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See Appendix A-1 for Strategist Certification and Important Disclosures




    Thematic Investing
    November 2008


    Edward M. Kerschner, CFA
    Chief Investment Strategist
    Citi Global Wealth Management
    +1.212.559.2323
    edward.kerschner@citi.com
The Global Wealth Management division at Citi comprises two of the most respected brands in wealth management: The Citi Private Bank and Citi Smith Barney. Citi Investment Research
is a division of Citigroup Global Markets Inc. (the quot;Firmquot;), which 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. Non-US
research analysts who have prepared this report are not registered/qualified as research analysts with the NYSE and/or NASD. Such research analysts may not be associated persons of the
member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading
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at no cost to them, where such research is available. Customers can access this independent research at http://www.smithbarney.com (for retail clients) or http://www.citigroupgeo.com (for
institutional clients) or can call (866) 836-9542 to request a copy of this research.

Clients of Citi Private Bank in the U.S. and LATAM must contact their Citi Private Bank branch Financial Advisor for information regarding the securities mentioned herein.

Note: Our “thematic” analysis does not consider stock-specific metrics such as valuation, EPS, and P/E, or balance sheets, market capitalization, liquidity, etc. Accordingly, when making
investment decisions, investors should view thematic analysis as only one input to their investment decision. Since thematic analysis employs a longer-term methodology, its results may
differ from the conclusion of fundamental analysis. For example, in some thematic reports, we may mention specific stocks as being well positioned, but our fundamental analysts may
currently rate some of those stocks Sell owing to valuation.

Published 11/06/08
Table of Contents
                                                                           Page
  Postmodern Populism – The 2008 election and the impact of the likely
                                                                             3
  trend towards “Big Government.”
  Climatic Consequences – Investment implications of the behavioral,
                                                                            12
  regulatory, and physical impact of climate change.

  Water Worries – Precipitation patterns changing, drought increasing,
                                                                            18
  snow cover decreasing, and pollution rising.

  Build & Rebuild – Infrastructure development creates opportunities for
                                                                            24
  builders, owners, and operators of infrastructure assets.

  The Big Fix – The experiences of the US in the 1830s and 1930s, and
                                                                            27
  Japan in the 1990s, reveal 3 separate steps necessary for recovery.




                                                                                  2
And the Winner is…
     The Obama Edge
     • Quantitative models developed by well-regarded presidential historians suggested that Obama had a
       high likelihood of achieving a victory. The Republican Party was dealing with the dreaded “triple
       whammy” in 2008: an unpopular president, a weak economy and a second term election.
   Professor Allan Lichtman’s “Thirteen Keys to the Presidency”
   Key 1 (Party Mandate): After the midterm elections, the incumbent party holds more seats in the US House of Representatives than it did after the prev ious midterm elections.                                FALSE
   Key 2 (Contest): There is no serious contest for the incumbent party nomination.                                                                                                                              TRUE
   Key 3 (Incumbency): The incumbent party candidate is the sitting president.                                                                                                                                   FALSE
   Key 4 (Third Party): There is no significant third-party or independent campaign.                                                                                                                             TRUE
   Key 5 (Short-Term Economy): The economy is not in recession during the election campaign.                                                                                                                   UNCERTAIN
   Key 6 (Long-Term Economy): Real per-capita economic growth during the term equals or exceeds mean growth during the previous two terms.                                                                       FALSE
   Key 7 (Policy Change): The incumbent administration effects major changes in national policy.                                                                                                                 FALSE
   Key 8 (Social Unrest): There is no sustained social unrest during the term.                                                                                                                                   TRUE
   Key 9 (Scandal): The incumbent administration is untainted by major scandal.                                                                                                                                  TRUE
   Key 10 (Foreign/Military Failure): The incumbent administration suffers no major failure in foreign or military affairs.                                                                                      FALSE
   Key 11 (Foreign/Military Success): The incumbent administration achieves a major success in foreign or military affairs.                                                                                      FALSE
   Key 12 (Incumbent Charisma): The incumbent-party candidate is charismatic or a national hero.                                                                                                                 FALSE
   Key 13 (Challenger Charisma): The challenging-party candidate is not charismatic or a national hero.                                                                                                        UNCERTAIN

   Electoral Barometer* and Popular Vote Margin
                                                              30%
                                                                                                                                                   Incumbent Party Won
                                                              25%
                                                                                                                                                               1972           1964
                                                              20%
                                                                                                                                                           1984
                                        Popular Vote Margin




                                                                                                                                                                      1956
                                                              15%

                                                              10%
                                                                                                                                                        1996
                                                                                                                                 1988
                                                               5%                                                      1948
                                                                                                                                     2004
                                                                                                                1960                        2000
                                                               0%                                                             1968
                                                                                                                           1976
                                                              -5%                                              1992
                                                                                                    2008
                                                                         (Reagan Landslide)                                                                                            * Abramowitz Electoral Barometer =
                                                                                        1980
                                                              -10%
                                                                                                                                                                                       President’s net approval rating in Gallup
                                                                                                 1952
                                                                                                                                                                                       Poll + ( 5 x Real GDP growth) - 25
                                                                                         (Eisenhower trounces Stevenson)
                                                              -15%
                                                                        Incumbent Party Lost
                                                              -20%
                                                                 -100         -80        -60       -40        -20       0          20              40          60        80          100
                                                                                                                 Barometer Reading
Source: Professor Allan Lichtman, American University; Professor Alan Abramowitz, Emory University; Citi Investment Research                                                                                                       3
Election ‘08: Back to the Future?
     The Record
     • On average, neither Democrats nor Republicans have been “bad” for the stock market; likewise following
       turnover of Democratic and Republican administrations.
     • The combination of a Democrat president and Republican-controlled Congress has proved most
       favorable for stocks, while an “all blue” combination of a Democrat president and a Democrat-controlled
       congress (i.e., the Obama scenario) has been least favorable.
             Average Change by Presidential Political Party Since 1829
                                                                                                                                                                     3.0
                                                                                3.0%
           50%

                                                                                                                                                                                  Interest Rates (10 Yr Bond)
                                                                                                                  Inflation (CPI)
                            Stock Market (DJIA)                                                                                                                      2.0
                                                                                2.0%
           40%

                                                                                                                                                                     1.0
                                                                                1.0%
                                                             29%                                                                                                                       0.34
           30%
                                                                                                                                                0%
                            24%                                                                                                                                      0.0
                                                                                0.0%
                                                                                                                                                                                                                       -0.33
           20%
                                                                                                                                                                     -1.0
                                                                                -1.0%
                                                                                                          -1%
           10%
                                                                                                                                                                     -2.0
                                                                                -2.0%


                                                                                                                                                                     -3.0
            0%                                                                  -3.0%
                                                                                                                                                                                   Democrat                       Republican
                         Democrat                       Republican                               Democrat                             Republican



            Average Change when Incumbent Political Party Changes Since 1829
                                                                                 3.0%                                                                                 3.0
           60%
                                                                                                                Inflation (CPI)                                                   Interest Rates (10 Yr Bond)
                           Stock Market (DJIA)                                   2.0%                                                                                 2.0
                                                                                                                                                1%
                                                             42%
                             41%                                                 1.0%                                                                                 1.0
                                                                                                                                                                                       0.53
           40%
                                                                                                          0%
                                                                                                                                                                      0.0
                                                                                 0.0%
                                                                                                                                                                                                                       -0.23
                                                                                -1.0%                                                                                -1.0
           20%

                                                                                -2.0%                                                                                -2.0

                                                                                                                                                                     -3.0
                                                                                -3.0%
            0%
                                                                                                 Democrat                             Republican                                   Democrat                       Republican
                         Democrat                       Republican


            Average Change by Political Party in Executive and Legislative Branches Since 1829
            30%                                                                   3.0%                                                                                 3.0
                                                                                                                                                                                 Interest Rates (10 Yr Bond)
                                                                                                                 Inflation (CPI)
                           Stock Market (DJIA)                                    2.0%                                                                                 2.0
                                                                                                                                                        1%
            20%                                                                   1.0%                               0%             1%                                 1.0
                    17%                                                                                                                                                                                                         0.30
                                                                                                                                                                                                                0.07
                                     13%                                          0.0%                                                                                 0.0
                                                      12%
                                                                                                                                                                               -0.11            -0.12
                                                                     8%           -1.0%                                                                               -1.0
            10%
                                                                                  -2.0%                                                                               -2.0
                                                                                                            -
                                                                                  -3.0%                                                                               -3.0
             0%
                                                                                                          -7%                                                                  Dem. Pres       Rep. Pres       Rep. Pres       Dem. Pres
                   Dem. Pres        Rep. Pres       Rep. Pres     Dem. Pres                Dem. Pres              Rep. Pres       Rep. Pres            Dem. Pres
                                                                                                                                                                             Rep. Congress   Rep. Congress   Dem. Congress   Dem. Congress
                                                                                          Rep. Congress         Rep. Congress   Dem. Congress        Dem. Congress
                  Rep. Congress   Rep. Congress   Dem. Congress Dem. Congress

Source: Citi Investment Research                                                                                                                                                                                                             4
Big Government
     A Secular Shift in Opinion
     • The downsizing of the Federal Government may be ending.
     • In 2008 the candidates were tapping into a secular shift in opinion about the desired level of
       government involvement in the economy. In recent years, there has been a trend towards an increase
       in the percentage of Americans saying “government should do more.”
     • About half of the US economy could be at risk of government oversight and regulation.

     Federal Government Expenditures                                                                                                           Value Added by Industry
                                                                                Desired Level of
                (% of GDP)                                                                                                                        (2007 – % of GDP)
                                                                           Government in the Economy
     20%
                                                                                                                                                                                                     47%
                                                                 80%
                                                                               Government should do more
                                                                               Government is doing too many things                                            Agriculture
                                                                                                                                               Construction
                                                                               Linear (Government is doing too many things)                                       0%         Government
                                                                                                                                                   4%                           13%
                                                                               Linear (Government should do more)                      Information
                                                                                                                                           5%
                                                                 60%
                                                                                                                               Manufacturing
     15%
                                                                                                                                   12%
                                                                                                                                                                                           Finance,
                                                                                                                                                                                          Insurance,
                                                                                                                                                                                          Real Estate
                                                                 40%
                                                                                                                                                                                             21%
                                                                                                                              Wholesale &
                                                                                                                              Retail Trade
     10%                                                                                                                         12%

                                                                 20%                                                                                                                    Healthcare
                                                                                                                                                                                           7%
                                                                                                                                                                              Transportation
                                                                                                                                               Services                               3%
                                                                                                                                                                              Utilities
                                                                                                                                                 19%                Mining
                                                                                                                                                                                2%
                                                                                                                                                                     2%
      5%                                                           0%
        1950    1960    1970    1980    1990    2000    2010             Dec- Dec- Jan- Mar- Sep- Jul- Sep- Oct-
                                                                         1995 1997 2002 2007 2007 2008 2008 2008




Source: The Wall Street Journal / NBC News Poll; Bureau of Economic Analysis                                                                                                                               5
Populist Record
      • pop•u•list
          § Pronunciation: 'pä-py&-list
            Function: noun
            Etymology: Latin populus the people
          § A member of a political party claiming to represent the common people.

      • Early American Populism
                             Teddy Roosevelt’s “Trust-Busting”                                   Andrew Jackson Kills the Bank of the US
                            The Great Merger Wave of 1898–1903 was brought to                        Jackson effectively destroyed the bank by vetoing its
                            an end by effective federal intervention, most notably                   1832 re-charter by Congress, halting the deposit of
                            President Theodore Roosevelt’ s celebrated trust-                        U.S. funds in 1833, and letting it slowly decline until the
                            busting, which began with a 1904 Supreme Court case.                     expiration of its charter in 1836.

                            In addition to the end of the merger wave, a recession                   Jackson’s actions effectively ended all monetary
                            that lasted throughout 1903 and until the third quarter of               restraint in the U.S. The resulting “Panic of 1837”
                            1904 also took its toll on stocks. Public commentary at                  caused a collapse of the banking system, a multi-year
                            the time blamed Roosevelt’ s ‘trust- busting’ for the                    depression, and a prolonged bear market.
                            Panic of 1907.

                               Dow Jones Industrial Average:                                            Dow Jones Industrial Average:
                                       1895-1910                                                                 1830-1850
                                                                                                25
                   80
                                                                                                                            “Panic of 1837”
                                                                                                20
                   60

                                                                                                15

                   40
                                                                                                10

                                                     “Panic of 1907”
                                                                                                5
                   20
                                                                                                 1830          1835            1840            1845           1850
                     1895                   1900                      1905               1910
Source: Merriam-Webster; Historical Statistics of the United States                                                                                                  6
Populist Record
      • Modern American Populism

                                                                                                                                                             Carter’s Stagflation
                                                                       LBJ’s                                            Nixon:
                         JFK
                                                                                                                                                              The “Misery Index”
                                                                   “Great Society”                                The Silent Populist
                     vs. Big Steel
                                                                                                                                                         (Inflation + Unemployment)
           America was in a “golden age” of                 “Great Society ” promised to stamp               Nixon was preoccupied with foreign   25%
           low inflation and rapid growth, with             out poverty in both rural and urban              affairs. Nixon was often quoted as
           few excesses in the financial                    settings. LBJ pursued Medicare,                  saying: “You don’t really need a     20%
           system, which was still heavily                  Medicaid, aid to education, and a                President for domestic policy.”
           regulated.                                       major “War on Poverty.”
                                                                                                                                                  15%
                                                                                                             But domestically, it was a very
           But, JFK’s victory over Big Steel                Unfortunately, the decision to fight             active regulatory period: EPA,
                                                                                                                                                  10%
           undercut business confidence,                    both the War on Poverty and the                  Consumer Product Safety
           provoking fears that the President               War in Vietnam led to inflation,                 Commission, OSHA and for a time,
           intended to initiate de facto controls           rising interest rates and the end of             wage and price controls.              5%
           on prices and profits.                           a bull market.
                                                                                                                                                   0%
                                                                                                                                                     1950 1960 1970 1980 1990 2000 2010

                                                                      Dow Jones Industrial Average:1960-1980
   1200

                         DJIA           Real DJIA
   1000


    800

                                                                                                                                                                       Adjusted for
                                                                                                                                                                        inflation,
    600

                                                                                                                                                                      DJIA falls 47%
    400


    200
      1960                                              1965                                               1970                                   1975                         1980

Source: Bureau of Labor Statistics; Historical Statistics of the United States; Citi Investment Research                                                                                  7
Populist Pause
     • The 28 year pause began with the “Reagan Revolution.”


                                                                                                                               President Clinton’s Tenure
             Top Marginal Income Tax Rate                                             Populist Pause
                                                                                        1980-2008
  100%
                                                                                                                           Clinton signed into law welfare reform, so people
                                                                       1981 – Ronald Reagan                                had to look for a job before being eligible for
                                                                                                                           welfare; ended the “retirement test” for Social
   80%
                                                                                                                           Security benefits; pushed NAFTA; signed the
                                                                       1989 – George H.W. Bush
                                                                                                                           largest capital gains tax cut ever and reduced
                                                                                                                           government spending as a share of GDP by 3
   60%                                                                 1993 – Bill Clinton
                                                                                                                           percentage points.
                                                                                                                           By reacting to the political environment and posing
                                                                       2001 – George W. Bush
   40%
                                                                                                                           as “a New Democrat, an Old Democrat, and
                                                                                                                           ultimately, in effect, a moderate Republican,” (as
                                                                                                                           The Economist pointed out), Clinton created a
   20%
                                                                                                                           very favorable environment for investors
        1950     1960     1970     1980     1990     2000     2010


                                                                     Dow Jones Industrial Average:1980-2008
  16,000

                        DJIA          Real DJIA
  12,000



                                                                                                                                                       Adjusted for
    8,000

                                                                                                                                                         inflation,
                                                                                                                                                      DJIA gains 340%
    4,000



         0
          1980                          1985                           1990                          1995           2000                       2005                        2010

Source: Tax Policy Center; Citi Investment Research; The Economist, Which Bill Clinton?, August 24, 1996; FactSet                                                                 8
Populist Platforms
     Taxes
     • On the last three occasions when there has been incumbent party change, in the post-election year
       Congress has passed a major fiscal package that has included significant changes to tax rates.
     • Obama offers large tax breaks to low- and middle-income taxpayers.
     • A number of key tax provisions expire in 2010, and revert to their previous levels.

                        Election Year          Post-Election Year      Winning Party   Winning President   Fiscal Reform
                        1976                                           Democrat        Carter
                        1980                                           Republican      Reagan
                                               1981                                                        Economic Recovery Tax Act of 1981
                        1984                                           Republican      Reagan
                        1988                                           Republican      G.H.W. Bush
                        1992                                           Democrat        Clinton
                                               1993                                                        Omnibus Budget Reconciliation Act of 1993
                        1996                                           Democrat        Clinton
                        2000                                           Republican      Bush
                                               2001                                                        Economic Growth and Tax Relief Reconciliation Act of 2001
                        2004                                           Republican      Bush
                        2008                                           Democrat        Obama
                                               2009                                                        ?????

                                  Top Federal Tax Rate:                                                            Select Tax Rates:
                               Today and Under Obama Plan                                                       Currently and Post 2010
              60%
                                                                                                                                      Currently        Post-2010
                          Itemized Deduction Phaseout
                          Top Federal Tax Rate                                                             Income Tax Brackets          35.0%           39.6%
                                                                    48.65%
              50%         Social Security Payroll Tax
                                                                                                           (High to Low)                33.0%           36.0%
                          Medicare Payroll Tax
                                                                                                                                        28.0%           31.0%
              40%                  36.45%
                                                                                                                                        25.0%           28.0%
                                                                                                                                        15.0%           15.0%
              30%
                                                                                                                                        10.0%           15.0%
              20%                                                                                          Stock Dividends:                            Taxed as
                                                                                                                                        15.0%          ordinary
                                                                                                           Rate for taxpayers
              10%                                                                                                                                       income
                                                                                                           above the 15% bracket
                                                                                                           Capital Gains:
                0%
                                                                                                                                        15.0%           20.0%
                                                                                                           Rate for taxpayers
                                    Today                           Obama?
                                                                                                           above the 15% bracket
Source: Citi Investment Research; Tax Policy Center                                                                                                                    9
Postmodern Populism
      • President-elect Obama’s electoral platform suggests that more sectors are at risk than stand to benefit.


         At Risk                      Sector       Sub-Sector                       Comment

                                      Energy       Big Oil Companies                Obama has proposed windfall profit taxes when a barrel of oil is over $80

                                                   Coal Miners                      A carbon cap and trade regime would favor natural gas and nuclear power

                                      Finance      Alternative Investments          Obama supports taxing carried interest as regular income

                                                   Brokers & Asset Managers         A higher tax on capital gains would be a negative
                                                   Credit Card Companies            Obama has proposed to ban universal defaults, and interest on fees
                                                   Multi-line Insurance Companies   Obama has proposed preventing insurers from overcharging for malpractice insurance
                                                   Tax Preparation Companies        Obama has proposed simplifying tax filings for middle class Americans
                                      Healthcare   Biotech                          “Biogenerics” (i.e., generic biotech drugs) a negative
                                                   Managed Care                     Government intervention poses risks
                                                   Pharmaceuticals                  Greater government role in Medicare drug prices
                                      Retail       Upscale Retailers                Higher taxes on upper-income groups would be a negative for luxury goods

                                      Utilities    Coal-burning Utilities           Potentially at risk from a carbon cap and trade regime

                                                   High Payout Utilities            A higher tax on dividends would be a negative for high payout stocks




         Relatively Well-Positioned   Sector       Sub-Sector                       Comment

                                      Energy       Ethanol Producers                Obama supports subsidies and tariffs for ethanol
                                                   Nuclear-powered Utilities        Well-positioned under a carbon cap and trade regime
                                                   Solar Industry                   Obama favors renewable power sources
                                                   Wind Power Industry              Obama favors renewable power sources
                                      Healthcare   Drugstores                       What they lose from brand name pricing pressure, they make up on movement to generics
                                                   Generic Drug Makers              Generics would help the government save money under a universal healthcare system
                                      Retail       Low -end Retailers               Obama’s tax cuts would primarily benefit those with very low incomes




Source: Citi Investment Research                                                                                                                                            10
Postmodern Populism
     • Party does not dictate stock market direction. Fundamentals, such as growth and inflation, have much
       more significance. The DJIA rallied in the period following the election victories of populist Democrats
       Carter, LBJ, and JFK, and then performed poorly following Carter’s inauguration (reflecting stagflation),
       but continued to do well early during the administrations of LBJ and JFK (reflecting economic stimulus).
     • But the record of modern populism (1960 – 1980) was a stock market that zigged and zagged, and rose
       modestly in nominal terms, but declined 47% in real terms.
     • Will Obama emulate Clinton, who “posed as a New Democrat, an Old Democrat, and ultimately, in
       effect, a moderate Republican,” or modern populists JFK and LBJ, big government social activists?

                                                       DJIA Performance following the Election of First Term Populists
                                                                                                                                                   Inauguration thru 1 st Year
                                                   Election thru Inauguration                Inauguration thru First 100 Days                                                               Inauguration thru First Term
Average of Populist Presidents                                           3%                                         -1%                                        -2%                                               12%
J. Carter (1976)                                                         4%                                         -8%                                       -17%                                               -4%
R. Nixon (1968)                                                         -2%                                          2%                                       -14%                                               10%
L. Johnson (1964)                                                        2%                                          3%                                         8%                                                5%
J. Kennedy (1960)                                                        6%                                          7%                                        15%                                               18%
T. Roosevelt (1901)                                                       -                                         -9%                                        -9%                                                0%
A. Jackson (1828)                                                        2%                                          0%                                         6%                                               42%


                     DJIA Performance                       DJIA Performance                      DJIA Performance
          (Avg. 1 st Term Presidents since 1829) (Avg. when Dem. replaces Rep. since 1829) (Avg. Select Populists since 1829)
                                                                                                                                                              80%
                                                                                     80%
         80%
                                                                                                                                             69%

                                                                                     60%
         60%                                                                                                                                                  60%

                                                                       33%
                                                                                                                                                              40%
                                                                                     40%
         40%

                                                                                                                                                              20%
                                                                                     20%
         20%                                                                                                                                                                                                                12%
                                                                                                                              11%
                                                                                                               7%
                                                      2%                                                                                                                 3%
                    2%              1%
                                                                                                                                                               0%
                                                                                      0%
          0%
                                                                                                                                                                                         -1%               -2%
                                                                                                -2%
                                                                                                                                                             -20%
         -20%                                                                        -20%
                                                                                                                                                                     Election thru   Inauguration      Inauguration      Inauguration
                                                                                            Election thru Inauguration Inauguration Inauguration
                Election thru   Inauguration      Inauguration      Inauguration
                                                                                                                                                                     Inauguration    thru first 100   thru first year   thru first term
                                                                                            Inauguration thru first 100 thru first year thru first term
                Inauguration    thru first 100   thru first year   thru first term
                                                                                                                                                                                         days
                                                                                                              days
                                    days
Source: Citi Investment Research                                                                                                                                                                                                          11
Climatic Consequences
    • For investors, the issue is not whether climate change is occurring. Governments, regulators, corporations,
      and individuals are reacting to the perceived threat of climate change.
    • In the past 420,000 years, there have been four transitions from glacial to warm periods. All of the four
      transitions were accompanied by increases in atmospheric carbon dioxide.
    • GHG abatement is not necessarily “Green.”
    • Climate change initiatives are part of a much broader agenda

                                                               Variation with Time of Temperature                                                                       “Mammoth with the Eye”
                                                                and Carbon Dioxide (CO2) Levels                                                                           (18,000-13,500 B.C.)
                               390                                                                                                               15
                                                                 CO2 levels today are 25%
                                     Carbon Dioxide (LHS)
                                                                                                                   Degrees Variation (RHS)
                               360

                                                                  above prior peak levels
       Carbon Dioxide (PPMV)




                                                                                                                                                 10
                               330

                                                                                                                                                 5
                               300

                               270
                                                                                                                                                 0
                               240
                                                                                                                                                 -5
                               210

                               180                                                                                                               -10
                                      400,000        350,000     300,000   250,000      200,000       150,000   100,000       50,000         0
                                                                               Years Before Present

                                                                                                                                                                       Multiple Agendas
                                                    Climate Friendly vs. Green
                                                                                                                                                                                                       $100 oil
                                                                                                                                                        Environmental                  Economic
                                            CLIMATE FRIENDLY                         “GREEN”
                                                                                                                                                       Climate Change              Energy Efficiency
                                             Nuclear Power Plants                Radioactive Waste

                                                 Coal Gasification                  Noxious CO2

                                                Hydroelectric Power           Environmental Damage

                                                   Wind Farms                 Deaths of Birds & Bats
                                                                                                                       Finland                                                                         Developing
                                                                                                                   Nuclear Power vs
                                                Diesel Fueled Cars                 Air Pollutants
                                                                                                                                                                                                        Markets
                                                                                                                                                       Energy Security              “Fuel Poverty ”
                                                                                                                     Russian Gas                                                                        Source
                                                Biofuel Production            Threat to Rare Species
                                                                                                                                                           Political                    Social

Source: J.R. Petit, et al., Climate and atmospheric history of the past 420,000 years from the Vostok ice core, Antarctica, Nature 399 (1999); Grotte de Rouffignac, France; Citi Investment Research               12
Climate: Regulatory Response
    • Two tracks of negotiations will continue: (i) Kyoto-track (excludes US); (ii) Bali track (includes US), and
      which are expected to converge in Copenhagen in December 2009.
    • 44-76% of global GDP has committed to reducing GHG emissions under Kyoto.
    • Despite the US not signing Kyoto, 26 states (59% of GSP) will curb GHG emissions by 2012.

   Kyoto Timeline
                       The United Nations Framework Convention on Climate Change (UNFCCC) began to negotiate a global treaty to reduce the emissions ofsix GHGs.
        1992
                       Kyoto Protocol was adopted at the Convention’s third meeting in Kyoto, Japan.
        1997
                       Industrialized and transition economies assumed binding emission caps to be achieved during the five-year period from 2008 to 2012.
        2008
                       § Kyoto-Track: Kyoto parties; Finalize second round of targets.
                       § Bali-Track: All Countries; Develop initial commitments for many developing nations and US.

                       15th Conference of the Parties in Copenhagen
        2009


      GHG Emissions by Country (2002)                                  Percentage of Global GDP                                         US Gross State Product
      (E.U. 25, 16%)                                             Accounted for by Kyoto “Annex 1 ” Countries                               likely Covered by
                                                                                                                                    GHG Emissions Schemes by 2012
       Other - Non-                         US                  100%
                                                                                                                                                                            RGGI - Total
                                           23%
        Annex 1                                                                                                                                                              10 States,
                                                                           76%
          25%                                                    80%                                                                                                            19%


                                                                 60%                                                                Other, 41%
                                                                                        47%                          46%
                                                                                                       44%
                                                                 40%
       Other -
                                                                                                                                                                                   WCI - Total 7
      Annex 1                                  China
                                                                                                                                                                                   States, 20%
                                                                 20%
        11%                                    15%
     France
       2% Italy                                                   0%
                                         Russia
                                                                           Total      Ex. US and     Ex. US,       Ex. US and
                                          6%
           2%      U.K. India                                                                                                                                      MGGA - Total
                                                                                       Australia   Australia and    Canada                          Separate
                                                                                                                                                                   6 States, 13%
             Canada 2% 4%          Japan                                                             Canada                                      Initiatives, 8%
                     Germany        5%
               2%
                                                                                                                                          RGGI: CT, DE, MA, ME, MD, NH, NJ, NY, RI, VT
                       3%
                                                                                                                                          WCI: AZ, CA, MT, NM, OR, UT, WA
                                                                                                                                          MGGA: IL, IA, KS, MI, MN, WI
Source: United Nations Framework Convention on Climate Change (UNFCC); Citi Investment Research                                           Separate Initiatives: CO, FL, HI,                        13
Climate: Regulatory Implications
    Power Generation
    • Nuclear power plants are completely carbon-free sources of electricity, but the electricity generated by a
      nuclear power plant costs more than electricity generated by fossil fuels.
    • Nuclear power is increasing, mainly in China, India and Russia, as a response to strong power demand,
      greenhouse gas emission concerns, and energy security fears; a 65% increase in capacity by 2015.
    • Coal is the most abundant hydrocarbon. Clean, climate-friendly coal will need to be big part of solution.

                               Carbon Content of Fuels                                                                 US Electricity Generation Costs
                           (Tons of carbon/terajoule of energy)                                                                  (Cents/kWh)
                     30                                                                                          8
                                                                                                                          6.7
                                                                                                                 6
                     20                                                                                                                       3.8 - 5.6
                                                                                                                                                                     4.2
                                                                                                                 4
                     10
                                                                                                                 2
                                                                              0
                      0                                                                                          0
                               Coal            Oil            Gas          Nuclear                                      Nuclear     Natural Gas           Oil*      Coal
                          Global Nuclear Electricity Generation                                                      Carbon Capture Technologies Cost
                                      (Gigawatts)                                                                              (Cents/kWh)
                 800                                                                                            10
                                  Operating/Building      Planned     Proposed
                                                                                                                                                                    7.7
                                                                                                                 8
                                                                                                                                                          7.0
                 600                                                                                                                    6.5
                                                                                                                 6
                                                                                                                          4.8
                 400
                                                                                                                 4

                 200                                                                                             2

                                                                                                                  0
                    0                                                                                                  No Capture   Gasification      Oxy           Post
Source: World Resources Institute; Citi Investment Research; World Nuclear Organization; US Consulting; Bloomberg                                                             14
                                                                                                                                                   Combustion    Combustion
Climate: Regulatory Implications
    Renewable Energy Technologies
                Mature             Hydroelectric, Geothermal, Landfill Gas, Onshore Wind
          §

                Maturing           Offshore Wind
          §

                Viable             Photovoltaic Solar
          §


    Global Renewable Energy                                   Wind Turbine                                                  Wind Capacity Installed                                 New Wind Capacity Installed
        Existing Capacity                              Cum. Installed Capacity (gW)                                              (by Country)                                           (2007 – Megawatts)
                                                     200
       (2006 - excl. Hydro)                                                                                                                                                                                    Rest of
                                                                                                                                                                                                  Canada,
                                                                  Rest of World                                                                                                                               World, 1723
                                                                                                                                                                                                    386
                                                                                                                                 Rest of World,
                                Ocean                             Asia
                    Solar PV                                                                                                         14%
                                (tidal)                                                                                                                                                   UK, 427
                                                                  Americas
           Geo-                                      160
                       6%                                                                                                                                                            Portugal,
                                                                                                                                                                   Germany, 23%
                                  0%                                                                                                                                                                                               U.S., 5244
                                                                  Europe
          thermal                                                                                                                                                                      434
                                                                                                                         Portugal, 2%
            8%
                                                                                                                                                                                     Italy, 603
                                                                                                                            UK, 3%
                                                     120
                                                           10 yr CAGR = 25%
                                                                                                                         France, 3%                                                France, 888
                                                                                                                          Italy, 3%
                                                                                                                                                                                      Germany,
                                                      80                                                             Denmark, 3%
                                                                                                                                                                                        1667
                                          Wind
                                                                                                                          China, 6%
     Biomass                                                                                                                                                           U.S., 18%
                                          54%
       and                                            40
                                                                                                                                                                                        India, 1730                                 Spain, 3522
      Waste
                                                                                                                                 India, 9%
       33%
                                                                                                                                                                                                            China, 3449
                                                       0                                                                                              Spain, 16%
                                                           2000     2002     2004      2006      2008E    2010E


                                                                                                                                                                    Global Polysilicon Supply-Demand
                                                                                 Levelized Cost by Source
               US Wind Power Classification
                                                                                                                                                                               (Metric Tons)
                                                                           in Global Electricity Supply (US$/kWh)
                                                                                                                                                                   200
                                                                           $0.50
                                                                                                                                                                            Polysilicon Demand                     Polysilicon Supply
                                                                           $0.40
                                                                                                                                                                   150

                                                                           $0.30

                                                                                                                                                                   100
                                                                           $0.20

                        Texas
                                                                           $0.10                                                                                    50


                                                                           $0.00
                                                                                                                                                                      0
                                                                                     Solar    Hydro    Geo    Wind (1-           Nuclear      Coal      Gas
                                                                                    (~1%)     (20%)   (<1%)    2%)                (25%)      (40%)     (15%)
                                                                                                                                                                             2006          2007             2008            2009       2010
                                                                                                Renewable                                  Traditional
Source: Renewable Energy Policy Network for the 21 st Century; Global Wind Energy Council; US Department of Energy; Citi Investment Research                                                                                                      15
Climate: Regulatory Implications
      Transportation
      • Increased Fuel Efficiency
      • Alternative Fuels
           § Corn ethanol can only ever be a fuel additive; there’s just not enough corn to replace motor fuels.
           § Cellulosic technology may offer a way for ethanol to become a major source of motor fuel.

      • The Climate Backlash: “Food versus Fuel”
                         CO2 Emissions Relative to Conventional Engine                                                                               Automobile
                               (“Well-to-Wheel” carbon emissions)                                                                         GHG Emission Reduction Technologies
                                                                                                                                                         Advanced Gasoline Engine
                     Conventional engine                                                                                       Advanced Diesel Engine
                                                                                                                                                         BorgWarner
                                                                                               BorgWarner                      Honda, Peugeot, Tenneco
               Advanced gasoline engine
                                                                                                                                                                                                            Biofuels
                         Advanced diesel                                            Honda, Peugeot, Tenneco
                                                                                                                                     Hybrid Technology
                      Fuel cell (gasoline)
                                                                                                                                     Toyota Motor
                          Gasoline hybrid                                       Toyota Motor
         Fuel cell (Hydrogen from nat gas)
                            Diesel hybrid
      Fuel Cell (Hydrogen from renewables)          0

                                                                                                                                                                            Vehicle Load Reduction
                                             0%           20%          40%            60%            80%             100%
                                                                                                                                                                            Magna International
             US Corn Yields (Bushels/Acre)                                                       US Corn Prices (Cents/Bushel)
                                                                                                                                                         § Increased biofuels production accounts for only 2-3%
                                                                                     900
165
                                                                                                                                                           of overall increase in global food prices.
           Despite a 20% increase
                                                                                                                                                         § The “food versus fuel” debate ignores the inevitability
                                                                                                            . . . prices have been rising
              in corn yields . . .
                                                                                     700
155
                                                                                                                                                           of technological progress, and echoes Malthus’s
                                                                                                                                                           argument in 1798 that the starvation of Great Britain
                                                                                     500
145
                                                                                                                                                           was inevitable and imminent.
                                                                                                                                                         § Converting forest and grassland to crop, corn-based
                                                                                     300
135                                                                                                                                                        ethanol nearly doubles greenhouse emissions over 30
                                                                                                                                                           years and increases greenhouse gases for 167 years.
                                                                                     100                                                                 § Corn ethanol requires 3-4x more water than
125
   1996         1998         2000            2002       2004    2006     2008           1996       1998       2000     2002   2004     2006   2008
                                                                                                                                                           conventional crude refining.
Source: World Resources Institute, US Department of Agriculture; Citi Investment Research; Global Financial Data                                                                                                       16
Climate: Physical Implications
    • In recent years there have been a number of climatic trends:
         § Temperature — a warming of the global climate, but not every year, everywhere.
         § Wind — an increase in the frequency of intense hurricanes.
         § Water Worries — climate change is having a significant impact.


                                                                      Global Annual Temperature Anomalies
                               1.0


                               0.6


                               0.2


                              -0.2


                              -0.6
                                  1850                1875                1900               1925                1950                1975               2000                2025


                                                                                                                        Factors in the Water Supply-Demand Balance
                          Category 4 and 5 Hurricanes (% of total)
                                                                                  (41%)                                             Supply                               Demand
          West Pacific
                                                                    (25%)
                                                     (34%)
                                                                                                                                 Precipitation
         South Indian                    (18%)
                                                                                                                               Patterns Changing
                                                (35%)
          East Pacific
                                                                                                                                     Drought                          Emerging market
                                             (25%)
                                       (25%)
         North Atlantic                                                                                                             Increasing                        consumer sector
                                    (20%)
                                      (28%)
    Southwest Pacific                                                                                                              Snow Cover                       Developed economy
                                 (12%)
                                                                                                                                   Decreasing                         industrial sector
                                (25%)               1975-1989             1990-2004
          North Indian
                              (8%)
                                                                                                                                 Pollution Rising
                          0       20       40        60       80       100       120      140


Source: University of East Anglia, Norwich, UK; Changes in Tropical Cyclone Number, Duration, and Intensity in a Warming Environment, PJ Webster, et. Al, Science, September 2005; Citi Investment Research 17
Water Worries: Precipitation
    Precipitation Patterns Changing
                  Heavier
             §
                  Briefer
             §
                  Less Frequent
             §
                  Changing locations
             §

    • Australia has had wetter conditions in the past 30 years, but the distribution of rainfall has changed.
    • Spain’s severe drought continues; in late 2007, water levels in reservoirs resumed downward trend.

     Percentage of Total Global Land Area in Very Dry Conditions                                                     Trend in Australian Annual Rainfall
                    (Land areas within 600S – 750N)                                                                        (1970-2007, Millimeters)
            40%
                       Global very dry areas have more
                        than doubled since the 1970s
            30%


            20%


            10%

             0%
               1960             1970            1980             1990            2000              2010

    Rainfall Distribution                                                                                          Water Levels of Spanish Reservoirs
              Over India                                                                                            (Percent of Capacity – 12 mo. MA)
             During 2007                                                                                  80%
       Monsoon Season
                                                                            In India 50% of
                                                                                                                                       Atlantic   Mediterranean

                                                                           annual precipitation           60%

                                                                            takes place in 15
                                                                                   days                   40%


                                                                                                          20%
                                                                                                            2005       2006     2007      2008    2009            2010
Source: IPCC; Australian Bureau of Meteorology; Indian Ministry of Power; Ministerio de Ambiento                                                                         18
Water Worries: Droughts/Snow Cover
    Snow Cover Decreasing
    • From the South American Andes to the Asian Indus River basin the area covered by glaciers is shrinking.
    • In southwest US a reduction in water availability below current consumption is projected within 20 years.
    Drought Increasing
    • Drought increases, as precipitation over land has marginally decreased while evaporation has increased.

                                                                                                                        Anomaly of Northern Hemisphere
                                                                                                                             Snow Cover Extent
                                                                                                        3



                                                                                                        1


                                                                                                       -1


                                                                                                       -3
                                                                                                            1960          1970    1980     1990    2000    2010


                                                                                                               Palmer Drought Severity Index
                   Colorado River: Flow at Lees Ferry (U.S.)
                                                                                                Cumulative deficit relative to local mean in surface land moisture
                     minus 108 Yr Avg. (Million Acre Feet)
                                                                                                       2
         12
          8

                                                                                                       1
          4
          0

                                                                                                       0
         -4

         -8

                                                                                                      -1
        -12
                                                                                                        1960             1970     1980     1990     2000   2010
           1900          1920           1940          1960           1980          2000

Source: National Center for Atmospheric Research; Rutgers University Global Snow Lab; Upper Colorado River Commission                                                19
Water Worries: Desalination
    • Desalination has become a viable option.
    • Globally there are currently over 200 desalination plants in planning or up for consideration.

                                 Global Water Desalination Capacity                                                               Current Desalination Projects
                                    (Millions of Cubic Meters/Day)                                                                (by Country - % of Global Total)
                                                                                                                                                                Spain
                    120
                                                                                                                                    Others                       18%
                                                                                                                                    29%


                     80
                                                                                                                                                                        U.S.
                                                                                                                                                                        13%

                     40
                                                                                                                                  India
                                                                                                                                                                        UAE
                                                                                                                                   5%
                                                                                                                                                                        9%
                                                                                                                                       Libya
                                                                                                                                        5% China
                       0                                                                                                                                    Saudi
                                                                                                                                             6% Australia   Arabia
                       1988       1992       1996       2000      2004       2008          2012     2016                                          7%         8%

                                                     Cost of Water                                                      Proposed Desalination Plants in California
                                                       (US$/m 3)

                 France
                Germany
                     UK
               Australia
                     US
                 Japan
         US (Tampa Bay)
                Algeria
                 Israel
                 Russia
                  Africa                                                                    Groundwater
                  China
                                                                                            Desalination
                   India

                        $0.00              $1.00               $2.00               $3.00                   $4.00


Source: Global Water Intelligence; United Nations Educational Scientific and Cultural Organization; Citi Investment Research; Pacific Institute                                20
Thematic Investing
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Thematic Investing

  • 1. See Appendix A-1 for Strategist Certification and Important Disclosures Thematic Investing November 2008 Edward M. Kerschner, CFA Chief Investment Strategist Citi Global Wealth Management +1.212.559.2323 edward.kerschner@citi.com The Global Wealth Management division at Citi comprises two of the most respected brands in wealth management: The Citi Private Bank and Citi Smith Barney. Citi Investment Research is a division of Citigroup Global Markets Inc. (the quot;Firmquot;), which 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. Non-US research analysts who have prepared this report are not registered/qualified as research analysts with the NYSE and/or NASD. Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. Customers of the Firm in the United States can receive independent third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at http://www.smithbarney.com (for retail clients) or http://www.citigroupgeo.com (for institutional clients) or can call (866) 836-9542 to request a copy of this research. Clients of Citi Private Bank in the U.S. and LATAM must contact their Citi Private Bank branch Financial Advisor for information regarding the securities mentioned herein. Note: Our “thematic” analysis does not consider stock-specific metrics such as valuation, EPS, and P/E, or balance sheets, market capitalization, liquidity, etc. Accordingly, when making investment decisions, investors should view thematic analysis as only one input to their investment decision. Since thematic analysis employs a longer-term methodology, its results may differ from the conclusion of fundamental analysis. For example, in some thematic reports, we may mention specific stocks as being well positioned, but our fundamental analysts may currently rate some of those stocks Sell owing to valuation. Published 11/06/08
  • 2. Table of Contents Page Postmodern Populism – The 2008 election and the impact of the likely 3 trend towards “Big Government.” Climatic Consequences – Investment implications of the behavioral, 12 regulatory, and physical impact of climate change. Water Worries – Precipitation patterns changing, drought increasing, 18 snow cover decreasing, and pollution rising. Build & Rebuild – Infrastructure development creates opportunities for 24 builders, owners, and operators of infrastructure assets. The Big Fix – The experiences of the US in the 1830s and 1930s, and 27 Japan in the 1990s, reveal 3 separate steps necessary for recovery. 2
  • 3. And the Winner is… The Obama Edge • Quantitative models developed by well-regarded presidential historians suggested that Obama had a high likelihood of achieving a victory. The Republican Party was dealing with the dreaded “triple whammy” in 2008: an unpopular president, a weak economy and a second term election. Professor Allan Lichtman’s “Thirteen Keys to the Presidency” Key 1 (Party Mandate): After the midterm elections, the incumbent party holds more seats in the US House of Representatives than it did after the prev ious midterm elections. FALSE Key 2 (Contest): There is no serious contest for the incumbent party nomination. TRUE Key 3 (Incumbency): The incumbent party candidate is the sitting president. FALSE Key 4 (Third Party): There is no significant third-party or independent campaign. TRUE Key 5 (Short-Term Economy): The economy is not in recession during the election campaign. UNCERTAIN Key 6 (Long-Term Economy): Real per-capita economic growth during the term equals or exceeds mean growth during the previous two terms. FALSE Key 7 (Policy Change): The incumbent administration effects major changes in national policy. FALSE Key 8 (Social Unrest): There is no sustained social unrest during the term. TRUE Key 9 (Scandal): The incumbent administration is untainted by major scandal. TRUE Key 10 (Foreign/Military Failure): The incumbent administration suffers no major failure in foreign or military affairs. FALSE Key 11 (Foreign/Military Success): The incumbent administration achieves a major success in foreign or military affairs. FALSE Key 12 (Incumbent Charisma): The incumbent-party candidate is charismatic or a national hero. FALSE Key 13 (Challenger Charisma): The challenging-party candidate is not charismatic or a national hero. UNCERTAIN Electoral Barometer* and Popular Vote Margin 30% Incumbent Party Won 25% 1972 1964 20% 1984 Popular Vote Margin 1956 15% 10% 1996 1988 5% 1948 2004 1960 2000 0% 1968 1976 -5% 1992 2008 (Reagan Landslide) * Abramowitz Electoral Barometer = 1980 -10% President’s net approval rating in Gallup 1952 Poll + ( 5 x Real GDP growth) - 25 (Eisenhower trounces Stevenson) -15% Incumbent Party Lost -20% -100 -80 -60 -40 -20 0 20 40 60 80 100 Barometer Reading Source: Professor Allan Lichtman, American University; Professor Alan Abramowitz, Emory University; Citi Investment Research 3
  • 4. Election ‘08: Back to the Future? The Record • On average, neither Democrats nor Republicans have been “bad” for the stock market; likewise following turnover of Democratic and Republican administrations. • The combination of a Democrat president and Republican-controlled Congress has proved most favorable for stocks, while an “all blue” combination of a Democrat president and a Democrat-controlled congress (i.e., the Obama scenario) has been least favorable. Average Change by Presidential Political Party Since 1829 3.0 3.0% 50% Interest Rates (10 Yr Bond) Inflation (CPI) Stock Market (DJIA) 2.0 2.0% 40% 1.0 1.0% 29% 0.34 30% 0% 24% 0.0 0.0% -0.33 20% -1.0 -1.0% -1% 10% -2.0 -2.0% -3.0 0% -3.0% Democrat Republican Democrat Republican Democrat Republican Average Change when Incumbent Political Party Changes Since 1829 3.0% 3.0 60% Inflation (CPI) Interest Rates (10 Yr Bond) Stock Market (DJIA) 2.0% 2.0 1% 42% 41% 1.0% 1.0 0.53 40% 0% 0.0 0.0% -0.23 -1.0% -1.0 20% -2.0% -2.0 -3.0 -3.0% 0% Democrat Republican Democrat Republican Democrat Republican Average Change by Political Party in Executive and Legislative Branches Since 1829 30% 3.0% 3.0 Interest Rates (10 Yr Bond) Inflation (CPI) Stock Market (DJIA) 2.0% 2.0 1% 20% 1.0% 0% 1% 1.0 17% 0.30 0.07 13% 0.0% 0.0 12% -0.11 -0.12 8% -1.0% -1.0 10% -2.0% -2.0 - -3.0% -3.0 0% -7% Dem. Pres Rep. Pres Rep. Pres Dem. Pres Dem. Pres Rep. Pres Rep. Pres Dem. Pres Dem. Pres Rep. Pres Rep. Pres Dem. Pres Rep. Congress Rep. Congress Dem. Congress Dem. Congress Rep. Congress Rep. Congress Dem. Congress Dem. Congress Rep. Congress Rep. Congress Dem. Congress Dem. Congress Source: Citi Investment Research 4
  • 5. Big Government A Secular Shift in Opinion • The downsizing of the Federal Government may be ending. • In 2008 the candidates were tapping into a secular shift in opinion about the desired level of government involvement in the economy. In recent years, there has been a trend towards an increase in the percentage of Americans saying “government should do more.” • About half of the US economy could be at risk of government oversight and regulation. Federal Government Expenditures Value Added by Industry Desired Level of (% of GDP) (2007 – % of GDP) Government in the Economy 20% 47% 80% Government should do more Government is doing too many things Agriculture Construction Linear (Government is doing too many things) 0% Government 4% 13% Linear (Government should do more) Information 5% 60% Manufacturing 15% 12% Finance, Insurance, Real Estate 40% 21% Wholesale & Retail Trade 10% 12% 20% Healthcare 7% Transportation Services 3% Utilities 19% Mining 2% 2% 5% 0% 1950 1960 1970 1980 1990 2000 2010 Dec- Dec- Jan- Mar- Sep- Jul- Sep- Oct- 1995 1997 2002 2007 2007 2008 2008 2008 Source: The Wall Street Journal / NBC News Poll; Bureau of Economic Analysis 5
  • 6. Populist Record • pop•u•list § Pronunciation: 'pä-py&-list Function: noun Etymology: Latin populus the people § A member of a political party claiming to represent the common people. • Early American Populism Teddy Roosevelt’s “Trust-Busting” Andrew Jackson Kills the Bank of the US The Great Merger Wave of 1898–1903 was brought to Jackson effectively destroyed the bank by vetoing its an end by effective federal intervention, most notably 1832 re-charter by Congress, halting the deposit of President Theodore Roosevelt’ s celebrated trust- U.S. funds in 1833, and letting it slowly decline until the busting, which began with a 1904 Supreme Court case. expiration of its charter in 1836. In addition to the end of the merger wave, a recession Jackson’s actions effectively ended all monetary that lasted throughout 1903 and until the third quarter of restraint in the U.S. The resulting “Panic of 1837” 1904 also took its toll on stocks. Public commentary at caused a collapse of the banking system, a multi-year the time blamed Roosevelt’ s ‘trust- busting’ for the depression, and a prolonged bear market. Panic of 1907. Dow Jones Industrial Average: Dow Jones Industrial Average: 1895-1910 1830-1850 25 80 “Panic of 1837” 20 60 15 40 10 “Panic of 1907” 5 20 1830 1835 1840 1845 1850 1895 1900 1905 1910 Source: Merriam-Webster; Historical Statistics of the United States 6
  • 7. Populist Record • Modern American Populism Carter’s Stagflation LBJ’s Nixon: JFK The “Misery Index” “Great Society” The Silent Populist vs. Big Steel (Inflation + Unemployment) America was in a “golden age” of “Great Society ” promised to stamp Nixon was preoccupied with foreign 25% low inflation and rapid growth, with out poverty in both rural and urban affairs. Nixon was often quoted as few excesses in the financial settings. LBJ pursued Medicare, saying: “You don’t really need a 20% system, which was still heavily Medicaid, aid to education, and a President for domestic policy.” regulated. major “War on Poverty.” 15% But domestically, it was a very But, JFK’s victory over Big Steel Unfortunately, the decision to fight active regulatory period: EPA, 10% undercut business confidence, both the War on Poverty and the Consumer Product Safety provoking fears that the President War in Vietnam led to inflation, Commission, OSHA and for a time, intended to initiate de facto controls rising interest rates and the end of wage and price controls. 5% on prices and profits. a bull market. 0% 1950 1960 1970 1980 1990 2000 2010 Dow Jones Industrial Average:1960-1980 1200 DJIA Real DJIA 1000 800 Adjusted for inflation, 600 DJIA falls 47% 400 200 1960 1965 1970 1975 1980 Source: Bureau of Labor Statistics; Historical Statistics of the United States; Citi Investment Research 7
  • 8. Populist Pause • The 28 year pause began with the “Reagan Revolution.” President Clinton’s Tenure Top Marginal Income Tax Rate Populist Pause 1980-2008 100% Clinton signed into law welfare reform, so people 1981 – Ronald Reagan had to look for a job before being eligible for welfare; ended the “retirement test” for Social 80% Security benefits; pushed NAFTA; signed the 1989 – George H.W. Bush largest capital gains tax cut ever and reduced government spending as a share of GDP by 3 60% 1993 – Bill Clinton percentage points. By reacting to the political environment and posing 2001 – George W. Bush 40% as “a New Democrat, an Old Democrat, and ultimately, in effect, a moderate Republican,” (as The Economist pointed out), Clinton created a 20% very favorable environment for investors 1950 1960 1970 1980 1990 2000 2010 Dow Jones Industrial Average:1980-2008 16,000 DJIA Real DJIA 12,000 Adjusted for 8,000 inflation, DJIA gains 340% 4,000 0 1980 1985 1990 1995 2000 2005 2010 Source: Tax Policy Center; Citi Investment Research; The Economist, Which Bill Clinton?, August 24, 1996; FactSet 8
  • 9. Populist Platforms Taxes • On the last three occasions when there has been incumbent party change, in the post-election year Congress has passed a major fiscal package that has included significant changes to tax rates. • Obama offers large tax breaks to low- and middle-income taxpayers. • A number of key tax provisions expire in 2010, and revert to their previous levels. Election Year Post-Election Year Winning Party Winning President Fiscal Reform 1976 Democrat Carter 1980 Republican Reagan 1981 Economic Recovery Tax Act of 1981 1984 Republican Reagan 1988 Republican G.H.W. Bush 1992 Democrat Clinton 1993 Omnibus Budget Reconciliation Act of 1993 1996 Democrat Clinton 2000 Republican Bush 2001 Economic Growth and Tax Relief Reconciliation Act of 2001 2004 Republican Bush 2008 Democrat Obama 2009 ????? Top Federal Tax Rate: Select Tax Rates: Today and Under Obama Plan Currently and Post 2010 60% Currently Post-2010 Itemized Deduction Phaseout Top Federal Tax Rate Income Tax Brackets 35.0% 39.6% 48.65% 50% Social Security Payroll Tax (High to Low) 33.0% 36.0% Medicare Payroll Tax 28.0% 31.0% 40% 36.45% 25.0% 28.0% 15.0% 15.0% 30% 10.0% 15.0% 20% Stock Dividends: Taxed as 15.0% ordinary Rate for taxpayers 10% income above the 15% bracket Capital Gains: 0% 15.0% 20.0% Rate for taxpayers Today Obama? above the 15% bracket Source: Citi Investment Research; Tax Policy Center 9
  • 10. Postmodern Populism • President-elect Obama’s electoral platform suggests that more sectors are at risk than stand to benefit. At Risk Sector Sub-Sector Comment Energy Big Oil Companies Obama has proposed windfall profit taxes when a barrel of oil is over $80 Coal Miners A carbon cap and trade regime would favor natural gas and nuclear power Finance Alternative Investments Obama supports taxing carried interest as regular income Brokers & Asset Managers A higher tax on capital gains would be a negative Credit Card Companies Obama has proposed to ban universal defaults, and interest on fees Multi-line Insurance Companies Obama has proposed preventing insurers from overcharging for malpractice insurance Tax Preparation Companies Obama has proposed simplifying tax filings for middle class Americans Healthcare Biotech “Biogenerics” (i.e., generic biotech drugs) a negative Managed Care Government intervention poses risks Pharmaceuticals Greater government role in Medicare drug prices Retail Upscale Retailers Higher taxes on upper-income groups would be a negative for luxury goods Utilities Coal-burning Utilities Potentially at risk from a carbon cap and trade regime High Payout Utilities A higher tax on dividends would be a negative for high payout stocks Relatively Well-Positioned Sector Sub-Sector Comment Energy Ethanol Producers Obama supports subsidies and tariffs for ethanol Nuclear-powered Utilities Well-positioned under a carbon cap and trade regime Solar Industry Obama favors renewable power sources Wind Power Industry Obama favors renewable power sources Healthcare Drugstores What they lose from brand name pricing pressure, they make up on movement to generics Generic Drug Makers Generics would help the government save money under a universal healthcare system Retail Low -end Retailers Obama’s tax cuts would primarily benefit those with very low incomes Source: Citi Investment Research 10
  • 11. Postmodern Populism • Party does not dictate stock market direction. Fundamentals, such as growth and inflation, have much more significance. The DJIA rallied in the period following the election victories of populist Democrats Carter, LBJ, and JFK, and then performed poorly following Carter’s inauguration (reflecting stagflation), but continued to do well early during the administrations of LBJ and JFK (reflecting economic stimulus). • But the record of modern populism (1960 – 1980) was a stock market that zigged and zagged, and rose modestly in nominal terms, but declined 47% in real terms. • Will Obama emulate Clinton, who “posed as a New Democrat, an Old Democrat, and ultimately, in effect, a moderate Republican,” or modern populists JFK and LBJ, big government social activists? DJIA Performance following the Election of First Term Populists Inauguration thru 1 st Year Election thru Inauguration Inauguration thru First 100 Days Inauguration thru First Term Average of Populist Presidents 3% -1% -2% 12% J. Carter (1976) 4% -8% -17% -4% R. Nixon (1968) -2% 2% -14% 10% L. Johnson (1964) 2% 3% 8% 5% J. Kennedy (1960) 6% 7% 15% 18% T. Roosevelt (1901) - -9% -9% 0% A. Jackson (1828) 2% 0% 6% 42% DJIA Performance DJIA Performance DJIA Performance (Avg. 1 st Term Presidents since 1829) (Avg. when Dem. replaces Rep. since 1829) (Avg. Select Populists since 1829) 80% 80% 80% 69% 60% 60% 60% 33% 40% 40% 40% 20% 20% 20% 12% 11% 7% 2% 3% 2% 1% 0% 0% 0% -1% -2% -2% -20% -20% -20% Election thru Inauguration Inauguration Inauguration Election thru Inauguration Inauguration Inauguration Election thru Inauguration Inauguration Inauguration Inauguration thru first 100 thru first year thru first term Inauguration thru first 100 thru first year thru first term Inauguration thru first 100 thru first year thru first term days days days Source: Citi Investment Research 11
  • 12. Climatic Consequences • For investors, the issue is not whether climate change is occurring. Governments, regulators, corporations, and individuals are reacting to the perceived threat of climate change. • In the past 420,000 years, there have been four transitions from glacial to warm periods. All of the four transitions were accompanied by increases in atmospheric carbon dioxide. • GHG abatement is not necessarily “Green.” • Climate change initiatives are part of a much broader agenda Variation with Time of Temperature “Mammoth with the Eye” and Carbon Dioxide (CO2) Levels (18,000-13,500 B.C.) 390 15 CO2 levels today are 25% Carbon Dioxide (LHS) Degrees Variation (RHS) 360 above prior peak levels Carbon Dioxide (PPMV) 10 330 5 300 270 0 240 -5 210 180 -10 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0 Years Before Present Multiple Agendas Climate Friendly vs. Green $100 oil Environmental Economic CLIMATE FRIENDLY “GREEN” Climate Change Energy Efficiency Nuclear Power Plants Radioactive Waste Coal Gasification Noxious CO2 Hydroelectric Power Environmental Damage Wind Farms Deaths of Birds & Bats Finland Developing Nuclear Power vs Diesel Fueled Cars Air Pollutants Markets Energy Security “Fuel Poverty ” Russian Gas Source Biofuel Production Threat to Rare Species Political Social Source: J.R. Petit, et al., Climate and atmospheric history of the past 420,000 years from the Vostok ice core, Antarctica, Nature 399 (1999); Grotte de Rouffignac, France; Citi Investment Research 12
  • 13. Climate: Regulatory Response • Two tracks of negotiations will continue: (i) Kyoto-track (excludes US); (ii) Bali track (includes US), and which are expected to converge in Copenhagen in December 2009. • 44-76% of global GDP has committed to reducing GHG emissions under Kyoto. • Despite the US not signing Kyoto, 26 states (59% of GSP) will curb GHG emissions by 2012. Kyoto Timeline The United Nations Framework Convention on Climate Change (UNFCCC) began to negotiate a global treaty to reduce the emissions ofsix GHGs. 1992 Kyoto Protocol was adopted at the Convention’s third meeting in Kyoto, Japan. 1997 Industrialized and transition economies assumed binding emission caps to be achieved during the five-year period from 2008 to 2012. 2008 § Kyoto-Track: Kyoto parties; Finalize second round of targets. § Bali-Track: All Countries; Develop initial commitments for many developing nations and US. 15th Conference of the Parties in Copenhagen 2009 GHG Emissions by Country (2002) Percentage of Global GDP US Gross State Product (E.U. 25, 16%) Accounted for by Kyoto “Annex 1 ” Countries likely Covered by GHG Emissions Schemes by 2012 Other - Non- US 100% RGGI - Total 23% Annex 1 10 States, 76% 25% 80% 19% 60% Other, 41% 47% 46% 44% 40% Other - WCI - Total 7 Annex 1 China States, 20% 20% 11% 15% France 2% Italy 0% Russia Total Ex. US and Ex. US, Ex. US and 6% 2% U.K. India MGGA - Total Australia Australia and Canada Separate 6 States, 13% Canada 2% 4% Japan Canada Initiatives, 8% Germany 5% 2% RGGI: CT, DE, MA, ME, MD, NH, NJ, NY, RI, VT 3% WCI: AZ, CA, MT, NM, OR, UT, WA MGGA: IL, IA, KS, MI, MN, WI Source: United Nations Framework Convention on Climate Change (UNFCC); Citi Investment Research Separate Initiatives: CO, FL, HI, 13
  • 14. Climate: Regulatory Implications Power Generation • Nuclear power plants are completely carbon-free sources of electricity, but the electricity generated by a nuclear power plant costs more than electricity generated by fossil fuels. • Nuclear power is increasing, mainly in China, India and Russia, as a response to strong power demand, greenhouse gas emission concerns, and energy security fears; a 65% increase in capacity by 2015. • Coal is the most abundant hydrocarbon. Clean, climate-friendly coal will need to be big part of solution. Carbon Content of Fuels US Electricity Generation Costs (Tons of carbon/terajoule of energy) (Cents/kWh) 30 8 6.7 6 20 3.8 - 5.6 4.2 4 10 2 0 0 0 Coal Oil Gas Nuclear Nuclear Natural Gas Oil* Coal Global Nuclear Electricity Generation Carbon Capture Technologies Cost (Gigawatts) (Cents/kWh) 800 10 Operating/Building Planned Proposed 7.7 8 7.0 600 6.5 6 4.8 400 4 200 2 0 0 No Capture Gasification Oxy Post Source: World Resources Institute; Citi Investment Research; World Nuclear Organization; US Consulting; Bloomberg 14 Combustion Combustion
  • 15. Climate: Regulatory Implications Renewable Energy Technologies Mature Hydroelectric, Geothermal, Landfill Gas, Onshore Wind § Maturing Offshore Wind § Viable Photovoltaic Solar § Global Renewable Energy Wind Turbine Wind Capacity Installed New Wind Capacity Installed Existing Capacity Cum. Installed Capacity (gW) (by Country) (2007 – Megawatts) 200 (2006 - excl. Hydro) Rest of Canada, Rest of World World, 1723 386 Rest of World, Ocean Asia Solar PV 14% (tidal) UK, 427 Americas Geo- 160 6% Portugal, Germany, 23% 0% U.S., 5244 Europe thermal 434 Portugal, 2% 8% Italy, 603 UK, 3% 120 10 yr CAGR = 25% France, 3% France, 888 Italy, 3% Germany, 80 Denmark, 3% 1667 Wind China, 6% Biomass U.S., 18% 54% and 40 India, 1730 Spain, 3522 Waste India, 9% 33% China, 3449 0 Spain, 16% 2000 2002 2004 2006 2008E 2010E Global Polysilicon Supply-Demand Levelized Cost by Source US Wind Power Classification (Metric Tons) in Global Electricity Supply (US$/kWh) 200 $0.50 Polysilicon Demand Polysilicon Supply $0.40 150 $0.30 100 $0.20 Texas $0.10 50 $0.00 0 Solar Hydro Geo Wind (1- Nuclear Coal Gas (~1%) (20%) (<1%) 2%) (25%) (40%) (15%) 2006 2007 2008 2009 2010 Renewable Traditional Source: Renewable Energy Policy Network for the 21 st Century; Global Wind Energy Council; US Department of Energy; Citi Investment Research 15
  • 16. Climate: Regulatory Implications Transportation • Increased Fuel Efficiency • Alternative Fuels § Corn ethanol can only ever be a fuel additive; there’s just not enough corn to replace motor fuels. § Cellulosic technology may offer a way for ethanol to become a major source of motor fuel. • The Climate Backlash: “Food versus Fuel” CO2 Emissions Relative to Conventional Engine Automobile (“Well-to-Wheel” carbon emissions) GHG Emission Reduction Technologies Advanced Gasoline Engine Conventional engine Advanced Diesel Engine BorgWarner BorgWarner Honda, Peugeot, Tenneco Advanced gasoline engine Biofuels Advanced diesel Honda, Peugeot, Tenneco Hybrid Technology Fuel cell (gasoline) Toyota Motor Gasoline hybrid Toyota Motor Fuel cell (Hydrogen from nat gas) Diesel hybrid Fuel Cell (Hydrogen from renewables) 0 Vehicle Load Reduction 0% 20% 40% 60% 80% 100% Magna International US Corn Yields (Bushels/Acre) US Corn Prices (Cents/Bushel) § Increased biofuels production accounts for only 2-3% 900 165 of overall increase in global food prices. Despite a 20% increase § The “food versus fuel” debate ignores the inevitability . . . prices have been rising in corn yields . . . 700 155 of technological progress, and echoes Malthus’s argument in 1798 that the starvation of Great Britain 500 145 was inevitable and imminent. § Converting forest and grassland to crop, corn-based 300 135 ethanol nearly doubles greenhouse emissions over 30 years and increases greenhouse gases for 167 years. 100 § Corn ethanol requires 3-4x more water than 125 1996 1998 2000 2002 2004 2006 2008 1996 1998 2000 2002 2004 2006 2008 conventional crude refining. Source: World Resources Institute, US Department of Agriculture; Citi Investment Research; Global Financial Data 16
  • 17. Climate: Physical Implications • In recent years there have been a number of climatic trends: § Temperature — a warming of the global climate, but not every year, everywhere. § Wind — an increase in the frequency of intense hurricanes. § Water Worries — climate change is having a significant impact. Global Annual Temperature Anomalies 1.0 0.6 0.2 -0.2 -0.6 1850 1875 1900 1925 1950 1975 2000 2025 Factors in the Water Supply-Demand Balance Category 4 and 5 Hurricanes (% of total) (41%) Supply Demand West Pacific (25%) (34%) Precipitation South Indian (18%) Patterns Changing (35%) East Pacific Drought Emerging market (25%) (25%) North Atlantic Increasing consumer sector (20%) (28%) Southwest Pacific Snow Cover Developed economy (12%) Decreasing industrial sector (25%) 1975-1989 1990-2004 North Indian (8%) Pollution Rising 0 20 40 60 80 100 120 140 Source: University of East Anglia, Norwich, UK; Changes in Tropical Cyclone Number, Duration, and Intensity in a Warming Environment, PJ Webster, et. Al, Science, September 2005; Citi Investment Research 17
  • 18. Water Worries: Precipitation Precipitation Patterns Changing Heavier § Briefer § Less Frequent § Changing locations § • Australia has had wetter conditions in the past 30 years, but the distribution of rainfall has changed. • Spain’s severe drought continues; in late 2007, water levels in reservoirs resumed downward trend. Percentage of Total Global Land Area in Very Dry Conditions Trend in Australian Annual Rainfall (Land areas within 600S – 750N) (1970-2007, Millimeters) 40% Global very dry areas have more than doubled since the 1970s 30% 20% 10% 0% 1960 1970 1980 1990 2000 2010 Rainfall Distribution Water Levels of Spanish Reservoirs Over India (Percent of Capacity – 12 mo. MA) During 2007 80% Monsoon Season In India 50% of Atlantic Mediterranean annual precipitation 60% takes place in 15 days 40% 20% 2005 2006 2007 2008 2009 2010 Source: IPCC; Australian Bureau of Meteorology; Indian Ministry of Power; Ministerio de Ambiento 18
  • 19. Water Worries: Droughts/Snow Cover Snow Cover Decreasing • From the South American Andes to the Asian Indus River basin the area covered by glaciers is shrinking. • In southwest US a reduction in water availability below current consumption is projected within 20 years. Drought Increasing • Drought increases, as precipitation over land has marginally decreased while evaporation has increased. Anomaly of Northern Hemisphere Snow Cover Extent 3 1 -1 -3 1960 1970 1980 1990 2000 2010 Palmer Drought Severity Index Colorado River: Flow at Lees Ferry (U.S.) Cumulative deficit relative to local mean in surface land moisture minus 108 Yr Avg. (Million Acre Feet) 2 12 8 1 4 0 0 -4 -8 -1 -12 1960 1970 1980 1990 2000 2010 1900 1920 1940 1960 1980 2000 Source: National Center for Atmospheric Research; Rutgers University Global Snow Lab; Upper Colorado River Commission 19
  • 20. Water Worries: Desalination • Desalination has become a viable option. • Globally there are currently over 200 desalination plants in planning or up for consideration. Global Water Desalination Capacity Current Desalination Projects (Millions of Cubic Meters/Day) (by Country - % of Global Total) Spain 120 Others 18% 29% 80 U.S. 13% 40 India UAE 5% 9% Libya 5% China 0 Saudi 6% Australia Arabia 1988 1992 1996 2000 2004 2008 2012 2016 7% 8% Cost of Water Proposed Desalination Plants in California (US$/m 3) France Germany UK Australia US Japan US (Tampa Bay) Algeria Israel Russia Africa Groundwater China Desalination India $0.00 $1.00 $2.00 $3.00 $4.00 Source: Global Water Intelligence; United Nations Educational Scientific and Cultural Organization; Citi Investment Research; Pacific Institute 20