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Economic and Equity Market Outlook

December 3, 2009

For Informational and Educational Purposes Only

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The Power of Zero The Fed Panics

Source: Baseline, 2009.

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Why the Panic? Bank/Economic Collapse and Negative Feedback Loops

Source: Baseline, 2009.Source: Baseline, 2009.

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Surge in Unemployment

Politically unpalatable

Source: Baseline, 2009.

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Additional Stimulus (QE)

Fed also buying Treasuries and MBS

Source: Baseline, 2009. Source: St. Louis Fed, 2009.

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Has Stimulus Worked?

Evidence that Recession ended Mid 2009

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Production should continue to improve

Heading into 2009, in the face of such a significant economic collapse, we set very aggressive cash flow targets for each of our businesses. Ground leaders and their teams have responded with great results. Third quarter free cash flow is $1.6 billion, up $769 million versus last year's third quarter. This represents a 97% year-on-year increase. The improvement was driven by many factors, but most notably by lower capital expenditures, improving that working capital, lower cash tax payments and also reduced cash pension contributions. Net working capital declined by $415 million year-on-year, with inventory down $443 million

3M CFO October 2009

Our customers are continuing to order with a request for extremely short lead times. That is a good indication they don't have any inventory.

Rogers Corp CEO October 2009

It's shocking. Honestly, it's sometimes a shocking number. And I don't -- I can't get at the numbers by retailer, but we do get it from -- like one retailer we're down about 6% on point of sale at one retailer. Our inventories are down over 30%.

Lifetime Brands CEO Oct 2009

Source: Baseline, 2009.

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Dollar under attack

Why? Capital Flight? Reversal of risk aversion?

Source: Baseline, 2009.

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How are banks responding to low rates? It is clear they are not lending (yet, hopefully!)

Source: St. Louis Fed, 2009.Source: St. Louis Fed, 2009.

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Main Street Banks suffering

Regional Bank Index underperforming

Source: Baseline, 2009.

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The Bear Case: Consumers vastly over-levered

The household debt service ratio (DSR) is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgage and consumer debt.

The DSR is less encompassing than the financial obligations ratio (FOR), which adds automobile lease payments, homeowners' insurance, and property tax payments to the debt service ratio, but the charts look similar.

Source: Credit Suisse

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Permanent Shift in Consumer Attitudes?

Source: St. Louis Fed, 2009.

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Excess Consumption

Bear Case: debt fueled consumer spending will unwind and consumption will decline for several consecutive years.

Source: United States Department of Commerce. PCE is U.S. Personal Consumption Expenditures

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Consumption Components

Excluding healthcare costs, consumption as a share of GDP has been relatively constant (bottom line).

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Consumer confidence

Source: Empirical Research Partners, 2009.

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The High End Consumer really matters

Source: Empirical Research Partners, 2009.

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Improvement in attitudes with higher income consumers

Source: Empirical Research Partners, 2009.

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Epicenter of Economic Collapse: Residential Real Estate

Source: Baseline, 2009.

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California: Epicenter of Real Estate Collapse

Source: Empirical Research Partners, 2009.

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Stabilization

Source: Baseline, 2009.

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Stock Market Discussion No obvious excesses in US equities, Abysmal decade

Source: Baseline, 2009.

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Stock markets have produced positive returns over 10-year trailing periods on average, while experiencing volatility.

Source: Crestmont Research, 2009.

Bull Case: Equities Have Appreciated over the Long Term

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Market Valuation

Source: Leuthold Group, 2009.

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PE’s and Profitability Profits have been relatively strong, while market no longer cheap

Source: Baseline, 2009.

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Profit trends

Excluding financials, corporate profits have been solid

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Encouraging Data at the Company Level

Source: Empirical Research Partners, 2009.

Large-Capitalization StocksFree Cash Flow Margins

1952 through 2008

Large-Capitalization StocksInventories as a Share of Sales

1952 through 2008

• Free Cash Flow Margins at record levels

• Inventories at record lows will require firms to replenish inventories; increasing demand for capital, labor, materials, etc.

Bullish indictors on both Statement of Cash Flows and Balance Sheets

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Plenty of Cash on the Sidelines

• Corporations have record high cash balances.

Source: BCA Research, 2009. Wilshire 5000 Index

• Potential for:• Mergers & Acquisitions• Share Repurchases• Increased Dividend Payouts

• That cash is earning very little return on investment.

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What are Investors doing with cash hoards?

Answer: Buying Bonds!

Fixed Income Funds Net Cash Inflow

YTD 2009: +$308 Billion (open end) +$ 35 Billion (ETFs)

2008 Total: +$ 33 Billion (open end) +$ 44 Billion (ETFs)

2007 Total: +$109 Billion (open end) +$ 21 Billion (ETFs)

2006 Total: +$ 61 Billion (open end) +$ 11 Billion (ETFs)

2005 Total: +$ 31 Billion (open end) +$ 16 Billion (ETFs)

YTD 2009 Through end of October

Source:Leuthold Group

Source: Leuthold Group, 2009.

Source: Empirical Research Partners, 2009.

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Stocks vs. Bonds Bonds have beaten stocks over past twenty years. Anomaly?

Source: Leuthold Group, 2009.

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The $64,000 Question. New Bull Market???

Source: Leuthold Group, 2009.

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Disclosure

Eaton Vance Investment Counsel (EVIC) is a

This presentation is for illustrative, informational and educational purposes only. It does not constitute investment advice, a recommendation to buy or sell any particular security or to adopt any investment strategy. Any investment views and market opinions/analyses expressed constitute judgments as of the date of this presentation and are subject to change at any time without notice. Any investment views and market opinions/analyses expressed may not reflect those of Eaton Vance as a whole, and different views may be expressed based on different investment styles, objectives, views or philosophies. Each investor’s portfolio is individually managed and may differ significantly from the information discussed in terms of portfolio holdings, characteristics and performance. It should not assume that any investments in securities, companies, sectors or markets described were or will be profitable. This information should not be considered as representative of any particular investor’s experience or assume that any investor will have an investment experience similar to any returns shown or to any previous or existing investor. This presentation has been prepared on the basis of publicly available information, internally developed data and other third party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information and Eaton Vance has not sought to independently verify information taken from public and third party sources.Broad-based indices are unmanaged and are not subject to fees and expenses typically associated with investment management accounts such as those managed by Eaton Vance Investment Counsel. It is not possible to directly invest in an Index.Investing entails risks and there can be no assurance that Eaton Vance Investment Counsel will achieve profits or avoid incurring losses. Past performance does not predict future results.

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