February 10, 2010 Americas Equity Morning Summary

Companies Featured
ARST.O, CFN.N, CRL.N, DIS.N, DSCM.O, GHL.N, HIG.N, LAZ.N,
NVDA.O, OPEN.O, PAET.O, PSSA3.SA, RAX.N, T.TO, TNDM.O,
TWTC.O, VLCCF.O


Diversified Financials: M&A Market: Continue to Expect Steady Improvement
but Don’t Look for an Explosion

1) We do not expect M&A market activity to increase significantly overnight. There is still an
elevated level of uncertainty regarding the strength and breadth of the economic recovery, as well
as regulatory and legislative concern in both the US and abroad potentially impacting both capital
to fund deals and the attractiveness of certain industries. 2) Most market participants continue to
expect Europe to lag the US (in line with our current and prior forecasts). In our view, recent
questions about sovereign credit in Europe may only prolong the lag to the US, although it’s too
early to know for certain. 3) Normalized valuation is still a big question mark for many
companies/industries. Given differing views on the state of the economy short- and long-term,
questions about valuation is hindering M&A deals for now.

STEP Commentary: Changes to the US Model Portfolio

We are adding a 2% position in Occidental Petroleum ($77.91). Although we generally seek to
avoid intra-sector swaps in highly correlated stocks, we agree with our analysts that Occidental is
a more compelling near-term (and potentially longer-term) idea. The OXY addition is consistent
with Evan Calio’s upgrade to OW on January 28. We are removing the portfolio’s 2% position in
Devon Energy ($67.30), reflecting our view that OXY has a better growth profile and oil leverage
than Devon. With its plan to divest its international and offshore assets, Devon will evolve into a
North American focused natural gas-levered player – our commodity research team has less
conviction in natural gas than oil over the longer term, in light of structural concerns surrounding
supply.

Equity Derivatives Dynamics/Equities and the Commodities Tail

Oil and equity markets have moved in tandem since the Fall of 2008, but as we move forward,
this strong relationship can weaken, even if it remains positively correlated. There are manypoints in history where oil and equities decoupled, including oil shocks and inflationary times. Our
commodities strategy team remains constructive on oil and argues that significant EM demand
for oil can impose a “burden” on the US economy. Such a sequence of events can be negative for
US equities. In Asia, the strength of the economic rebound is already raising concerns about
inflation risks, and regional equities are typically sensitive to inflation pressures.


FULL REPORT ------HERE