April 27th 2011

Fed Under the Microscope

Another winning day for US stocks as Dow Jones Industrial Average climbed 115.49 points or 0.93%
to settle at 12,595.37. S&P 500 also advanced, adding 11.99 points or 0.9% to finish at 1,347.24
while the NASDAQ composite ended at 2,847.54, up 21.66 points or 0.77%.

Commodities were mostly on the retreat with US light crude futures contract for June delivery ended
at $112.21 or 7c lower after gyrating between $111.12 and $112.64. Brent crude futures for June
delivery however, ended at $124.14 a barrel, up 48c. Libyan conflict, added with unrests in Syria
and Yemen and flare-up between Bahrain and Tehran were all supportive to oil prices.

On the precious metals markets, gold and silver were both declining on Tuesday. Spot gold price
went down 0.4% to $1,502.40 an ounce, while the gold futures for June delivery settled at
$1,503.50, also down 0.4%. Silver’s rise also came down to a halt as it settled the day down from
$46.90 on Monday to $44.98 an ounce. Silver futures for May delivery ended at $45.05, down from
$47.15.

CAT, INTC and CSCO were top gainers on Tuesday, adding 2.84%, 2.46% and 2.46%, respectively.
Still stuck at the bottom was BAC with 1.69% decline, while KO’s miss on earnings has sent it 1.2%
lower by the end of the day. Third from the bottom was HD with 0.93% decline.

On the M&A front, JNJ has agreed to buy Synthes Inc. for SF19B or $21.59B on Wednesday. This
would be JNJ’s largest ever acquisition. The deal includes a premium of 8.5% over Synthes last
trading price on Tuesday, and will close in 1H12. JNJ will gain a lead in orthopedics which has a
market value of around $37B.

Earnings Review
Two Dow components delivered their earnings reports on Tuesday: KO and MMM.

KO said that Q1 adjusted EPS (excluding restructuring costs and other items) was at 86c, just below
the consensus of 87c and up from prior year’s 80c. Net operating revenue jumped 40% from $7.53B
last year to $10.52B but missing the analysts’ estimates of $10.57B. Japan’s earthquake chipped
away 1c out of EPS as operations got disrupted. It is expected to cut further between 2c and 4c per
share off the company’s FY earnings as Japanese bottlers may not be able to meet demand. Rising
commodities were also putting pressures on the earnings, particularly on the cost of plastics which
requires oil to produce. KO fell 1.2% or 81c to settle at $66.93 but later rebounded during the after
hours session to $67.27 or 0.51% higher.

MMM on the other hand, reported Q1 EPS of $1.49 per share, beating analysts’ estimates of $1.44
per share. Q1 revenue was reported at $7.31B, also higher than the expected $6.95B. For full year
2011, EPS is seen between $6.05 and $6.25, roughly within the consensus of $6.22. Capital

1 .DJI 12,595.37 (+115.49 ● +0.93%) .SPX 1,347.24 (+11.99 ● +0.90%) .IXIC 2,847.54 (+21.66 ● +0.77%)
 April 27th 2011

expenditures for FY11 are seen between $1.3B and $1.4B while revenue growth rate is seen at
double digit rate for this year bringing in around $30B in sales. While Japan’s earthquake is seen as
a near-term challenge, the impact could echo throughout the entire FY11, particularly in 2H11 which
could dent EPS by up to 2c. Across the regions, sales were up at double-digit rates. Asia Pacific sales
were up 21%, LatAm/Canada was up 19.5%, Europe grew 13.1%, and US rose 10.2%. MMM
zoomed higher by 1.93% finishing the day at $95.94. According to the company, capital spending
will be focused outside US for the first time to cope with the demand coming from the emerging
markets.

Day Ahead
One Dow component will report on Wednesday before the market opens: BA.

Q1 EPS is seen at 72c on revenue of $15.13B. The consensus ranges between 60c and 91c for EPS
and $14.54B to $16.35B for revenue. Guidance to FY11 earnings is seen at $4.05. During prior
quarter announcement, BA forecast FY11 EPS within the range of $3.80-$4.00, below the consensus
of $4.54. FY11 revenue is seen between $68B and $71B while the consensus was at $69.87B. Risk
faced by BA remains in the government’s realm where budget cuts could dent performance. Do not
forget however, that BA still has a good stream of orders coming from the commercial sector. The
positive side so far is seen on the flow of orders but this too, poses its own risk: delivery capability.
High oil prices could also put restraints on capital spending of airliners.

Other than BA’s earnings and FOMC results, economic data will present the durable goods orders for
March and this is seen posting strong gains of 3% after a 0.6% drop in February.

Reiterating my view on the Fed’s monetary policy, I expect the meeting will end with no changes in
policy. The Fed is tilted to wait until the QE2 program ends in June. Afterwards, I see the Fed will
stand pat while watching the developments in the economy, particularly the labor markets. While not
completely out of the Fed’s consideration, inflation does not seem to be worrying for the Fed. Still,
should the oil prices to remain roughly at the current levels three to six months from now, the
inflationary pressure will definitely seep in to the economy significantly. By that time, the Fed will face
even more pressures to start raising the rates. Late 3Q11 could be the earliest but it is more probable
to expect rate increases in 4Q11.

2 .DJI 12,595.37 (+115.49 ● +0.93%) .SPX 1,347.24 (+11.99 ● +0.90%) .IXIC 2,847.54 (+21.66 ● +0.77%)
 April 27th 2011

Stock Focus: Microsoft Corporation

MSFT
Last Apr 26th Resistances 26.51 27.07 27.63 28.33 28.84
$26.19  2.26% Supports 26.03 25.38 24.68 24.32 22.73
WTD MTD Outlook
 2.63%  3.15% NEUTRAL
YTD 12-Month Price Range
 6.16%  14.24% $22.73-$31.58

Software giant MSFT has been stuck in a trading range between $31.58 and $22.73 since July last
year. Despite its recent foray to the upside, the rally has been blocked by the trio of EMAs. Indicators
suggest near-term upside potential which could be triggered by the assessment of the earnings report
set for release on Thursday. RSI is breaking higher as well as MACD and these points at a rise
towards $28.84. Risk lies also at the earnings report itself as worse-than-expected results could put a
renewed pressure to the stock and send it back to the bottom of the range at $22.73.

3 .DJI 12,595.37 (+115.49 ● +0.93%) .SPX 1,347.24 (+11.99 ● +0.90%) .IXIC 2,847.54 (+21.66 ● +0.77%)
 April 27th 2011

Price Performance - as of Apr 26th 2011

Code Last Dy WTD MTD YTD 12-Mos
AA 17.03 0.83% 0.35% -3.57% 10.66% 26.81%
AXP 47.10 0.11% -0.02% 4.20% 9.74% 2.12%
BA 75.55 0.87% 0.15% 2.19% 15.77% 4.31%
BAC 12.23 -1.69% -0.65% -8.25% -8.32% -31.41%
CAT 111.94 2.84% 2.30% 0.53% 19.52% 64.40%
CSCO 17.52 2.46% 3.42% 2.16% -13.40% -34.94%
CVX 108.75 1.24% 0.57% 1.17% 19.18% 33.53%
DD 55.06 -0.11% -1.52% 0.16% 10.38% 38.20%
DIS 42.33 0.95% 0.14% -1.76% 12.85% 14.90%
GE 20.10 1.06% 0.75% 0.25% 9.90% 6.57%
HD 37.21 -0.93% -1.56% 0.40% 6.13% 5.62%
HPQ 40.69 0.39% -0.73% -0.68% -3.35% -21.70%
IBM 168.49 0.49% 0.12% 3.32% 14.81% 30.61%
INTC 22.48 2.46% 4.75% 11.40% 6.89% -1.58%
JNJ 64.95 1.31% 1.37% 9.62% 5.01% 1.01%
JPM 45.12 1.14% 0.98% -2.13% 6.36% 5.97%
KFT 33.39 0.97% 0.03% 6.47% 5.97% 12.80%
KO 66.93 -1.20% -1.40% 0.89% 1.76% 25.22%
MCD 76.94 -0.25% 0.04% 1.12% 0.23% 9.00%
MMM 95.94 1.93% 2.15% 2.61% 11.17% 8.20%
MRK 35.06 2.13% 3.00% 6.21% -2.72% 0.06%
MSFT 26.19 2.26% 2.63% 3.15% -6.16% -14.24%
PFE 20.19 0.25% 2.02% -0.59% 15.31% 20.75%
PG 63.83 0.73% 0.89% 3.62% -0.78% 2.69%
T 30.94 1.28% 0.85% 1.08% 5.31% 18.73%
TRV 61.39 -0.63% 0.11% 3.21% 10.20% 20.99%
UTX 87.86 1.53% 0.87% 3.79% 11.61% 17.22%
VZ 37.63 1.73% 1.95% -2.36% 5.17% 30.21%
WMT 53.91 1.01% 0.62% 3.57% -0.04% 0.50%
XOM 87.42 1.39% 1.23% 3.91% 19.56% 29.00%

4 .DJI 12,595.37 (+115.49 ● +0.93%) .SPX 1,347.24 (+11.99 ● +0.90%) .IXIC 2,847.54 (+21.66 ● +0.77%)
 April 27th 2011

Analysts' Upgrades & Downgrades

Code House Ratings PT
MSFT CLSA Buy $31.00
MSFT Morgan Stanley Overweight $32.00
n Reiterate n Upgrade n Downgrade n Initiation
US Economic Calendar
Date Time Report Period Actual Forecast Previous
25-Apr 10:00 AM New home sales Mar 300K 290K 270K
26-Apr 9:00 AM Case-Shiller home prices Feb -1.1% - -1.0%
26-Apr 10:00 AM Consumer confidence Apr 65.40 65.0 63.8
27-Apr 8:30 AM Durable goods orders Mar 3.0% -0.6%
27-Apr 8:30 AM Core equipment orders Mar -0.7%
27-Apr 10:00 AM Housing vacancies Q1 14.1%
27-Apr 12:30 PM FOMC statement
28-Apr 8:30 AM Jobless claims 23-Apr 395K 402K
28-Apr 8:30 AM GDP Q1 1.7% 3.1%
28-Apr 10:00 AM Pending home sales Mar 2.1%
29-Apr 8:30 AM Personal income Mar 0.3% 0.3%
29-Apr 8:30 AM Consumer spending Mar 0.5% -0.7%
29-Apr 8:30 AM Core PCE Price Index Mar 0.1% 0.2%
29-Apr 8:30 AM Employment cost index Q1 0.5% 0.4%
29-Apr 9:45 AM Chicago PMI Apr 68.0% 70.6%
29-Apr 9:55 AM Consumer sentiment Apr 70.0 67.5

Disclaimer: This report is provided for information purposes only. It is not an offer to sell or to buy any securities. This
report has been prepared based on sources believed to be reliable, but there is no assurance or guarantee regarding its
completeness and accuracy. The author accepts no responsibility or liability arising from any use of the report.

5 .DJI 12,595.37 (+115.49 ● +0.93%) .SPX 1,347.24 (+11.99 ● +0.90%) .IXIC 2,847.54 (+21.66 ● +0.77%)