Justin H. Hoogendoorn, CFA Managing Director U.S. Fixed Income BMO Capital Markets GKST Inc.

1. Justin H. Hoogendoorn, CFA Managing Director U.S. Fixed Income BMO Capital Markets GKST Inc.

2. Broad Market Returns Source: Merrill Lynch Indices, S&P, Dow Jones, Bloomberg

3. Sand Pile Theory • Gain a better understanding of what happened to draw us into the Great Recession • Discuss the path for our future economy • Uncover market opportunities Mark Buchanan-- Ubiquity, Why Catastrophes Happen

4. Slide from 2007 Seminar

5. Extraordinary Housing Market Shifts Housing Prices Source: S&P Case/Shiller Home Price Index

6. Credit Crisis vs. Financial CrisisA Vicious Cycle Subprime Mortgages/Housing Implosion • Steps to Deterioration • Delinquencies and defaults rise • Loan performance deteriorates • Spreads widen • Companies/funds tied to credit spreads falter • Confidence falls • Stocks fall • Financing costs rise • Highly leveraged fail • Loan supply falls Credit Crisis Fed to the Rescue? Credit Crunch Spread Blowout Equity Drop Financial Crisis

7. Fixed Income Markets 2008 TED Spread, 3m LIBOR – 3m Treasury Yield (Bps) Municipal Percentage of Treasury Levels • TED spreads blew out to records • Institutional demand fell as profitability evaporated and liquidity needs rose • Worst muni relative returns on record, underperformed Treasuries by 22% Source: Bloomberg Market Spreads Source: MMD Source: Bloomberg, JP Morgan

8. The Great Government Experiment Combined fiscal and monetary commitment of around $13 trillion to the “problem” The Fed’s grew to more than $2 trillion • Beginning the wind down process of extraordinary lending programs • PDCF • TAF • CPFF • TALF • Quantitative easing security purchases are done • $200 billion GSE debt • $1,250 billion MBS • $300 billion Treasury debt $787B fiscal stimulus package (ARRA) altered the muni landscape Source: Federal Reserve, Grant Observer

9. Economy has Rebounded Sharply Source : Federal Reserve

10. Is it a Double Dip? Source: National Association of Realtors

11. 4 Keys to the Future:Government Replacing Private Demand • Government attempting to fill the gap as banks and consumers repair balance sheets • Consumers still deleveraging • Bank lending continuing to contract Source : Federal Reserve

12. 4 Keys to the Future:Mutual Fund Flows Mutual Fund Flows ($, billions, cumulative) • Recovery expanding • S&P 500 above 1200 • Corporate spreads below Treasury at times • Fund flows over the past year • Exiting money markets, -$866B, into? • Not equities, +$42B • Bond flows higher, +$427B • Savings accounts, +$653B • Fund flows suggests caution One thousand miles wide, two inches deep Sources: ICI, Federal Reserve

13. 4 Keys to the Future:Housing at its Worst Recovery Level • Cumulative housing starts numbered 1.19MM 9 months after the end of the 1982 recession, while during the jobless recovery of 2001 the economy posted the a record level of 1.25MM starts • Nine months after the end of the current recession the cumulative housing starts are at historically low levels (.43MM) Source : BMO, Federal Reserve

14. 4 Keys to the Future:Job Creation Still Poor • Nine months following the end of the 1980 and 1982 recessions the economy had added 1.1MM and 1.5MM jobs, respectively • Nine months after the end of the current recession the economy has lost 890K Source : BMO, Federal Reserve

15. Rates and Risks Rates • BMO SAG targets below consensus • 1Q 10yr forecast accurate (3.9% vs 3.8%) • Rate Pressure through 2nd Quarter • Supply trends may turn relatively supportive • Baseline Risks to forecast • “Bad auction” risks higher for the near-term • Additional stimulus and revenue shortfalls could occur and alter forecasts • Health Care—not slated to ramp up until 2013 • New spending/stimulus initiatives • Double dip recession Source: Bloomberg, BMO Capital Markets

16. Recommendations Municipals (Overweight) • Concentrate purchases on GO and essential service revenue bonds • Move to an up-in-quality stance • Intermediate range, 7-12 years, roll down return potential can adds value • Build America Bonds/taxable municipals core holdings in taxable accounts MBS (Underweight) • Higher volatility likely as Fed is done with mortgage purchase program (MPP) • Add opportunistically with spread widening • Focus on shorter maturity/higher coupon • FNMA 30-yr 6’s attractive due to buyout prepay characteristics Agencies/Treasuries (Market weight) • Net Treasury supply should begin to fall late 2nd or 3rd quarter • Intermediate range bullets attractive versus callables for curve roll benefit • Mid-range callables attractive against short duration counterparts (low volatility) • Underweight TIPS, use for long-term inflation protection Stocks and Corporate Bonds (Underweight) • Equities appear to have moved further than broad recovery suggests • Spreads have tightened to 2007 levels yet we know fundamentals problematic • Stick with higher quality, industry leaders • Continue to look for improving debt profiles

17. Justin H. Hoogendoorn, CFA Managing Director U.S. Fixed Income BMO Capital Markets GKST Inc.