estimated at 10.6%. The fact that revenue growth is so close to earnings growth for the quarter suggests that cost cutting is not playing as much of a role in bottom-line growth this season. The same sectors that are leading earnings growth for the third quarter are also posting the strongest revenue increases (see chart 7).

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Chart 7

Although only 20% of companies have reported, the first week of peak earnings season has delivered some positive news and helped boost equity markets. We should clarify our earnings picture by the end of next week, as 187 companies are scheduled to report results, bringing the total to 63%.

Europe
As the European debt crisis remains unresolved, Standard & Poor's Ratings Services, among other major credit rating agencies, recently took rating actions on certain sovereigns within the eurozone. After downgrading Italy in September, Standard & Poor's lowered its long-term sovereign credit rating on Spain to 'AA-' from 'AA' last week. These downgrades, combined with Monday's statement from German officials that European leaders would not fix the debt crisis by the Oct. 23 deadline, added to concern about economic growth in Europe. Over the past two weeks ended Oct. 14, analysts continued to lower their consensus calendar-year 2011 earnings expectations for the S&P Europe 350 Index from €100.17 to €99.40, a 0.8% drop and to the lowest level since the start of the third quarter, according to Capital IQ data aggregated by VRS Research (see chart 8). Amid the uncertainty, the consensus estimates were significantly lower for the typically economically sensitive sectors, including energy, materials, industrials, consumer discretionary, and financials. Over the past two weeks, the S&P Europe 350 energy sector has overtaken the consumer discretionary sector in terms of earnings growth expectations in 2011. Earnings growth for the energy sector has been approaching that of the materials sector. These two sectors also led earnings growth among the 10 sectors of the S&P 500 Index in the third quarter, and the VRS team expects these two sectors to remain top performers for the fourth quarter (see "Lookout Report: Could The Fourth Quarter Be "Déjà Vu All Over Again" For Stocks?," published Oct. 7, 2011, on the Global Credit Portal). Higher earnings growth for these two sectors might mean that despite recently decreasing commodity prices, analysts currently
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view commodity-focused businesses as more profitable amid economic uncertainty compared with other businesses.
Chart 8

Contact Information: Christine Short, Senior Manager—Valuation and Risk Strategies, Christine_Short@standardandpoors.com Victoria Chernykh, Director—Valuation and Risk Strategies, Victoria_Chernykh@standardandpoors.com

S&P Index Equity Commentary: Consistency In Reporting Is Paramount
At one point in time, Henry Ford was able to produce only black cars, but that didn't last long. And at one point in time, firms only dealt with earnings--not "operating," not "as reported," not "core," not "normalized," not "EBITDA"--just earnings. Those days are gone. Now, firms and investors use different earnings calculations to evaluate different aspects of a business. For S&P Indices and S&P Capital IQ, accuracy is paramount, but so is consistency. A methodological approach to reporting earnings gives investors insight and allows them to better utilize the information. As a builder selects and cuts his timber to specifications when building a house, investors can appraise specific earnings details to determine how much weight they hold and if the firm is worthy of being added to a portfolio. Although we provide our own interpretations, evaluations, and--at times--projections, how investors evaluate earnings is ultimately up to investors. Several large financial houses, such as Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., and Morgan Stanley utilize a credit valuation adjustment (CVA) and a debit valuation adjustment (DVA), which in their case added a few billion dollars to their net income. These are legitimate entries, and these companies have released full documents explaining the items. At S&P Indices, we include these items as "as reported GAAP earnings" because that is the

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requirement as set forth by GAAP. We are not, nor do we wish to be, the accountant. Both valuation adjustments are typical for companies making loans or dealing in securities and, as such, are a risk and cost of doing business in their industry. Therefore, they are considered part of regular operations. As a result, S&P Indices makes no adjustment to earnings for these items in operating earnings. We will continue to review earnings data, with help from public releases and S.E.C. filings to insure proper treatment. While companies may properly argue for inclusion of certain items (and we do not expect the banks to argue with treatment to include the items), and more commonly argue to exclude certain costs or charges, we look to our rule-based determinant, which is principle based. The question of what is and is not normal or part of a typical ongoing operation is extremely complex, which is why we strive to adhere to methodology. Consistency with methodology and transparency helps investors make informed decisions. But we realize that some analysts may deviate from our number. Contact Information: Howard Silverblatt, Senior Index Analyst—S&P Indices, Howard_Silverblatt@standardandpoors.com

Leveraged Commentary And Data: As The LBO Market Sags, Higher Equity Contributions Become Standard
Because of the current conditions in leveraged finance, outsized equity contributions have become necessary to play in today's leveraged buyout (LBO) market. Indeed, among the three large-cap LBOs that private equity firms have struck since Labor Day, contribution capital accounts for no less than 40% of total sources.

Pharmaceutical Product Development (45% equity contribution)
LCD News recently reported on the terms of the deal backing Carlyle and Hellman & Friedman's $3.9 billion take-private buyout.

99 Cents Only Stores (45%, equity as a percent of total debt and contributed capital)
Sources for Ares and CCP's $1.6 billion public-to-private acquisition of the discount retailer are $775 million of funded debt, $636 million of sponsor capital, and roughly $90 million of rollover equity. (What constitutes the remaining $100 million is unclear.)

OpenLink Financial (42%, according to market sources)
This is a sponsor-to-sponsor deal in which Hellman & Friedman is buying the financial software company from Carlyle. Although no public data are available, LCD News reported that sponsor equity, pro forma for the acquisition, will be 42%, or $434 million. Downmarket, equity contributions have gapped out even more. Since Labor Day, LCD News has reported on two middle-market LBOs--Welsh Carson's acquisition of Triple Point Technology and Warburg Pincus' LBO of Total Safety–-both of which are capitalized at 50%, give or take. These and other LCD News stories are available on www.lcdcomps.com. Today's higher capital contributions are hardly surprising. The gap between the purchase multiple demanded by sellers and the leverage ratio lenders are willing to finance typically widens when the credit markets wobble, as they have lately (see chart 9).

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Chart 9

Given the right deal, private equity firms will kick in enough equity to bridge the divide in hopes of later re-leveraging the balance sheet when credit conditions improve. Certainly, that proved a winning strategy in 2009, when the credit markets were burning and the average equity contribution among the large-corporate LBO class rose to a record 46% (see chart 10). Since then, sponsors have extracted a dividend equal to 51% of their original capital contributions on seven of the 23 deals in 2009.

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Chart 10

The 2009 experience demonstrates, yet again, that the best deals tend to be executed in the worst times--and vice versa. That's the good news for private equity firms buying properties today. The bad news, though, is equally axiomatic: when equity contributions balloon, deal flow sags. Of course, sponsors could be under more pressure to put money to work than they were in 2009. According to a Bain estimate, sponsors had $434 billion of dry powder on a global basis at the end of 2010 (see chart 11). With no LBO boom since that time, the ticking of the clock can only grow louder.

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Chart 11

All of these data show why most players expect buyout activity to remain limited (and lightly leveraged) until the leveraged finance market is able to shake off its recent slump. Contact Information: Steve Miller, Managing Director—Leveraged Commentary & Data, Steven_Miller@standardandpoors.com

R2P Corporate Bond Monitor
The political and economic crisis in Europe has raised concerns that the eurozone, established a decade ago, could be broken up by the departure of one or more members. Over the past 18 months, eurozone leaders have repeatedly met to try to find solutions to the debt problem, but have disappointed financial markets. Investors continue to watch developments in Europe closely, and hope European leaders will produce a clear plan to tackle the sovereign debt crisis that began in Greece and now threatens to drag down Italy, Spain, and even France. In the U.S., new data on the economy turned out to be encouraging. Housing starts jumped 15% to a 658,000 annual rate, the most since April 2010. In addition, Federal Reserve Bank of Atlanta president Dennis Lockhart said he does not expect a double-dip recession. He believes the U.S. economy will grow modestly and inflation will fall to a "healthy level" of about 2%. However, Lockhart also believes unemployment will decline very slowly, as the U.S. economy has been weaker than expected. Initial results from the U.S. third-quarter reporting season, similar to the previous quarter, once again indicate double-digit earnings growth. So far, 136 companies (27%) of the S&P 500 Index reported their third-quarter earnings, and 91 (67%)

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beat expectations. Since the beginning of October, risk-reward profiles--as measured by average Risk-to-Price (R2P) scores--affirm the slowly improving trend that began in September in most sectors (see tables 1 and 2). With the exception of the financials, telecommunication services, and utilities sectors in the U.S., and the health care and materials sectors in Europe, scores have increased across the board, with average option-adjusted spreads (OAS) steadily reflecting a decrease in market and credit risks in October. In the U.S., a 7% decrease in average probability of default (PD) and a 5 basis point (bps) increase in the OAS contributed to the gain in the average score, offsetting a more than 15% jump in bond price volatility. In Europe, the scores increased as bond price volatility fell 5% and more than offset a 14% rise in the average PD.
Table 1

North American Risk-Reward Profiles By Sector--Average R2P Score And Components Changes
Consumer discretionary Consumer staples Energy Financials Health care Industrials Information technology Materials Telecommunication services Utilities
Change as of Oct. 18, 2011, from Sept. 30, 2011.

Scores (%) 3 7 11 (3) 3 0 7 5 (8) (3)

OAS (bps) 2 12 2 13 (26) 11 8 22 (5) 13

PD (%) (12) (22) (12) (4) (36) (19) (1) 3 12 21

Bond price vol. (%) 23 0 22 18 7 12 3 19 38 6

Table 2

European Risk-Reward Profiles By Sector--Average R2P Score And Components Changes
Consumer discretionary Consumer staples Energy Financials Health care Industrials Information technology Materials Telecommunication services Utilities
Change as of Oct. 18, 2011, from Sept. 30, 2011.

Scores (%) 4 2 9 5 (12) 5 7 (3) 2 14

OAS (bps) 26 (2) (5) 11 (3) 4 (17) (3) (12) (2)

PD (%) (4) 2 45 (1) 33 (4) 41 18 2 4

Bond price vol. (%) 19 1 (7) (10) 3 (10) (31) (3) 3 (12)

Contact Information: Fabrice Jaudi, Senior Director—Valuation and Risk Strategies, Fabrice_Jaudi@standardandpoors.com

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Market Derived Signal Commentary: France's Vulnerability Fans CDS Market Fears
A major credit rating agency warned that France's declining economy and costs related to the eurozone debt crisis may lead to an outlook revision for the sovereign's top rating, Reuters reported Tuesday. A lowered outlook would signify a potential downgrade in the next two years. After this news, the country's five-year credit default swap (CDS) spread widened immediately to 185 basis points (bps) from 181 bps but it has since narrowed to 182 bps, according to CMA DataVision. However, ahead of the report, the CDS reached an all-time high of 193 bps on Sept. 23, and we think the credit market might have already had concerns about the potential for such an event. Year to date through Oct. 19, the spread has widened 70% (see chart 12). France, the second-largest economy in the eurozone, has been instrumental in trying to resolve the debt crisis, hoping to stave off a Greek default that would exacerbate the region's ballooning financial problems. But bailouts of other eurozone countries have weighed heavily on France's budget. In addition, French banks have heavy exposure to Greek debt. On Oct. 14, 2011, Standard & Poor's Ratings Services lowered its Banking Industry Country Risk Assessment (BICRA) on France to 'Group 2' from 'Group 1' and the economic risk score to '2' from '1'. BICRA rankings reflect the strengths and weaknesses of a country's banking system relative to other countries, with 'Group 1' the strongest on the scale out of 10 groups. Since June 25, 1975, Standard & Poor's has had a 'AAA' rating on France with a stable outlook. "The BICRA change reflects our revised view of several factors: rising economic risk in France since we lowered our forecasts for French economic growth, more difficult funding conditions for banks that illustrate greater vulnerability to capital flows than we had anticipated, and still rising housing prices that might create a potential market imbalance," Standard & Poor's said (see "BICRA On France Revised To Group 2 From Group 1 On Higher Funding Constraints And Rising Housing Prices," published Oct. 14, 2011, on the Global Credit Portal). "BICRA action also takes into account that the largest banks have to rebalance their funding profiles and build higher capital ratios to deal with new regulation and capital market pressure. This will likely constrain asset and revenue growth, and could exacerbate competition to attract customer deposits." Standard & Poor's economic risk score of '2', down from '1' (1 being the strongest and 10 the weakest), places the country in a weaker position than Germany, in line with Japan, and stronger than the U.S. "Our lowered economic risk score reflects our view of greater than we had anticipated vulnerability to capital flows coming from the large balance sheets of French banks." French banks are not likely to see across-the-board ratings cuts as a result of the change in the BICRA score, but the lower score could contribute to revisions "on a case-by-case basis." Over the past year, France's CDS spread has consistently traded wide of its credit rating benchmark. It is in line with its Market Derived Signal (MDS) rating of 'bbb+', seven notches lower than the credit rating.

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Chart 12

We also note that the MDS rating on France has not been 'aaa' since April 14, 2010.

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Chart 13

France's CDS is also wide of 'AAA' rated eurozone peers Germany and the Netherlands and the lower-rated U.S. (AA+/Negative) (see chart 14).

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Chart 14

We think France's CDS will remain vulnerable to market volatility and ongoing news about the debt crisis. And as long as the threat of a ratings action remains, the spread is likely to remain elevated. We will continue to monitor the spread for significant moves in either direction, but we would not be long the CDS at this time. Contact Information: Lisa Sanders, Director, Research—Valuation and Risk Strategies, Lisa_Sanders@standardandpoors.com

Capital Market Commentary: Weak IPO Equity Performance Sends Chills Across The Market
IPOs
Only two domestic company IPOs, priced on a major U.S. exchange and excluding real estate investment trusts, funds, and banks, managed to be completed since mid-August. Medical device company Zeltiq Associates priced seven million shares at an offering price of $13 each on the heels of a $105.6 million offering by communications equipment company Ubiquiti Networks on Oct. 13. So far this month, only 10 U.S. companies have filed plans to raise capital through an IPO. That compares to 21 such filings in the prior month. The scant quantity of deals, along with the fact that a majority of this year's IPOs are trading lower than their offer price, is likely sending chills across the IPO market (see tables 3 and 4).

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Table 3

IPOs In U.S.--Market Leaders 2011
--Share price-Closed date 5/18/2011 2/4/2011 4/7/2011 4/19/2011 7/26/2011 7/26/2011 3/31/2011 1/19/2011 8/10/2011 6/8/2011 Target/Issuer LinkedIn Corp. Endocyte Inc. CVR Partners L.P. Sagent Pharmaceuticals, Inc. Tangoe Inc. Dunkin' Brands Group, Inc. GNC Holdings Inc. Wolverine Bancorp Inc. Carbonite Inc. Fusion-io Inc. Total transaction value (mil. $) 352.8 75.0 307.2 92.0 87.7 422.8 360.0 25.1 62.5 233.7 Opening ($) 45 6 16 16 10 19 16 10 10 19 Close ($)* 87.13 11.15 24.33 23.95 14.53 27.60 22.46 14.01 13.56 25.45 Change (%) 93.6 85.8 52.1 49.7 45.3 45.3 40.4 40.1 35.6 33.9

*Data as of Oct. 19, 2011. Source: S&P Capital IQ.

Table 4

IPOs In U.S.--Market Laggards 2011
--Share price-Closed date 5/10/2011 2/7/2011 2/10/2011 1/24/2011 1/25/2011 5/4/2011 2/2/2011 5/11/2011 5/4/2011 1/28/2011 Target/Issuer FriendFinder Networks Inc. Imperial Holdings Inc. Kips Bay Medical Inc. Tibet Pharmaceuticals Inc. Demand Media Inc. NetQin Mobile Inc. Trunkbow International Holdings Ltd. Phoenix New Media Ltd. Renren Inc. BCD Semiconductor Manufacturing Ltd. Total transaction value (mil. $) 50.0 179.2 16.5 16.5 151.3 89.1 20.0 140.4 743.4 63.0 Opening ($) 10.0 10.8 8.0 5.5 17.0 11.5 5.0 11.0 14.0 10.5 Close ($)* 1.80 1.98 1.69 1.22 5.62 4.47 2.00 4.42 5.66 4.65 Change (%) (82.0) (81.6) (78.9) (77.8) (66.9) (61.1) (60.0) (59.8) (59.6) (55.7)

*Data as of Oct. 19, 2011. Source: Capital IQ.

M&A
Following the announcement that Norwegian energy concern Statoil agreed to acquire Texas-based Brigham Energy for $4.88 billion, reports of the demise of foreign acquisitions in the U.S. market may be exaggerated if the pace of cross-border deals accelerates (see table 5). Already this year, the volume of foreign purchases of U.S. energy operations has exceeded $35 billion, the busiest pace of such transactions since 1998, when foreign energy acquisitions in the U.S. topped $58 billion. Furthermore, foreign purchases in the U.S. year to date now top $140.8 billion, exceeding 2010's full-year total of $131.7 billion. The energy and financials sectors accounted for about $72 billion of deal activity to date, according to data retrieved from S&P Capital IQ. To that end, some foreign companies hard pressed to cultivate growth at home appear to be going abroad to acquire growth through U.S. assets.

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Table 5

Largest Foreign Acquisitions In U.S. 2011
Announced date 7/14/2011 2/15/2011 2/6/2011 7/12/2011 10/17/2011 6/13/2011 7/12/2011 3/7/2011 4/28/2011 1/17/2011 Target/Issuer Buyers/Investors Petrohawk Energy Corp. BHP Billiton Ltd. NYSE Euronext Inc. Pride International Inc. Kinetic Concepts Inc. Brigham Exploration Graham Packaging Company Inc. Transatlantic Holdings Inc. CaridianBCT Inc. SunPower Corp. General Growth Properties Inc. Deutsche Boerse AG Ensco PLC Apax Partners Worldwide LLP; CPP Investment Board; Public Sector Pension Investment Board Statoil ASA Reynolds Group Holdings Ltd. Validus Holdings Ltd. Terumo Corp. Total Gas & Power USA S.A.S Brookfield Asset Management Inc. Location Asia-Pacific developed markets European developed markets European developed markets European developed markets European developed markets Asia-Pacific developed markets Caribbean Asia-Pacific developed markets European developed markets Canada Total transaction value (mil. $) 15753.6 12657.2 9219.5 6291.6 4882.1 4590.3 4482.9 2625 2249.2 1700.6

Source: S&P Capital IQ.

Debt
The prospects on an accelerating corporate debt calendar appear to be justified based on the latest statistics on security identifier requests. According to information provided by CUSIP Global Services, the most recent data for CUSIP requests show that domestic corporate debt identifier orders through mid-October are trending at the highest monthly count this year. Specifically, if the 580 orders already tallied through Oct. 14 are extrapolated for the balance of the month, then the month could end with more than 1,100 requests. That would mark a 2011 high water mark for CUSIP requests for this asset class (see chart 15).

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Chart 15

Contact Information: Richard Peterson, Director, Research—Valuation and Risk Strategies, Richard_Peterson@standardandpoors.com

S&P Index Commodity Commentary: Backwardation Into The Futures
Along with most other risk assets, commodities continued to recover in the third week of the fourth quarter, as measured by the 5.80% month-to-date increase in the S&P GSCI Index as of Oct. 20. To the chagrin of cash-strapped consumers, energy prices have been the biggest driver of the S&P GSCI, with the S&P GSCI Energy Index up 7.80% month to date. There were few positive signs of economic recovery. The industrial metals continued to be one of the weakest sectors in October, as measured by the month-to-date decline of 3.75% in the S&P GSCI Industrial Metals Index. Reflecting concerns of tightening supply-demand conditions, there continued to be steady movement in the petroleum futures term structures away from contango in the case of WTI crude oil, and steeper into backwardation in the case of Brent crude. Contango (when longer-dated futures contracts trade at higher prices to near-term contracts) is the more common condition in futures markets due to storage costs. Backwardation is the opposite of contango and is often the result of tight supply-demand conditions and generally synonymous with bull markets. WTI crude oil and Brent crude are the two largest constituents in the S&P GSCI. From Oct. 20, 2010, to Oct. 20, 2011, the spot WTI crude oil price increased 4.3%, and the spread between the front-month futures contract to the one-year-out contract month has declined from a contango of $4.68 per barrel to $2.22 per barrel. Over the same time period, the spot price of Brent crude has increased 31.3%, and the one-year term structure has moved from a contango position of $3.73 per barrel to backwardation of $7.39 per barrel. This trend toward backwardation positively affects commodity index total returns, as contango has a tendency to reduce total index returns.
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A simple way to measure the broad market relative movement in futures term structures is to compare the performance of the base S&P GSCI to the S&P GSCI Three-Month Forward Index. The S&P GSCI Three-Month Forward Index reflects an investment in the same futures contract months as the base S&P GSCI, but three months in the future. Since the end of the first half of 2011, the S&P GSCI has declined 6.57%, compared with a drop of 8.08% for the S&P GSCI Three-Month Forward Index, indicating the trend toward backwardation in the futures curve term structures. Chart 16 depicts the performance of the S&P GSCI and the S&P GSCI Three-Month Forward Index, along with a measure of their relative performance. Since about mid-May of 2010, the S&P GSCI Three-Month Forward Index's return has been about the same as the base S&P GSCI, reflecting the trend in futures curves toward backwardation.
Chart 16

Contact Information: Mike McGlone, Senior Director, Commodities—S&P Indices, Mike_McGlone@standardandpoors.com

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