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U.S. Portfolio Strategy

Harris Private Bank Sector Strategy

April 5, 2011 Chicago, Illinois Jack A. Ablin, CFA U.S. Portfolio Strategist CIO, Harris Private Bank (312) 461-2636 [email protected] Jeff Weniger, CFA Senior Investment Analyst Harris Private Bank (312) 461-7684 [email protected]

Summary

· The Harris Sector Strategy provides a glance into technical and fundamentalconceptsthatguideourassetallocationdecisionmaking process. · Our research indicates that observation of the interaction between assetclassesandtheir200-daymovingaveragesprovidesabeneficial guideforour12-to-18monthglobalmacroperspective. · Allofthepricechartsinsideareplottedrelativetotheir200-daymoving averageswithwhatwerefertoas"breakout"and"breakdown"bands oscillatingintandemwiththemovingaverage.Wedeemanymove abovethebreakoutbandorbelowthebreakdownbandasbullishand bearishdevelopments,respectively. · Wealsoobservethedevelopingtrendsinsectorvaluations.Historyhas shownthatrelativeP/Emomentum(valuationexpandingmorethan thebroadmarket)tendstoprecedecontinuedrelativeoutperformance. WegaugeP/Emomentumtrendsbyobservingtheinteractionbetween the10-monthmovingaverageandthe20-monthmovingaverageof eachsector'srelativevaluation.

Index

Chart S&P 500 Sector Charts Relative Sector Charts Relative Sector P/E Expansion/Contraction Charts Disclosure

Page 3 4 5 6 7

Please refer to page 7 for Important Disclosures.

Page 2

Harris Sector Strategy

Thoughts From Harris' Strategists

Thebullmarketisrapidlybecomingagedbutitishardtoarguewithanenvironmentin whichthetwobestperformingsectorslastquarterwereenergyandindustrials.The16.8% surgeintheenergysectorduringthefirstthreemonthsoftheyearwas1087bpsmore thantheS&P500.Itishardnottothinkthattoday'ssurgingcrudeoilenvironmentis beginningtolookalotlike2006-2008.Theimplicationsforcorporateprofitmarginsand retailsalesarebeginningtolooktroublesome.Inthemeantime,aslongascyclicalsand latecyclicalsareholdingupwehavetoviewthisasanelderlybullmarketthathaslegs. ThefactthatonlytwoofthetensectorsoutperformedinQ1isaharbingerofanarrowingofleadership,whichisusuallyadisturbingomen.Thatsaid,therecontinuesto bebroadparticipationinthemarket'sascent.AlltensectorsralliedalongwiththeS&P, whichwasup5.9%inQ1.Additionally,onlyconsumerdiscretionaryclockedinwithtwo negativemonthsofperformanceandeventhatdidnotpreventasatisfactory4.7%rally duringthequarter.Perhapsthemostbullishcaseforthebroadmarkethasbeenthefact thatstaplesandutilitiesremainatthebackofthepack.Itwillbeasellsignalwhenthese twostarttoperkup. Oursectorrotationmodelplacesequalweightsinpositivelyviewedsectorsregardless ofindexcomposition.At25%apiece,theyarematerials,industrials,discretionaryand telecom.Insidethispacketarethechartsthatguideourtechnicalobservationsonthe S&Psectors.Wepayattentionsolelytorelativeperformancechartsbutweprovidethe traditionalsectorchartsinthisreportforyouredification.

Harris Sector Strategy

Page 3

S&P 500 Index ­ Attractive

We wrap bands around the 200-day moving average to avoid being whipsawed. The lower "breakdown band" was originally breached back in June but that was a false signal. The index broke through the 200-day moving average in September and has been ascending since.

1600 1500 1400 1300 1200 1100 1000 900 800 700

S&P 500

On all performance charts in this report the solid line is the 200 day moving average. Dotted lines are the bands we place around it to designate technical trigger points.

Source: Bloomberg, Harris Private Bank Strategy

We look at expanding P/Es as a good thing. The 10-month moving average of the P/E broke convincingly above the 20-month moving average in September 2009 but it was in a downtrend throughout 2010. This points to more contraction.

Ap r-0 9 Ju n09 Au g09 O ct -0 9 D ec -0 9 Fe b10 Ap r-1 0 Ju n10 Au g10 O ct -1 0 D ec -1 0 Fe b11 Ap r-1 1

S&P 500 P/E

S&P 500 P/E 10 Mo. Moving Average S&P 500 P/E 20 Mo. Moving Average S&P 500 P/E S&P 500 P/E Breakout Band

This P/E breakout above the band ultimately failed. Until further notice it looks like market multiples are headed down

26 24 22 20 18 16 14 12 10 8 6 Apr-07

We look for the P/E to move toward multiple expansion, which is triggered when the 10-month moving average breaks above the 20-month moving average's "breakout band".

We look at ex P/Es as a go The 10 mont average of th convincingly 20 month mo average in Se 2009 but it w downtrend th 2010. This p more contrac

Jul-07

Jul-08

Jul-09

Oct-07

Oct-08

Oct-09

Jul-10

Oct-10

Jan-08

Jan-09

Jan-10

Apr-08

Apr-09

Apr-10

Jan-11

M o m e n t u m

Source: Bloomberg, Harris Private Bank Strategy

There are four sectors currently viewed bullishly within our monthly sector model: discretionary, materials, industrials and telecom. Energy is the clear momentum leader but it is not receiving a premium valuation in the market.

Sector Scatter

5

-

Contraction Energy ATTRACTIVE Technology

Price/Earnings

Expansion Industrials

+

4

Materials

Discretionary ATTRACTIVE BUY Telecom Health Care

3

2 Financials 1 1

AVOID = Current Holdings 2 3

WATCH Staples Utilities 4

-5

Source: Harris Private Bank Innovative Solutions Team

Apr-11

Page 4

Harris Sector Strategy

Sector Charts

If last "touch" was breakout band, ü. If breakdown band, û. Our model does not use these charts (it Sector Charts: relative to the S&P on the next . If uses performanceIf last "touch" was breakout band,page). breakdown band, . Our model does not

use these (it uses performance relative to the S&P on the next page).

400 380 360 340 320 300 280 260

330 320 310 300 290 280 270 260 250 240 230 220 210

S&P 500 Consumer Staples

S&P 500 Health Care

Ap r-0 9 Ju n09 Au g09 O ct -0 9 D ec -0 9 Fe b10 Ap r-1 0 Ju n10 Au g10 O ct -1 0 D ec -1 0 Fe b11 Ap r-1 1

170 160 150 140 130 120

S&P 500 Utilities

Ap r-0 9 Ju n09 Au g09 O ct -0 9 D ec -0 9 Fe b10 Ap r-1 0 Ju n10 Au g10 O ct -1 0 D ec -1 0 Fe b11 Ap r-1 1

240 220 200 180 160 140 120 100

S&P 500 Financials

Ap r-0 9 Ju n09 Au g09 O ct -0 9 D ec -0 9 Fe b10 Ap r-1 0 Ju n10 Au g10 O ct -1 0 D ec -1 0 Fe b11 Ap r-1 1

360 340 320 300 280 260 240 220 200 180 160

S&P 500 Industrials

Ap r-0 9 Ju n09 Au g09 O ct -0 9 D ec -0 9 Fe b10 Ap r-1 0 Ju n10 Au g10 O ct -1 0 D ec -1 0 Fe b11 Ap r-1 1

460 440 420 400 380 360 340 320 300 280 260 240 220

S&P 500 Technology

Ap r-0 9 Ju n09 Au g09 O ct -0 9 D ec -0 9 Fe b10 Ap r-1 0 Ju n10 Au g10 O ct -1 0 D ec -1 0 Fe b11 Ap r-1 1

Yes, on an absolute basis all 10 sectors are in bull mode. However, in our sector framework we care about the relative charts on the next page. Source: Harris Private Bank Strategy

Ap r-0 9 Ju n09 Au g09 O ct -0 9 D ec -0 9 Fe b10 Ap r-1 0 Ju n10 Au g10 O ct -1 0 D ec -1 0 Fe b11 Ap r-1 1

Ap r-0 9 Ju n09 Au g09 O ct -0 9 D ec -0 9 Fe b10 Ap r-1 0 Ju n10 Au g10 O ct -1 0 D ec -1 0 Fe b11 Ap r-1 1

Ap r-0 9 Ju n09 Au g09 O ct -0 9 D ec -0 9 Fe b10 Ap r-1 0 Ju n10 Au g10 O ct -1 0 D ec -1 0 Fe b11 Ap r-1 1

Ap r-0 9 Ju n09 Au g09 O ct -0 9 D ec -0 9 Fe b10 Ap r-1 0 Ju n10 Au g10 O ct -1 0 D ec -1 0 Fe b11 Ap r-1 1

Ap r-0 9 Ju n09 Au g09 O ct -0 9 D ec -0 9 Fe b10 Ap r-1 0 Ju n10 Au g10 O ct -1 0 D ec -1 0 Fe b11 Ap r-1 1

260 250 240 230 220 210 200 190 180 170 160 150 140 130 120

S&P 500 Materials

640 600 560 520 480 440 400 360 320

S&P 500 Energy

320 300 280 260 240 220 200 180 160 140

S&P 500 Discretionary

135 130 125 120 115 110 105 100 95

S&P 500 Telecom

Harris Sector Strategy

Page 5

RELATIVE Sector Charts

If last "touch" was breakout band, ü. If breakdown band, û.

Consumer Staples Relative to S&P 500

RELATIVE Sector Charts: If last "touch" was breakout band,

Almost broke out in August but was just short

1.30 1.25 1.20 1.15 1.10 1.05 1.00

. If breakdown band,

Health Care Relative to S&P 500

1.50 1.45 1.40 1.35 1.30 1.25 1.20 1.15

Ap r-0 9 Ju n09 Au g09 O ct -0 9 D ec -0 9 Fe b10 Ap r-1 0 Ju n10 Au g10 O ct -1 0 D ec -1 0 Fe b11 Ap r-1 1

1.35 1.30 1.25 1.20 1.15 1.10 1.05 1.00 0.95 0.90

Utilities Relative to S&P 500

Ap r-0 9 Ju n09 Au g09 O ct -0 9 D ec -0 9 Fe b10 Ap r-1 0 Ju n10 Au g10 O ct -1 0 D ec -1 0 Fe b11 Ap r-1 1

0.60 0.55 0.50 0.45 0.40

Financials Relative to S&P 500

Ap r-0 9 Ju n09 Au g09 O ct -0 9 D ec -0 9 Fe b10 Ap r-1 0 Ju n10 Au g10 O ct -1 0 D ec -1 0 Fe b11 Ap r-1 1

1.05 1.00 0.95 0.90 0.85 0.80

Industrials Relative to S&P 500

Ap r-0 9 Ju n09 Au g09 O ct -0 9 D ec -0 9 Fe b10 Ap r-1 0 Ju n10 Au g10 O ct -1 0 D ec -1 0 Fe b11 Ap r-1 1

1.40 1.35 1.30 1.25 1.20 1.15 1.10 1.05 1.00

Technology Relative to S&P 500

This is still bullish until the lowest dotted line is breached.

Ap r-0 9 Ju n09 Au g09 O ct -0 9 D ec -0 9 Fe b10 Ap r-1 0 Ju n10 Au g10 O ct -1 0 D ec -1 0 Fe b11 Ap r-1 1

Source: Harris Private Bank Strategy

Ap r-0 9 Ju n09 Au g09 O ct -0 9 D ec -0 9 Fe b10 Ap r-1 0 Ju n10 Au g10 O ct -1 0 D ec -1 0 Fe b11 Ap r-1 1

Ap r-0 9 Ju n09 Au g09 O ct -0 9 D ec -0 9 Fe b10 Ap r-1 0 Ju n10 Au g10 O ct -1 0 D ec -1 0 Fe b11 Ap r-1 1

Ap r-0 9 Ju n09 Au g09 O ct -0 9 D ec -0 9 Fe b10 Ap r-1 0 Ju n10 Au g10 O ct -1 0 D ec -1 0 Fe b11 Ap r-1 1

Ap r-0 9 Ju n09 Au g09 O ct -0 9 D ec -0 9 Fe b10 Ap r-1 0 Ju n10 Au g10 O ct -1 0 D ec -1 0 Fe b11 Ap r-1 1

Ap r-0 9 Ju n09 Au g09 O ct -0 9 D ec -0 9 Fe b10 Ap r-1 0 Ju n10 Au g10 O ct -1 0 D ec -1 0 Fe b11 Ap r-1 1

1.30 1.25 1.20 1.15 1.10 1.05 1.00

Basic Materials Relative to S&P 500

1.45 1.40 1.35 1.30 1.25 1.20 1.15 1.10 1.05

Energy Relative to S&P 500

1.20 1.15 1.10 1.05 1.00 0.95 0.90 0.85 0.80

Consumer Discretionary Relative to S&P 500

1.50 1.45 1.40 1.35 1.30 1.25 1.20 1.15 1.10 1.05 1.00 0.95 0.90 0.85

Telecom Relative to S&P 500 Telecom breached a few times mid-month but popped just enough when we ran the models on the 1st of the month.. Thus the continued overweight despite the red "X"

Page 6

Harris Sector Strategy

RELATIVE P/E Multiples

If 10-month Moving Avg. broke above 20-Month MA breakout band ü. Otherwise, û. We pay attention RELATIVE P/E Multiples: If 10 month Moving Avg. broke convincingly above 20 Mo. MA if that occurs while momentum is positive.

breakout band,

. Otherwise,

. We pay attention if that occurs while momentum is positive.

1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 Health Care

1.4 1.3 1.2 1.1 1.0 0.9 0.8

Consumer Staples Rel. P/E 10 Mo. MA 20 Mo. MA Breakout Band

Rel. P/E 10 Mo. MA 20 Mo. MA Breakout Band

Recently broke but no momentum yet (previous page)

Ja n Ap -06 rJu 06 O l-06 ct Ja -06 n Ap -07 rJu 07 O l-07 ct Ja -07 n Ap -08 rJu 08 O l-08 ct Ja -08 n Ap -09 rJu 09 O l-09 ct Ja -09 n Ap -10 rJu 10 O l-10 ct Ja -10 n11

1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7

Utilities Rel. P/E 10 Mo. MA 20 Mo. MA Breakout Band

Ja n Ap -06 rJu 06 O l-06 ct Ja -06 n Ap -07 rJu 07 O l-07 ct Ja 07 n Ap -08 rJu 08 O l-08 ct Ja -08 n Ap -09 rJu 09 O l-09 ct Ja -09 n Ap -10 rJu 10 O l-10 ct Ja -10 n11

2.2 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6

Financials Rel. P/E 10 Mo. MA 20 Mo. MA Breakout Band

Ja n Ap -06 rJu 06 O l-06 ct Ja -06 n Ap -07 rJu 07 O l-07 ct Ja 07 n Ap -08 rJu 08 O l-08 ct Ja -08 n Ap -09 rJu 09 O l-09 ct Ja -09 n Ap -10 rJu 10 O l-10 ct Ja -10 n11

1.30 1.25 1.20 1.15 1.10 1.05 1.00 0.95 0.90 0.85 0.80 0.75 0.70

Industrials Rel. P/E 10 Mo. MA 20 Mo. MA Breakout Band

Ja n Ap -06 rJu 06 O l-06 ct Ja -06 n Ap -07 rJu 07 O l-07 ct Ja 07 n Ap -08 rJu 08 O l-08 ct Ja -08 n Ap -09 rJu 09 O l-09 ct Ja -09 n Ap -10 rJu 10 O l-10 ct Ja -10 n11

1.5 1.4 1.3 1.2 1.1 1.0 0.9

Technology Rel. P/E 10 Mo. MA 20 Mo. MA Breakout Band

Ja n Ap -06 rJu 06 O l-06 ct Ja -06 n Ap -07 rJu 07 O l-07 ct Ja 07 n Ap -08 rJu 08 O l-08 ct Ja -08 n Ap -09 rJu 09 O l-09 ct Ja -09 n Ap -10 rJu 10 O l-10 ct Ja -10 n11

We have found that P/E ratio expansion is a positive event because it often gives way to further expansion and outperformance. This sounds counterintuitive but oftentimes we observe trends that play out over many years. Three that come to mind are the tech expansion in the 1990s, its contraction in the 2000s and energy through much of the last decade. Source: Harris Private Bank Strategy

Ja n Ap -06 rJu 06 O l-06 ct Ja -06 n Ap -07 rJu 07 O l-07 ct Ja 07 n Ap -08 rJu 08 O l-08 ct Ja -08 n Ap -09 rJu 09 O l-09 ct Ja -09 n Ap -10 rJu 10 O l-10 ct Ja -10 n11

Ja n Ap -06 rJu 06 O l-06 ct Ja -06 n Ap -07 rJu 07 O l-07 ct Ja 07 n Ap -08 rJu 08 O l-08 ct Ja -08 n Ap -09 rJu 09 O l-09 ct Ja -09 n Ap -10 rJu 10 O l-10 ct Ja -10 n11

1.5 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 Telecom Rel. P/E 10 Mo. MA 20 Mo. MA Breakout Band

Ja n Ap -06 rJu 06 O l-06 ct Ja -06 n Ap -07 rJu 07 O l-07 ct Ja 07 n Ap -08 rJu 08 O l-08 ct Ja -08 n Ap -09 rJu 09 O l-09 ct Ja -09 n Ap -10 rJu 10 O l-10 ct Ja -10 n11

2.2 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 Consumer Discretionary Rel. P/E 10 Mo. MA 20 Mo. MA Breakout Band

Ja n Ap -06 rJu 06 O l-06 ct Ja -06 n Ap -07 rJu 07 O l-07 ct Ja 07 n Ap -08 rJu 08 O l-08 ct Ja -08 n Ap -09 rJu 09 O l-09 ct Ja -09 n Ap -10 rJu 10 O l-10 ct Ja -10 n11

1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 Energy Rel. P/E 10 Mo. MA 20 Mo. MA Breakout Band

Ja n Ap -06 rJu 06 O l-06 ct Ja -06 n Ap -07 rJu 07 O l-07 ct Ja 07 n Ap -08 rJu 08 O l-08 ct Ja -08 n Ap -09 rJu 09 O l-09 ct Ja -09 n Ap -10 rJu 10 O l-10 ct Ja -10 n11

2.2 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Basic Materials Rel. P/E 10 Mo. MA 20 Mo. MA Breakout Band

It would normally get an "X" but was positive when "Mo" broke out last year, which is what we care about.

This has not confirmed the momentum breakout

Same story as materials. Gets a " " because of what it did when momentum was breaking out in 2009.

Harris Sector Strategy

General Disclosure

Page 7

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