UBS Investment Research

Morning Expresso - United States

Monday 26 July 2010

Global Equity Research

Americas

Equity Strategy

Market Comment

26 July 2010

www.ubs.com/investmentresearch

U.S. Equity Product Management

212-713-2400

Morning Expresso

This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 22. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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Morning Expresso - United States 26 July 2010

UBS 2

Morning Meeting Agenda Wal-Mart Rating: Buy Target: US$60.00 Price: US$51.67 RIC: WMT.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$195bn BBG: WMT US

Retailers, Broadline Analyst: Neil Currie Tel: +1-203-719 3070

Back to the Future for Wal-Mart Rapid transformation…to what WMT used to look like In a meeting with the company’s US buying team, we believe that senior WMT executives

indicated a virtual U-turn in merchandising and pricing strategy. The company hopes to return to the Wal-Mart of three years ago in terms of assortment and rollback activity. Much of this has already been highlighted in recent UBS reports, but we believe the intended changes will take place by the end of August

Recent deep rollbacks, not the required return, but a start We believe recent deep rollbacks, heavily funded by the company, did not achieve intended targets but helped to kick-start Wal-Mart’s intention to improve its diminished price perception. Future rollbacks, like those of three years ago, will be more broad-based and feature key traffic drivers.

Better balance between sales and returns in prospect While Wal-Mart is set to revert to type as far as consumers and vendors are concerned (a good thing, we think) we believe it will retain many successful behind-the-scenes elements of Project Impact and continue to push productivity and structural inventory programs. This should provide a better balance between ROI and top line performance.

Valuation: Maintain Buy. Conference call Monday Our price target is based on a target P/E ratio of 14x our calendar 2011 EPS estimate. Along with our Staples Team, we will host a conference call at 2pm on Monday July 26 to discuss. Toll Free: 800-920-2905, Toll: 212-231-2928, Code: 21477437.

Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$51.67 on 23 Jul 2010 19:36 EST

UBS Consumer Staples

Consumer, Non-Cyclical Analyst: Nik Modi Tel: +1-212-713 2204

Bentonville Moving Fast Change at Walmart = Positive for Consumer Staples Vendors As we indicated in our inaugural report on the implications of recent management

changes at Walmart for consumer staples companies, we believe the mega retailer is likely to pursue a more vendor-friendly philosophy going forward. This will mean: 1) rapid re-implementation of action alley (key for the many impulse categories in CPG), 2) no more surprise/deep rollbacks, and 3) more collaboration between Walmart’s buyers and the vendor community. This should lead to better visibility/profitability for CPG vendors.

Field Work Uncovering Confirming Data Points By the Day Walmart is moving fast. We have picked up 3 incremental data points since our last report: 1) the rollbacks did not meet Walmart’s internal return thresholds, 2) Walmart seems focused on moving back to a pre-Project Impact merchandising philosophy in very short order and 3) Walmart’s buyer community has been directed to “collaborate/listen/partner” with the vendor community—a reversal of the adversarial relationship that become the norm over the past 2 years.

Uniform Positive for Staples…with a Few Real Stand Outs We believe all staples companies will benefit from these changes, with a few companies poised to experience material, “needle moving” impact. We believe affected companies fall into one or more of the following categories: Companies that (1) were affected by the roll back initiative, (2) will benefit from SKU re-stocking, and/or (3) have significant leverage to Walmart (% of sales). These companies, in order of importance, are: 1) Energizer, 2) Clorox, 3) Cott, 4) ConAgra, and 5) PepsiCo. Details by company are in the body of this report.

Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 26 July 2010

US Economic Perspectives

Economist: Maury N. Harris Tel: +1-212-713 2472

Bottom Fishing Fishing for a Red Herring? Neither recent data nor expected future inflation measures signal price deflation. Temporary factors that have helped limit

inflation over the last few months have begun to abate, suggesting that the medium-term bias is toward modestly higher inflation. Overall, the evidence points toward very little inflation – but not deflation – this year, followed by a gradual rise in inflation over the next few years.

The past week: public policymakers vs. business world Fed Chair Bernanke’s semiannual Monetary Policy Report to Congress testimony communicated Fed policymakers’ “unusually uncertain” economic outlook. And the recent behavior of Congress itself also has not inspired confidence in sustained economic recovery. On the other hand, the private sector’s behavior is becoming firmer ground for such confidence. Q2 corporate earnings reports so far have been generally better than expected. For smaller firms, a hopeful sign is the apparent Q2 turnaround in business lending at smaller banks.

The week ahead The market’s focus is likely to be on the Q2 GDP report due out on Friday, as concerns about a “double dip” and deflation continue to hold markets captive. We expect a modest slowing in Q2 growth relative to Q1 but look for a modest acceleration in final demand. The Fed’s Beige Book report of regional business conditions in early Q3 should provide some economic insight ahead of the upcoming July ISM and jobs reports in the first week of August. We will scrutinize Q2 housing vacancy data to determine how much vacant supplies for sale were trimmed by the expiring homebuyer tax credits.

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Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 23 July 2010

Morning Expresso - United States 26 July 2010

UBS 3

US Equity Strategy

Strategist: Jonathan Golub, CFA Tel: +1-212-713 8673

Great Results! Stealth Tightening? Another quarter of strong results Despite rising concerns coming into 2Q reports, companies are handily beating consensus estimates and posting

robust growth. Cyclicals have upsided expectations by 10% on the back of 17% top-line and 72% bottom-line growth. Financials produced biggest surprises on lower credit losses Financials have missed top-line expectations due to lower trading volumes, tighter

spreads, and tough investment banking comps. However, the sector has beaten bottom-line estimates by 27%, largely due to lower credit losses at the biggest banks. Management commentary points to a continuation of each of these trends over the remainder of the year.

The key 2Q takeaway — big banks are reinforcing capital positions While results have been better than expected, the biggest takeaway from this earnings season has been comments from big bank CEOs and CFOs regarding their capital positions. More specifically, they describe actions taken to further shore up their balance sheets — guarding against uncertainties surrounding the recently passed Dodd-Frank Act and new Basel capital standards. These actions should lower bank ROEs, and may act as ‘Stealth Tightening’ for the broader economy — similar in many ways to additional Fed tightening.

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Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 26 July 2010

Morning Expresso - United States 26 July 2010

UBS 4

MACRO AND STRATEGY RESEARCH Weekly Weight Watcher

Economist: Larry Hatheway Tel: +44-20-7568 4053

Why are spreads tight and ERPs high? Credit fundamentals still look supportive Corporate credit fundamentals remain favourable. Lower leverage, higher interest cover, robust

profitability, and falling default rates all make for a supportive environment. Arguably, corporate discipline and strong earnings are not fully reflected in credit prices, especially in high-yield spreads.

But what about equity-credit relative valuations? Still, investment-grade credit spreads have tightened while equity risk premiums (ERPs) remain elevated. Credit and equity valuations, in other words, have moved apart. Does this mean that equities will out-perform credit? Our work suggests the answer is yes, but perhaps not for some time. As we show, relative risk premiums matter for relative returns, but the relationship is not stable and, unfortunately, appears to work only over long time horizons. In short, just because equities look cheap today relative to credit does not suggest near-term out-performance.

Reconciling the conundrum The impact of leverage and corporate behaviour can help square the puzzle of prolonged equity-credit risk premium divergence. During the late 1990s, for example, corporate leverage boosted RoE and equity returns, and also increased equity volatility. Risk was effectively transferred to bondholders and, predictably, credit spreads widened. Risk premiums can diverge if corporate behaviour is designed to disproportionately reward equity holders versus bondholders (or vice versa, as has been the case over much of the past decade). Nevertheless, a large and growing gap between equity and credit valuations suggests that at some point investors and corporate managers, alike, may opt to exploit the opportunity posed by apparent differences in the return on capital. The timing of that shift is probably dictated by an improvement in confidence regarding the macroeconomic outlook.

Unchanged allocations That will take time. So, for now, we retain unchanged allocations in our model portfolio. We remain moderately overweight equities, with a regional preference for the US, Japan, and Asia. We also retain an overweight recommendation to US high-yield credit, as well as to soft commodities and precious metals. Our underweight recommendations remain in nominal and inflation-linked government bonds and cash.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 23 July 2010

UBS Client Flow Watch

Strategist: Thomas M. Doerflinger, Ph.D. Tel: +1-212-713 2540

Even more net buying of US equities US Client Flow: Highest net buying in 22 weeks US clients continued net buying US equities for a seventh straight week. The buying was broad-

based, with only intermediaries net selling. Hedge funds continued the net buying begun in the last four-week period. Sector details: Broad-based increases in net buying Both US clients and foreign clients were net buyers of most US sectors. US clients increased

their net buying of financials, media, and telecoms and went from being net sellers to net buyers of consumer. Only healthcare and industrials were net sold by US clients. Foreign clients increased their net buying of most sectors, with only telecoms seeing net selling.

Foreign Client Flow: Only corporate clients are net selling Foreign clients also continued net buying US equities for a seventh straight week. Both long only funds and intermediaries increased their net buying of US equities. Only corporate clients were net sellers.

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Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 23 July 2010

US Daily Economic Comment

Economist: Maury N. Harris Tel: +1-212-713 2472

Housing data on tap Preview: UBSe: New Home Sales: 260k New home sales likely fell sharply again in June after plunging 32.7% in May. Other June housing-related

data were weak. These include declines in mortgage applications, homebuilder sentiment, existing home sales, and housing starts. The sharp declines in May and June housing-related data represent payback for demand that was pulled forward by housing tax credits. Looking beyond this period of volatility, the outlook for housing will depend importantly on jobs. We continue to expect a strengthening labor market to provide support to sales later this year.

European bank stress test results Only seven of ninety-one European banks “failed” their stress tests, according to the Committee of European Bank Supervisors report released at noon (EST) after the close of European financial markets. The aggregate capital shortfall among banks was just EUR3.4 billion. (In contrast, the US stress tests last year resulted in ten US banks raising around $75 billion.) The US equities markets initially rallied in the afternoon, although it was hard to disentangle the effects of the European bank stress test results from domestic corporate developments.

The week ahead The market’s focus is likely to be on the Q2 GDP report due out on Friday, as concerns about a “double-dip” and deflation continue to hold markets captive. We expect a modest slowing in Q2 growth relative to Q1 but look for a modest acceleration in final demand. The Fed’s Beige Book report of regional business conditions in early Q3 should provide some economic insight ahead of the upcoming July ISM and jobs reports in the first week of August. We will scrutinize Q2 housing vacancy data to determine how much vacant supplies for sale were trimmed by the expiring homebuyer tax credits.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 23 July 2010

Morning Expresso - United States 26 July 2010

UBS 5

GLOBAL SECTOR RESEARCH Global Banks Reality Check

Banks Analyst: Philip Finch Tel: +44-20-7568 3456

Post stress test European banking stress From a global banks perspective, we view the European banking stress test as a missed opportunity to raise large-scale

capital needed to help address structural challenges in the sector. While the stress test showed impressive regulatory co-ordination and good disclosure, we question whether the framework was sufficiently robust, raising some concerns over its credibility.

Regulatory reforms With global rules under Basel III likely to be pushed out, what matters today are local regulations, which clearly vary from country to country, raising the prospect of an uneven regulatory playing field. While the new US financial sector legislation is a clear risk to industry earnings power, in our view, the regulatory framework elsewhere (i.e., Asia and Canada) is likely to remain stable and supportive.

Fundamental outlook With the second-quarter reporting season underway, we outline the following sector fundamental trends that we expect in the second half of this year: (1) top-line pressure; (2) peaking provisions; (3) capital markets headwinds; (4) increased capital-raisings; and (5) potential sector consolidation.

Investment strategy Strategically, we maintain our underweight stance in Europe in light of structural headwinds, and prefer banks in emerging markets and Canada, which are better capitalised with strong deposit platforms and superior growth prospects. Reflecting this, our preferred list includes HSBC, Scotiabank, Akbank, Sberbank, Banco do Brasil and Punjab National Bank.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 25 July 2010

UBS Global I/O: Semiconductors

Semiconductors Analyst: Gareth Jenkins Tel: +44-20-7567 3950

Microsoft licensing ARM IP Input: Microsoft signs architectural licensing agreement with ARM Microsoft signed a multi-year architectural licensing agreement with ARM

(which provides processor designs to semi manufacturers). Disclosure has been limited and although both have worked together since 1997, it is clear to us that this deal signals closer collaboration and potentially Microsoft working on processor design.

Output: Impact to ARM – US$10m to EBIT for each 10% market share Working off ARM’s estimate for the computing segment in 2014 of 500m units (growing from 30m in ’09), we estimate that every 10% market share ARM gains in the applications processor would contribute $10m in royalty revenues (US$15-20 chip ASP and 1-2% royalty rate) that flows straight through to EBIT (c.100% gross margin). We also believe ARM is likely to earn c.$0.20 per unit from peripheral chips representing a US$100m opportunity in a 500m unit market.

Output: Impact to Microsoft –rational for such a license We believe this is a response from Microsoft to the growth being seen in Apple/Linux based tablets, and could be a response to the success Apple had in developing it’s own A4 processor (also ARM-based).

Output: Impact to Intel – we see no impact as it’s a new market If MSFT is working on its own chip, we see no impact to the established app processor suppliers. In the future, much will depend on product positioning and investment in a roadmap, which is non trivial. We do not think this deal will imply the use of ARM processors with the mainstream Windows OS in PCs; instead we see the potential in addressing a new market and so doesn’t impact AMD and Intel.

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Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 26 July 2010

Morning Expresso - United States 26 July 2010

UBS 6

BASIC MATERIALS Kimberly-Clark Rating: Buy Target: US$74.00 Price: US$63.64 RIC: KMB.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$26.5bn BBG: KMB US

Household Products, Non-Durable Analyst: Gail S. Glazerman, CFA Tel: +1 212 713 3486

Some optimism heading into second half 2Q EPS of $1.20 vs $0.97 in 2Q09 and consensus $1.13 KMB earned $1.20/share in 2Q10, up from $0.97 last year and $1.14 in 1Q10. Our estimate

was $1.15 and consensus was $1.13. Segment EBIT was lower than we expected with weaker Personal Care and Health Care only partially offset by higher Consumer Tissue/KC Pro EBIT. Corporate items were lower than we expected. Lower tax rate also helped 2Q. The comps were easy as 2Q09 absorbed $0.19 hit from severance costs and 1Q10 saw $0.05 non-recurring tax items.

Improving outlook…holding guidance KMB has absorbed $305mm inflation ytd and expects $700-800 mm inflation in 2010. But pulp costs are falling, and should be lower in 2011. KMB sees potential for stronger volume in 2H10 vs 1H. There is some price recovery still coming through and management hopes to hold prices despite falling input costs. While KMB tweaked budget assumptions a bit they continue to forecast 2010 EPS $4.80-5.00. They still see risk that EPS will fall towards the lower end of this range.

A bit obscured by inflation, but delivering KMB is posting good results with new products (double digit growth in fem care & adult incontinence). Chinese personal care volumes rose 25% y/y in 2Q. Lower 2010 volume guidance is mainly due to unique issues in Venezuela rather than slower market growth.

Valuation Our price target is $74 which assumes the shares trade at 14x our 2011 EPS estimate. This reflects a modest discount to historic trend given macro uncertainty.

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Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$63.64 on 23 Jul 2010 17:42 EDT

U.S. Paper & Forest Products

Paper Products Analyst: Gail S. Glazerman, CFA Tel: +1 212 713 3486

July paper and board price update General upward momentum continues Overall paper and paperboard pricing trends were stable to positive in July. The coated paper grades and

uncoated groundwood finally gained some traction (+3-7% m/m). Newsprint pricing continues to edge up (11th consecutive increase). Bleached board added to recent gains (+3.5% in July). Containerboard was steady ahead of the August price initiative. Uncoated free was stable after realizing at least 75% of the broad-based May hike.

Containerboard, bleached board and uncoated free still have best trends While containerboard and uncoated free prices were flat in July, they have seen some of the strongest price performance during the downturn and subsequent recovery. Uncoated free, containerboard and bleached board prices have rebounded to levels above prior peak. This has been supported by capacity closures (5-7% of each grade) and low inventories. In contrast, even after recent gains, coated paper and newsprint are still 14-20% below prior peaks.

Next month’s decision on containerboard is key Pulp & Paper Week pricing decisions are most significant for containerboard since the majority of box prices are indexed off the newsletter’s reported pricing. We expect August pricing to be out the weekend of Aug 20th. Given high utilization, very low inventories and expectation for seasonally stronger demand ahead of the holidays, we expect at least partial recognition. Containerboard remains our preferred paper/board grade and International Paper our top pick.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 25 July 2010

Morning Expresso - United States 26 July 2010

UBS 7

COMMUNICATION Verizon Rating: Neutral Target: US$28.00 Price: US$28.02 RIC: VZ.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$79.2bn BBG: VZ US

Fixed-Line Communications Analyst: John C. Hodulik, CFA Tel: +1-212-713 4226

Cost cutting drives increasing EPS outlook Similar to AT&T, EPS beats on wireless and wireline margins We are raising our 2010 EPS estimate to $2.22 from $2.10 after baking in more

aggressive cost cutting efforts and the effects of the 11K headcount reductions. We are also increasing our 2011 estimate to $2.25 from $2.10, previously, suggesting 7% EPS growth off the adjusted 2010 base.

Wireless segment sees better than expected subscriber adds and margins Wireless margins of 47.5% were well ahead of expectations (UBSe 46.2%), shrugging off higher than expected net adds and a higher than usual upgrade rate. Management was bullish on its ability to take share, grow adds and accelerate revenue growth while maintaining industry leading margins. Capex in the segment will continue to ramp as the company approaches its LTE launch in 4Q.

Expect cost cutting to help offset Frontier sale in 2H wireline margins We expect margin declines from the Frontier sale to be partially offset by cost cutting efforts and believe wireline operating margins will remain in the black in 3Q. Enterprise trends continue to improve, turning positive in 2Q for the first time with the help of strong CPE sales. FiOS adds came in as expected but net broadband adds were light. Coupled with the strong margins, this suggests management took its foot off the pedal, leaving the door open to cable share gains.

Valuation: Maintain Neutral We maintain our PT of $28 per share. VZ trades at 5.7x 2011E EBITDA and 12.4x P/E, a 3% premium to the S&P500. Our PT is DCF based (8% WACC, 2% growth).

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$28.02 on 23 Jul 2010 19:13 EDT

Morning Expresso - United States 26 July 2010

UBS 8

CONSUMER US Specialty Retail

Retailers, Specialty Analyst: Roxanne Meyer, CFA Tel: +1 212 713 8602

Sequential Downtick in Overall Promo Levels; Early BTS Teen Pricing Snapshot Increased focus on fall; week-to-week downtick in promo levels We saw a sequential downtick in promotional levels last week; ironically, those

we’d expect to be cleaner for BTS saw an uptick. Less promotional: ANN, Banana Rep, CWTR, JCG, Urban, and WH|BM. More: ARO, AEO, EXPR and Gap.

Early BTS Teen Pricing Snapshot (see Charts 1 & 2 inside) Looking at the 3 A’s, ARO remains the low priced leader with AEO and Hollister 1.6x more expensive and A&F 2.7x more. The spread has narrowed meaningfully vs LY when AEO was 1.8x, Hollister 2.0, and A&F 3.6x more than ARO. Compared to ARO, denim is 20-25% higher at Hollister, 30-35% at AEO, and >2x at A&F; woven shirts are 70% higher at Hollister, ~2x at AEO, and ~3x at A&F.

AEO: week-over-week uptick in promos; website issues last week AEO’s key promos: 1) try on any jeans, get a free phone (w/ 2 year plan) and 2) 20% off any purchase including 2+ pairs of jeans (7/21-27). All graphic tees were B1G1 50% and shorts $29.95. AEO's website was down last Mon-Thurs due to external server issues; in response, offered free shipping through Sunday, 7/25.

ANN: Seeing incremental improvement for fall; very low markdown levels ANN flowed in early fall, with a focus on animal print, neutrals and lower entry level price points (down double digits to LY). The in-store pant shop features 3 fits, starting at $88; some + Facebook chatter. Minimal clearance (breadth 10-15%; depth 50% off). Loft much less promotional to last week; new assortment strong.

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Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 26 July 2010

Under Armour Rating: Buy Target: US$38.00 Price: US$37.42 RIC: UA.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$1.90bn BBG: UA US

Retailers, Apparel Analyst: Michael Binetti Tel: +1-212-713 3805

Solid Fall Orders Should Drive 2H Optimism Forecasting $0.05 for UA in 2Q (Street: $0.03); Maintain Buy Rating Our 2QE EPS of $0.05 is based on 16% rev growth, +150bp in YOY GM

improvement, and 90bp in SG&A inflation YOY. While 2Q is a low-volume quarter for UA, we believe that guidance for 2H will be the key driver of UA’s stock near term. Sporting goods contacts suggest that orders for the important fall season have been accelerating lately. We believe a solid outlook for back-to-school should allow UA to provide more constructive guidance for 2H, which should support the stock in the near term.

Hoping to See Margin Trends Improve in 2Q While margin improvements have lagged our expectations for UA in recent quarters, we would hope to start seeing accelerating improvements in 2Q based on: 1) diminished levels of liquidations through low-margin third-party channels YOY; 2) higher rev growth contributions from high-margin businesses (apparel & DTC); and 3) lapping the beginning of heavy footwear markdowns in 2Q09.

Street Estimates Still Not Reflecting Emerging 2011 Growth Drivers In our May 26 upgrade note, we noted several 2011 EPS drivers that we believe are still not reflected in Street ests, including: 1) the launch of hybrid cotton apparel (US cotton athletic apparel is a $12B mkt, vs $2-3B for performance fabrics); 2) acquisition of the licensed hats/bags business; and 3) strong initial orders of core performance apparel for spring 2011. We forecast $1.38 in EPS for 2011, and believe that rising Street estimatess (currently at $1.29) will be a catalyst for UA shares in coming months.

Valuation: Buy; $38 Price Target Our $38 PT is 28x our 2011 EPS estimate of $1.38 (+22% YOY) and implies a 1.7x PEG. Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$37.42 on 23 Jul 2010 19:36 EDT

Morning Expresso - United States 26 July 2010

UBS 9

ENERGY Schlumberger Rating: Buy Target: US$86.00 Price: US$59.35 RIC: SLB.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$70.8bn BBG: SLB US

Oil Drilling, Equipment & Services Analyst: Angie Sedita Tel: 1-212-713 3587

International recovery slow and steady Q2 EPS of $0.68 vs our $0.66 estimate – essentially in-line quarter Q2 was helped by a lower tax rate (+$0.02) and share count (+$0.01). NAM

revenues were +2.4% better than our forecast, but Europe/CIS/Africa was -7% below. Total margins were in-line with our forecast, w/ NAM better than our ests.

International outlook improving at a slow and steady pace We believe that the international markets will show a gradual recovery for both revenues and margins. Increases in activity should drive revenues and margins, versus pricing. This recovery will be more tempered than in past cycles, in our view. SLB sees Brazil, North Sea and Russia driving 2H-10. For a more robust recovery to occur we believe oil prices need to be higher and/or that IOCs and NOCs need to gain greater confidence in the global economic outlook.

N.Am driven by strong US land, GOM reduces EPS $0.08-$0.10 in 2H-10 SLB expressed confidence in the offshore markets outside of the US; however the GOM moratorium shaves $0.08-$0.10 off 2H-10. Impressive strength was seen in US land w/ a 35% gain in revenue and 15% increase in margins. Importantly SLB’s US reorganization should have a larger impact in 2011, but starts in Q3-10. However, the outlook for US land in 2011 remains unclear given gas prices.

Reiterate Buy, SLB trading at discount to historical premium of 20%-25% SLB’s historical multiple premium has been 20%-25% and is currently 10%. For long-term investors we believe these price levels offer a compelling opportunity to buy a high quality company without paying a sizable premium. Our $86 PT is based on a 23x ‘11E P/E multiple versus the group average of 19.5x.

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Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$59.35 on 23 Jul 2010 16:42 EDT

Morning Expresso - United States 26 July 2010

UBS 10

FINANCIALS CBOE Holdings Rating: Neutral Target: US$29.00 Price: US$27.15 RIC: CBOE.O Prior: Not Rated Prior: - Not Rated Mkt Cap: US$2.83bn BBG: CBOE US

Diversified Financial Analyst: Alex Kramm, CFA Tel: +1 212 713 4060

Industry Leader with Many Options Initiating with a Neutral rating We are initiating coverage of CBOE Holdings (CBOE) with a Neutral rating and a $29 price target. We have a

favorable fundamental view of CBOE, as we believe the company represents a pure play on the secular growth in the US options business. We also believe CBOE’s industry leadership and its near monopoly in the index options business sets the company apart from many peers.

Attractive secular growth profile with upside potential from new market In addition to key growth drivers for CBOE’s base business, such as product innovation, market structure changes, and wider adoption of options by investors, we look for the company’s new options market “C2” to add an additional growth leg. We expect C2 to enable CBOE to compete more effectively and potentially drive substantial upside from electronification of the index complex.

Consolidation a potential exit strategy We believe the market is broadly viewing CBOE as an acquisition candidate. While we do not see potential buyers rushing to acquire CBOE in the near term, we believe M&A speculation will likely 1) drive short-term volatility in the shares from time to time; and 2) result in the shares trading at a premium to what the market would otherwise consider fair value.

Valuation: $29 price target only offers limited upside from current levels Our $29 price target applies an 18x multiple on our FY11 EPS estimate of $1.60. At 17x estimated 2011 earnings, the shares are trading at a significant premium to peers. We would look for more value elsewhere in the exchange group at present.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$27.15 on 23 Jul 2010 19:36 EDT

US Exchanges

Diversified Financial Analyst: Alex Kramm, CFA Tel: +1 212 713 4060

Will FCM Mandate Reshuffle the CDS Deck? Financial regulatory reform bill requires FCM structure for cleared swaps Discussions with dealers suggest increased uncertainty around the

future structure of the cleared swaps market. We believe section 724 (Swaps; Segregation and Bankruptcy Treatment) of the Dodd-Frank Act is intended to create a segregation and bankruptcy regime for cleared swaps that mirrors the current structure of the futures markets. Dealers that intend to clear swaps for customers will have to register as FCMs and hold customer margin in segregated accounts.

Time is ticking for ICE to restructure clearing model ICE’s CDS clearing model is an extension of the current OTC structure (DCM model) and we believe it would have to be restructured to conform with new legislation. We have said for a while that the OTC clearing model will likely evolve over time and therefore we believe ICE is prepared to adapt. That said, delays and uncertainty around a transition could result in the company losing some of its front-runner position on CDS and open the door for competitors. We still believe ICE is positioned to see meaningful upside from buy-side clearing of CDS, but we believe uncertainties will have to be addressed in the very near term.

A second act for CME on CDS clearing? We believe the current uncertainty could breathe some new life in CME’s struggling CDS venture. CME chose the FCM route for its CDS clearing model and we believe most dealers are ready to clear on the platform today. As the buy-side is starting to get ready for clearing of OTC swaps, we believe it could favor the certainty of CME’s model. We also believe CME is becoming more open to addressing push-back by FCMs on its default fund structure in regards to CDS.

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Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 26 July 2010

Morning Expresso - United States 26 July 2010

UBS 11

HEALTHCARE Medtronic Rating: Buy Target: US$53.00 Price: US$36.58 RIC: MDT.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$40.4bn BBG: MDT US

Advanced Medical Devices Analyst: Bruce Nudell, PhD Tel: +1 212 713 2716

AMPLIFY: Focus on cancer signal US BMP usage An FDA panel will discuss MDT’s Amplify (BMP) app for posterior lateral fusion (PLF) on 7/27. US BMP sales have stalled at $800M

following safety issues in cervical apps and high penetration in thoracic-lumbar fusion. Virtually all BMP use is spinal (95%+) and off-label (90%+). We estimate that 85% of spinal use is for TL fusion, virtually all of this involves PLF, and that TL penetration is 40%+.

Conventional non-inferiority endpoints met in 463 pt pivotal trial Overall success (no neuro worsening, no revisions, no device related SAE, fusion success, and disability index improvement) were similar between A and control (C; bone harvest) at 24 months (60.5% A v. 55.5% C) and 60 months (43.9% A v. 35.1%). Fusion success was higher with A at 24 months (95.9% v. 89.3%). The FDA was disturbed by the relatively low mid-term success rate in part because contribution of fusion (v decompression) to symptom relief is TBD.

Cancer signal was FDA’s focus At 60 MO, there were 15 cancer events in 12 A patients versus 5 events in 5 C pts. Pooled MDT studies (1152 BMP pts v 1008 C pt; 3.3 yr FU) showed 27 cancer events in BMP arms v. 12 in C. HR was 1.50 (NS). Shorter term Wyeth studies showed less of signal. Given high A dose (3X) rel to current BMP, we expect a cancer surveillance study and a tougher label if approved. Cancer signal makes panel a difficult call with asymmetric risk given our muted expectations for growth.

Valuation Our DCF-based price target is $53. Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$36.58 on 23 Jul 2010 19:36 EST

Morning Expresso - United States 26 July 2010

UBS 12

INDUSTRIALS Ford Rating: Buy Target: US$17.00 Price: US$12.72 RIC: F.N Prior: Unchanged Prior: US$15.00 Mkt Cap: US$42.8bn BBG: F US

Automobile Manufacturers Analyst: Colin Langan, CFA Tel: +1-212-713 9949

Pricing, Not Mix, Boosts Results Ford reported EPS of $0.68, better than our $0.47 and consensus of $0.40 Ford’s auto pre-tax profit was $2.1bn, compared to a $1.0bn loss last

year and a $1.3bn profit in Q1. The y/y improvement was driven by volume/mix ($1.5bn) and pricing ($1.1bn). The beat came from N America ($450m), Ford Credit ($380m), and Europe ($210m). Ford generated $2.6bn in auto CFO during the quarter and targets reaching a net cash position by the end of 2011. This implies at least a $5.4bn further reduction in debt.

Car and truck profit gap shrinking; H2 earnings headwinds We were surprised by the small mix impact in Q2 despite the Super Duty launch. Traditionally, full-size pickups were one of the biggest factors impacting Ford’s earnings. This difference likely reflects the improved profitability of Ford’s car line-up. We expect global pre-tax earnings will be relatively flat in the second half due to lower profits from Europe (-$870m y/y) and Ford Credit (-$490m y/y). However, we expect N American pre-tax profits to be up $1.2bn y/y.

Raising EPS est to $1.80 from $1.35 (2010) and to $2.25 from $1.90 (2011) We are raising EPS estimates for 2010 to $1.80 from $1.35, 2011 to $2.25 from $1.90, and 2012 to $2.50 from $2.05. The 2010 increase is driven by the Q2 beat, improved pricing, and better operating leverage. Increased EPS estimates for subsequent years reflect improved pricing and operating leverage.

Valuation: Maintain Buy rating; raising price target from $15 to $17 Our new $17 price target is based on 5.0x our revised 2011 EBITDAP estimate.

Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$12.72 on 23 Jul 2010 19:36 EDT

Honeywell Intl. Inc. Rating: Neutral Target: US$45.00 Price: US$43.50 RIC: HON.N Prior: Unchanged Prior: US$42.00 Mkt Cap: US$32.4bn BBG: HON US

Industrial, Diversified Analyst: Jason Feldman Tel: +1-212-713 4309

2Q Solid and Guidance Raised 2Q EPS of $0.60 vs. guidance update of $0.53-$0.57 (cons. $0.57) Sales of $8.2B increased 8% YoY (core also +8%, with M&A & FX flattish) vs.

consensus of $8.0B and guidance of $7.8-$8.1B. Aerospace, Transportation, and Specialty Materials revenue were all above HON’s expectations, while ACS was roughly in-line. Segment margins of 13.6% improved 130bps YoY and 30bps QoQ.

’10 Guidance raised to $2.40-$2.50 (was $2.30-$2.45) vs. consensus $2.48 Guidance now includes costs/dilution related to the pending Sperian acquisition. HON is forecasting ’10 sales of $32.4-$32.9B (was $31.5-$32.3B) vs. consensus $32.2B. For 3Q, HON expects $0.57-$0.62 (including $0.03-$0.04 in dilution from Sperian acq.) vs. consensus $0.66, with sales of $8.0-$8.3B vs. consensus $8.1B.

Results show continued end market improvement and solid execution Revised guidance now includes a number of incremental non-operational headwinds (acquisition related costs, higher restructuring). Consequently, the outlook for HON’s underlying businesses improved more than is implied by the headline guidance number. We also believe there is growing evidence that later cycle end markets (most notably commercial aftermarket) are beginning to improve, which bodes well for ‘11. We caution that pension expense (admittedly non-cash) could be a greater headwind than expected based on moves in the discount rate/ROA over the rest of ‘10.

Raising PT to $45, from $42; Maintain Neutral rating Our revised PT reflects a ~30% premium (was 20%) to the mkt multiple on our ‘11 EPS est. (was based on ‘10). The larger premium reflects the incremental, non-cash pension headwind in ‘11 (premium roughly unchanged on pension-adjusted EPS).

Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$43.50 on 23 Jul 2010 17:12 EDT

Johnson Controls Rating: Neutral Target: US$30.00 Price: US$29.11 RIC: JCI.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$19.6bn BBG: JCI US

Auto Parts Analyst: Colin Langan, CFA Tel: +1-212-713 9949

A Rare Miss; Waiting for a Catalyst Adjusted Q3 EPS of $0.54 slightly below consensus estimates Adjusted Q3 EPS of $0.54 missed our $0.56 estimate and consensus of $0.55.

Revenues were inline, driven by higher Auto Experience and Power Solutions sales, but offset by lower Building Efficiency sales. JCI pointed to the high-end of its $1.90-$1.95 FY10 guidance, reflecting higher N American production. Importantly, the company lowered its Building Efficiency guidance, reducing sales growth expectations to 3%-5%, from 5% previously, and margins to 5.2% - 5.4% from 5.6% - 5.8% previously.

Unclean quarter unusual for JCI JCI was negatively impacted by a few different items during the quarter. Some of these included: 1) an impairment charge; 2) costs associated with integrating Visteon; and 3) Mexican work stoppages. While all of these were non-recurring, only the impairment was quantified. The net effect is “clean” EPS of ~$0.55.

US stimulus related sales much slower than expected Earlier this year, JCI estimated stimulus spending would open up a $3bn opportunity to 2011 and 2012 building efficiency sales. To date, however, only $430mm of this has been realized, which is significantly lower than expected.

Slightly lower 2010 estimates; maintain Neutral and $30 PT We are slightly lowering our FY10 EPS from $2.00 to $1.98 on the lower Building Efficiency guidance, slightly offset by higher Auto Experience and Power Solutions. Despite the decrease, our new estimate is still above JCI’s raised FY10 guidance. Our $30 price target is based on 7.8x our 2011 EBITDA estimate.

Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$29.11 on 23 Jul 2010 19:36 EDT

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Ingersoll-Rand Rating: Neutral Target: US$38.00 Price: US$37.29 RIC: IR.N Prior: Unchanged Prior: Unchanged Mkt Cap: US$12.0bn BBG: IR US

Industrial, Diversified Analyst: Jason Feldman Tel: +1-212-713 4309

2Q results reflect incremental progress 2Q EPS from cont. ops of $0.76 vs. preannounced $0.74-0.76 & cons. $0.72 EPS includes $0.04 restructuring and $0.02 from a divestiture. 2Q

sales of $3.7B (+7% YoY, +8% ex-FX) were in-line with the July 16 preannouncement. U.S. sales grew 6%, with int’l +10% (11% ex-FX). 2Q tax rate (cont. ops.) was 18.8% vs. FY10 guidance of 18%. Orders increased ~10% in 2Q, with total backlog +15% YoY. Op margin increased 280bps YoY with ~49% YoY incremental margins.

Adj. FY10 EPS outlook now $2.18-2.38 (was $2.00-$2.35) vs. cons. $2.26 FY10 guidance still includes $0.25 of restructuring, but excludes the 1Q $0.12 Medicare Part D charge. IR expects FY10 sales +4-6% YoY ($13.7-13.9B) vs. prior +3-5% YoY ($13.6-13.8B). Segment FY10 sales growth targets were raised for Industrial and Climate, Residential was unchanged, and Security was revised lower. 3Q EPS outlook is $0.70-0.80 (Cons $0.78), with sales of $3.65-3.75B (+5-8%).

Signs of improvement, but a few challenges remain IR's 2Q results and revised guidance were roughly in-line with expectations following the company's 7/16 pre-announcement. There are signs of improvement in execution, and several of IR's predominantly later cycle end markets have begun to stabilize/improve. We remain Neutral given what we view as a fair valuation, and we continue to note execution related challenges as productivity is expected to contribute a material portion of FY10 expected earnings.

We maintain our $38 price target and Neutral rating Our PT reflects a ~10-15% premium to the market multiple on our revised 2011 EPS estimate (was based on 2010). We maintain our Neutral rating.

Notes: Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$37.29 on 23 Jul 2010 16:42 EDT

US Auto Suppliers

Auto Parts Analyst: Colin Langan, CFA Tel: +1-212-713 9949

HON Q2 Read Throughs for BWA & JCI BWA: Q2 sales in-line with our forecast; Q3 guidance looks low HON competes with BWA in turbochargers, each accounting for about 35% of the

global market. This Friday, HON reported a 30% y/y increase in Transportation Systems (TS) sales as well as a 180 bps q/q margin improvement. Turbo sales were up 41% y/y, and European diesel penetration continues to increase. Consistent with HON’s results, we are forecasting a 43% y/y increase in BWA’s engine segment and a 40 bps q/q margin increase. Our Q2 BWA EPS estimate of $0.68 is above consensus of $0.66. HON guided to 3-14% y/y Q3 TS sales growth, slightly lower than our 14% y/y Q3 forecast for BWA’s engine segment. HON’s YTD turbo wins are estimated at over $2bn in sales over the life of the programs. HON also reported that it is gaining share in turbos; however we estimate that BWA's turbo sales were down less in 2009 than HON’s (BWA down ~24%, HON down 34%).

JCI: HON guides to 3–6% y/y increase in Q3 ACS sales HON’s Automation and Controls Solutions (ACS) segment competes directly with JCI’s building efficiency division. ACS sales were up 7% y/y, better than JCI’s building efficiency growth of 2% in Q3. HON reported that conditions were improving in this segment and guided to a 3-6% y/y increase in Q3 excluding acquisitions. This is significantly lower than JCI’s Q4 building efficiency guidance of 12-19% y/y. Like JCI, HON is seeing higher demand for energy efficient projects.

Maintain Neutral rating on JCI and Buy rating on BWA Our $30 price target for JCI is based on 7.8x our 2011 EBITDA estimate, and our $50 price target for BWA is based on 7.0x our 2011 EBITDA estimate.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 25 July 2010 U.S. Aerospace & Defense Playbook

Aerospace Analyst: David E. Strauss Tel: +1-212-713 6185

The Week Ahead What’s next for aerospace and defense? Big week for earnings with BEAV/BA/GD/HXL/GR/LLL/LMT/NOC/RTN/TGI all reporting, and EADS

reporting in Europe. We prefer BEAV/GD into earnings. We think BEAV can raise 2010 guidance Tuesday as Zodiac’s recent results and comments at Farnborough suggest the cabin retrofit market is beginning to recover. We think GD is likely to raise guidance Wednesday and think Gulfstream bookings will show improvement over Q1. Conference call schedule and dial-in numbers are listed on page 3.

Prefer the aftermarket names With production rate increases behind, we see more EPS upside with aftermarket than OE. While Q2 aftermarket results have been mixed, we think most noteworthy data point so far is HON’s expectation for aftermarket growth to double or triple flight hour growth in Q4, implying the beginning of a reversal in spare parts inventory destocking and deferred maintenance. GR/TDG/COL remain our top aero picks.

Selective in defense For defense, we continue to think the base budget will hold up fairly well despite the difficult fiscal environment, including a FY12 base budget that includes modest real growth and a higher than expected FY12 supplemental request, which we think can provide upside for the stocks. However pension is risk. Our top picks are GD/NOC/ATK.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 23 July 2010

Morning Expresso - United States 26 July 2010

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REITS Digital Realty Trust Rating: Buy Target: US$65.00 Price: US$60.82 RIC: DLR.N Prior: Unchanged Prior: US$67.00 Mkt Cap: US$6.20bn BBG: DLR US

Real Estate Analyst: Robert Salisbury Tel: +1 212 713 4760

Strong demand drowns out the noise A noisy quarter, but the core business continues to perform well Despite a headline 2Q10 FFO miss, our constructive thesis remains intact on

DLR, which is underpinned by robust secular demand dynamics. Leasing continued to improve in 2Q, including an uptick in Europe and for the high multiple Powered Base product, which has high margins and requires minimal invested capital. The backlog also remains solid, with signed leases set to commence over the next 12 months representing $42m of annual revenue (~$0.40 per share). With a positive outlook over both the near-term and long-term, we reiterate our Buy rating.

Guidance shortfall driven in part by a new 2H10 equity raise assumption FY10 FFO guidance was raised, but not by as much as expected, as management now assumes an equity raise in 2H10 which is expected to fund several development site acquisitions (non-income producing). This represents a large portion of the shortfall, which is unfortunate as we think this important assumption was poorly communicated. That said, guidance appears very achievable given that it assumes only $50m of acquisitions in 2H, well below the $1.1bn acquired in 1H.

Adjusting estimates for one-time items, now assuming equity raise in 4Q10 We have reduced our FY10/11 FFO estimates to $3.30/$3.90 from $3.53/$3.99, reflecting several one-time items in 2H10 and a $300m equity issuance in 4Q10.

Valuation: DLR is trading at 6.2% implied cap rate, 16.8x 2011E EBITDA Our revised $65 price target is based on our $65 DCF value and represents a 17x multiple of 2012E EBITDA. We have reduced our target and DCF by $2, reflecting a more conservative pace of development pipeline ramp-up over the next several years.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS estimates based on a share price of US$60.82 on 23 Jul 2010 18:42 EDT

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TECHNOLOGY Communications Equipment

Communications Technology Analyst: Nikos Theodosopoulos Tel: +1-212-713 3286

AT&T and VZ Capex Updates and Thoughts Second Half AT&T + VZ Capex Uninspiring, Except for Wireless AT&T and Verizon have uninspiring second half 2010 capital spending plans, in

our view, except in the area of wireless which may continue to yield upside for vendors. UBS fcst AT&T’s 2H10 spending flat YoY, with wireless up 41%. Verizon 2H10 may be up 4% YoY on its guide with strength in wireless (LTE).

UBS AT&T 2H Fcst Flattish YoY, 2Q Capex Inline, Wireless Upside In 2H10 AT&T has ~$9.8-$10.8B remaining on its capex guide of $18-$19B w/ ~$8.2B spent in 1H10. 2H10 capex could rise by 20%-32% vs. 1H, vs. 5 yr history of ~22% increases. UBS 2H $10B fcst is +21% vs. 1H and flattish YoY vs. 2H09. 2Q $4.9B capex slightly above UBSe. Wireline below, Wireless above.

VZ 2H10/ 2011 Wireline Pressured, 2Q Capex Inline, Wireless Upside VZ has $9.1-$9.5B remaining on its capex guide of $16.8-$17.2B ($7.7B in 1H10), possibly rising ~19-24% vs. 1H or 4% YoY vs. 2H09. If history is an indication it may increase 6% vs. 1H and decrease 10% YoY, though LTE may preclude this scenario. 2Q $4.2B capex slightly above UBSe. Wireline below, Wireless above.

Backhaul Vendors In Good 2H Position, Wireline Likely Sees Pressure Backhaul vendors in good position for 2H10 capex including JNPR, TLAB, CIEN on next-gen, and TLAB, ADTN, ALU on legacy at T. VZ LTE vendors may see tailwinds. While TLAB and CIEN are benefiting from backhaul spend at T, there is risk of share loss. At T ALU is pot’l gainer vs. TLAB, and CSCO is pursuing 2nd source to CIEN WWP. TLAB and CSCO are already selling psuedowire and aggregation products to T w/ ALU being tested in 3Q for pot’l shr gain vs. TLAB.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 26 July 2010

Semiconductor Equipment Industry Update

Semiconductor Capital Equipment Analyst: Stephen Chin Tel: +1-212-713 4111

More DRAM & Foundry orders from Taiwan New DRAM semicap orders from Powerchip and ProMOS last week Our review found ProMOS placed 2 equipment orders last week totaling $43M

including $22M with Applied Materials and $21 with Lam Research. Our analysis shows these were ProMOS’ first semicap equipment orders since Aug-08. We also found Powerchip placed a $48M order with ASML last week. Our analysis shows Powerchip has placed 3 orders with ASML so far in 2010 totaling $142M.

UMC’s semicap orders were $77M last week, TSMC ordered $54M Our review found UMC placed 4 semicap orders last week, including $21M with Applied, $16M with KLA and $16M with Novellus. Our analysis shows UMC ordered $534M of total semicap equipment in 2Q10, up 115% q/q. Our review found TSMC placed 1 order last week with ASML for $54M. Our own analysis shows TSMC ordered $1,129M of total semicap equipment in 2Q10, up 12% q/q.

Total Taiwanese semicap equipment orders in 2Q10 were up 19% q/q Our analysis shows the 8 big Taiwanese semiconductor companies ordered $2.4B of semicap equipment in 2Q10. Our own analysis also shows 2Q10 semicap orders from Taiwanese foundry customers were +32% q/q and DRAM orders up 2% q/q. Novellus had the most momentum in 2Q10 with its Taiwanese orders up 58% q/q.

Shin-Etsu’s semiconductor wafer results had mixed read-thrus for MEMC Shin-Etsu reported Jun-10 results on July 22nd and showed semiconductor wafer sales were flat q/q as 300mm volumes were flat, which compares to our MEMC semi wafer sales estimate of +12% q/q growth in 2Q10. Shin-Etsu

expects 10% semi wafer demand growth through year end, with a modest recovery in prices. Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 25 July 2010

UBS SemiBytes

Semiconductors Analyst: Uche Orji Tel: +1 212 713 4015

Results buoy secular growth names. Week 3: BRCM, RFMD, LSI, NETL, CAVM, MXIM Week Ahead: BRCM, RFMD, LSI, NETL, CAVM, MXIM results For earnings season week 3, we expect solid Broadcom results and guidance,

demonstrating continued operating leverage on sales growth led by consumer applications and baseband sales into Samsung, Nokia. Given the recent share price appreciation for NetLogic and Cavium, we believe the stocks have limited near-term upside without solid double-digit q/q sales guidance. RFMD’s potential share losses at Nokia & Maxim’s potential capacity constraints keep us on the sidelines.

Charts: Market share: few changes in processors but big shifts in chipsets In 2Q10, Intel gained 20 bps of overall microprocessor unit market share on gains in server, desktop processors to 82.0%. NVIDIA’s -32% q/q for C2Q chipset unit shipments is consistent with our F2Q -30% q/q MCP business sales estimate.

Review: TXN, ALTR, LLTC, XLNX, ISIL, CY, SWKS, SNDK results With declining risk aversion on largely consistent positive earnings results, we saw a semi sector rebound accentuated by the strong growth and outlook of our secular growth names – Altera, Xilinx and Skyworks, which provided a boost to other secular growth names including Cavium, NetLogic and Atmel. While we remain Neutral on valuation, TI, Linear and Cypress also posted strong results with solid C3Q guidance on strong end-market trends in communications, smartphones and industrial applications. We remain positive on SanDisk based on: 1) better than expected gross margin, 2) strong secular trends driving NAND Flash demand to be in balance with supply, and 3) expectations of a smooth CEO transition.

Notes:

Source: The content presented above reflects a front page summary of UBS Research content, UBS commentary as at 26 July 2010

Morning Expresso - United States 26 July 2010

UBS 16

Rating & PT Changes Key Rating and Price Target Changes: US

Company Name Directional Indicator/Rationale Reuters Code Current Share Price

New Rating New PT Prior

Rating Prior PT

CBOE Holdings Inc. Initiation of Coverage with Neutral CBOE.O US$27.15 Neutral US$29 Not Rated Not Rated

Digital Realty Trust Reiterate Buy, lower PT DLR.N US$60.82 Buy US$65 Buy US$67

Ford Motor Co. Reiterate Buy, increase PT F.N US$12.72 Buy US$17 Buy US$15

Honeywell International Inc. Maintain Neutral, increase PT HON.N US$43.5 Neutral US$45 Neutral US$42

Source: Reuters, UBS. Prices as at market close on July 23 2010.

Morning Expresso - United States 26 July 2010

UBS 17

Markets, Events and Newsflow Today’s Company Events

Company Name Event Reuters code Rating PT Notes

Alberto-Culver Earnings Release ACV.N Neutral US$30

Alcon Earnings Release ACL.N Neutral US$162

Arch Capital Group Earnings Release ACGL.O Buy US$84

Bank of Hawaii Earnings Release BOH.N Neutral US$50

Boardwalk Pipeline Earnings Release BWP.N Buy US$34

Duncan Energy Earnings Release DEP.N Neutral US$26

Enterprise Products Earnings Release EPD.N Buy US$41

Fluor Earnings Release FLR.N Buy US$60

HMA Earnings Release HMA.N Neutral US$7.5

Jacobs Engineering Earnings Release JEC.N Neutral US$40

Liberty Property Earnings Release LRY.N Neutral US$33

Lorillard Earnings Release LO.N Buy US$100

Masco Earnings Release MAS.N Sell US$8

Owens & Minor Earnings Release OMI.N Neutral US$32

Plum Creek Earnings Release PCL.N Neutral US$37

Range Resources Earnings Release RRC.N Neutral US$52

RGA Earnings Release RGA.N Buy US$75

SL Green Realty Earnings Release SLG.N Neutral US$61

UHS Earnings Release UHS.N Buy US$45

Veeco Instruments Earnings Release VECO.O Buy US$55

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UBS 18

W. R. Berkley Earnings Release WRB.N Neutral US$29 Source: Reuters, UBS. Prices as at market close on July 23 2010. Today’s Macroeconomic Events: US

Indicator Time (ET) UBS forecast Previous Consensus

New Home Sales (Jun)lvl 10:00 na -4.0% na

Texas Mfg. Outlook Survey (Jul)index 10:30 na 1.4% na

Source: Bloomberg, UBS

Today’s UBS Hosted Corporate Roadshow:

Company Event Location

None

Today’s UBS Hosted Fieldtrip:

Company Event Location None

Today’s UBS Hosted Conference:

Company Event Location

None

Morning Expresso - United States 26 July 2010

UBS 19

Latest Market Movements:

Country/Region Market Latest Price/Last Close 1-day % Change YTD % Change

Americas

United States Dow Jones 10424.6 0.99 -0.03

United States S&P 500 1093.7 0.82 -1.92

United States Nasdaq 2269.5 1.05 0.01

United States S&P VIX 23.47 -4.71 -

Europe

Europe FTSE Eurofirst300 1042.1 -0.22 -0.35

Belgium BEL 20 2508.3 0.09 -0.13

Germany DAX 6144.7 -0.35 3.14

France CAC 3608.2 0.03 -8.34

Italy MIB 30 20533.0 -0.35 -11.68

Netherlands AEX 336.9 -0.06 0.48

Portugal PSI 20 7283.2 0.42 -13.95

Spain IBEX 10385.0 -0.03 -13.02

Switzerland SMI 6162.3 -0.63 -5.86

UK FTSE 100 5306.5 -0.11 -1.96

Asia

Hong Kong Hang Seng 20839.9 0.12 -4.72

India BSE Sensex 18020.1 -0.61 3.18

Japan Nikkei 225 9503.7 0.77 -9.89

Source: UBS, Reuters. Indices in Americas as at market close on July 23, 2010. Indices in Europe and Asia as at 05:00 EDT on July 26, 2010.

Latest FX Movements: Name Currency Latest Price/Last Close 1-day % Change 1-month % Change YTD % Change

Euro €/$ 1.290 1.19% 4.8% -9.9%

UK £/$ 1.544 1.12% 3.1% -4.5%

Canada CAD/$ 0.965 0.05% 0.3% 1.6%

Switzerland CHF/$ 0.948 -1.09% 4.8% -1.9%

China Yuan/$ 0.147 -0.01% 0.5% 0.7%

Brazil BRL/$ 0.564 -0.87% 0.8% -1.7%

India INR/$ 0.021 0.45% -1.6% -1.1%

Mexico MXN/$ 0.079 0.16% -0.8% 2.8%

Japan $/JPY 0.875 0.43% -2.7% -6.0%

Australia AUD/$ 0.896 0.29% 2.4% -0.2%

Source: UBS, Reuters. Prices as at market close on July 23, 2010

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Latest Commodity Movements: Name Latest Price 1-day % Change 1-month % Change YTD % Change

Gold ($/oz) 1189 0.10 -5.06 7.84

Brent Crude spot, $/bbl 76.89 0.01 2.04 2.71

WTI Crude spot, $bbl 78.73 -0.38 - -

Natural Gas, $MMBTU 4.70 0.43 -3.10 -19.42

Source: UBS, Reuters. Prices as at market close July 26, 2010

Morning Expresso - United States 26 July 2010

UBS 21

Further Information

Morning Expresso – United States Welcome to the Morning Expresso, an early morning summary of the key ideas and issues presented from UBS for the day ahead. Its contents include:

- key items from UBS’ United States Morning Meeting

- highlighted recommendation and price target changes

- today’s anticipated company, sector and macro-economic catalysts from the US Contextual Diary

- company and client events, conferences and conference calls from UBS

- overnight global market, forex and commodity movements

Morning Expresso is designed to give you all that you ‘need to know’ each morning.

Data presented is accurate as at 06:00 EDT on Monday, July 26, 2010.

Contacts & Feedback For further details concerning today’s Morning Expresso – United States note, please visit www.ubs.com/investmentresearch or speak to your UBS contact. This note is not intended to be static and it will evolve over time. Feedback welcomed on email to

DL-USEquityProductManagement@ubs.com

Statement of Risk

Forecasting earnings and corporate financial behavior is difficult because it is affected by a wide range of economic, financial, accounting and regulatory trends, as well as changes in tax policy.

Morning Expresso - United States 26 July 2010

UBS 22

Analyst Certification

Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.

Morning Expresso - United States 26 July 2010

UBS 23

Required Disclosures This report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS.

For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures. The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results. Additional information will be made available upon request.

UBS Investment Research: Global Equity Rating Allocations

UBS 12-Month Rating Rating Category Coverage1 IB Services2

Buy Buy 54% 41%Neutral Hold/Neutral 37% 32%Sell Sell 9% 24%UBS Short-Term Rating Rating Category Coverage3 IB Services4

Buy Buy less than 1% 22%Sell Sell less than 1% 0%

1:Percentage of companies under coverage globally within the 12-month rating category. 2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. 3:Percentage of companies under coverage globally within the Short-Term rating category. 4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided within the past 12 months. Source: UBS. Rating allocations are as of 30 June 2010. UBS Investment Research: Global Equity Rating Definitions

UBS 12-Month Rating Definition Buy FSR is > 6% above the MRA. Neutral FSR is between -6% and 6% of the MRA. Sell FSR is > 6% below the MRA. UBS Short-Term Rating Definition

Buy Buy: Stock price expected to rise within three months from the time the rating was assigned because of a specific catalyst or event.

Sell Sell: Stock price expected to fall within three months from the time the rating was assigned because of a specific catalyst or event.

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KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any change in the fundamental view or investment case. Equity Price Targets have an investment horizon of 12 months. EXCEPTIONS AND SPECIAL CASES UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Sell: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece. Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not registered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained in the NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by a research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any, follows.

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Company Disclosures

Company Name Reuters 12-mo rating Short-term rating Price Price date Adtran Inc.16b ADTN.O Buy N/A US$32.29 23 Jul 2010 Advanced Micro Devices16b, 20 AMD.N Neutral (CBE) N/A US$7.82 23 Jul 2010 Aeropostale Inc.16b ARO.N Neutral N/A US$30.88 23 Jul 2010 Akbank4a, 16b AKBNK.IS Buy N/A TRY8.50 23 Jul 2010 Alcatel-Lucent5, 6c, 8, 16b ALUA.PA Neutral Buy €2.08 23 Jul 2010 Alliant Techsystems16b ATK.N Buy N/A US$68.62 23 Jul 2010 American Eagle Outfitters Inc.16b AEO.N Neutral N/A US$12.87 23 Jul 2010 AnnTaylor Stores Corp.16b, 20 ANN.N Buy (CBE) N/A US$17.60 23 Jul 2010 ARM Holdings Plc5, 14, 16b ARM.L Neutral N/A 353p 23 Jul 2010 AT&T Inc.4a, 6c, 7, 16b, 22 T.N Buy N/A US$25.54 23 Jul 2010 Banco do Brasil16b, 20, 22 BBAS3.SA Buy (CBE) N/A R$29.48 23 Jul 2010 Bank of Nova Scotia2, 3a, 4a, 4b, 6a, 16b BNS.TO Buy N/A C$50.12 23 Jul 2010 BE Aerospace Inc.16b, 20 BEAV.O Neutral (CBE) N/A US$30.20 23 Jul 2010 BorgWarner Inc.16b BWA.N Buy N/A US$42.97 23 Jul 2010 CBOE Holdings Inc.2, 4a, 5, 6a, 16b CBOE.O Neutral N/A US$27.15 23 Jul 2010 Ciena Corp.16b, 20 CIEN.O Neutral (CBE) N/A US$13.46 23 Jul 2010 Cisco Systems Inc.2, 4a, 6a, 6b, 6c, 7, 8,

13, 16b, 18a CSCO.O Neutral N/A US$23.35 23 Jul 2010

Clorox16b CLX.N Buy N/A US$65.43 23 Jul 2010 CME Group Inc.2, 4a, 6a, 6c, 7, 16b CME.O Neutral N/A US$286.56 23 Jul 2010 Coldwater Creek Inc.16b, 20 CWTR.O Neutral (CBE) N/A US$3.89 23 Jul 2010 ConAgra Foods Inc.4a, 6a, 6b, 7, 16b CAG.N Buy N/A US$23.93 23 Jul 2010 Digital Realty Trust2, 4a, 6a, 16b DLR.N Buy N/A US$60.82 23 Jul 2010 Energy Conversion Devices, Inc5, 13, 16b, 20 ENER.O Sell (CBE) N/A US$5.00 23 Jul 2010

Ford Motor Co.2, 4a, 5, 6a, 6b, 6c, 7, 14, 16b F.N Buy N/A US$12.72 23 Jul 2010 Gap Inc.16b GPS.N Neutral N/A US$18.41 23 Jul 2010 General Dynamics Corp.16b GD.N Buy N/A US$61.29 23 Jul 2010 Honeywell International Inc.4a, 6a, 6b, 6c, 7, 16b, 18b HON.N Neutral N/A US$43.50 23 Jul 2010

HSBC2, 4a, 5, 6a, 16a, 16b, 22 HSBA.L Buy N/A 646p 23 Jul 2010 Ingersoll-Rand Co.16b, 18i, 22 IR.N Neutral N/A US$37.29 23 Jul 2010 Intel Corp.6b, 7, 8, 16b, 18c INTC.O Buy N/A US$21.69 23 Jul 2010 IntercontinentalExchange, Inc.4a, 6a, 16b ICE.N Buy N/A US$108.36 23 Jul 2010

International Paper2, 4a, 6a, 6b, 6c, 7, 16b,22 IP.N Buy N/A US$24.98 23 Jul 2010

Johnson Controls Inc.16b, 22 JCI.N Neutral N/A US$29.11 23 Jul 2010 Juniper Networks5, 16b JNPR.N Neutral N/A US$28.09 23 Jul 2010 Kimberly-Clark4a, 5, 6b, 6c, 7, 16b KMB.N Buy N/A US$63.64 23 Jul 2010 Medtronic, Inc.2, 4a, 6a, 6b, 6c, 7, 16b MDT.N Buy N/A US$36.58 23 Jul 2010 MEMC Electronic Materials16b, 18d WFR.N Buy N/A US$11.68 23 Jul 2010 Microsoft Corp.2, 4a, 5, 6a, 6b, 6c, 7, 16b MSFT.O Buy N/A US$25.81 23 Jul 2010 Northrop Grumman Corp.16b NOC.N Buy N/A US$58.17 23 Jul 2010 PepsiCo Inc.2, 4a, 5, 6a, 6b, 6c, 7, 16b, 18e PEP.N Buy N/A US$64.45 23 Jul 2010 Punjab National Bank PNBK.BO Buy N/A Rs1,050.60 23 Jul 2010 Rockwell Collins Inc.4a, 5, 6a, 6b, 6c, 7,

8, 16b, 18f COL.N Buy N/A US$56.76 23 Jul 2010

Sberbank16b, 18h, 20 SBER.RTS Buy (CBE) N/A US$2.71 23 Jul 2010 Schlumberger Ltd.3b, 16b, 18g SLB.N Buy N/A US$59.35 23 Jul 2010 Shin-Etsu Chemical16b 4063.T Neutral N/A ¥4,290 23 Jul 2010 Tellabs Inc.16b TLAB.O Buy N/A US$7.65 23 Jul 2010 TransDigm Group Inc.2, 4a, 6a, 16b TDG.N Buy N/A US$53.11 23 Jul 2010 Under Armour, Inc.16b UA.N Buy N/A US$37.42 23 Jul 2010

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Company Name Reuters 12-mo rating Short-term rating Price Price date Urban Outfitters Inc.16b URBN.O Buy N/A US$34.19 23 Jul 2010 Verizon Communications4a, 5, 6a, 6c,

7, 16b VZ.N Neutral N/A US$28.02 23 Jul 2010

Wal-Mart Stores2, 4a, 5, 6a, 6b, 6c, 7, 16b WMT.N Buy N/A US$51.67 23 Jul 2010

Source: UBS. All prices as of local market close. Ratings in this table are the most current published ratings prior to this report. They may be more recent than the stock pricing date 2. UBS AG, its affiliates or subsidiaries has acted as manager/co-manager in the underwriting or placement of securities of

this company/entity or one of its affiliates within the past 12 months. 3a. UBS Securities LLC is acting as advisor to Royal Bank of Scotland Group Plc on its announced agreement to sell its

wholesale banking operations in Colombia to The Bank of Nova Scotia(Scotiabank). 3b. UBS Securities LLC is acting as advisor to Smith International on its announced agreement to be acquired by

Schlumberger. 4a. Within the past 12 months, UBS AG, its affiliates or subsidiaries has received compensation for investment banking

services from this company/entity. 4b. Within the past 12 months, UBS Securities Canada Inc or an affiliate has received compensation for investment banking

services from this company/entity. 5. UBS AG, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services

from this company/entity within the next three months. 6a. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and investment banking

services are being, or have been, provided. 6b. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-investment

banking securities-related services are being, or have been, provided. 6c. This company/entity is, or within the past 12 months has been, a client of UBS Securities LLC, and non-securities

services are being, or have been, provided. 7. Within the past 12 months, UBS Securities LLC has received compensation for products and services other than

investment banking services from this company/entity. 8. The equity analyst covering this company, a member of his or her team, or one of their household members has a long

common stock position in this company. 13. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company`s common equity

securities as of last month`s end (or the prior month`s end if this report is dated less than 10 days after the most recent month`s end).

14. UBS Limited acts as broker to this company. 16a. UBS Securities (Hong Kong) Limited is a market maker in the HK-listed securities of this company. 16b. UBS Securities LLC makes a market in the securities and/or ADRs of this company. 18a. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position

in Cisco Systems Inc. 18b. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position

in Honeywell International. 18c. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position

in Intel Corp. 18d. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position

in MEMC Electronic Materials. 18e. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position

in PepsiCo Inc. 18f. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position

in Rockwell Collins Inc. 18g. The U.S. equity strategist, a member of his team, or one of their household members has a long common stock position

in Schlumberger. 18h. UBS AG, its affiliates or subsidiaries beneficially owned 1% or more of a class of this company`s common equity

securities as of last month`s end (or the prior month`s end if this report is dated less than 10 days after the most recent month`s end).

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18i. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month`s end (or the prior month`s end if this report is dated less than 10 working days after the most recent month`s end).

20. Because UBS believes this security presents significantly higher-than-normal risk, its rating is deemed Buy if the FSR exceeds the MRA by 10% (compared with 6% under the normal rating system).

22. UBS AG, its affiliates or subsidiaries held other significant financial interests in this company/entity as of last month`s end (or the prior month`s end if this report is dated less than 10 working days after the most recent month`s end).

Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report. For a complete set of disclosure statements associated with the companies discussed in this report, including information on valuation and risk, please contact UBS Securities LLC, 1285 Avenue of Americas, New York, NY 10019, USA, Attention: Publishing Administration. Additional Prices: Alberto-Culver, US$29.40 (23 Jul 2010); Alcon, US$154.14 (23 Jul 2010); Arch Capital Group Ltd., US$78.06 (23 Jul 2010); Bank of Hawaii Corporation, US$50.83 (23 Jul 2010); Boardwalk Pipeline Partners, LP, US$32.02 (23 Jul 2010); Duncan Energy Partners, US$29.52 (23 Jul 2010); Enterprise Products Partners, US$38.73 (23 Jul 2010); Fluor Corporation, US$47.04 (23 Jul 2010); Health Management Associates, Inc., US$6.65 (23 Jul 2010); Jacobs Engineering Group, Inc., US$39.30 (23 Jul 2010); Liberty Property Trust, US$30.11 (23 Jul 2010); Lorillard, US$76.30 (23 Jul 2010); Masco Corp., US$11.42 (23 Jul 2010); Owens & Minor Inc., US$27.67 (23 Jul 2010); Plum Creek, US$37.85 (23 Jul 2010); Range Resources Corp., US$40.02 (23 Jul 2010); Reinsurance Group of America Inc., US$49.07 (23 Jul 2010); SL Green Realty Corp, US$56.95 (23 Jul 2010); Universal Health Services, US$35.02 (23 Jul 2010); Veeco Instruments Inc., US$42.73 (23 Jul 2010); W. R. Berkley Corporation, US$26.73 (23 Jul 2010); Source: UBS. All prices as of local market close.

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