US Year Ahead 2011

North America Equity Research
14 December 2010
U.S. Year Ahead 2011

Stronger Growth Emerging
Contents
Macro.............................................................7
Capital Goods / Industrials...........................39
Consumer ....................................................47
Energy .........................................................61
Financial ......................................................67
Health Care..................................................75
Materials ......................................................85
Media & Telecom.........................................91
Technology ..................................................95
For a complete list of contributors,

please see Table of Contents on page 4.
Bloomberg JPUS2011 <GO>

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a basket created by the J.P. Morgan
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See page 110 for analyst certification and important disclosures, including non-US analyst disclosures.
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factor in making their investment decision.
North America Equity Research US Year Ahead 2011
December 2010
2
December 14, 2010
Dear Investor,
The U.S. economy has lifted from its bout of midyear weakness and, after a long
summer vacation following its retreat in May and June, the U.S. equity market steadily
advanced in September and October. After a pause in November, the S&P 500 hit a
new high for the year on December 10, and looks to end the year more than 10%
higher than at its start, the best performance among the developed markets on a
regional basis.
While economic fragility and uncertainty were key characteristics of equity sentiment
and performance over the course of 2010, somewhat stronger growth should emerge
in 2011 with Fed and fiscal support. J.P. Morgan’s baseline economic forecast calls for
the U.S. economy to gradually accelerate from growth averaging only about 2% in the
middle two quarters of 2010 to above-trend growth through 2011 and 2012. Our
economists expect inflation to hold below 1% in 2011 and do not look for a Fed rate
hike until 2013.
Consequently, we remain constructive on U.S. equities. Tom Lee, J.P. Morgan’s Chief
U.S. Equity Strategist, expects the S&P 500 to advance at least 15% in 2011, driven
more by valuation expansion than upside to estimates. Amid considerable
countervailing forces on asset values, we believe the equity market risk premium will
contract from a 50-year high toward more normalized levels, despite likely more rapid
industry rotation than seen over the past two years.
We designed this report as a sector-by-sector guide to equity investing in the United

States for the upcoming year. We asked our analyst teams to identify key drivers of
sector stock prices and to present their best investment ideas, framed by commentary
from our economists, strategists, as well as derivatives and accounting experts. One of
the most common themes was the need for investors to be selective, given notable
risks both to the upside as well as downside.
As always, we aim to provide analysis that proves helpful in your investment decision-
making process and hope you find this report useful.
Noelle Grainger
Head of U.S. Equity Research
J.P. Morgan Securities LLC • Equity Research • 383 Madison Avenue, New York, NY 10179
3
December 2010
Table of Contents
Macro
Economics (Robert Mellman) .......................................................................................7
Equity Strategy (Thomas J Lee, CFA)........................................................................11
Equity Technical Strategy (Michael Krauss) ...............................................................17
Accounting & Valuation (Dane Mott, CFA, CPA) ........................................................21
Equity Derivatives (Marko Kolanovic) .........................................................................26
Delta One Strategy (Marko Kolanovic) .......................................................................33
Capital Goods / Industrials
Aerospace & Defense (Joseph B. Nadol III) ...............................................................39
Airfreight & Surface Transportation (Thomas R. Wadewitz) .......................................40
Electrical Equipment & Multi-Industry (C. Stephen Tusa, Jr CFA)..............................41
Engineering & Construction (Scott Levine).................................................................42
Environmental Services (Scott Levine).......................................................................43
Machinery (Ann Duignan)...........................................................................................44
Marine Transportation (Jonathan B Chappell, CFA)...................................................45
Consumer
Airlines (Jamie Baker) ................................................................................................47
Autos & Auto Parts (Himanshu Patel, CFA) ...............................................................48
Beverages (John Faucher) .........................................................................................49
Gaming & Lodging (Joseph Greff)..............................................................................50
Homebuilding & Building Products (Michael Rehaut, CFA) ........................................51
Household & Personal Care Products (John Faucher)...............................................52
Packaged Food (Terry Bivens)...................................................................................53
Restaurants (John Ivankoe) .......................................................................................54
Retailing – Broadlines & Department Stores (Charles Grom, CFA, CPA) ..................55
Retailing – Food (Charles Grom, CFA, CPA) .............................................................56
Retailing – Hardlines (Christopher Horvers, CFA)......................................................57
Retailing – Specialty (Brian J. Tunick) ........................................................................58
Tobacco (Rae Maile) ..................................................................................................59
4
December 2010
Energy
Electric Utilities & Independent Power Producers (Andrew Smith).............................61
Energy MLPs (Xin Liu, CFA) ......................................................................................62
Integrated Oil & Gas (Katherine Lucas Minyard) ........................................................63
Oil & Gas Exploration & Production (Joseph Allman, CFA)........................................64
Oil Services & Equipment (J. David Anderson, PE, CFA) ..........................................65
Financials
Asset Managers (Kenneth B. Worthington, CFA) .......................................................67
Banks – Large Cap & Trust and Processors (Vivek Juneja).......................................68
Banks – Mid- and Small Cap (Steven Alexopoulos, CFA) ..........................................69
Exchanges (Kenneth B. Worthington, CFA) ...............................................................70
Insurance – Life (Jimmy S. Bhullar, CFA)...................................................................71
Insurance – Non-Life (Matthew G Heimermann) ........................................................72
REITs / Real Estate Services (Michael W. Mueller, CFA / Anthony Paolone, CFA) ...73
Health Care
Biotechnology (Geoffrey Meacham, Ph.D.) ................................................................75
SMid Biotechnology (Cory Kasimov) ..........................................................................76
Healthcare Technology & Distribution (Lisa C. Gill)....................................................77
Healthcare Information Technology (Atif Rahim)........................................................78
Managed Care (John Rex) .........................................................................................79
Medical Technology & Devices (Michael Weinstein) ..................................................80
SMid Medical & Life Sciences Technology (Tycho W. Peterson) ...............................81
Pharmaceuticals – Major (Chris Schott, CFA) ............................................................82
Pharmaceuticals – Specialty (Chris Schott, CFA) ......................................................83
Materials
Chemicals – Specialty, Commodity & Agricultural (Jeffrey J. Zekauskas)..................85
Coal (John Bridges CFA, ACSM) ...............................................................................86
Gold (John Bridges CFA, ACSM) ...............................................................................87
Metals & Mining (Michael F. Gambardella).................................................................88
Platinum & Palladium (John Bridges CFA, ACSM).....................................................89
Silver (John Bridges CFA, ACSM)..............................................................................90
5
December 2010
Media & Telecommunications
Advertising & Marketing Services (Alexia S. Quadrani)..............................................91
Entertainment (Imran Khan) .......................................................................................92
Information Services / Radio & TV Broadcasting (Michael A. Meltz, CFA) .................93
Technology
Alternative Energy (Christopher Blansett) ..................................................................95
Applied & Emerging Technologies (Paul Coster, CFA) ..............................................96
Business & Education Services (Andrew C. Steinerman)...........................................97
Communications Equipment & Data Networking (Rod Hall, CFA)..............................98
Communications Infrastructure Technology (Steven J. O’Brien) ................................99
Computer Services & IT Consulting (Tien-tsin Huang, CFA)....................................100
IT Hardware (Mark Moskowitz).................................................................................101
Semiconductors (Christopher Danely)......................................................................102
SMid Semiconductors (Harlan Sur) ..........................................................................103
Software (John DiFucci) ...........................................................................................104
Software Technology (Sterling Auty, CFA) ...............................................................105
Disclosures...............................................................................................................110
Note: Unless otherwise noted, all stock prices and coverage lists in this report are as
of the close on December 7, 2010, and target prices for December 2011.
6
December 2010
Economics
Macro
Fiscal Policy Helping to Lift Growth into 2011
Robert Mellman • With important adjustments behind us, as well as Fed and fiscal support,
(1-212) 834-5517 growth should turn somewhat stronger in 2011
robert.e.mellman@jpmorgan.com
JPMorgan Chase Bank NA • The forecast calls for real GDP to accelerate from 2.6% growth in 2010 to
3.5% in 2010 (4Q/4Q)
• Core inflation should hold below 1% through 2011; the Fed Funds rate
expected to stay near zero until 2013, but the Fed’s asset purchase program
will likely end in June
• Economic recovery is not health—unemployment rate to end 2011 at 9.0%;

fiscal deficit to widen even more
The forecast looks for the U.S. economy to gradually accelerate from growth
averaging only about 2% in the middle two quarters of 2010 to above-trend growth
through 2011 and 2012. The economy has been held back over the past few years by
important adjustments in the aftermath of the credit crisis and extended recession.
Business has been reluctant to hire while it rebuilt profit margins and shored up
corporate finances; households cut back on spending while they raised their saving
rate; and homebuilding activity has dropped to extreme lows with associated declines
in output and employment. With these adjustments largely behind us, growth should
turn somewhat stronger. And the latest readings on most economic indicators,
including consumer spending, tend to indicate that the economy is lifting from a bout
of weakness in the middle of 2010. Swings in the financial markets over the past few
months—especially rising stock prices—tend to increase confidence that the upturn
in growth will continue.
Until recently it seemed that modest acceleration in growth now under way would
meet substantial headwinds in the form of tighter fiscal policy that would hold back
growth in early 2011. But the recent agreement on tax policy between the Obama
Administration and Congressional Republicans has replaced restraint with fiscal
stimulus, notably the $120 billion reduction in employee payroll. (The forecast had
already incorporated the continuation of the Bush tax cuts and the renewal of
emergency unemployment benefits.) While the tax agreement has not yet been
passed by Congress, it seems very likely that it will be passed in something close to
its current form soon. As the recent turn to stronger growth is reinforced by the tax
cuts, real GDP growth should reach 3.5% in 1Q11 and 4.0% in the second quarter.
Growth is forecast to slow to 3.0% in 4Q10 as households and business anticipate the
hit to disposable income in early 2012 when payroll taxes revert to their higher level.
Core inflation has fallen below 1% over the past year as measured by either the core
CPI or the core PCE price index. High unemployment in labor markets, high vacancy
rates in real estate, and relatively low operating rates in manufacturing should
continue to hold core inflation below 1% in 2011. Energy and food prices are
expected to increase, but even headline inflation should average only 1.2%.
7
December 2010
The economy is likely to end 2011 with core inflation below 1.0%, the
unemployment rate at about 9.0%, and real GDP growth moderating to 3.0%.
Against this backdrop, the Fed will likely keep official rates close to zero, and the
forecast does not look for a Fed rate hike until early 2013. The Fed’s asset purchase
program is expected to run through June and then expire as currently planned.
The baseline forecast may look comforting against the brutal backdrop of the past
few years. The economy looks to enjoy stronger growth, declining unemployment,
and continued increases in profit margins. But the economic recovery will not bring
economic health. Even a shift to the solid growth in the forecast is apt to bring the
unemployment rate down at a pace of only about 3/4% per year. Thus, the
unemployment rate, now 9.8%, likely will remain highly elevated for years to come.
And the boost to growth from lower taxes comes at the expense of a larger budget
deficit, now forecast to be $1.5 trillion, or nearly 10% of GDP, in 2011. The forecast
looks for the federal fiscal deficit to narrow after 2011, but the decline will not come
quickly and fiscal challenges at both the federal and state and local levels will be
with us for the foreseeable future.
A turn to stronger growth brings with it upside risks to the baseline forecast as
business and households turn more optimistic. But the baseline forecast will remain
subject to visible downside risks too, and the expansion may well continue to feel
fragile. Contagion effects of Euro-area fiscal problems could rock the U.S. equity
markets. Core inflation probably will hold below 1.0% through 2011, raising obvious
concerns that a downside shock could push the economy into outright deflation. The
reality of an unprecedented number of long-term unemployed brings concerns about
prospects for an increase in the number of long-term unemployable. And what looks
to be a period of sustained strong corporate profits and high unemployment might
give rise to a political environment that is increasingly hostile to the market
economy. In short, improved economic growth and declining unemployment should
mark a welcome change in the economic landscape, but they are not likely to be a
panacea that will eliminate current problems and tensions.
8
December 2010
Table 1: U.S. Economic Forecast

%ch saar, except as noted
1H11 2H11 2011 2012

(4Q/4Q) (4Q/4Q)
Real GDP 3.75 3.25 3.50 3.00
Real domestic final sales 3.50 3.70 3.60 3.00
Core PCE price index 0.6 0.7 0.7 1.0
Unemployment rate (%, eop) 9.4 9.0 9.0 8.6
Fed funds rate (%, eop) 0.13 0.13 0.13 0.13
Source: J.P. Morgan.
Figure 1: Real GDP and Core PCE Price Index

%ch saar, both scales
Real GDP
Forecast
6 3
3
2
0
-3
Core PCE price index 1
-6
-9 0
05 06 07 08 09 10 11 12
Figure 2: Unemployment Rate and Federal Budget, with Forecast
Percent, annual av g Percent of GDP, annual av g

Budget balance
10 3
0
8
-3
Unemployment rate -6
6
-9
4 -12
90 95 00 05 10
9
December 2010
Table 2: J.P. Morgan U.S. Forecast

%q/q, saar %q4/q4 %y/y
2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 2010 2011 2012 2010 2011 2012
Gross domestic product
Real GDP 1.7 2.5 2.5 3.5 4.0 3.5 3.0 2.6 3.5 3.0 2.8 3.1 3.0
Final sales 0.9 1.2 4.1 3.8 3.9 3.8 2.9 1.8 3.6 3.0 1.3 3.3 2.9
Domestic 4.3 2.9 2.7 3.3 3.7 4.1 3.3 2.8 3.6 3.0 1.9 3.4 3.1
Consumer spending 2.2 2.8 2.5 3.5 3.5 4.0 3.0 2.3 3.5 2.6 1.7 3.2 2.7
Business investment 17.2 10.3 7.0 7.8 10.6 11.5 10.1 10.5 10.0 8.9 5.7 9.6 9.7
Equipment 24.8 16.8 10.0 10.0 12.0 12.0 10.0 17.9 11.0 8.5 15.6 12.3 9.6
Structures -0.5 -5.8 -3.0 0.0 5.0 9.0 10.0 -7.0 5.9 10.0 -14.5 1.3 9.6
Residential investment 25.6 -27.5 5.0 10.0 20.0 15.0 10.0 -4.3 13.7 13.7 -2.9 6.7 13.1
Government 3.9 4.0 1.1 -0.6 -1.0 -1.0 -0.1 1.8 -0.7 -0.5 1.2 0.5 -0.5
Net exports ($bn, chained $2005) -449 -507 -467 -454 -453 -468 -487 - - - - - -
Exports (goods and services) 9.1 6.3 7.0 7.0 8.0 9.0 8.0 8.4 8.0 8.0 11.6 7.5 8.1
Imports (goods and services) 33.5 16.8 -2.0 3.0 6.0 10.0 10.0 14.2 7.2 6.7 13.5 7.2 8.2
Inventories (ch $bn, chained $2005) 68.8 111.5 61.2 51.6 55.3 47.2 52.4 - - - - - -
Contribution to real GDP growth (% pts):
Domestic final sales 4.4 3.0 2.7 3.3 3.7 4.1 3.3 2.8 3.6 3.0 1.9 3.4 3.1
Net exports -3.5 -1.8 1.3 0.5 0.2 -0.3 -0.5 -1.0 0.0 0.0 -0.6 -0.1 -0.2
Inventories 0.8 1.3 -1.6 -0.3 0.1 -0.3 0.1 0.8 -0.1 0.0 1.4 -0.2 0.0
Income and profits (NIPA basis)
Adjusted corp profits 12.7 11.5 8.0 8.0 10.0 8.0 7.0 19.2 8.2 5.5 29.8 9.0 5.9
Real disposable personal income 5.6 0.9 1.0 4.5 3.5 3.0 3.0 2.2 3.5 2.4 1.3 3.0 2.3
Saving rate1 6.2 5.8 5.4 5.7 5.7 5.4 5.4 - - - 5.7 5.6 5.2
Prices and labor cost
Consumer price index -0.7 1.5 2.3 1.8 1.0 1.1 1.1 1.1 1.2 1.3 1.6 1.4 1.2
Core 0.9 1.2 0.4 0.6 0.6 0.7 0.8 0.6 0.7 1.1 1.0 0.7 0.9
Producer price index -0.5 0.9 4.0 1.0 0.7 0.8 1.3 3.2 0.9 1.4 4.1 1.4 1.3
Core 1.7 2.2 1.0 0.6 0.5 0.5 1.0 1.8 0.6 1.1 1.3 0.9 1.0
GDP chain-type price index 1.9 2.3 1.3 1.0 1.0 1.0 1.1 1.6 1.0 1.2 1.0 1.3 1.2
Core PCE deflator 1.0 0.8 0.5 0.6 0.6 0.7 0.8 0.9 0.7 1.0 1.4 0.7 0.9
S&P/C-S house price index (%oya) 3.6 -1.2 -2.1 -2.5 -1.0 1.0 2.0 -2.1 2.0 2.0 0.6 -0.1 2.0
Productivity -1.8 1.9 1.0 2.0 2.5 2.0 2.0 1.2 2.1 1.6 3.4 1.7 1.7
Other indicators
Housing starts (mn units, saar)1 0.602 0.584 0.550 0.600 0.650 0.675 0.700 - - - 0.588 0.656 0.781
Industrial production, mfg. 9.3 3.7 4.0 4.5 5.0 4.5 3.5 5.8 4.4 3.5 6.0 4.6 3.7
1
Capacity utilization, mfg. (%) 71.6 72.3 73.0 73.7 74.4 75.0 75.5 - - - 71.7 74.6 76.2
1
Light vehicle sales (mn units, saar) 11.3 11.6 12.2 12.4 12.6 12.8 12.9 - - - 11.5 12.7 13.2
1
Unemployment rate 9.7 9.6 9.7 9.6 9.4 9.2 9.0 - - - 9.7 9.3 8.8
Nominal GDP 3.7 4.8 3.8 4.5 5.0 4.5 4.1 4.3 4.6 4.3 3.9 4.5 4.2
Current account balance ($bn)1 -123.3 -135.6 -137.7 -140.8 -143.6 -148.4 -157.3 - - - -505.7 -590.1 -665.6
% of GDP -3.4 -3.7 -3.7 -3.7 -3.8 -3.9 -4.0 - - - -3.4 -3.9 -4.2
Federal budget balance ($bn)1 - - - - - - - - - - -1294.2 -1500.0 -1200.0
% of GDP - - - - - - - - - - -8.8 -9.8 -7.5
1. Entries are average level for the period. Federal balance figures are for fiscal years.
10
December 2010
Equity Strategy
YE 2011 Target 1425; Raise ’11E EPS to $94 from $91; ’12E EPS of $102
Thomas J Lee, CFA AC S&P 500 to Reach 1425 in 2011—Debate Will Be on P/E
(1-212) 622-6505
thomas.lee@jpmorgan.com We see the S&P 500 delivering at least a 15% gain in 2011, driven more by valuation
expansion (risk premium falling) than EPS beats. Our YE2011 target for the
Daniel M McElligott
(1-212) 622-5598
S&P 500 is 1425, based on 14x 2012E EPS of $102.
daniel.m.mcelligott @jpmorgan.com
J.P. Morgan Securities LLC
• We have increased our 2011 EPS estimate for the S&P 500 to $94 (from $91),
principally reflecting higher anticipated EPS contributions from Financials and
Bloomberg JPMA TLEE <GO>
Industrials. Our 2012 EPS estimate of $102 anticipates that the prior EPS peak (in
2Q07 at $92) will be surpassed. This is consistent with prior earnings cycles.
• Amid considerable countervailing forces on asset values, we believe P/E
expansion will be driven primarily by i) contracting relative value relationship of
equities vs. corporate credit, in which risk premium for stocks narrows from
record-high toward normalized levels, and ii) positive impact on asset prices from
Fed’s large-scale asset purchases (QE2). As such, our target risk premium is
5.7%, down from 6.2% currently but still well above the ten-year average of
3.56%.
Figure 3: Comparative S&P 500 Price Levels Based on EPS and P/E Ratios
Index level
Range of 2012 EPS….
Implied '12 GDP gth 2.25% 2.50% 2.75% 3.00% 3.25%
EPS $98.00 $100.00 $102.00 $104.00 $106.00
Applied Implied Equity Risk EY vs BAA
P/E Premia YE '11 Yield
(EY less {10Y less
inflation})
12.5x 6.57% 2.02% 1,222 1,247 1,272 1,297 1,322
13.0x 6.26% 1.71% 1,271 1,297 1,323 1,349 1,375
13.5x 5.97% 1.42% 1,320 1,347 1,374 1,401 1,428
14.0x 5.71% 1.16% 1,369 1,397 1,425 1,453 1,481
14.5x 5.46% 0.91% 1,418 1,447 1,476 1,505 1,534
15.0x 5.23% 0.68% 1,467 1,497 1,527 1,557 1,587
15.5x 5.01% 0.46% 1,516 1,547 1,578 1,609 1,640
Source: J.P. Morgan estimates.
History suggests an even stronger 20%-plus gain, and that there should be more rapid
industry rotation in 2011 (year 3) than any prior year in this bull market. Thus, for
the portfolio manager, 2011 represents some daunting challenges—a 15-20%
“bogey” to beat along with the prospect for even greater group rotation than in 2010.
Thus far, this market has been “textbook” in staging leadership, and in our
2011 Outlook piece, we introduce some tools to help target alpha generation.
Three Reasons to Be Constructive in 2011

#1: Solid GDP growth expected in 2011
U.S. GDP growth is forecast to accelerate to 3.5% (4Q/4Q) from 2.6% in 2010 aided
by expansionary behavior by business and consumer, rehabilitation of consumer
balance sheets, and accommodative fiscal and monetary policy.
11
December 2010
We see labor picking up, adding 175k/month. Inflation remains muted due to
resource slack.
#2: History argues for 20%-plus year in equities

This year represents the third year of a business expansion AND the third year of a
Presidential term. There were only five periods in the 111 years of Dow history when
both occurred and markets rose in each instance, posting an average gain of 21%
(Figure 4 and Figure 5).
Figure 4: Annual Performance of S&P 500 During Expansion/Contraction and Presidential Cycles Figure 5: Years that Were Both 3rd Yr.
Annual % change of Pres. Term & 3rd Yr. of Expansion
% Annual Gain Number of Instances % times Instances >=0% Annual % change
1935 41.4%
Contraction
Contraction
Contraction
3rd Year of
3rd Year of
3rd Year of
Expansion
Expansion
Expansion
Expansion
Expansion
Expansion
All Years
All Years
All Years
2003 26.4%
All Years 7.2% -6.7% 11.4% 7.2% 111 26 85 14 66% 42% 72% 71% 1963 18.9%
Presidential Election Years 8.2% 1.2% 11.1% 0.1% 28 8 20 5 71% 50% 80% 60% 1951 16.3%
during 2-y r of bear
1947 0.0% market w hich

Non-Presidential Election Years 6.8% -10.2% 11.5% 11.1% 83 18 65 9 63% 39% 69% 78%
started in 05/46
3rd Year of Presidential Term 13.3% -13.9% 21.0% 20.6% 27 6 21 5 81% 33% 95% 100% 0% 20% 40% 60%
Source: J.P. Morgan and FactSet. Wow… Wow… Source: J.P. Morgan and FactSet.
The risks of a bear market in 2011 appear low given (i) low recession risk; (ii) low
inflation; (iii) positive real rates; and (iv) higher EY vs. BAA BY. These four items
were key determinants (of 20 we examined) of longer (vs. shorter) bull markets.
#3: Relative return of equities should outperform other risky assets

Finally, relative value should strongly support stocks in 2011. Equity risk premium
remains at a 50-year high at 6.2% (our 14x assumes premium drops to 5.7%, well
above ten-year average of 3.56%). Moreover, forecast returns in 2011 for fixed
income markets are meaningfully weaker—with treasuries flat, high grade +2%,
against double-digit increases seen for commodities and equities.
Market Strategy: Staging as Correlation Falls

Sector correlations historically have fallen to cycle lows during the third year of a
bull market, suggesting a drop in correlation from current 90%.
Group leadership likely rotates more rapidly in 2011, arguing for staging
We compared the price performance of 30 industries at each point in the bull market
cycle (thus, staging) and found top-quartile leadership shifted rapidly in Year 3
compared to Years 1 and 2. This seems logical to us as a fall in correlation leads to
divergences and business cycle dynamics dominate.
Staging would have identified top groups in 2010. This bull market has been a
“textbook” example thus far. The top eight groups which history indicated should
outperform in 2010 indeed outperformed by 1,000bp while the expected worst eight
(based on history) underperformed by 400bp.
12
December 2010
Figure 6: Suggested Top Quartile (Based on Staging) Outperformed in 2010

% change relative to S&P 500 The bottom 8 groups
underperformed by
Predicted 2010 Actual 2010 400bp.
10.3
The top 8 groups expected to
Relative perf. vs S&P 500

perform well based on results 6.5
in past bull markets did in 3.9 3.8
2.7
fact outperform by 1,030bp in
0.2
2010.
-2.2
-4.0
Quartile 1 Quartile 2 Quartile 3 Quartile 4
Source: J.P. Morgan and Datastream.
For 2011, staging analysis suggests the best groups in the first four months of 2011
should be: Asset Managers, Insurance, Construction Materials, Restaurants,
Retail, Gaming, and interestingly Telecom Services and Utilities.
Figure 7: Groups Expected to Outperform in 2011 Based on Historical Staging

Top quartile is shaded green; Bottom quartile in italics and red
2011 stylized (based on all bull markets since '73)
1st third (~month 22) 2nd third (~month 26) 3rd third (~month 30)
1. Consumer Cyclicals Credit Sensitive Asset Mgrs, Cons. Fin, etc Asset Mgrs, Cons. Fin, etc Asset Mgrs, Cons. Fin, etc
expected to outperform in Banks Banks Banks
early 2011, along with Insurance Insurance Insurance
Financials. REITs REITs REITs
Resource & Chemicals Chemicals Chemicals

Commodity Metals, Paper and Gold Metals, Paper and Gold Metals, Paper and Gold
Producers Oil & Gas Oil & Gas Oil & Gas
E&P E&P E&P
2. The leadership is
expected to shift toward Corporate Semis Semis Semis
Enterprise/Capex Capex & Telco Eq Telco Eq Telco Eq
Sensitives. It makes sense Infrastructure Construction Materials Construction Materials Construction Materials
that domestic cyclicals Plays Transports Transports Transports
would be expected to Airlines Airlines Airlines
gain…
Industrials Industrials Industrials
Software Software Software
PC PC PC
Auto & Auto Parts Auto & Auto Parts Auto & Auto Parts
Consumer Homebuilders Homebuilders Homebuilders
Cyclicals Restaurants Restaurants Restaurants
Retail Retail Retail
Hotels Hotels Hotels
Gaming Gaming Gaming
Media Media Media
Defensives Health Care Eq & Svcs Health Care Eq & Svcs Health Care Eq & Svcs
Biotech Biotech Biotech
3. Defensives expected to Pharma Pharma Pharma
gain in the final third of Food & Beverages Food & Beverages Food & Beverages
2011… Personal products Personal products Personal products
Telecom Telecom Telecom
Utes Utes Utes
Source: J.P. Morgan and Datastream.
13
December 2010
Sector Strategy—2011 Outlook

We explore our Strategy Sector Overweights and Underweights in detail in our 2011
Outlook report. A summary is provided below:
Overweight
• Materials: The global synchronized expansion has fueled a recovery in demand
for many global commodities. The Fed’s QE is essentially another easing cycle
with a resulting weakening of the U.S. dollar (being a byproduct) and, thus,
boosting the outlook for these commodity producers.
• Industrials: Industrials typically prove attractive during most of a bull market
cycle but we believe valuation sensitivity or at a minimum, GARP traits, will
matter in 2011. We still recommend exposure but realize a lot more good news
has been priced in here.
• Discretionary: History suggests that in early 2011, investors should still want to
own consumer cyclicals. And given our expectation of a strengthened consumer,
coupled with rising employment and repaired balance sheets, there could be
upside to estimates as well.
• Technology: Group is not expensive but fiscal austerity in Europe and U.S.
states/towns will pose a risk to tech spending. We remain Overweight due to
strong balance sheets coupled with potential upside in U.S. visibility as the U.S.
economy accelerates.
• Energy: In the short term we see strong fundamental trends and positive outlook
driving outperformance for the sector. That said, group is very sensitive to the
price of oil and other commodities and to the perception about the durability of
the global economic expansion.
• Financials: Historical staging favors banks and insurance in 2011. This sector is
also the largest contributor to expected EPS growth and should be the fastest
grower in 2011.
Neutral
• Healthcare: Healthcare is not getting sicker—group could look more attractive
later in 2011 once we get closer to seeing full impact of healthcare reform and
move toward the other side of the “valley” for several segments.
• Telecom: Potentially “overcapitalized” as the number of scale players suggests
pricing pressure while intermodal threats challenge volumes and share.
Underweight
• Staples: Fundamental outlook is mixed, but generally positive, with offsetting
effects from slowly rising demand but also rising cost pressures.
• Utilities: We remain Underweight and see little reason to put fresh money to
work in the sector given slower EPS growth. However, as the bull market
matures, valuations should become more attractive at some point.
14
December 2010
EPS Driven by Cyclicals

The drivers of earnings growth in 2011 and 2012 should basically be the
economically sensitive stocks—Cyclicals and near-Cyclicals account for $8 of the $9
in incremental EPS we forecast for 2011. Figure 8 below highlights our J.P. Morgan
Strategy forecasts for earnings growth in 2011-2012, as well as P/E (2012) multiples
for each sector.
Figure 8: Sector Earnings Outlook and Valuation

Earnings growth… (2011) Valuation…. (2012 P/E)
JPM JPM Est Consensus P/E (2012)
Strategy EPS Est EPS JPM vs. P/E Relative to
Rating Growth Growth Consensus Comment (2012) S&P 500 Comment
Cyclicals
Materials OW 18.8% 20.2% -144 bp Domestic materials like Paper, Construction 15.2x 3.2x Valuatons less attractive
materials and Steels
Industrials OW 17.2% 20.1% -295 bp Domestic cyclicals still more attractive 13.6x 1.6x Upside to P/E
Discretionary OW 10.5% 12.7% -222 bp 12.7x 0.7x Upside to P/E
Technology OW 7.9% 12.8% -491 bp See some risk to EPS growth due to Europe 12.2x 0.2x Upside to P/E
Near-Cyclicals
Energy OW 11.7% 9.9% 177 bp Above consensus due to higher Oil forecast 10.7x -1.3x See upside here
Financials OW 23.4% 24.4% -98 bp Fastest EPS growth in 2011 and largest 9.6x -2.4x Some P/E expansion possible
contributor to EPS gains
Defensives
HealthCare N 3.7% 4.3% -66 bp Weak EPS growth… 11.4x -0.6x Upside to P/E as market trades higher
Telecom N 10.1% 10.5% -41 bp 16.2x 4.2x Expensive
Staples UW 6.7% 8.3% -165 bp Slower EPS 14.0x 2.0x …and rel. higher valuatio
Utilities UW -16.4% -16.9% 51 bp 14.2x 2.2x P/E bit high
S&P 500 10.4% 12.1% -167 bp 12.0x Forecast P/E to reach 14x
S&P ex-Fin 8.0% 9.8% -180 bp 12.6x
Cyclicals 11.3% 14.9% -360 bp EPS gains driven by Cyclicals 12.8x 0.8x P/E should be 15x-16x
Defensives 2.5% 3.3% -83 bp 13.1x 1.1x
Cylicals vs. Defensives 883 bp 1159 bp -277 bp -0.3x -0.3x
Source: J.P. Morgan and FactSet.
15
December 2010
Top Stock Ideas from J.P. Morgan Fundamental Analysts

Table 3 lists the 67 top picks of our J.P. Morgan Fundamental Analysts for 2011.
These stocks have an average upside of 22% to current prices.
Table 3: Top Stock Ideas from J.P. Morgan Fundamental Analysts

Priced as of 12/10/2010, sorted by Implied Upside
JPM Current Market Target Implied JPM Current Market Target Implied
Ticker Name Rtg Price Cap Price Upside TickerName Rtg Price Cap Price Upside
1 NRG NRG Energy Inc. OW $18.70 $4,623 $33.00 76% 35 TUP Tupperware Brands Corp. OW $47.87 $3,023 $57.00 19%
2 DNDN Dendreon Corp. OW $37.65 $5,434 $66.00 75% 36 UPS United Parcel Service Inc. OW $72.89 $53,130 $86.00 18%
3 ITRI Itron Inc. OW $55.89 $2,258 $95.00 70% 37 LIFE Life Technologies Corp. OW $52.76 $9,852 $62.00 18%
4 AMR AMR Corp. OW $7.97 $2,656 $13.50 69% 38 SMG Scotts Miracle-Gro Co. OW $50.92 $3,391 $59.00 16%
5 KGC Kinross Gold Corp. OW $18.44 $20,890 $27.00 46% 39 AFL AFLAC Inc. OW $56.12 $26,447 $65.00 16%
6 COL Rockwell Collins Inc. OW $58.19 $9,127 $83.00 43% 40 ICE IntercontinentalExchange I OW $117.55 $8,599 $136.00 16%
7 WFC Wells Fargo & Co. OW $30.27 $158,880 $43.00 42% 41 CTSH Cognizant Technology Solu OW $70.31 $21,338 $80.00 14%
8 PFE Pfizer Inc. OW $17.02 $136,329 $24.00 41% 42 DRI Darden Restaurants Inc. OW $49.48 $6,849 $56.00 13%
9 WCRX Warner Chilcott Plc OW $21.31 $5,380 $30.00 41% 43 NTAP NetApp Inc. OW $54.15 $19,571 $61.00 13%
10 MDRX Allscripts Healthcare Soluti OW $18.25 $3,415 $25.00 37% 44 MW Men's Wearhouse Inc. OW $24.88 $1,314 $28.00 13%
11 DVN Devon Energy Corp. OW $73.29 $31,654 $100.00 36% 45 COST Costco Wholesale Corp. OW $71.25 $30,804 $80.00 12%
12 LEN Lennar Corp. (Cl A) OW $17.69 $2,718 $24.00 36% 46 CA CA Inc. OW $24.14 $12,351 $27.00 12%
13 BVMF3.SA BM&F Bovespa S/A Bolsa OW $12.55 $25,652 $17.00 35% 47 YUM Yum! Brands Inc. OW $50.26 $23,551 $56.00 11%
14 IPG Interpublic Group Of Cos. OW $11.11 $5,430 $15.00 35% 48 CBI Chicago Bridge & Iron Co. OW $32.52 $3,226 $36.00 11%
15 IVZ INVESCO Ltd. OW $23.23 $10,734 $30.50 31% 49 X United States Steel Corp. OW $53.61 $7,699 $59.00 10%
16 KFT Kraft Foods Inc. OW $30.75 $53,713 $40.00 30% 50 VLCCF Knightsbridge Tankers Ltd. OW $22.82 $543 $25.00 10%
17 ALL Allstate Corp. OW $30.94 $16,651 $40.00 29% 51 CNX Consol Energy Inc. OW $43.99 $9,935 $48.00 9%
18 NXY.TO Nexen Inc. OW $21.76 $11,425 $28.00 29% 52 MCD McDonald's Corp. OW $77.56 $81,943 $84.00 8%
19 STJ St. Jude Medical Inc. OW $40.85 $13,993 $52.00 27% 53 HOT Starwood Hotels & Resorts OW $61.23 $11,673 $66.00 8%
20 ESRX Express Scripts Inc. OW $54.76 $28,815 $69.00 26% 54 JBL Jabil Circuit Inc. OW $16.71 $3,640 $18.00 8%
21 RHI Robert Half International In OW $30.20 $4,444 $38.00 26% 55 HAR Harman International Indus OW $48.37 $3,365 $52.00 8%
22 C Citigroup Inc. OW $4.77 $138,567 $6.00 26% 56 QCOM QUALCOMM Inc. OW $49.48 $80,040 $53.00 7%
23 SWC Stillwater Mining Co. OW $20.07 $1,965 $25.00 25% 57 JWA John Wiley & Sons Inc. (Cl OW $45.79 $2,344 $49.00 7%
24 PEP PepsiCo Inc. OW $64.90 $102,856 $80.00 23% 58 CREE Cree Inc. OW $72.05 $7,815 $77.00 7%
25 BBBB Blackboard Inc. OW $42.36 $1,457 $52.00 23% 59 IR Ingersoll-Rand Plc OW $44.41 $14,389 $47.00 6%
26 MRVL Marvell Technology Group OW $19.56 $12,723 $24.00 23% 60 EPD Enterprise Products Partne OW $40.70 $33,983 $42.00 3%
27 VIAB Viacom Inc. (Cl B) OW $39.54 $21,991 $48.50 23% 61 ETN Eaton Corp. OW $98.91 $16,647 $102.00 3%
28 BIN IESI-BFC Ltd. OW $22.91 $2,528 $28.00 22% 62 ENTR Entropic Communications I OW $11.75 $987 $12.00 2%
29 HAL Halliburton Co. OW $40.22 $36,581 $49.00 22% 63 WFMI Whole Foods Market Inc. OW $49.49 $8,559 $50.00 1%
30 MBFI MB Financial Inc. OW $16.43 $886 $20.00 22% 64 UDR UDR Inc. OW $22.86 $4,164 $23.00 1%
31 WLP WellPoint Inc. OW $57.68 $22,703 $70.00 21% 65 SLW Silver Wheaton Corp. OW $38.51 $13,338 $36.00 -7%
32 OMX OfficeMax Inc. OW $18.14 $1,542 $22.00 21% 66 LLTC Linear Technology Corp. OW $34.62 $7,804 $31.00 -10%
33 OC Owens Corning OW $28.75 $3,584 $34.50 20% 67 RAI Reynolds American Inc. OW $32.22 $18,786
34 GILD Gilead Sciences Inc. OW $37.61 $30,534 $45.00 20% Average 22%
Source: J.P. Morgan and FactSet.
16
December 2010
Equity Technical Strategy

U.S. Equity 2011 Technical Outlook
Michael Krauss • S&P 500 targets 1300-1350 in 2011, which should complete this bull cycle
(1-212) 834-5103 from 666 in March 2009
michael.krauss@jpmorgan.com
David Cohen, CFA • Shorter term, buy pullbacks now to 1155-1175; we see an 1130 floor; favor
(1-212) 622-5338 new highs to the 1240-1248 dual Head and Shoulders targets by the end of
david.e.cohen@jpmorgan.com January, then some correction
• In 2011, we expect the S&P 500 to see a 1300-1350 range high and a 1100-
1130 range low
• Our preferred trajectory suggests a rally to the range highs around mid-
year, and then a correction toward the range lows in 2H
• This scenario suggests that a five-wave advance from the 2010 low and a
conservative three-wave advance from the 2009 bottom would both complete
around 1300-1350
• Most favored S&P 500 sectors are: Consumer Discretionary, Energy,

Industrials, Technology
S&P 500 Index Outlook

Our Equity forecast from the 2010 Outlook was a lot better than our incorrect Bond
outlook. For the S&P 500 index, we had suggested that 2010 would see a trading
range year between 950 on the downside and 1150/1200 on the upside. Our best case
upside target was 1229-1240. In our 2010 Outlook trading theme section, we
suggested entering S&P 500 “core longs toward the 950-1000 range low territory,”
then “exit core longs in the 1200-1240 upper ceiling area.”
The S&P 500 did accommodate our views this year. The market did trade sideways
throughout 2010 and formed an actual range of 1011 (July low) to 1220 (April high)/
1227 (November high). Effectively, our 2010 Outlook trading theme outlook
captured both ends of this year’s entire S&P 500 range. In addition, during the year
in our US Equity Technical Strategist, we turned bearish just before the April 26 top,
and then shifted bullish very close to the July 1 bottom. Into the November high, we
targeted a 1229-1248 peak, missing by 2 points at the 1227 actual high prior to the
recent 4.4% decline. The 1248 area marks the May-September Head and Shoulders
bottom breakout target above 1130 (see figure below).
17
December 2010
Figure 9: S&P 500 Index 1240-1248 Dual Head and Shoulders Bottom Objectives
S&P 500 Index—Weekly bars
The 1229 and 1240 levels have indeed been important “barriers” throughout 2010, as
referenced in last year’s Outlook. The 1229 level marks a 61.8% retracement of the
major bear market from the 1576 October 2007 all-time high, down to the 666
March 2009 bottom. The 1240 level is the 2008-2009 Head and Shoulders bottom
rally target (see figure above). The April and November S&P 500 peaks stopped just
below these levels. However, the basing activity this year above 950-1000 and
October’s important monthly momentum buy signal (see figure below) suggest that
this barrier will be exceeded on the “third time up” to this zone.
Figure 10: S&P 500 Index Technical Roadmap for 2011

S&P 500 Index—Monthly bars
18
December 2010
In 2011, we expect the S&P 500 to see a 1300-1350 range high and an 1100-1130
range low (see following figure). Our preferred trajectory suggests a bit more
pullback now, a rally to the range highs around mid-year, and then a correction
toward the range lows in 2H (see above figure). This scenario suggests that a five-
wave advance from the 2010 low and a conservative three-wave advance from the
2009 bottom would both complete around 1300-1350. The rally completion would
then produce a steep correction in 2H 2011 that either: (a) retests this year’s
1220/1227 highs; (b) deepens further toward 1130-1140, thereby equating with the
209 point April-July decline; or (3) tests 1100, retracing 38.2% of the entire 2009-
2011 bull market.
Figure 11: S&P 500 Index Targets 1300-1350 in 2011
S&P 500 Index—Weekly bars
We expect some more consolidation now. In the days/weeks ahead, the correction
unfolding from the 1227 November 5 high targets 1155-1175 and assumes an 1130
floor. Indeed the market has held twice at 1173 in the past week. We expect to see
buyers on this weakness. The 1155-1175 targets include a 38.2% retracement from
the 1040 August 27 low and mid-October congestion. The 1130 interim floor marks
the top end of the June-August range and August low 50% retracement (see above
figure). From these supports, we expect new highs early in 2011, in line with New
Year seasonality.
Amid our preferred “risk-on” environment as evidenced by monthly momentum
signals (bullish Equities and bearish Treasuries), we anticipate that the S&P 500 will
reach 1229 October 2007 61.8% retracement, and the 1240-1248 dual Head and
Shoulders bottom targets by the end of January 2011. We would book half of 1155-
1175 longs in that 1229-1248 zone.
In 1H2011, we see the S&P 500 peaking for the year around 1300-1350. This
confluence area includes: 1290/1307 Elliott fifth-wave targets from the July low,
1297 where the rally from the July low is equal to the March to June 2009 rally,
1313 August 2008 “pre-Lehman bankruptcy” high, 1327 May 2006 high,
1333 “a double” from the March 2009 low, and 1353 where the rally from the July
low is 0.618 as long as the entire March 2009 to April 2010 rally. Just above here,
1364-1373 saw three significant monthly lows in March 2007, August 2007, and
May 2008. While unexpected, 1430 would be the measured move above the April to
July range.
19
December 2010
If the 1100 area is violated to the downside, our worst-case scenario would retarget
this year’s 1011 low and the 950-1000 longer-term floor. Interestingly, if the
1350 area does mark a 2011 S&P 500 peak, then this year’s 1011 low would mark an
exact 50% retracement of the entire 666 to 1350 cyclical bull market! Finally,
repeating the last sentence of the 2010 Outlook, “We do not expect the 666 cycle low
breaking, absent a global depression.”
Trading Themes
S&P 500: Buy pullbacks toward 1155-1175. Risk closes below 1130. Take half
profits in the 1229-1248 zone in December/January. Exit core longs in the 1300-1350
target zone, and go short for a move to 1150-1200.
20
December 2010
Accounting & Valuation

Coming into Focus: Tax Legislation and New Accounting Standards in View
Dane Mott, CFA, CPA AC When hope is not an option: looking for compromise on tax legislation
(1-415) 315-5905 On November 15, Congress began its lame duck session following the mid-term
dane.mott@jpmorgan.com elections that gave Republicans control of the House and narrowed the Democratic
Amy Schmidt majority in the Senate beginning in the 112th Congress. Congressional Democratic
(1-415) 315-6705 leaders remain in control of both chambers through year-end 2010 and have set a
amy.m.schmidt@jpmmorgan.com laundry list of tax priorities for resolution during the lame duck session. At the top of
J.P. Morgan Securities LLC the list is addressing the expiring 2001 and 2003 Bush-era tax cuts. Other priorities
Bloomberg JPMA MOTT <GO> include patching the individual alternative minimum tax (AMT) for 2010, dealing
with the estate tax before it reverts to pre-2001 levels in 2011, and extending
retroactively temporary tax incentives that expired at the beginning of 2010.
A framework for compromise emerges

On December 7, President Obama announced a framework for an agreement between
the White House and Congressional Republicans on a broad tax package. Reaction
from lawmakers that were not part of the negotiations will ultimately determine the
fate of the agreement between the President and Republican Congressional leaders.
Said differently, Democratic Congressional leaders will have to sign off on any
agreement before it can move forward in the House or the Senate.
It is worth noting that, on December 9, the House Democratic caucus rejected the
proposed framework in a symbolic vote. The caucus vote is non-binding; it is also
likely not a clear indicator of the direction (yay or nay) that House Democrats will
ultimately vote. However, the private vote is a signal that significant uncertainty
remains as to the specific details of the final legislation—that is, changes to the
compromise framework may be required to guarantee the necessary vote count for
passage.
In accordance with the proposed compromise, President Obama and Republican

Congressional leaders have tentatively agreed to:
• Extend the Bush-era tax cuts for the next two years (i.e., FY 2011 and FY 2012)
for all individual taxpayers.
• Maintain the current maximum 15% tax rate on net capital gains and dividends
for two years (i.e., FY 2011 and FY 2012).
• Extend other income tax relief enacted in 2001 and 2003 including marriage
penalty relief, the 10% bracket, and the enhanced child credit.
• Patch the alternative minimum tax (AMT) for FY 2011 and FY 2012.
• Reinstate the estate tax for two years with a top rate of 35% and a maximum
exemption amount of $5 million.
• Include a 2% employee-side payroll tax cut for workers. Under the plan, the
Social Security payroll tax on individual wages would be lowered to 4.2% in
2011, from the current 6.2% rate. Social Security taxes apply only to the first
$106,800 in wages; the benefit for high earners tops out at approximately $2,100.
The employer share of Social Security taxes would not be affected.
• Extend unemployment insurance benefits through the end of FY 2011.
21
December 2010
Tax incentives are also proposed for businesses. Among the business incentives
proposed in the compromise are:
• The research and development (R&D) tax credit that expired on

December 31, 2009 would be retroactively extended for an additional two years
(i.e., FY 2010 and FY 2011).
• Businesses would be allowed to expense 100% of their capital expenditures (for

tax purposes) in 2011. The write-off would be retroactive to September 2010—
that is, it could be applied to capital expenditures made on or after
September 2010, when President Obama originally floated the proposals.
It is important to note that the proposed tax compromise does not include
spending cuts to offset the extension of lower tax rates and tax credits. Said
differently, none of the provisions will be paid for with offsets (or reductions) in
government spending. This means that the U.S. government will have to borrow
to pay for the plan.
The compromise would let companies keep more cash now; it is also meant to give
companies that may be hesitant to invest an incentive to expand, which would in turn
act as a stimulus to the overall economy. Some think that businesses unnerved by the
faltering economic recovery but with investments already in the pipeline may decide
to accelerate some activities already planned for 2012 and after into 2011 to take
advantage of the proposed 100% depreciation tax break. If this behavior of
accelerating planned future activity into 2011 to take advantage of tax breaks does
play out, an implication is that it could essentially dampen longer-term economic
growth if the end result is simply to reallocate growth that would have otherwise
occurred in 2012 and beyond to 2011. If the end result is only to accelerate activity
that would have occurred with or without stimulus, then the primary benefit of such
legislation is a time-value-of-money benefit. This approach of accelerating future-
period demand into current periods to produce temporary effect has been seen before
with the homebuying tax credit, cash for clunkers, and tax rebates.
Cloudy with a chance of converged accounting standards

As the Financial Accounting Standards Board (FASB) and the International
Accounting Standards Board (IASB) round the corner that is 2011 and sprint towards
June 30, the likelihood that the boards will deliver a common set of high-quality
global accounting standards to investors remains uncertain. The boards have
narrowed their focus to four primary projects: financial instrument accounting,
revenue recognition, lease accounting, and insurance accounting.
In recent months, the FASB has slowed its work on the insurance accounting project.
As a result, it is our expectation that the IASB will move forward on its own to
finalize its proposed insurance accounting standard by June 30, 2011. Whether the
boards are able to deliver on their commitment to produce common accounting
standards on the remaining primary projects by the June 30, 2011 deadline is an open
question. Another open question is whether the final standards on those projects will
be received positively by market participants.
As the boards proceed in their redeliberations, we expect that market participants will
gain clarity in late 1Q 2011 about the final details of the new accounting standards.
The IASB is particularly motivated to land the four priority projects by the
June 30, 2011 deadline for two reasons. First, the IASB loses its founding chairman,
Sir David Tweedie, when he retires on June 30, 2011. Second, the U.S. Securities
and Exchange Commission (U.S. SEC) is scheduled to determine as early as mid-
22
December 2010
2011 whether and how International Financial Reporting Standards (IFRS) might be
incorporated into the U.S. financial reporting framework. Even if the U.S. SEC
chooses not to supplant U.S. Generally Accepted Accounting Principles
(U.S. GAAP) with IFRS, companies still face significant headwinds to implement
the new standards for the four primary projects. Below is summary information on
the four primary projects, including our take on whether a common FASB/IASB
accounting standard will be published for each project by June 30, 2011.
• Financial instrument accounting. There are three parts to the financial

instrument accounting project: classification and measurement; impairment; and
hedge accounting. The FASB issued a comprehensive exposure draft in
May 2010 covering all three parts of the project; the IASB chose to deliberate
each part of the project separately. In particular, the IASB chose to fast track their
deliberations on classification and measurement, leapfrogging FASB in the
process and finalizing deliberations on classification and measurement in
October 2010.
We expect the FASB to move towards the conclusions reached by the IASB in
the area of classification and measurement (perhaps with some differences
remaining in the accounting for changes in own credit). Further, we expect that
the boards will attempt to reach a common answer on the impairment of financial
assets. We also expect that FASB will finalize its deliberations on parts one and
two of the financial instrument accounting project by June 30, 2011 and that the
conclusions reached will be substantially similar to the IASB’s position on those
topics.
We are less certain as to whether the boards will be able to complete their
deliberations on the hedge accounting part of the project by June 30, 2011. While
the FASB released its proposals to improve hedge accounting in May 2010, the
IASB recently released its proposals on December 9, 2010. The IASB proposes to
reconsider fundamentally the accounting for hedges of both financial and non-
financial instruments in closed portfolios. FASB chose instead to propose
minimal improvements to the accounting for hedges of financial instruments
only. Given the overarching goal of publishing common standards to account for
financial instruments, the FASB has recently committed to exposing the IASB’s
hedge accounting exposure draft in 1Q 2011. Feedback received on the hedge
accounting exposure draft will ultimately dictate whether the proposals are
carried forward for further consideration. However, given the fact that the IASB’s
proposals represent a fundamental re-think of hedge accounting for both IFRS
and U.S. GAAP, it is unlikely that the boards will be able to complete
deliberations on hedge accounting in time to meet the June 30, 2011 deadline.
Instead, we expect that this part of the project will be completed closer to
year-end 2011.
It is worth noting that the boards are also deliberating jointly proposals to
determine when offsetting of financial assets and financial liabilities in the
balance sheet is appropriate. The balance sheet offsetting project is an outgrowth
of the boards’ work to reconsider the accounting for financial instruments.
Currently, U.S. GAAP allows for offset (i.e., “netting”) to a much greater extent
than what is permitted in accordance with IFRS. The issue is that, even if the
boards came to a common answer for recognition and measurement of financial
instruments, investors would not have comparable information because of
divergent presentation requirements in U.S. GAAP and IFRS. The boards are
expected to issue a joint exposure draft of their proposals for balance sheet
23
December 2010
offsetting in early 1Q 2011 and are expected to finalize their deliberations on

those proposals in time to meet the June 30, 2011 deadline.
• Revenue recognition. In June 2010 the boards issued a joint exposure draft
Revenue from Contracts with Customers. If finalized as written, the new revenue
recognition model would eliminate the industry-specific requirements currently
present in U.S. GAAP, replacing that body of accounting literature with a single
model to be used by all companies, irrespective of industry. The proposed
revenue recognition model is the most “converged” of the exposure drafts issued
on the four primary projects in 2010. Said differently, both the FASB and the
IASB reached common tentative decisions on all aspects of the proposed revenue
recognition model. The comment period on the joint exposure draft ended
October 22, 2010; redeliberations are expected to begin in December 2010. While
we expect it to be tight, we do think the boards will finalize their deliberations for
a new revenue recognition model in time to meet the June 30, 2011 deadline. We
expect that deliberations will focus on the scope of the proposed model, on the
measurement of revenue, and on the timing of its recognition in the income
statement.
• Lease accounting. In August 2010 the boards issued another joint exposure draft
Leases. In accordance with the proposed lease accounting model, the operating
lease concept would be eliminated from U.S. GAAP and IFRS, thereby bringing
substantially all leases onto the face of the balance sheet. While the FASB and
the IASB propose a right-of-use model for both lessee and lessor accounting, the
boards differ on a number of points in the model. We do not think the proposed
model is a converged solution—that is, if each board were to finalize their
respective exposure drafts as written, the accounting result would differ
depending upon whether U.S. GAAP or IFRS is used as the basis for accounting.
The comment period on each board’s Leases exposure draft ends
December 15, 2010; we expect redeliberations to begin in earnest in
February 2011.
We think the boards have an outside chance at finalizing their proposals for a new
lease accounting model in time to meet the June 30, 2011 deadline if they decide
to delay their proposals on lessor accounting and, instead, focus their time in the
next six months on improving the proposed lessee accounting model. While we
do not expect the boards to reconsider their proposal to bring substantially all
operating leases onto the face of a lessee’s balance sheet, we do expect the boards
to spend most of their deliberations reconsidering the proposed measurement of a
lessee’s right-of-use asset and its associated lease liability. If the boards decide to
move forward with their discussion of the proposed lessor accounting model, we
expect deliberations to continue into 2012.
• Insurance accounting. The boards have chosen to take different paths to

reconsider the accounting for insurance contracts in IFRS and U.S. GAAP. In
July 2010 the IASB issued its own exposure draft Insurance Contracts; in
contrast, the FASB issued in September 2010 a discussion paper Preliminary
Views on Insurance Contracts. Many see the overhaul of insurance accounting
requirements to be a pressing need in IFRS; however, it remains to be seen
whether that same need exists in U.S. GAAP. It is worth noting that FASB’s
Emerging Issues Task Force (EITF) published its consensus position to amend
the accounting for costs associated with acquiring or renewing insurance
contracts in U.S. GAAP (i.e., deferred acquisition costs) in October 2010. The
finalized amendments were approved by unanimous vote of the FASB in
September 2010. We consider the FASB’s action on deferred acquisition costs
24
December 2010
(through the EITF) to be a signal that the board is in no hurry to overhaul

insurance accounting in U.S. GAAP.
Consequently, we think that the IASB will move forward on its own to finalize its
proposals to overhaul the accounting for insurance contracts in IFRS. While we
expect the FASB to participate (to some degree) in the IASB’s redeliberations,
we think that it is likely the FASB will take a “wait-and-see” approach regarding
further changes to the accounting for insurance contracts in U.S. GAAP. We
think that FASB’s future deliberations on the accounting for insurance contracts
will ultimately be informed by the experience of non-U.S. companies that
implement the IASB’s final insurance accounting standard.
Dane Mott is a member of the FASB’s Investor Technical Advisory Committee and
several IASB advisory committees: the IFRS Advisory Council; the Analyst
Representative Group; and the Employee Benefit Working Group. Amy Schmidt is a
former Technical Manager at the IASB.
JPMorgan Chase & Co. and its affiliates do not provide tax advice or advice on tax
accounting matters. Accordingly, this material is not intended or written to be used,
and cannot be used or relied upon, by any recipient in connection with promotion,
marketing, or a recommendation for the purpose of avoiding U.S. tax-related
penalties. Each client should consult his/her personal tax and/or legal advisor to
learn about any potential tax or other implications that may result from acting on a
particular recommendation.
25
December 2010
Equity Derivatives
Global Volatility Outlook
Marko Kolanovic AC Equity Volatility in 2010

(1-212) 272-1438
mkolanovic@jpmorgan.com In order to better understand market volatility in 2010, we point to some remarkably
similar volatility patterns of the past (see following two figures). Studying the
Amyn Bharwani
(1-212) 622-8030
anatomy of market crises can also help anticipate future patterns of volatility. Spikes
amyn.x.bharwani@jpmorgan.com in volatility similar to what we saw in 2008 and 2010 are likely to occur in 2011 as
well. The cause of many crises is a disconnect between asset prices and their
Adam Rudd, CFA
(1-212) 272-1215
fundamental valuations. While the severity of each crisis is determined by the
adam.ch.rudd@jpmorgan.com magnitude of this disconnect, the behavior of equity investors and resulting volatility
patterns tend to be similar.
Bloomberg JPMA KOLANOVIC <GO>
A primary cause of the 2008 crisis (figure below) was a housing and credit bubble in
the United States. The first serious showing of the severity of the crisis was the
collapse of Bear Stearns. Following the collapse, many market participants failed to
recognize the magnitude of the problem or misconstrued a quick fix for a long-term
solution. The 2008 crisis fully escalated six months later, resulting in multiple
failures and a recession in the U.S. and Europe. During this most acute phase,
investors overreacted (i.e., projected a collapse of the global financial system and a
great depression), sending asset prices sharply lower. Large U.S. government
stimulus and Fed interventions helped set a floor for the collapse, while reduced asset
prices and the stimulus set the stage for the growth cycle in 2009. As the markets
rallied, propped up by the removal of systemic risk and a return to growth, volatility
plummeted. Several smaller aftershocks (e.g., Dubai, CIT bankruptcy) didn’t notably
change the declining volatility pattern.
Figure 12: 2008 Market Crisis
90%
70%
Global GDP and
Earnings
Systemic Risk
US Subprime
VIX
50% Removed
Bear Stearns
CIT
Collapse
Dubai
Contained?
US Financial
System?
30%
Global Depression?
US ~$1T Stimulus
QE, Bailouts
10%
Jan 08 Apr 08 Jun 08 Sep 08 Nov 08 Feb 09 Apr 09 Jul 09 Sep 09 Dec 09
Source: J.P. Morgan Equity Derivatives Strategy.
26
December 2010
Figure 13: 2010 (Smaller) Market Crisis

50%
EU Finances
Greece
40% Quantitative
Greece Aid Easing
Problem
Resolved? US Earnings
(Q2, Q3)
Earnings, GDP
VIX
30% Ireland
EU Govs
and Banks?
20% Global
Contagion?
EU/IMF $1T
Bailout Fund
10%
Dec 09 Jan 10 Mar 10 Apr 10 May 10 Jul 10 Aug 10 Oct 10
Among the primary causes of the market crisis in 2010 (above figure) were the high
debt levels and budget deficits of several European sovereigns. In an almost identical
pattern to the 2008 crisis, Greece’s issues were not fully acknowledged and only
superficially resolved in January. Following the initial spike, volatility declined,
propped up by strong growth in the U.S. and Asia. Following this brief phase of
problem denial, the sovereign credit problem resurfaced, causing multiple shocks in
volatility and the overreaction of market participants (i.e., projection of a collapse of
the euro and global contagion). The ensuing EU and ECB interventions ($1 trillion
bailout fund), further easing by the Fed (QE2), and strong U.S. corporate results set
the stage for a market recovery and decline in volatility. The most recent volatility
spike due to Ireland’s credit did not significantly impact S&P 500 volatility and
appears only as an aftershock of the 2010 crisis at this junction.
The 2008 global crisis was triggered by low-quality U.S. mortgages. In 2008, U.S.
GDP dropped faster and bottomed before Europe’s. Fortunately for the markets, the
quality of European sovereign debt was not in question at the peak of the 2008 crisis.
During the 2008 crisis, Emerging Asia never entered recession and maintained
positive growth through the crisis. The time lag between the U.S. subprime and
European sovereign crises, as well as positive growth in Emerging Asia, helped the
financial system avoid the perfect storm that could have made the crises all the more
severe. Currently, relatively strong growth in the U.S. and Asia is helping global
markets weather the European sovereign crisis. Less-than-perfect synchronization
between economic cycles, capital markets, and market regulations in different
regions in this way helps to protect the global economy from major disasters. For
instance, after recent crises in the U.S. and Europe, should risks start emerging in
Asia, the global economy may recover just enough to dampen its impact.
27
December 2010
2011 Volatility Outlook

In this section we discuss our base case volatility forecast for the S&P 500. We
base our forecast on J.P. Morgan’s 2011 projections for the overall economy,
equities, and credit and also take into account interest rate risk and ongoing
concerns in Europe. In addition to the S&P 500 volatility forecast, we will forecast
the volatility of major European and Asian indices. Finally, we outline the main risks
for our base case.
Volatility of the S&P 500 in 2011 will most likely be realized at the same or slightly
lower level compared to 2010. Our forecast is that the average realized volatility
of the S&P 500 in 2011 will be 18% with a most likely range of ~15-20% (please
see the end of this section for region-specific forecasts). While projected tightening
of credit spreads and the anticipated appreciation of equities point to a lower level of
volatility of ~15%, asset prices may have elevated volatility as a result of changes in
monetary stimulus and interest rate volatility. Over the course of the year, we expect
periods of equity volatility below our target range and volatility spikes above our
target range. Volatility spikes are likely to occur due to the European sovereign crisis
and potential exit from QE and are less likely due to weak growth or inflation.
Economic Data–Based Forecast

Evidence continues to build that the global economy is regaining momentum. Global
economies are expected to grow at a ~2.7% rate in Q3 and Q4. In 2011 the global
economy is expected to grow at a rate of 3.3%. This increase in growth rate should
benefit equity markets and put downward pressure on market volatility. The highest
growth is expected in the Asia ex-Japan region at ~7.6%. The U.S. is expected to
grow 3% in 2011 (growth is expected to be 2.6% in 2010), the Euro area 1.6%, and
Japan 1.45%. Based on the historical relationship between U.S. GDP and volatility,
market volatility has averaged ~15% in a 3% growth environment (the volatility
range was 10-20%). Given that we had 18% volatility with 2.6% growth in 2010, the
expected increase in GDP should be a positive and would point to an average
realized volatility at the end of 2011 of ~17%.
The current high unemployment rate is likely a structural problem. Unemployment

and a weak consumer segment will be a source of downside risk for equities, and
hence an upside risk for volatility. U.S. unemployment is expected to peak in
Q1 2011 and decline to 9.5% by the end of 2011. While the slight decline in
unemployment should benefit markets, these levels of unemployment were
historically associated with higher levels of volatility (~20%). A projected marginal
decline in unemployment would not have a meaningful effect. We think that the
unchanged unemployment outlook translates into unchanged end-of-2011 volatility
of ~18%.
Equity-Based Forecast
The J.P. Morgan outlook for global equities in 2011 is positive. Positive
developments in global economies are expected to lift equity indices from the current
levels by approximately ~15% in the U.S., ~15% in Europe, and ~25% in emerging
market economies. Our strategists see multiple reasons to remain constructive on
equities, ranging from U.S. post-election dynamics, quantitative easing, economic
momentum, and M&A activity. A significant part of any volatility forecast is related
to the directional view on equities. The historical regression of annual market returns
against the subsequent change in realized volatility suggests that a projected ~15%
increase in equities would lead to a ~2% drop in volatility. Given the current level of
realized volatility of 18%, this would point to an average realized volatility at the end
of 2011 of ~16%.
28
December 2010
Credit-Based Forecast
In our equity volatility forecast we also refer to J.P. Morgan Strategy outlooks for
HG and HY credit spreads. The CDX Investment Grade (IG) Index began 2010 at
~80bps and is now at ~95bps. The J.P. Morgan High Grade Credit Strategists
maintain an overweight recommendation for HG credit, with a 70bp 2011 year-end
target for the CDX IG Index. The strategists believe that spreads are likely to
continue to tighten due to both the rise in sentiment and equity markets and the
reduction in available fixed income product supply. The midterm elections are also
positive for HG credit as the large banking, energy, and healthcare sectors, which
have been under significant regulatory scrutiny, could see some relief. In addition,
credit fundamentals such as record-high cash balances, profit margins, and free cash
flow support lower spreads. Based on the historical relationship between HG credit
and equity volatility, when the spread was 70bp, volatility averaged ~17%. However,
a drop of 27bps in HG spread suggests a significant drop in equity volatility (~5%).
Given the current level of 6M realized volatility of 18%, we assess that both level
and projected changes of high grade spreads point to S&P 500 realized volatility at
the end of 2011 of ~15%.
We repeated a similar analysis for HY credit spreads based on J.P. Morgan HY credit
2011 forecasts. The 2011 target for CDX HY index is 390bps, which is 140bps
below the current level. Based on the historical relationship of volatility to HY
spreads, the projected level of 390bps would point to a ~15% realized volatility level.
A 140bps tightening from current spread levels would suggest a drop in equity
volatility of ~5% from current levels. We think that such a decline of equity volatility
is not realistic and perhaps reflects a dislocation between the current levels of equity
volatility and HY spreads.
Interest Rate–Based Forecast

Interest rate volatility is highly correlated with equity volatility.1 Currently, the
volatility of the 10-year rate appears higher than equity volatility (based on the
regression of the past 30 years). The historical relationship between the two would
imply S&P 500 volatility of ~20% (versus the current level of 18%). This
discrepancy wasn’t of much concern for us over the past year as there was no
inflationary pressure and quantitative easing kept rates low. However, we think that
potential interest rate volatility could put some upward pressure on equity volatility
in 2011. There are essentially two scenarios in which interest rate changes can
negatively affect equities and thus cause higher volatility. The main risk is the Fed
removing monetary stimulus from the system, which would cause intermediate rates
to rise. During this ‘Fed exit’ scenario, equity volatility would be elevated due to the
potential reduction of risky asset holdings (e.g., unwind of carry trades) and
increased borrow cost for companies and consumers. As the Fed exit is more likely
to happen in a growth scenario, we think that it would not cause a very large increase
of equity volatility. The other interest rate–related risk is inflation, which could cause
an increase of longer rates and introduce uncertainty for companies and increase
equity volatility.
1
For instance, levels of volatility of the 10-year Treasury rate and S&P 500 volatility had a
70% correlation over the past 30 years. Returns of volatility had a 25% correlation to returns
of the 10-year rate.
29
December 2010
Non-U.S. Risks
Forecasting S&P 500 volatility based solely on U.S. economic, equity, and fixed
income projections is incomplete as it overlooks possible volatility shocks outside
the United States. In particular, we believe that an ongoing European sovereign debt
crisis will continue to add to S&P 500 volatility (e.g., Spain, Portugal). The transfer
of volatility from Europe to the United States is realized via the strong correlation of
global equity indices and via perceived risk of a spillover. While we believe that the
crisis will stay contained to the periphery of the region, and eventually be resolved
by EU policy makers, we estimate its impact to add ~100bps of volatility to the
S&P 500 in 2011. We also recognize potential risk from inflation and asset volatility
in China, though we perceive this as a smaller risk. Gradual monetary policy
tightening in 2011 would not significantly impact the growth in emerging Asia, in
our view.
Our S&P 500 volatility target—a weighted average of individual forecasts—for 2011
realized volatility is 18%, with a most likely volatility range of 15-20%. The table
below shows each of the factors influencing our forecast. While asset prices propped
up by quantitative easing point to the low end of our forecast range, risks related to
global monetary and fiscal policy developments point to the upper end of our range.
Table 4: Forecast of S&P 500 Volatility

Asset 2010 2011 S&P Volatility
HG Credit 97 70 15%
HY Credit 530 390 15%
S&P 500 1180 1375 16%
GDP 2.6% 3.0% 17%
Unemployment 9.6% 9.5% 18%
Interest Rates -- +1% 19%
Non-US Risks +1% +1% +1%
S&P Volatility 18%
Risks to Our Base Case

The risks to our base case forecast are skewed to the upside, in our view. These risks
are related to economic growth and associated changes in interest rates.
Should the economy start growing steadily, a removal of monetary stimulus and
related interest rate volatility could lead to medium-sized but short-lived volatility
spikes. The risk is that policy changes cause multiple interest rate and asset price
shocks and 2011 S&P 500 volatility ends in a 20-25% range.
Should growth start weakening and the central banks’ policies fail to reverse the
trend, we may see a period of low growth and higher inflation—stagflation.
Stagflation would negatively affect equities and would cause a significant increase of
equity volatility. Depending on the severity of the condition, S&P 500 volatility
would likely end up in a 20-30% range.
The most extreme and the least likely risk is a full-blown double-dip recession. The
ensuing unemployment, falling housing prices and consumption levels, and
disappointing corporate earnings would likely send S&P 500 realized volatility to a
30-40% range.
30
December 2010
Outside the United States, we see the European sovereign debt crisis as a main
source of upside volatility risk. Concerns about the solvency of peripheral European
sovereigns appeared to be most acute before the bailout of Greece. However, the
recent arrangement for Ireland has drawn attention back to the solvency and liquidity
of European sovereigns. The market’s focus is now set to move to Portugal and
Spain. We accounted for some of this risk by increasing our largely U.S.-driven
volatility forecast. However, our assumption was that this crisis will stay contained
within Europe and perhaps within its periphery. Should the crisis spill over, it could
potentially trigger a global crisis sending S&P 500 volatility above our target range.
Although hard to predict, escalations of geopolitical risk can put further upward
pressure on volatility. A breakdown in global policy coordination, trade restrictions
(e.g., terms of trade between U.S. and China), and currency crises (currency
manipulations, dollar crisis) can all increase equity volatility. On a more extreme
end, there is a risk of conflicts between the two Koreas as well as a Middle East crisis
involving Iran and Gulf oil shipments.
Volatility Targets by Region

Global equity derivatives markets largely revolve around the ~$5 trillion listed index
option market.2 About 90% of index option markets consist of options on only the six
most active indices: S&P 500, Euro STOXX 50, DAX, FTSE 100, Nikkei 225, and
KOSPI 200. The S&P 500 listed option market represents ~40%, the European
Indices are ~50%, and Asian indices are about 10% of the global index volatility
market (see following table). Before we proceed to formulate our 2011 volatility
view for these indices, it is perhaps instructive to put the current volatility levels in a
historical context. Current levels of implied volatility of western indices (U.S. and
Europe) are elevated (in ~70th percentile relative to 10-year history). Over the past
quarter, short-term realized volatility dropped from high (~70th percentile) to below-
average levels (~40th percentile), which caused volatility carry to widen to 10-year
highs (~100th percentile). This high level of volatility premium will be the basis for
some of our short volatility recommendations for 2011. The volatility of equity
indices in Asia is lower. For instance, the KOSPI 200 realized volatility is at its
lowest point in ten years and slightly lower than the volatility of the S&P 500. While
this may be viewed as a historical dislocation, it can also be viewed as a convergence
of volatilities due to the increased globalization of risk. The figure on the following
page shows the level of implied volatility for these six indices over the past ten years.
We note how the difference between the most volatile and the least volatile index
dropped from 15 volatility points to only 5 volatility points over the past decade.
Table 5: Global Listed Index Option Market

Notional OI of Listed Options in $Bn
US EMEA Asia
SPX 1,946 SX5E 1,776 NKY 242
RUY 114 DAX 397 KOSPI2 233
NDX 105 UKX 304 HSI 56
MNX 16 SMI 50 HSCEI 23
OEX 9 CAC 37 AS51 23
2
This does not include delta one derivatives, single-stock derivatives, or structured products.
For a more comprehensive overview of the listed equity derivatives market see our ‘Global
Liquidity Markets Volumes’ report.
31
December 2010
Figure 14: Implied Volatility of Global Indices over the Past Ten Years
65%
Volatility SPX SX5E DAX UKX NKY KOSPI2
Implied 6M 22.7% 27.5% 24.1% 23.4% 22.6% 21.0%
55%
%-tile Rank 67% 78% 62% 75% 47% 30%
Realized 3M 14% 18% 15% 14% 18% 13%
%-tile Rank 42% 39% 24% 44% 26% 4%
Carry 6M-3M 8.7% 9.9% 9.4% 9.2% 4.5% 7.9%
45% %-tile Rank 99% 100% 100% 100% 87% 99%
35%
25%
15%
S&P 500 EuroStoxx
DAX FTSE
Implied Volatility Nikkei KOSPI2
5%
Nov 00 Dec 01 Jan 03 Feb 04 Mar 05 Apr 06 May 07 Jun 08 Jul 09 Aug 10
Volatility Targets by Region

Our base case volatility forecast was formulated in terms of realized S&P 500
volatility. Regional equity benchmarks can have higher or lower volatility compared
to the S&P 500. The volatility of a regional equity index typically depends on the
index composition, Emerging/Developed market designation, and region-specific
fundamentals.
Europe: We expect that the Euro STOXX 50 average realized volatility in 2011 will
be in an 18-24% range, with a most likely level of 21.5%. Our base case forecast puts
realized volatility for the Euro STOXX 50 3.5 points above our forecast for the
S&P 500, a spread slightly higher than the long-term average of 2 volatility points.
Our forecast for FTSE 100 average realized volatility is identical to our forecast for
the S&P 500, with a 15-20% range and most likely level of 18%.
Asia ex-Japan: We expect the volatility in the region to remain similar to or slightly
higher than the current level. Our base case realized volatility forecasts for 1H 2011
are 14.9% for the ASX 200 (vs. current level of 15.8%), 17.3% for the Hang Seng
(vs. current level of 16.1%), and 16.1% for the KOSPI 200 (vs. current level of
14.4%). While a bullish outlook for equity markets and solid economic growth
expectations impose downward pressure on the volatility forecasts, risk of interest
rate hikes, the ongoing development of the Eurozone sovereign debt crisis, and the
normal relationship of the Asian indices and S&P 500 support the volatility forecasts.
Japan: The correlation between the Nikkei 225 and S&P 500 volatility was ~50%
over the last eight years. As such, we believe that the Nikkei 225 volatility in 2011
will likely follow the trend outlined for the S&P 500. Historically, the Nikkei 225
displayed higher volatility than the S&P 500 (e.g., the average 6M Nikkei 225
realized volatility over the last eight years was ~4 points higher than that for the
S&P 500). We expect the Nikkei 225 volatility to come in only ~2 points above that
of S&P 500 (this was the case in 2005 when the Nikkei 225 spot outperformed
S&P 500). Accordingly, we expect the year-end volatility for the Nikkei 225 to be
around 19.5%.
32
December 2010
Delta One Strategy

J.P. Morgan U.S. Top Picks for 2011 Basket <JPUS2011>
Marko Kolanovic AC Introduction

(1-212) 272-1438
mkolanovic@jpmorgan.com The J.P.Morgan U.S. Top Picks for 2011 Basket (<JPUS2011> Index on Bloomberg)
represents the portfolio of U.S. stocks that J.P.Morgan Equity Research Analysts
Adam Rudd, CFA
(1-212) 272-1215
have selected as their top ideas for 2011.
adam.ch.rudd@jpmorgan.com
Kapil Dhingra Basket Methodology and Composition

(1-212) 272-7823 Each of the stocks in the basket has been selected as a key stock to own in 2011 that
kapil.dhingra@jpmorgan.com
should outperform its sector, according to our analysts. The rationale for each stock’s
J.P. Morgan Securities LLC selection is provided by the analysts in their individual sector notes. We have
Bloomberg JPMA KOLANOVIC <GO> weighted the basket equally for all large-cap (>$5 billion market capitalization) and
liquid (>$50 million average daily value traded) stocks. For smaller stocks with
lower liquidity, we have used a sliding scale so that the amount of stock traded to
Basket Details enter the position should not be a substantial proportion of average daily volume.
Bloomberg Ticker JPUS2011 <Index>
The constituents and their weights are shown in the table on the following page.
Benchmark SPX Index
Number of Components 67
Weighting Scheme Proprietary
Bloomberg subscribers can use the

ticker JPUS2011 to access tracking
information on a basket created by
the J.P. Morgan Delta One desk to
leverage the themes discussed in
this report. For information on
JPUS2011, please contact your
J.P. Morgan salesperson or the
Delta One Desk.
33
December 2010
Table 6: Composition of the J.P. Morgan Top Picks for 2011 Basket – JPUS2011 <Index>
Ticker Name Sector Analyst Wgt(% ) Mkt. Cap ($Bn) ADV ($M)
C US Citigroup Banks - Large Cap & Trust and Processors Vivek Juneja 1.85% 135.5 2707.0
WFC US Wells Fargo Banks - Large Cap & Trust and Processors Vivek Juneja 1.85% 155.7 887.2
QCOM US Qualcomm Communications Equipment & Data Networking Rod Hall, CFA 1.85% 79.2 706.1
PFE US Pfizer Pharmaceuticals - Major Chris Schott, CFA 1.85% 133.8 660.6
HAL US Halliburton Oil Services & Equipment J. David Anderson, PE, CFA 1.85% 36.7 659.2
X US U.S. Steel Metals & Mining Michael F. Gambardella 1.85% 7.7 493.6
MCD US McDonald's Restaurants John Ivankoe 1.85% 83.2 468.3
SLW US Silver Wheaton Silver John Bridges CFA, ACSM 1.85% 13.4 469.2
NTAP US NetApp IT Hardware Mark Moskowitz 1.85% 19.8 432.7
PEP US PepsiCo Beverages John Faucher 1.85% 102.1 400.8
IR US Ingersoll Rand Electrical Equipment & Multi-Industry C. Stephen Tusa, Jr CFA 1.85% 14.3 363.6
GILD US Gilead Sciences Biotechnology Geoffrey Meacham, Ph.D. 1.85% 30.1 335.3
WLP US WellPoint Managed Care John Rex 1.85% 22.4 293.0
UPS US United Parcel Service Airfreight & Surface Transportation Thomas R. Wadewitz 1.85% 72.1 286.7
MRVL US Marvell Technology SMid Semiconductors Harlan Sur 1.85% 13.1 260.6
KFT US Kraft Foods Packaged Food Terry Bivens 1.85% 54.2 255.7
DVN US Devon Energy Oil & Gas Exploration & Production Joseph Allman, CFA 1.85% 31.3 247.5
CREE US Cree Alternative Energy Christopher Blansett 1.85% 7.6 250.0
COST US Costco Retailing - Broadlines & Department Stores Charles Grom, CFA, CPA 1.85% 30.2 236.8
CNX US Consol Energy Coal John Bridges CFA, ACSM 1.85% 9.9 182.9
ESRX US Express Scripts Healthcare Technology & Distribution Lisa C. Gill 1.85% 28.7 181.3
AFL US AFLAC, Inc. Insurance - Life Jimmy S. Bhullar, CFA 1.85% 26.1 179.3
CTSH US Cognizant Tech. Computer Services & IT Consulting Tien-tsin Huang, CFA 1.85% 21.4 172.6
YUM US Yum Brands Restaurants John Ivankoe 1.85% 23.5 163.1
ETN US Eaton Corp. Machinery Ann Duignan 1.85% 16.8 151.2
VIA/B US Viacom Entertainment Imran Khan 1.85% 24.2 151.0
BVMF3 BS BM&F Bovespa Exchanges Kenneth B. Worthington, CFA 1.85% 26.4 150.2
LEN US Lennar Homebuilding & Building Products Michael Rehaut, CFA 1.00% 3.1 77.8
SWC US Stillwater Mining Platinum John Bridges CFA, ACSM 1.00% 1.9 79.2
ALL US Allstate Corp. Insurance - Non-Life Matthew G Heimermann 1.85% 16.4 138.7
STJ US St. Jude Medical Medical Technology & Devices Michael Weinstein 1.85% 13.8 130.3
AMR US AMR Corp. Airlines Jamie Baker 1.00% 2.6 70.6
HOT US Starwood Hotels Gaming & Lodging Joseph Greff 1.85% 11.5 128.9
JBL US Jabil Circuit Communications Infrastructure Technology Steven J. O'Brien 1.00% 3.7 64.7
IVZ US Invesco Ltd Asset Managers Kenneth B. Worthington, CFA 1.85% 10.7 119.1
KGC US Kinross Gold John Bridges CFA, ACSM 1.85% 20.7 116.7
DNDN US Dendreon SMid Biotechnology Cory Kasimov 1.85% 5.4 113.6
OMX US OfficeMax Inc. Retailing - Hardlines Christopher Horvers, CFA 0.50% 1.5 28.7
NRG US NRG Energy Electric Utilities & Independent Power Producers Andrew Smith 1.00% 4.6 58.3
RAI US Reynolds American Tobacco Rae Maile 1.85% 18.8 102.0
MW US Men's Wearhouse Retailing - Specialty Brian J. Tunick 0.50% 1.2 24.2
ENTR US Entropic Communications SMid Semiconductors Harlan Sur 0.50% 0.9 25.1
LLTC US Linear Technology Semiconductors Christopher Danely 1.85% 7.8 91.2
WFMI US Whole Foods Retailing - Food Charles Grom, CFA, CPA 1.85% 8.4 90.0
LIFE US Life Technologies SMid Medical & Life Sciences Technology Tycho W. Peterson 1.85% 9.8 90.5
WCRX US Warner Chilcott Pharmaceuticals - Specialty Chris Schott, CFA 1.00% 5.2 48.0
MDRX US Allscripts Healthcare Solutions Healthcare Information Technology Atif Rahim 1.00% 3.4 46.5
COL US Rockwell Collins Aerospace & Defense Joseph B. Nadol III 1.85% 9.1 83.9
CA US CA Technologies Software John DiFucci 1.85% 12.3 77.2
BBBB US Blackboard Software Technology Sterling Auty, CFA 1.85% 1.5 12.9
HAR US Harman International Autos & Auto Parts Himanshu Patel, CFA 1.00% 3.3 41.5
UDR US UDR, Inc. REITs/Real Estate Services Michael W. Mueller, CFA 1.00% 4.1 39.8
DRI US Darden Restaurants Restaurants John Ivankoe 1.85% 6.9 73.1
EPD US Enterprise Products Energy MLPs Xin Liu, CFA 1.85% 34.4 72.4
TUP US Tupperware Household & Personal Care Products John Faucher 0.50% 3.0 18.9
OC US Owens Corning Homebuilding & Building Products Michael Rehaut, CFA 1.00% 3.5 37.3
IPG US Interpublic Advertising & Marketing Services Alexia S. Quadrani 1.85% 5.4 66.0
VLCCF US Knightsbridge Tankers Marine Transportation Jonathan B Chappell, CFA 0.20% 0.5 6.8
BIN US IESI-BFC Environmental Services Scott Levine 0.20% 2.5 6.9
ICE US The Intercontinental Exchange Exchanges Kenneth B. Worthington, CFA 1.85% 8.6 62.2
CBI US Chicago Bridge & Iron Engineering & Construction Scott Levine 1.00% 3.2 32.2
RHI US Robert Half Business and Education Services Andrew C. Steinerman 1.00% 4.4 32.2
ITRI US Itron, Inc Applied and Emerging Technologies Paul Coster, CFA 1.00% 2.2 30.2
NXY US Nexen Integrated Oil & Gas Katherine Lucas Minyard 1.85% 11.4 49.8
SMG US Scotts Miracle-Gro Chemicals - Specialty, Commodity & Agricultural Jeffrey J. Zekauskas 1.00% 3.4 23.4
JW/A US John Wiley & Sons Information Services/Radio & TV Broadcasting Michael A. Meltz, CFA 0.20% 2.7 4.6
MBFI US MB Financial Banks - Mid- and Small Cap Steven Alexopoulos, CFA 0.20% 0.9 4.3
Source: J.P. Morgan Derivatives & Delta One Strategy, Bloomberg.
34
December 2010
Basket Performance Statistics

The daily returns from the J.P.Morgan U.S. Top Picks for 2011 Basket would have
been closely correlated to those of the S&P 500 Index (~91% correlation over the last
year). Figure 15 shows the hypothetical performance of the J.P.Morgan
U.S. Top Picks for 2011 Basket as well as that of the S&P 500 Index. Figure 16
shows a scatter plot of weekly returns of the J.P.Morgan U.S. Top Picks for 2011
Basket and the S&P 500. The basket has a beta of ~1.2 versus the S&P 500. The
daily realized volatility would have been ~15% over the last three months, compared
~13.5% for the S&P 500 (Figure 17). The J.P. Morgan U.S. Top Picks for 2011
Basket has a dividend yield well below that of the S&P 500, given the relatively high
weighting of lower-yielding stocks (Figure 18).
Figure 15: The J.P. Morgan Top Picks for 2011 Basket Would Have Figure 16: The Returns of the J.P. Morgan Top Picks for 2011 Basket
Outperformed over the Last Year Would Have Been Closely Related to the Returns of the S&P 500
Basket returns
Performance of Basket and S&P 500 over last year
6%
125
2011 Top Picks 4% y = 1.1673x + 0.0002
120 2
S&P 500 R = 0.9556
115 2%
110 0%
105
-2%
100
-4%
95
90 -6%
Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 -6% -4% -2% 0% 2% 4% 6%
S&P returns
Figure 17: The J.P. Morgan Top Picks for 2011 Basket Would Have Figure 18: The J.P. Morgan Top Picks for 2011 Basket Dividend Yield
Delivered Higher Volatility than the S&P 500 over the Last Year Is Lower than the Dividend Yield of the S&P 500
3-month volatility of daily returns 12-month forward dividend yield
35% 2011 Top Picks 3-month v olatility 2.4% 2011 Top Picks div idend y ield
S&P 500 3-month v olatility S&P 500 div idend y ield
2.2%
30%
2.0%
25% 1.8%
20% 1.6%
1.4%
15%
1.2%
10% 1.0%
Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10
Source: J.P. Morgan Derivatives & Delta One Strategy, Bloomberg. Source: J.P. Morgan Derivatives & Delta One Strategy, Bloomberg.
35
December 2010
The basket is well diversified across sectors, with stocks selected by analysts
covering a range of different industry groups.
Figure 19: Composition of the J.P. Morgan Top Picks for 2011 Basket, by Industry Group
Utilities, 1%
Real Estate, 1%
Construction, 2%
Food, 4%
Tech, 16% Insurance, 4%
Banks, 4%
Media, 4%
Retail, 5%
Health, 14%
Household, 5%
Financial Services,
6%
Industrials, 11%
Resources, 8%
Travel, 8% Oil & Gas, 7%
36
December 2010
Additional Basket Methodology

In order to keep the basket relevant to the investment theme, J.P. Morgan reserves
the right to review the following at any time:
• Basket methodology. This is to ensure the rules of the basket remain relevant
following any structural changes to the theme. This may include ensuring that the
sector exposure of the basket remains broadly consistent with the investment
theme.
• Basket change implementation. J.P. Morgan will consider extending the
implementation of changes to the basket composition from one trading session to
any period up to five trading sessions in the event that a material increase in the
liquidity or capacity of the basket is required to minimize market impact.
Corporate actions may affect the J.P. Morgan U.S. Top Picks for 2011 Basket. The
composition of a custom basket is typically adjusted in the following manner:
• Cash merger. The divisor is adjusted and we remove the target company from
the basket on the day of merger and redistribute gains into remaining companies
according to recalculated market cap weights of surviving constituents in the
basket.
• Stock merger. If the acquirer is a member of the basket, then the weight
allocated to the acquired will transfer to the surviving entity on the close of the
last day it trades. If the acquirer is not a part of the basket, then proceeds (losses)
from the acquired company will be redistributed to the surviving basket
constituents based on the recalculated weighting on the close of its last trading
day.
• Spinoffs. The spinoff company and parent will be included in the basket and both
the spinoff and parent company weights will be readjusted according to new
market capitalizations after the spinoff date.
• Tender offers and share buybacks. The stock will remain in the basket and its
weight will be adjusted according to the impact the tender/buyback has on the
stock’s market value.
• Delisting/insolvency/bankruptcy. The stock will be removed from the basket as
of the close of the last trading day, and the proceeds (losses) will be redistributed
among remaining companies according to re-calculated weights of remaining
stocks in the basket. If a stock trades on “pink sheets” it will not be included in
the basket.
37
December 2010
38
December 2010
Aerospace & Defense
Capital Goods / Industrials

Commercial Aero Returns Should Be Solid But Moderate; Defense Outlook Challenging
Joseph B. Nadol III AC We still look for solid returns from commercial aerospace stocks, as we believe mid-
(1-212) 622-6548 teens-type EPS growth plus perhaps a point or two of P/E-multiple upside could lead
joseph.nadol@jpmorgan.com to 15-20% average returns. However, we do expect returns to moderate from the
Seth M. Seifman, CFA strong levels of 2009-10, as estimates already reflect an aftermarket recovery and
(1-212) 622-5597 rising OE rates. Multiples could expand somewhat, but the stocks are trading back in
seth.m.seifman@jpmorgan.com line with longer-term averages. Nonetheless, fundamentals remain attractive, and a
Rica D Mendoza challenging defense outlook makes commercial aero relatively attractive.
(1-212) 622-8113
rica.d.mendoza@jpmorgan.com Execution on the 787 program might be the most important issue in commercial
aerospace, and while we believe Boeing can work through remaining issues, this
could take longer and cost more than expected. Our estimate for first delivery is Q3,
Bloomberg JPMA NADOL <GO>
but another delay would not surprise us—therefore, we prefer stocks for which the
Alliant Techsystems Inc. ATK N only 787 downside is foregone earnings, such as PCP and COL. For OE overall,
Boeing Company BA N planned rate increases look reasonable, and we see total deliveries rising from ~1,000
Bombardier BBDb.TO OW
CACI International Inc CACI N this year to ~1,300 by mid-decade. In the aftermarket, the gap between sales growth
Comtech Telecommunications CMTL OW and airline capacity growth has closed, and recovery should continue in 2011. We
Embraer SA ERJ N
General Dynamics Corp. GD N expect high-single to low-double-digit sales growth, with discretionary maintenance
Goodrich GR N and upgrades, capacity growth, and easy comps in 1H all contributing. Continued
Harris Corporation HRS N
L-3 Communications LLL N weak demand for bizjets has led most to dismiss the possibility of real improvement
Lockheed Martin LMT OW in deliveries in 2011, but production could drop further if backlogs continue to
Northrop Grumman NOC N
Precision Castparts PCP OW decline. We expect used inventory for sale to continue to clear slowly, which should
Raytheon RTN OW enable orders to recover, driving the cyclical pickup we expect to commence in 2012.
Rockwell Collins COL OW
SAIC SAI N
Spirit AeroSystems SPR N
We are still cautious on defense stocks going into 2011 given ongoing DoD belt-
United Technologies UTX OW tightening and a difficult contracting environment—we expect slowing defense
budgets and fiscal austerity to continue to pressure top-lines and margins. We foresee
gradual declines in annual investment spending starting in FY11, followed by mid-
single-digit percentage declines in each of the next few years. We do not, however,
see a drop similar in magnitude to that in the last downturn (end of the Cold War),
and shifting geopolitical winds could make budget consolidation shorter than
expected. While we think the market has largely discounted the weak budget
environment, we see further downside to earnings from weaker-than-expected
margins. As industry earnings come under pressure in coming years, we anticipate an
increasing volume of strategic actions in the form of acquisitions and divestitures,
which could be a positive catalyst, particularly for net sellers of businesses.
Best Idea – Rockwell Collins (COL)
We expect Rockwell Collins’ commercial business to generate robust multi-year
earnings growth, with new bizjet and OE platforms, rate increases, and an
aftermarket recovery helping fuel above-average sales growth. Incremental margins
of about 50% should magnify the earnings impact. While COL’s defense business
faces sales and margin risk, we view it as relatively well-positioned. We expect the
stock to garner multiple expansion based on its historical valuation and anticipated
growth rate, and we see it potentially reaching $90+ in 2012.
Rockwell Collins (COL) – Overweight – Dec 11 Price Target: $83
Price 52-Wk Range FY EPS P/E Mkt Cap
12/7/2010 High Low FY End Last (A) Cur (E) Next (E) Cur Next (mil.)
$58.22 $68.04 $51.85 September $3.52 $4.05 $4.75 14.4 12.3 $9,132
Note: Target represents ~17x our CY12E EPS, returning to historical valuation levels with signs of earnings recovery. Risks: Prolonged
decline in bizjet demand and flight ops; defense budget cuts (esp. JTRS program); scrutiny of commercial-type defense contracts.
39
December 2010
Airfreight & Surface Transportation

Pricing Stories Support Constructive 2011 View on Transports
Thomas R. Wadewitz AC Assuming modest growth (2-3% GDP), we believe that most sectors of
(1-212) 622-6461 transportation are likely to realize improving pricing with the greatest potential
thomas.r.wadewitz@jpmorgan.com acceleration in the more cyclical segments including truckload, less-than-truckload,
Alexander K. Johnson and intermodal. For truckload in particular, we believe that constraints from
(1-212) 622-6513 underinvestment in the tractor fleet over the past several years and rising regulatory
alexander.k.johnson@jpmorgan.com pressures on driver capacity are likely to cause a significant tightening in capacity
Michael R. Weinz, CFA and cyclical rise in rates. We expect modest volume growth and increasing discipline
(1-212) 622-6383 to support a further improvement in pricing for the small package companies UPS
michael.r.weinz@jpmorgan.com and FDX while a tighter truckload market could add incremental gains to what has
J.P. Morgan Securities LLC remained a very resilient core rail pricing story.
Bloomberg JPMA WADEWITZ <GO>
Broadly positive pricing stories for the transportation group should support EPS
Thomas R. Wadewitz growth and constructive performance of the stocks. Against this favorable backdrop,
Arkansas Best ABFS UW
C.H. Robinson Worldwide CHRW OW
we believe that cost control and share gain are two dimensions which can provide
Canadian National Railway CNI N differentiation within the transport group. We expect UPS to realize strong cost
Canadian Pacific Railway CP N
Con-way CNW N
control which should support margin expansion and EPS growth. The best-positioned
CSX CSX OW intermodal names JBHT and HUBG are likely to benefit from intermodal share gain
Expeditors EXPD N
FedEx Corp FDX OW
versus truck and also gains versus other intermodal competitors. We believe that
Genesee & Wyoming GWR N reward to risk for all three of these names is attractive.
Heartland Express HTLD N
J.B. Hunt Transport Services JBHT OW
Kansas City Southern KSU OW
Best Idea – United Parcel Service (UPS)
Knight Transportation, Inc. KNX N
Landstar LSTR OW In our view, United Parcel Service (UPS) represents the most compelling reward to
Norfolk Southern NSC OW risk in 2011 due to a combination of solid cost control and improving pricing which
Old Dominion ODFL N
RailAmerica RA OW should drive significant margin expansion in a modestly growing economy. By
Union Pacific UNP OW making a $3.2 billion early cash contribution to its pension fund in 4Q10, UPS has
United Parcel Service UPS OW
UTi Worldwide UTIW N addressed a large potential expense headwind it could have faced in 2011. UPS is
Werner Enterprises WERN N likely to realize a lower pace of per-hour labor cost inflation in 2011 due to a
YRC Worldwide YRCW N
favorable mix effect as it brings on lower-cost employees to handle growth in
Michael R. Weinz, CFA volumes. Our expectation of 2-2.5%-type of per-hour compensation inflation is
Hub Group HUBG OW
Pacer International PACR N favorable relative to ~5% and 4% labor cost inflation in 2009 and 2010. While its
pricing story has developed only gradually in 2009, we believe this story remains on
track and it is likely to accelerate as UPS and FDX remain focused on raising rates in
their domestic small package businesses. The large dimensional weight factor change
announced for 2011 by both FDX and UPS, which could drive an ~17% effective
price increase for some shippers of low-density products, illustrates the focus on
raising rates at these two small package companies.
United Parcel Service (UPS) – Overweight – Dec 2011 Price Target: $86
$71.69 $72.42 $55.77 December $2.30 $3.51 $4.20 20.4 17.1 $70,897
40
December 2010
Electrical Equipment & Multi-Industry

Favoring Late-Cycle Value over Early-Cycle Momentum
C. Stephen Tusa, Jr CFA AC The EE/MI sector has outperformed in 2010, up 23% YTD versus the S&P up 10%,
(1-212) 622-6623 on a combination of a bounce in business spending and renewed optimism around
stephen.tusa@jpmorgan.com commodities/emerging markets-driven growth. Group valuation of ~15x 2011E EPS
Drew Pierson appears reasonable in a historical context, but at a 15-20% premium to the S&P
(1-212) 622-6627 unattractive relative to the current market and lingering macro uncertainty.
drew.a.pierson@jpmorgan.com Therefore, we look for names that can show fundamental upside versus standing
J.P. Morgan Securities LLC expectations, more challenging given a bullish consensus and most companies in our
Bloomberg JPMA TUSA <GO> sector calling for high-single-digit organic growth in 2011.
3M MMM UW On the stocks, we continue to see a divergence between dramatic growth seen in
Danaher DHR OW early-cycle exposures like auto and tech, and short-cycle general industrial markets,
Dover DOV N
Emerson Electric Co. EMR N and stubborn weakness seen in later-cycle markets like non-residential and power
Generac GNRC N spending. Stock performance has followed end-market momentum, rewarding those
General Electric Co. GE OW
Honeywell HON OW with the biggest sales growth and upward earnings revisions. In a consensus
Hubbell Inc. HUBB OW economic recovery, however, we view this dichotomy as unsustainable, as either
Ingersoll Rand IR OW
ITT Corp. ITT N short-cycle slows or late-cycle picks up. Thus, our ratings skew continues to lean
Lennox International LII OW toward names with later-cycle exposures, where we generally see better two- to
Rockwell Automation ROK N
Roper Industries ROP N three-year growth at a more reasonable multiple.
Sensata ST OW
SPX Corp. SPW OW Best Idea – Ingersoll Rand (IR)
Textron TXT N
Tyco International TYC N Ingersoll Rand (IR) remains our best idea to play the move from early-cycle
WABCO WBC N
Watsco WSO OW momentum to later-cycle value. Shares have been held back in 2010 by mixed
Watts Water Technologies WTS N earnings results, mostly from a lack of top-line momentum—indeed, IR revenues are
Wesco WCC OW
only 6% off of the trough versus the group average of 9% and leaders like
MMM/DOV with sales 15-20% off the trough, not a surprise given limited exposure
to overachieving markets like electronics/auto/Asia and ~50% of the portfolio tied to
non-residential end markets. This was punctuated by concerns around residential
HVAC and copper inflation, which led to significant underperformance through the
summer, only partially recouped in recent weeks.
We see several factors working in IR’s favor in 2011, with a turn in late-cycle
markets magnifying productivity opportunities. First, the biggest lever remains
Commercial HVAC (~40% of sales), a business just now coming off the bottom with
significant profit leverage. Sentiment on non-residential markets remains muted,
despite two consecutive quarters of commercial HVAC order growth. Residential
HVAC exposure is small at just 10-15% of revenues, but is a driver of sentiment, and
here we expect incrementally better news with mid-single-digit growth (or better)
next year—industry price increases are positive, helping offset inflation risk from
copper. Finally, the Street remains skeptical on ongoing productivity opportunities—
consensus estimates appear to bake in only about half of IR’s target for 2011. Under
our 6% organic growth forecast, we see potential for $3.80+ in 2011 EPS (vs. Street
~$3.05) if management simply hits its standing productivity target, as in 2010. Given
limited revenue tailwind this year, we think even a modest pickup in end markets
helps make productivity more achievable. In the end, we see upside to EPS even
under reasonable economic scenarios, an attractive opportunity into next year.
Ingersoll Rand (IR) – Overweight – Dec 11 Price Target: $47
$43.68 $44.10 $30.12 December $1.65 $2.38 $3.10 18.4 14.1 $14,153
41
December 2010
Engineering & Construction

Bookings Pace Expected to Build Momentum
Scott Levine AC Cyclical recovery should drive improved order trends

(1-212) 622-5609 We expect a gradually improving global economy to support more broad-based
scott.j.levine@jpmorgan.com growth in E&C order books than we’ve seen over the past few years, including
Rodney C Clayton, CFA increasing business levels across most end markets and geographies. Prospects
(1-212) 622-2873 appear to be brightest in commodity markets such as oil & gas and mining, buoyed
rodney.c.clayton@jpmorgan.com by firm commodity market trends and robust demand in emerging markets, which
J.P. Morgan Securities LLC should bode well for E&Cs with a strong presence in such areas. Conversely, we
Bloomberg JPMA LEVINE <GO> think austerity measures and regulatory uncertainty could limit the pace of bookings
in government and power markets, respectively, though such overhangs could
Babcock & Wilcox Co. BWC N
Chicago Bridge & Iron Co. NV CBI OW
dissipate as the year progresses, as Congress provides greater clarity regarding
EnergySolutions ES N regulatory and administrative priorities.
Fluor Corp FLR N
Jacobs Engineering JEC OW
Mistras Group MG OW
Mix a critical factor in supporting margins
Pike Electric PIKE N Although we believe demand will improve across several E&C end markets in 2011,
Quanta Services, Inc. PWR OW
The Shaw Group, Inc SHAW UW
the industry is recovering from modest activity levels, suggesting that terms on new
URS Corporation URS OW contracts could be demanding for the E&Cs, which may still face supply-demand
imbalances in several markets. As such factors could weigh on profitability, we
prefer companies with structural support for margins stemming from factors such as
favorable mix shifts and exposure to markets with high barriers-to-entry that are
somewhat insulated from competitive pressures.
Cash flow deployment strategies should enhance growth

E&Cs have built substantial cash balances throughout the recent downturn, and with
order books likely to improve in 2011, we expect the majors to actively deploy
excess cash to enhance shareholder value. E&Cs appear poised to do this through a
variety of means, including M&A (JEC, URS), organic growth/partnering
arrangements (SHAW), share buybacks (FLR), dividends (CBI), and debt
repayment (ES), among other options.
Best Idea – Chicago Bridge & Iron (CBI)

Chicago Bridge & Iron (CBI) remains our favorite name in the E&C industry, due
to its 1) favorable end-market exposure (hydrocarbons), 2) healthy mix profile, and
3) attractive valuation. CBI has one of the highest exposures within our E&C
coverage universe to oil & gas, and has a strong franchise in emerging markets
(Asia-Pacific, Middle East, and South America) which have more robust spending
outlooks than many developed economies. Furthermore, we think the company’s mix
of technology and steel-plate work should support its margins despite intense
competition for EPC services. Lastly, despite an improving execution profile and
healthy growth outlook, CBI continues to trade at a sizable discount to the peer
group, which we expect to narrow as it avoids execution mishaps and as backlog
continues to grow, consistent with its healthy end market outlook.
Chicago Bridge & Iron (CBI) – Overweight – Dec 11 Price Target: $36
$31.17 $32.00 $16.64 December $1.79 $2.00 $2.35 15.6 13.3 $3,092
42
December 2010
Environmental Services
M&A Could Enhance a Modest Organic Growth Outlook
Scott Levine AC Volumes recovering gradually; construction a swing factor

(1-212) 622-5609 2010 was a year of recovery for solid waste volumes, which improved steadily from
scott.j.levine@jpmorgan.com the lows reached in mid-2009, driven by gradual improvement in cyclical conditions
Rodney C Clayton, CFA and favorable year-over-year comparisons. Despite our expectation that volume
(1-212) 622-2873 trends should continue to improve in 2011, toughening comps could make additional
rodney.c.clayton@jpmorgan.com gains tougher to come by, and recent anecdotes and economic data suggest the pace
J.P. Morgan Securities LLC of recovery could be gradual. We highlight construction & demolition (C&D) as a
Bloomberg JPMA LEVINE >GO> potential swing factor to watch: while only a small portion (we estimate <10%) of
the total waste stream, C&D is also among the most volatile areas, and any up-tick in
Casella Waste Systems Inc. CWST N
EnergySolutions ES N
residential or non-residential construction activity could drive upside to our forecasts.
IESI-BFC, Ltd. BIN OW
Republic Services Inc RSG OW Pricing disciplined but modest, given muted inflationary trends
Stericycle Inc. SRCL N
Waste Connections WCN OW
We expect the waste companies to continue the disciplined pricing trends we’ve seen
Waste Management WM N materialize across the industry since the middle of the last decade, and expect this to
drive margin gains across the group next year. That said, we expect nominal price
growth to be modestly below 2010 levels for most waste companies, as moderating
CPI trends and budget pressure could limit price gains in the municipal business
(which we estimate accounts for ~25-50% of the waste business and is index-based).
We highlight landfill pricing trends as a critical support factor for industry pricing
and one to watch closely in 2011.
M&A could complement modest organic growth in 2011

With organic growth potentially remaining at somewhat modest (low-single-digit)
levels for another few quarters, we think M&A could emerge as an important driver
of growth for the waste companies this year. We believe the deal pipeline remains
robust in both the solid and medical waste industries, though valuation (including the
involvement of financial buyers) and tax legislation could be important factors with
respect to the timing (and accretion) of any acquisition activity for the group.
Best Idea – IESI-BFC (BIN)

IESI-BFC (BIN) is our top pick in Environmental Services for 2011. We see both
financial and strategic positives stemming from the 2010 merger with WSI
(including the realization of synergies and improved competitive positioning within
both U.S. and Canadian markets). We expect BIN’s trading multiples (in line with
the peer group on forward EV/EBITDA) should increase as the company
successfully integrates the recent WSI merger, and as it produces EBITDA growth
toward the top of the peer group, consistent with its historical performance.
IESI-BFC (BIN) – Overweight – Dec 11 Price Target: $28

$22.38 $24.29 $14.74 December $0.71 $0.95 $1.03 23.6 21.7 $2,476
43
December 2010
Machinery
2011: A Year for Stock Selection
Ann Duignan AC Can the Machinery sector outperform for a third year in a row? Following two
(1-212) 622-0381 years of outperformance (+40% in 2009 and +49% in 2010 YTD vs. S&P 500 up
ann.duignan@jpmorgan.com +27% and +12%, respectively, on a total return basis), the Machinery sector is less
Ingrid Aja, CFA likely to broadly outperform again in 2011 as historically investors have rotated out
(1-212) 622-3730 of the group as an economic recovery takes hold and individual stock selection has
ingrid.c.aja@jpmorgan.com become more important. J.P. Morgan’s U.S. Equity Strategy team expects increasing
Greg Williams, CFA rate volatility as well as dollar volatility, and thus no longer broadly recommends
(1-212) 622-3549 cyclical over defensive stocks—instead believing that investors will benefit from
gregory.b.williams@jpmorgan.com stock selection.
Housing recovery bodes well for most names in our group. J.P. Morgan’s
Bloomberg JPMA DUIGNAN <GO>
U.S. Equity Strategy team is forecasting a shortage in U.S. housing in 2011 fueled by
Actuant Corp ATU N recovering household formation, which is “already evident in a robust rental
AGCO Corp. AGCO N market”—this should lead to a recovery in housing starts (J.P. Morgan Economics
Bucyrus International BUCY rs
Caterpillar Inc. CAT rs forecast is for up ~13% y/y). This supports our thesis that the U.S. construction cycle
CNH Global CNH N is past trough and at the beginning of a long, but maybe more moderate, up-cycle (5+
Commercial Vehicle Group CVGI OW
Cummins Inc CMI N years). Historically, the construction cycle has commenced with the residential
Deere & Co. DE N market followed by non-residential (~20-month lag), and this cycle will likely follow
Eaton Corp. ETN OW
Illinois Tool Works ITW N a normal recovery given the excess capacity across many commercial sectors. In our
Joy Global JOYG N view, this should sustain the construction equipment recovery, which is already
Kennametal Inc. KMT N
Manitowoc Co. MTW N under way (up 12% YTD). We believe CAT is best positioned to benefit from
Modine Manufacturing Co MOD OW improving residential construction driving the beginning of the replacement cycle in
Navistar Int'l NAV UW
Oshkosh Corp. OSK UW the U.S. The bottoming of non-residential construction and a recovery likely in 2012
PACCAR Inc. PCAR OW bodes well for ETN’s NA electrical business (~20% of sales).
Parker Hannifin PH N
Terex Corp TEX N
Meanwhile, visibility remains high for the truck sector with fundamentals
supporting year two of a cyclical recovery. The other group we like is the truck
group which is heading into the second year of a cyclical recovery. We expect an
acceleration of the NAFTA HD truck recovery in 2011, forecasting 210,000 builds
(up ~39% y/y), on the back of positive leading indicators (growth in freight and new
orders), improving truck fleet profitability, rising used truck prices, an aging truck
fleet, and growth in Canada and Mexico. Europe should also enter its second year of
a coincident cyclical truck recovery which is further supported by the start of a
possible Euro 6 emissions pre-buy—we forecast 220,000 builds (up ~34% y/y). In
the truck and truck-related sector, PCAR, CVGI, and MOD are our top picks.
Best Idea – Eaton (ETN)
Our best idea for 2011 is Eaton (ETN) due to its revenue mix. The company has
exposure to a mix of early- and later-cycle businesses, which should continue to
drive improving top line and ensuing operating leverage. In 2010, ETN benefited
from the recovery in its early-cycle businesses (Hydraulics, Truck, and Automotive;
combined represented 42% of sales). Looking into 2011 the company should
continue to deliver strong earnings growth driven largely by the second year of the
cyclical recovery in the truck and automotive sectors, as well as an acceleration in
later-cycle businesses (Aerospace and Electrical—58% of sales).
Eaton (ETN) – Overweight – Dec 11 Price Target: $102
$100.51 $101.79 $60.83 December $2.59 $5.68 $7.30 17.7 13.8 $16,916
44
December 2010
Marine Transportation
Choppy Waters Ahead for Shipping in 2011; Tankers Appear Better Positioned than Dry Bulk
Jonathan B Chappell, CFA AC The rampant volatility that has historically plagued shipping markets should remain
(1-212) 622-6412 in 2011. In fact, we believe the tanker market may be more volatile than usual in
jonathan.chappell@jpmorgan.com 2011 as the above-consensus global oil demand growth J.P. Morgan forecasts offsets
Darren T Hicks fleet expansion. However, we look for dry bulk rates to remain within a relatively
(1-212) 622-6571 tight band as record capacity growth should cap potential rate upside.
darren.t.hicks@jpmorgan.com
Tankers: We retain our modestly bullish view on the tanker market for 2011, though
admittedly our conviction has been tempered by ongoing rate weakness in what is
Bloomberg JPMA CHAPPELL <GO>
typically a seasonally strong 4Q. Our positive thesis is driven by both above-average
Jonathan Chappell demand forecasts (as J.P. Morgan’s Commodities Research team estimates global oil
Capital Product Partners L.P. CPLP N demand growth of 1.5 million barrels per day in 2011, versus 1.2 mbd by the
DHT Maritime, Inc. DHT N
Diana Shipping Inc. DSX OW International Energy Agency and OPEC), which we believe will result in an increase
Eagle Bulk Shipping Inc. EGLE N in OPEC oil production and long-haul exports by mid-2011, as well as a more
Frontline Ltd. FRO OW
Genco Shipping & Trading Ltd. GNK OW tempered capacity expansion outlook, as we believe slippage and cancellations will
General Maritime Corp. GMR OW accelerate as the most expensive pre-crisis ships are scheduled for delivery in 2011.
Kirby Corp KEX N
Knightsbridge Tankers Ltd. VLCCF OW Our rate forecasts represent mid-single-digit growth in 2011; however, we estimate
Navios Maritime Acquisition NNA N more meaningful EPS recoveries at most companies as they continue to reduce costs.
Navios Maritime Holdings Inc. NM OW
Navios Maritime Partners L.P. NMM N With extremely negative sentiment prevailing and tanker stocks underperforming
Nordic American Tanker Shipping NAT N other cyclical sectors over the last several months, we believe tanker stocks offer an
Overseas Shipholding Group OSG OW
Ship Finance International SFL UW attractive, high-beta way to invest in an ongoing global economic recovery in 2011.
Teekay Corporation TK N
Teekay Tankers Ltd. TNK OW Dry Bulk: J.P. Morgan’s favorable economic outlook for next year should bode well
Tsakos Energy Navigation TNP N for the dry bulk market as well, as demand for dry commodities such as iron ore and
World Fuel Services Corp INT OW
coal are more leveraged to emerging market economic growth than oil. However, as
Darren Hicks China aims to apply the brakes to its recent infrastructure and construction boom,
Bristow Group Inc. BRS OW
Hornbeck Offshore Services HOS N imports of these essential materials may begin to decelerate. Indeed, we forecast total
dry bulk shipping demand growth of 5.0% in 2011, down from 6.7% in 2010. Worse,
dry bulk capacity expansion is likely to accelerate to record levels next year, with our
net fleet growth forecast of 8% coming in below most estimates owing to aggressive
scrapping and slippage projections, but still exceeding demand growth. We expect
rates to continue to trend downward, with lower highs and lower lows in 2011—
as such, we expect dry bulk stocks to remain relatively range-bound next year.
Best Idea – Knightsbridge Tankers (VLCCF)
Our top stock pick for 2011 is Knightsbridge Tankers (VLCCF). Although our
forecasted total return of 18%, based on our 2011E DPS of $2.40 (10.3% yield) and
our Dec 2011 price target of $25, is below that for some other covered stocks, we
believe the risk/reward balance of VLCCF is superior, particularly given the strong
rate volatility we forecast for both the tanker and dry bulk markets next year. VLCCF
has all eight of its vessels on fixed-rate time-charter contracts (one expires in June
2011, but the next expiration is not until mid-2012), providing strong cash flow and
dividend visibility and sustainability, while its robust balance sheet (only 36% total
debt-to-capital forecasted for year-end 2010) should enable it to acquire at least one
more vessel without issuing equity, which could result in further dividend upside.
Knightsbridge Tankers (VLCCF) – Overweight – Dec 11 Price Target: $25
$23.23 $24.49 $12.90 December $1.27 $2.20 $2.02 10.6 11.5 $550
Note: Target applies 15% premium (relatively in line with industry average) to average historical EV/EBITDA and P/CF multiples for
high-yield tanker peer group. Risks: Dividend pullback to pursue growth initiatives; spot tanker rates exceeding our current forecasts.
45
December 2010
46
December 2010
Airlines
Consumer
2011: Things Are Different This Time, and Expected to Stay That Way
Jamie Baker AC Things are different this time, so far. The U.S. airline industry appears in
(1-212) 622-6713 surprisingly good shape. The “Great Recession” failed to claim any casualties or
jamie.baker@jpmorgan.com bring about any bankruptcies, the first time a recession (however mild) ever failed to
Scott Tan, CFA do so. Shortly thereafter, the industry is generating record profits despite anemic
(1-212) 622-5541 U.S. growth. The industry shed three managements in five years, with a fourth
scott.b.tan@jpmorgan.com expected to depart soon given Southwest’s pending acquisition of AirTran. Balance
Joseph Abboud sheet repair implies reduced bankruptcy risk in the future, and expected ROIC and
(1-212) 622-7059 FCF generation in 2011 look strong across the board. As a result, it comes as little
joseph.g.abboud@jpmorgan.com surprise that YTD equity performance has trounced the broader market (XAL +43%
J.P. Morgan Securities LLC vs. S&P +10%, with LCC and UAL having more than doubled).
Bloomberg JPMA BAKER <GO>
Newfound prosperity should continue. For 2011, we model $84 bbl oil, industry
AerCap Holdings N.V. AER N revenue growth of 6.5%, and modest capacity growth of ~3% (with growth heavily
Aircastle Limited AYR OW
AirTran Holdings, Inc. AAI N
biased to international). 2008-2009 capacity withdrawals and continued M&A
Alaska Air Group, Inc. ALK UW momentum are largely to credit, though the lack of grow-at-all-costs ambitions also
AMR Corp. AMR OW
Babcock & Brown Air Limited FLY N
helps. We believe 6.5% revenue growth in a soft economy sounds reasonable given
Copa Holdings, S.A. CPA N consistency with past GDP/revenue observations. Recall, the industry managed ~7%
Delta Air Lines, Inc. DAL OW
GOL Linhas Aereas Inteligentes GOL N
growth in 2008, and that was during a recession. Apart from the calamity of 2009,
JetBlue Airways Corp. JBLU OW 9/11, and the 1982/1991 recessions, revenue growth has never been less than 3.2%.
Southwest Airlines Co. LUV N
TAM S.A. TAM rs
United Continental Holdings UAL OW
De-levering—rather than fleet renewal—will be a collective industry priority.
US Airways Group, Inc. LCC OW From here, we believe de-levering and balance sheet repair will emerge as the
defining themes in 2011. Aircraft orders and capex plans are largely minimal,
resulting in significant FCF projections. And with each dollar of FCF, net debt levels
are equally reduced. If one believes that equities will somehow fail to respond to a
scenario in which Delta, for example, should reduce net debt from $15 billion to
$10 billion by 2012, look no further. But for those sharing our confidence that
industry dynamics really are turning out to be different this time (record profits,
a healthy pace of consolidation, superior management discipline, ex-fuel cost
convergence, to name a few) and for whom the idea of de-levering strongly
resonates, anticipated risk/reward in 2001 appears highly favorable, we believe.
Best Idea – AMR Corp. (AMR)

We expect AMR Corp. (AMR) to turn a significant margin corner in 2011, as
alliance immunity, rising industry labor costs, and a shifting Latin/Pacific supply
dynamic reverse its multiyear relative margin decline. In addition, there is significant
leverage in AMR’s model. Based on our theoretical analysis, if AMR relative
margins can perform in line with the industry from here, upside equity potential is
expected to exceed that of all other U.S. names we cover. If relative margins can
narrow their gap to the industry, potential equity upside is still great. Furthermore,
AMR has the highest percentage of “sell” and “hold” (or equivalent) ratings of any
U.S. Legacy, despite a backdrop of otherwise favorable analyst sentiment. Hence, we
rate AMR Overweight with a December 2011 price target of $13.50.
AMR Corp. (AMR) – Overweight – Dec 11 Price Target: $13.50

$7.98 $10.50 $5.86 December $(4.63) $(1.20) $1.00 NM 8.0 $2,658
Note: Target predicated on a 75%/25% weighted average of our forward EV/EBITDAR company-specific curve (6x) and a P/E
methodology (8x). Risks: Lower-than-expected demand for air travel; less capacity exiting industry than expected; oil price flucuations;
AMR’s Flight Plan 2020 strategy falling short of expectations.
47
December 2010
Autos & Auto Parts

Constructive: Rising Volumes and M&A, Though Margins Peaking in Many Cases
Himanshu Patel, CFA AC We are constructive on the U.S. auto parts space, and we think sector sentiment will
(1-212) 622-3906 remain constructive as volumes continue to nudge up and M&A activity picks up.
himanshu.patel@jpmorgan.com While margins may be flattening out for many suppliers, a handful still have
Vivek Aalok company-specific margin expansion potential (HAR, MGA, JCI, GT).
(1-212) 622-0798
vivek.x.aalok@jpmorgan.com Volumes: Based on the improving tone of the latest U.S. economic data, we recently
upgraded our U.S. SAAR forecasts to 13MM in 2011, 14MM in 2012, and 15MM in
Michael Kimlat
(1-212) 622-0458
2013.
michael.x.kimlat@jpmorgan.com M&A: We think small-ticket M&A is set to accelerate in the U.S. auto parts space,
J.P. Morgan Securities LLC as evidenced by recent small assets bought by JCI and MGA. Deal activity has
Bloomberg JPMA Patel <GO> started to accelerate, obviously because financials are better, but also partly because
some supplier CFOs are having to answer the somewhat awkward question of what
American Axle AXL OW
ArvinMeritor, Inc. ARM N
to do with their excess cash after having raised equity/equity-linked capital just last
Autoliv ALV OW year at much lower share prices. Regardless, increasing small-ticket deal activity
AutoNation, Inc. AN N
Avis Budget Group, Inc. CAR rs
could eventually morph into expectations for bigger deals involving Tier 1 suppliers
Borg Warner Inc. BWA N as potential targets, although we doubt this likely would happen for at least a year.
CarMax Inc. KMX N
Cooper Tire & Rubber CTB OW Margins: With the exception of HAR, MGA, JCI, and GT, most suppliers are likely
Dana Holding Corporation DAN N
Dollar Thrifty Automotive DTG rs to see moderated earnings growth in the coming three years even as SAAR grows, as
Ford Motor Company F N their current margins appear in line with medium-term potential, per their own
Gentex Corporation GNTX N
Genuine Parts Company GPC N assessments. Said differently, contribution margins should converge to EBIT margins
Goodyear Tire & Rubber GT OW in the next 1-2 years as 1) commodity costs rise, 2) OEM pricing pressure re-
Group 1 Automotive, Inc GPI OW
Harley-Davidson HOG N normalizes (i.e., grows from 2009’s level), and 3) eventually, as capacity addition
Harman International HAR OW costs surface (unlikely until SAAR passes ~14MM in the United States).
Hertz Global Holdings, Inc. HTZ N
Johnson Controls, Inc. JCI OW
KAR Auction Services, Inc. KAR N
Best Idea – Harman International (HAR)
Lear Corporation LEA N
Lithia Motors LAD N On December 1, we upgraded Harman International (HAR) from Neutral to
Magna International, Inc. MGA OW Overweight, raised estimates across the board, and raised our price target. While we
Penske Automotive Group, Inc. PAG N
Sonic Automotive, Inc. SAH N had shifted to a more positive bias in prior weeks, we now have more conviction on
Tenneco Automotive TEN N two specific issues: 1) better luxury car demand in both the United States and in
Tesla Motors TSLA OW
Tower International TOWR N China, where HAR’s indirect revenue exposure via German exports is hard to
TRW Automotive TRW OW measure but likely better than most think; and 2) higher margin assumptions,
primarily in Automotive but also somewhat in Pro. We raised our Dec 2011 price
target to $52 (unchanged 14x P/E on our calendarized 2012E EPS of ~$3.68), but see
the potential for a mid-$60 stock within two years (assuming calendarized 2013 EPS
of ~$4.50). Interestingly, our new FY2013 (June-ending) EPS estimate still assumes
group margins of only 8.7%, near the midpoint of guidance of 7-10%, which
management continues to call conservative. A 10% group EBIT margin in our model,
all else equal, implies EPS of ~$5 in FY2013 or the potential for a two-year “blue
skies” case of ~$70 for the stock.
Harman International (HAR) – Overweight– Dec 11 Price Target: $52
$46.99 $53.36 $28.10 June $0.85 $1.90 $3.00 24.73 15.7 $3,269
Risks: Rapid growth in mid-priced infotainment systems without required manufacturing footprint changes leading to margin pressure;
failure for U.S. auto sales to rebound from current levels; major “payback” in European auto demand from 2009’s scrappage schemes;
significant strengthening in the U.S. dollar.
48
December 2010
Beverages
Looking for Demand to Rebound in 2011
John Faucher AC We remain relatively blasé about the beverage space as we head into 2011, as we
(1-212) 622-6443 expect demand to remain relatively muted, and cost inflation should continue to
john.faucher@jpmorgan.com weigh on margins. That said, we would expect volumes to generally improve over
Neal Rudowitz the course of the year, and think that pricing across both alcoholic and non-alcoholic
(1-212) 622-0094 categories will remain fairly rational. At this point, we still prefer the non-alcoholic
neal.m.rudowitz@jpmorgan.com players.
Peter K Grom
(1-212) 622-4876 On the non-alcoholic beverage side, we think that the focus needs to remain on
peter.k.grom@jpmorgan.com international markets, where growth prospects are more robust, particularly in
Sofya Tsinis emerging markets where Coke and Pepsi continue to drive significantly higher
(1-212) 622-6391 revenue growth than they do in the U.S. CCE should also benefit from solid demand
sofya.s.tsinis@jpmorgan.com growth in Western Europe.
In the United States, we expect non-alcoholic beverage growth to come mostly from
Bloomberg JPMA FAUCHER <GO>
non-carbonated brands (including energy drinks), which is a benefit primarily for
John Faucher
Hansen, but also Coke and Pepsi relative to DPS. We believe that DPS does not
Coca-Cola Co. KO OW have enough non-carbonated exposure right now, and should take advantage of low
Coca-Cola Enterprises CCE N
Coca-Cola Hellenic Bottling HLBr.AT N
interest rates to more aggressively re-work their portfolio. Cott is the company most
Dr Pepper Snapple Group DPS N affected by raw materials trends, as it cycles a much more favorable 2009/2010 in
Hansen Natural Corp. HANS N
Molson Coors Brewing TAP OW
terms of sweeteners, packaging, and juice concentrates. With the CSD category still
PepsiCo PEP OW relatively troubled, we think that Cott’s margins will be challenged in 2011.
SodaStream International SODA N
Neal Rudowitz
On the alcoholic beverage side, beer comparisons remain fairly easy, but we have yet
Brown-Forman Corp BFb N to see demand truly return to the categories. We expect volumes to remain modestly
Cott Corp COT N
Constellation Brands STZ N
positive through the first half, with acceleration in the back half assuming that the
consumer fully recovers. We expect the pricing environment to remain positive for
beer, good news for Molson Coors’ Miller/Coors unit, but are a little more
concerned about pricing for the wine/spirits categories.
Best Idea – PepsiCo (PEP)

PepsiCo (PEP) is our top pick for 2011. The stock has had a disappointing 2010, as
momentum in the first half was lost in the second half. That said, we think top-line
growth will continue to come in ahead of PEP’s multi-national consumer staples
peers, as reinvestment in the business pays off. We do point out that we are below
consensus for 2011, and do expect consensus to move down from $4.62 to around
our $4.54 estimate, but believe this is priced in given the recent weakness in the
stock.
We expect top-line growth to accelerate behind sequential improvement at Frito-Lay
North America, which should benefit from a big new product push (behind the core
salty snack businesses). We also expect emerging market growth to be strong as the
company sees the top-line benefits from recent investments in China, India, and other
markets.
PepsiCo (PEP) – Overweight – Dec 11 Price Target: $80

$64.68 $68.11 $58.75 December $3.71 $4.12 $4.54 15.70 14.2 $102,508
49
December 2010
Gaming & Lodging

Lodging Up-Cycle Has Legs Here
Joseph Greff AC
Given our analysis of historical and forward 1) demand trends, 2) supply trends, and
(1-212) 622-0548 3) revenue and operating profit trends (ADR- or occupancy-driven RevPAR and the
joseph.greff@jpmorgan.com ensuing flow-through), we believe we are in the early stages of a lodging up-cycle,
Kevin Milota one that has many years remaining. We note that changes in demand and supply
(1-212) 622-0987 patterns are the two key factors that cause shifts in the lodging industry cycle, with
kevin.milota@jpmorgan.com changes in occupancy, average daily room rates (ADRs), revenue per available room
James Omstrom, CFA (RevPAR), and operating profits. We believe we are in the midst of the early stages
(1-212) 622-1306 of a multi-year up-cycle, as March 6, 2010 was the inflection point when total U.S.
james.omstrom@jpmorgan.com RevPAR turned positive; history suggests (although of course it does not guarantee)
J.P. Morgan Securities LLC that we should have many more years of operating performance and stock price
Bloomberg JPMA GREFF <GO> upside. Following the lodging downturn of 1991, the industry experienced nine
consecutive years of annual RevPAR growth, and RevPAR increased 48% in total
Joseph Greff
Ameristar Casinos, Inc. ASCA N
from trough to peak. After the downturn of 2001-2002, the industry experienced five
Bally Technologies, Inc. BYI OW consecutive years of annual RevPAR growth, and RevPAR increased 32% from
Boyd Gaming Group BYD UW
Chesapeake Lodging Trust CHSP N
trough to peak. On average, we estimate that the duration of a typical U.S. lodging
Choice Hotels International CHH N cycle from trough to peak (recovery/expansion phases) is ~6.8 years (+/- 1.7 years).
Hasbro, Inc. HAS N
Host Hotels & Resorts Inc. HST N
At the low end, this would imply at least five years of up-cycle remaining (6.8 years
Hyatt Hotels Corporation H OW – 1.7 years = 5.1 years), the same as after the last downturn of 2001-2002. On the
International Game Technology IGT OW
Las Vegas Sands Corp. LVS OW
high end, this would imply at least 8.5 years of up-cycle remaining (6.8 years +
LaSalle Hotel Properties LHO N 1.7 years = 8.5 years), the same as after the lodging downturn of 1991.
Marriott International MAR OW
Mattel, Inc. MAT N
Melco Crown Entertainment MPEL N
Best Idea – Starwood Hotels & Resorts (HOT)
MGM Resorts International MGM OW
Orient-Express Hotels OEH N We see Starwood Hotels & Resorts (HOT) as a supercharged play on the
Penn National PENN OW improving lodging cycle given its 1) large exposure to gateway cities worldwide,
Pinnacle Entertainment PNK OW
Shuffle Master SHFL N which are seeing business travel-related pricing power—and this should translate into
Starwood Hotels & Resorts HOT OW accelerating operating leverage, and 2) above-peer unit growth rates, with an
Sunstone Hotel Investors Inc. SHO OW
WMS Industries WMS OW increasing presence in emerging markets such as the Asia-Pacific region and India,
Wyndham Worldwide WYN OW among others, which have solid secular growth prospects. In addition, based on our
Wynn Resorts WYNN N
analysis, HOT’s stock price undervalues its hard assets—the value of which we
Kevin Milota expect to be unlocked, over time, through industry and/or HOT-specific hotel asset
Carnival Corporation CCL OW
Gaylord Entertainment GET OW sales. Current and potential future asset sales for HOT and the industry should result
Royal Caribbean Cruises RCL OW in an elevated support level for the stock.
James Omstrom, CFA
Scientific Games Corporation SGMS N Our year-end 2011 price target is $66, which we derive by using a blended net-asset-
value/sum-of-the-parts approach. We value HOT’s owned hotels at ~$317,500 per
key, its managed and franchised fee-related business at 14.0x our 2012 estimate, its
timeshare business at 6.0x our 2012 estimate (or 1x timeshare book value), and
unallocated expenses at 12.7x, less net debt (including HOT’s share of JV debt). We
believe this valuation is consistent with H (HOT’s closest comparable), HOT’s
lodging REIT peers (with regard to owned-hotel per-key valuation), and MAR (with
regard to fees and timeshare valuation).
Starwood Hotels & Resorts (HOT) – Overweight – Dec 11 Price Target: $66
$59.92 $61.25 $32.50 December $1.02 $1.12 $1.53 53.50 39.2 $11,424
Risks: Meaningful slowdown in U.S. or global economy; FX volatility; potential for increased levels of capital to fund pipeline; lower-
than-expected proceeds from Bal Harbour in 2012.
50
December 2010
Homebuilding & Building Products

Attractive Risk/Reward for Builders, While Selectivity Key Among Products
Michael Rehaut AC Homebuilders

(1-212) 622-6696
Trading at 0.99x P/B (ex-adj. FAS 109), our larger-cap homebuilders are down 27%
michael.rehaut@jpmorgan.com
since 4/30 and 1% YTD, vs. the S&P 500 up 4% and 10%, respectively. We think
Jason A Marcus the group’s valuation and sell-off reflect overdone fears of another round of land
(1-212) 622-4906
impairment charges eroding BV due to further material home price deflation.
jason.a.marcus@jpmorgan.com
However, in contrast to 2006-08, when falling demand and rising supply drove lower
William Wong home prices and impairment charges, today, we view demand, while highly
(1-212) 622-1442
depressed, as more stable, and supply, while elevated, is off peak levels and more
william.w.wong@jpmorgan.com
manageable. While a positive catalyst may be lacking over the next 1-2 quarters, we
see the bear case as overdone and fully reflected in the group—therefore, downside
Bloomberg JPMA REHAUT <GO> appears limited. Moreover, we expect the builders to demonstrate improving order
Beacon Roofing Supply BECN N
growth in 4Q10, steady margins and minimal charges in 2011, as well as profitability
Beazer Homes BZH UW for several next year, which should serve as positive catalysts.
D.R. Horton DHI N
Fortune Brands FO N Best Idea – Lennar (LEN)
Hovnanian Enterprises HOV N
KB Home KBH OW We believe LEN’s premium to its peers, which, at 1.12x P/B (ex-adj. FAS 109), is
Lennar LEN OW
Masco Corp. MAS UW
currently only 8%, slightly above its historical level, should expand materially over
MDC Holdings MDC UW 2011, as we expect LEN to continue to lead the industry in margins and profitability.
Mohawk Industries MHK OW
Owens Corning OC OW
Moreover, LEN’s Rialto segment, which invests in non-performing real estate loans
PGT, Inc. PGTI OW and assets, was profitable in 3Q for the second quarter in a row, which we expect to
PulteGroup Inc. PHM N
Ryland Group RYL N
continue as it becomes more accretive over the next several years.
Standard Pacific SPF UW
Stanley Black & Decker SWK N Lennar (LEN) – Overweight – Dec 11 Price Target: $24*
Toll Brothers TOL OW Price 52-Wk Range FY EPS P/E Mkt Cap
USG Corporation USG N
Whirlpool WHR N
$17.52 $21.79 $11.56 November $(2.45) $0.41 $0.80 42.7 21.9 $3,147
Note: Target applies 1.44x P/B multiple (roughly 10-year avg.) against our 2011-end BV est. of $16.68 (ex-adj. FAS 109). Risks:
Larger-than-expected charges; weaker-than-expected order growth; lower-than-expected Rialto contribution. * TP as of 12/8/2010.
Building Products
Our more selective approach to the Building Products sector is based on two factors.
First, the Street is largely in line or ahead of our 2011E, leaving little room for
upside. Second, while not expensive, the group’s P/E of 18.1x and 17.8x for 2010E
and 2011E, and current EV/EBITDA at 8.6x, is not compelling either, in our view.
Best Idea – Owens Corning (OC)
At only 7.2x 2010E EBITDA, roughly in line with its ten-year average and a 17%
discount to its peers, OC’s valuation is attractive, in our view. We note that margins
for one of its three main segments—Insulation—remain near trough levels and
represent a compelling upside opportunity, while we believe the Roofing segment’s
margins can remain well above normalized levels at least through 2011. Lastly, OC’s
third main segment, Composites, should show further margin expansion in 2011. In
addition, there is upside potential, in our view, to the Street consensus for 2011E, as
our $2.25 is above the Street’s $2.11.
Owens Corning (OC) – Overweight – Dec 2011 Price Target: $34.50
$28.00 $37.36 $22.56 December $1.14 $1.51 $2.25 18.54 12.4 $3,490
Note: Target applies 6.5x EV/2011E EBITDA, conservative 10% discount to 10-year avg. with concerns on stability of Roofing margins.
Risks: Weaker-than-expected U.S. residential demand, further pressuring Insulating Systems/Roofing & Asphalt pricing/margins.
51
December 2010
Household & Personal Care Products

Looking for a More Rational 2011
John Faucher AC After remaining cautious on the large-cap Household & Personal Care (HPC) space
(1-212) 622-6443 for 2010, we expect a slightly more favorable 2011, as we believe sentiment
john.faucher@jpmorgan.com surrounding the heightened competitive environment will improve over the course of
Sofya Tsinis the year. While we are not ready to make a big push into names that have been
(1-212) 622-6391 waging these battles, like Procter & Gamble, Colgate, and Church & Dwight, we
sofya.s.tsinis@jpmorgan.com expect opportunites could emerge over the course of the year.
Peter K Grom
(1-212) 622-4876 We believe the competitive environment will get better for a few specific reasons:
peter.k.grom@jpmorgan.com 1) PG needs to show that it can deliver “profitable” volume growth going forward,
Neal Rudowitz which will require price and mix much closer to flat than the -3% we should see this
(1-212) 622-0094 year; 2) other competitors like Colgate and Unilever have responded to PG’s
neal.m.rudowitz@jpmorgan.com aggressive moves and therefore have limited the incremental benefit from lower
J.P. Morgan Securities LLC prices; and 3) increases in raw materials will create a need to raise prices in 2011.
Bloomberg JPMA FAUCHER <GO>
We expect the improved sentiment on price/mix combined with fund flows from
John Faucher
fixed income to boost high-dividend-yield plays like PG, CLX, and KMB over the
Alberto-Culver ACV N first half of 2011.
Church & Dwight CHD N
Clorox CLX OW
Colgate-Palmolive CL N
Our current bias remains with the SMid-cap part of our HPC coverage universe, as
Energizer Holdings ENR OW we prefer cheaper stocks with company-specific catalysts. In particular, we point to
Estee Lauder EL N
Kimberly-Clark KMB N
NUS and ENR, for which new product launches (ageLOC and Hydro, respectively)
Newell Rubbermaid Inc. NWL OW should benefit the top line. Also, until we see the developed market consumer bounce
Nu Skin Enterprises NUS OW
Procter & Gamble PG N
back, we continue to prefer names with more emerging market exposure, which
Tupperware Brands TUP OW include Tupperware and NuSkin.
Sofya Tsinis
Sealy Corp. ZZ N
Best Idea – Tupperware Brands (TUP)
Our top pick for 2011 is Tupperware Brands (TUP), as we believe that easier
comps and continued strength in emerging markets should push the P/E multiple
higher. At 11x our 2011 EPS estimate, TUP in our view is not getting credit for
consistent mid-single-digit organic top-line growth, and this should become apparent
as top-line comparisons ease starting in Q2 2011 (although on a two-year basis,
comparisons are not difficult in Q4 2010 and Q1 2011). Furthermore, we believe that
the overhang from the Russian accounting issues should fully abate in Q1 2011, as
the market gets comfortable with a lack of further discoveries.
Tupperware Brands (TUP) – Overweight – Dec 11 Price Target: $57

$47.82 $54.15 $36.12 December $3.08 $3.62 $4.21 13.2 11.4 $3,020
52
December 2010
Packaged Food
Still the Big Cheese
Terry Bivens AC Best Idea – Kraft Foods (KFT)

(1-212) 622-0326
terry.bivens@jpmorgan.com Kraft Foods (KFT) is our best idea heading into 2011. Our constructive view
includes a gradual, yet visible, improvement in the heretofore sluggish U.S. business,
home to such well-known brands as Oreo, Maxwell House, Oscar Mayer, and Tang.
Bloomberg JPMA BIVENS >GO>
While the third quarter results announced in early November were hardly
Archer Daniels Midland ADM N auspicious—volume and mix contributed only 0.2% of the company’s overall
Bunge Limited BG N organic growth of 2.5%—we see signs that growth may be picking up. Indeed,
Campbell Soup Company CPB N
ConAgra Foods CAG N Nielsen Co. data revealed a robust performance during October, with volume growth
Dean Foods DF N of 9% spurring overall sales growth of 3%. We look for continued progress
General Mills GIS OW
H.J. Heinz Co. HNZ OW domestically under the leadership of Tony Vernon, an ex-Johnson & Johnson
Hain Celestial Group HAIN OW executive who brings a fresh marketing eye to Kraft’s established brands.
Hershey HSY N
Kellogg K OW
Kraft Foods KFT OW Another pillar of our investment thesis is margin expansion, much of it from
Mead Johnson Nutrition MJN OW capturing synergies with recently acquired Cadbury. After capturing some
Sara Lee SLE
$70 million in costs synergies in 2010 (our estimate), we see such savings
contributing $300 million to the operating line in 2011 and sending operating
margins up by at least 50 basis points. These synergies are a major factor in Kraft’s
powerful algorithm of 5% organic growth on the top line, with margins expanding
into the mid- to high-teens from the current mid-13% level at present. Considerable
earnings momentum can be generated if the company even approaches those goals.
We also expect Cadbury, despite its lackluster performance to date, to help generate
sustained sales growth over time, especially in developing markets where Kraft has
little or no presence, e.g., India. Unlike some, we believe the acquisition was
strategic, and made at the right price. Kraft now has a strong global presence in the
better-than-average-growth categories of confections and snacks.
An improving global economy should buttress these fundamentals. Like many
packaged consumer goods companies, Kraft has seen sluggish economies in Europe,
notably some southern European markets, offset better performance by Cadbury in
the U.K. and Ireland. Some developing-market results have also slowed a bit
recently. We see a distinctly positive tailwind to sales with a better global recovery.
While we see a better-than-expected fourth quarter, we would caution investors that a
genuine inflection quarter, i.e., a performance that sends the KFT shares on a firm
upward trajectory, may not materialize until early or mid-2011. As witnessed in the
third quarter, Kraft was not able to immediately offset abrupt surges in commodities
such as coffee and cocoa with pricing and some volume bumpiness may linger. But
as the year progress, we expect to see margins widen on pricing, better mix,
productivity efforts, and the aforementioned cost synergies.
Our $40 target for December 2011 is based on the assumption that visible earnings
momentum will expand Kraft’s NTM P/E multiple toward a more historical 15x. We
apply that multiple to our preliminary 2012 estimate of $2.65.
Kraft Foods (KFT) – Overweight – Dec 11 Price Target: $40

$30.64 $32.67 $26.48 December $2.04 $2.06 $2.37 14.87 12.9 $53,521
Risks: Stumble upon integration of Cadbury causing earnings growth to disappoint; additional dilutive divestitures resulting in lower-
than-expected future earnings; U.S. distribution continuing to decline resulting in further domestic volume disappointment.
53
December 2010
Restaurants
Valuations Approaching Fair Value but DRI, MCD, YUM Remain Core Holdings
John Ivankoe AC As expected, most restaurant companies showed firming sales trends in 3Q10 vs.
(1-212) 622-6487 1H as year-ago employment declines were lapped. This trend has been maintained
john.ivankoe@jpmorgan.com into 4Q as stability/modest firming has occurred across the space driven by
Amod Gautam improvements in y/y total employment. The KnappTrack casual dining industry
(1-212) 622-6417 average comp in October was 1.6% after 3Q’s 0.8% (September at 1.2%). While the
amod.gautam@jpmorgan.com J.P. Morgan macro outlook and our current sales forecasts anticipate accelerating
Renato Basanta, CFA GDP growth next year, meaningful gains in employment are expected to remain
(1-212) 622-5331 elusive. Better-than-expected employment gains likely would act as the major macro
renato.x.basanta@jpmorgan.com data point to provide further upside.
Bloomberg JPMA IVANKOE <GO>

While J.P. Morgan forecasts downward pressure on core inflation to continue,
the macro outlook notes “food and energy prices have been rising faster than
Brinker International EAT OW core prices.” This is consistent with anticipated 3-5% increases in PPI-finished food
Chipotle Mexican Grill, Inc. CMG N
Darden Restaurants DRI OW
next year, and most restaurant companies are discussing F11/C11 COGS increases of
DineEquity Inc. DIN N 1-2% exclusive of modest pricing impact. As COGS are now near or at trough levels
Domino's Pizza Inc DPZ OW
McDonald's MCD OW
for many casual dining companies, sustaining these costs longer term will be key to
P.F. Chang's China Bistro PFCB N protecting EPS in 2011 and beyond. Globally, 100bp of company store margins is
Starbucks SBUX OW
Sysco Corporation SYY N
worth an estimated 11-19% to EPS for casual dining while a much lower 1-6% for
Texas Roadhouse Inc. TXRH OW QSR operators.
The Cheesecake Factory, Inc. CAKE N
Tim Hortons Inc. THI.TO N
Wendy’s/Arby’s Group WEN N
Best Ideas – Darden (DRI), McDonald’s (MCD), Yum Brands (YUM)
Yum Brands YUM OW
Fairly extreme recent stock performance makes stock selection very important.
Many names, including MCD, YUM, and SBUX, are at or above important
psychological levels, and most companies’ valuations have closed the gap to within
5-10% above or below longer-term averages, making selectivity in the space
important, in our view. Our favorite names in the QSR space into 2011 are
McDonald’s (MCD) and Yum Brands (YUM). We see both as providing low-risk,
strong-FCF-generating businesses worldwide, allowing for cyclical upside as global
economies grind upward. While valuations look full relative to the traditional long-
term 16-17x QSR average, opportunity for additional EPS-accretive leverage (MCD,
see note from 10/22) and sum-of-the-parts (YUM, see note from 10/14) imply
support and potential upside, by our estimates. In casual dining, we highlight Darden
Restaurants (DRI) as the lowest-multiple casual dining company in the space with
brand-differentiated concepts and ability to enact significant cost cuts to offset
potential for higher shrimp- and beef-driven COGS in F12.
Darden Restaurants (DRI) – Overweight – Dec 11 Price Target: $56*
$49.63 $50.84 $31.71 May $2.86 $3.27 $3.64 15.2 13.6 $7,032
*Price target and EPS estimates as of 12/10/2010.
McDonald’s (MCD) – Overweight – Dec 11 Price Target: $84
$80.34 $80.94 $60.04 December $4.06 $4.60 $4.96 17.5 16.2 $84,880
Yum Brands (YUM) – Overweight – Dec 11 Price Target: $56*
$50.27 $52.47 $32.49 December $2.17 $2.48 $2.78 20.3 18.1 $24,350
* Price target as of 12/9/2010.
54
December 2010
Retailing – Broadlines & Department Stores

Sticking with Barbell Approach in 2011
Charles Grom, CFA, CPA AC Recent observations: With the release of 3Q earnings in mid-November, many of
(1-212) 622 6527 our broadline retailers provided upbeat commentary on the consumer entering 4Q,
charles.grom@jpmorgan.com despite sales that were lighter than expected at a few of our more discretionary
Paul Trussell, CFA retailers. While we were encouraged by these comments and a solid start to the
(1-212) 622 5671 holiday selling season with increased levels of self-gifting, we believe the consumer
paul.e.trussell@jpmorgan.com will remain value-oriented into next year as the outlook for consumer spending
Radina L Russell remains cloudy with today’s stubbornly high unemployment levels.
(1-212) 622 8738
radina.l.russell@jpmorgan.com In the near term, while the consumer has begun to show some strength in
Lindsey Bell
November, it may be tough for the “Santa Claus Rally” to continue as 2011 concerns
(1-212) 622 8023 move to the forefront. Since November 1, our coverage group has risen 7.4% vs. the
lindsey.c.bell@jpmorgan.com SPX up 0.5%, and the group is up 32.1% year-to-date vs. the SPX up 9.7%.
Looking ahead to FY11, we see some puts and takes that will influence the stocks.
Bloomberg JPMA GROM <GO> On the positive side, (1) recent sales trends are showing an acceleration on a two-
year stacked basis despite cycling tougher compares; (2) inventory levels are well
Charles Grom
Big Lots, Inc. BIG UW aligned, driven by more conservative order plans and technology investments, such
BJ's Wholesale Club BJ N as price/size optimization tools; and (3) significant cash balances should drive share
Costco Wholesale Corporation COST OW
Dollar General DG N repurchases/deleverage, store expansion, and investments in technology. However,
Dollar Tree, Inc. DLTR N on the negative side, gross profit margins are expected to come under pressure in
Family Dollar Stores, Inc. FDO OW
JCPenney Corporation JCP N 2H11 given increasing sourcing costs resulting from higher raw material costs and
Kohl's Corporation KSS OW increased labor/shipping costs. Since apparel inflation hasn’t occurred since 1992, it
Macy's Inc. M OW
Nordstrom, Inc. JWN N remains to be seen how elastic consumer spending will be in such an environment.
Saks, Inc. SKS N All told, it’s very likely that merchandise margins turn negative for many in our
Target Corporation TGT OW
Vitamin Shoppe, Inc VSI OW coverage group. Furthermore, the group will be cycling very strong 1Q SSS
Wal-Mart Stores, Inc. WMT OW compares when the combination of easy compares, favorable weather, and rising
Paul Trussell consumer confidence translated into some of the strongest sales in years.
Fred's Inc. FRED N
All told, given the confluence of these factors we maintain our barbell strategy in
FY11—that is, staying balanced with retailers that have a more discretionary product
mix—à la Target, Kohl’s, and Macy’s—and those with more defensive
characteristics—Costco, Family Dollar, and Wal-Mart.
Best Idea – Costco (COST)
Costco has multiple levers to drive (15%+) EPS growth over the next few years—
including: (1) improving core comp trends led by highly productive California clubs;
(2) unit growth (5% expansion in FY11); (3) improving gross profit margins via less
2% Reward pressure, private label expansion, and higher merchandise margins;
(4) outsized MFI growth potential given the approval by the California Board of
Equalization to increase the de minims rate to $55; and (5) share buybacks via
substantial cash position, including $11 per share (16% of current stock price). All
told, if core comp trends are stronger than expected, we see significant upside to our
$3.36 EPS estimate (possibly to $3.45-$3.50). While Costco has performed well the
past few months, it has still lagged most of our coverage group year-to-date (up 22%
vs. Broadline average up 32%)—we believe it can play catch-up and move higher.
Costco (COST) – Overweight – Dec 11 Price Target: $80*
$71.02 71.13 53.41 August $2.95 $3.36 $3.90 21.1 18.2 $30,108
* EPS estimates and price target as of 12/10/10.
55
December 2010
Retailing – Food
The Song Remains the Same in a Secularly Challenged Sector
Charles Grom, CFA, CPA AC Summary: Overall, we continue to believe that the supermarket sector faces
(1-212) 622 6527
charles.grom@jpmorgan.com
significant secular challenges. To explain, with minimal barriers to entry and
meaningful competition from discounters (TGT’s P-Fresh), dollar stores (expanded
Radina L Russell
offering at DG, FDO), warehouse clubs (offering more “grocery” sizes), and price-
(1-212) 622 8738
radina.l.russell@jpmorgan.com
impact stores (Aldi, Save-A-Lot), we continue to see the traditional grocer sales pie
shrinking. In addition, with labor structures burdened with union contracts, most
Paul Trussell,CFA
conventional grocers struggle to compete on price with other players, particularly
(1-212) 622 5671
paul.e.trussell@jpmorgan.com
Wal-Mart and the warehouse clubs. Last, given the prospect of a benefit from food
inflation still seems shaky (i.e., inflation moving higher, but the ability to pass
Lindsey Bell
through product cost increases still uncertain), it remains to be seen whether the
(1-212) 622 8023
lindsey.c.bell@jpmorgan.com
grocers will see any benefits on this front. Finally, with J.P. Morgan economists still
predicting high unemployment levels, ID growth will likely remain subdued.
Bloomberg JPMA GROM <GO> With all that said, we think the sector likely will continue to have trading
opportunities over the next six months and highlight two main points: First,
Charles Grom
Kroger Co. KR OW supermarket IDs have historically held respectable correlations with the direction of
Ruddick Corporation RDK N food pricing. Given that inflation data has been less discouraging as of late (i.e., no
Safeway SWY N
SuperValu, Inc. SVU N longer deflationary), if moderate inflation (say 1-2% range) can be passed along to
Whole Foods WFMI OW consumers, the grocers should benefit. Second, we believe the industry in general
Radina L Russell (particularly the conventionals—both private and public) are gradually moving away
Susser Holdings Corp. SUSS N from heavy price investments, which should provide some stability to gross profit
margins going forward.
Best Idea – Whole Foods (WFMI)

Whole Foods (WFMI) is our top pick in the Food Retailing space for five
reasons: (1) traffic was responsible for ~80% of the company’s ID in the most recent
quarter and basket is beginning to tick higher, which combined with some food
inflation is encouraging; (2) evidence of trading-up is apparent in the store with
organic sales growth outpacing that of conventional items and sales of more premium
products on the upswing; (3) WFMI is reaccelerating growth and opening more
productive stores—to this point, new stores opened in FY10 have a contribution
margin 151 basis points higher than those opened in FY09; (4) recent operating
margin improvements look to be sustainable as the company continues to alter its
full-time to part-time mix and renegotiate formerly high-rent contracts; and
(5) management recently reinstated a dividend and we feel a return to share
repurchases could be on the horizon. All told, we see the potential for upside to our
FY11 EPS estimate of $1.75 and have a December 2011 price target of $50.
Whole Foods (WFMI) – Overweight – Dec 11 Price Target: $50

12/7/2010 High Low FY End Last (A) Cur (A) Next (E) Cur Next (mil.)
$48.71 $49.49 $24.94 September $0.98 $1.43 $1.75 34.1 27.8 $8,425
Note: Target based on a weighted, blended EV/EBITDA multiple using range of 9.5-11.5x. Risks: Greater-than-expected competition
as grocery landscape remains highly promotional and retailers continue to compete for traffic; sales pressure from cannibalization as
the company plans to open 17 new stores in 2011; worse-than-expected margin pressure from price investment.
56
December 2010
Retailing – Hardlines
OfficeMax (OMX): Outcome Control with an Option on the Macro
Christopher Horvers, CFA AC This year (2010) started as the year of the office retailers but a sluggish economic
(1-212) 622-1316 rebound that was led by the U.S. manufacturing base (not big users of office
christopher.horvers@jpmorgan.com products) has led to disappointment. As we look to 2011, we think investors will
Aaron Goldstein shift their eyes to this sector given the relative underperformance, the “hope” that
(1-212) 622-1336 employment will ultimately improve (and recent readings suggest there is some
aaron.goldstein@jpmorgan.com momentum in place), and considering investors will then have “a whole year to wait
Mark A Becks for things to get better.” Interestingly, while office retailers were the second group to
(1-212) 622-5265 see negative comps into the recession, it remains one of the last groups still in
mark.a.becks@jpmorgan.com negative territory.
Bloomberg JPMA HORVERS <GO>

The challenge for most retailers is that the longer the real recovery takes, the less
control they have over driving sales and margin outcomes. This is particularly true on
Christopher Horvers, CFA the top-line side for the most cyclical retail sectors (i.e., office and home). OMX,
Advance Auto Parts, Inc. AAP N
AutoZone, Inc. AZO N
however, stands out in its ability to drive margins higher through structural changes
Bed Bath & Beyond BBBY N that it has and continues to implement. This means earnings should grow in 2011
Best Buy BBY N
Cabela's Inc. CAB N
without a sales recovery and implies the potential for spring-like earnings upside
Dick's Sporting Goods DKS OW from any recovery in sales.
Hibbett Sports, Inc. HIBB N
Lowe's Companies, Inc. LOW OW
O'Reilly Automotive ORLY N
Best Idea – OfficeMax (OMX)
Office Depot ODP OW
OfficeMax Inc. OMX OW OfficeMax (OMX) is our favorite higher-beta idea for 2011 based on the company’s
PetSmart, Inc. PETM N high correlation to macroeconomic factors, the recovery in labor markets (albeit
RadioShack RSH N
Staples SPLS OW slow), the depressed nature of sales and earnings, and the ongoing successful
The Home Depot HD OW restructuring of its business. Furthermore, OMX’s margin outcome control appears
Tractor Supply TSCO N
Williams-Sonoma, Inc. WSM N greater than the market is giving it credit for, in our view.
Aaron Goldstein On the contract side, improved account profitability, increased private-label/direct-
hhgregg HGG OW
sourced product penetration, and continued supply-chain improvement should be
solid margin tailwinds into 2011. On the retail side, the benefits are not as robust but
still present a solid tailwind. By the nature of the occupancy costs, sales are needed
to get leverage (although with costs coming down, OMX can lever this line on flat
sales). In addition to the private-label and supply-chain benefits, this division
continues to see a lift from price optimization and shrink (albeit fading). We are
modeling 60 bps of gross margin expansion in 2011 on a 1.5% comp (with an
estimated 30 bps coming from occupancy-cost leverage).
Given these efforts and the spring-like leverage in the model if sales return, we
believe that OMX should be at least able to regain a mid-cycle EBIT margin of 4% in
a longer-term expansion (which corresponds to ~$2.00 in earnings power) with the
potential for upside in a more robust environment. All-in, this should lead to both
earnings upside as well as multiple expansion—the double helix of stock
appreciation. Our December 2011 price target of $22 represents ~19% upside from
current levels. This is based on ~20x P/E and ~6x EV/EBITDA using our 2011
forecasts.
OfficeMax (OMX) – Overweight – Dec 11 Price Target: $22

$18.53 $19.79 $9.67 December $0.24 $0.84 $1.07 22.1 17.3 $1,576
Risks: Deterioration in GDP and payroll growth negatively impacting results; the company’s high concentration of large corporate
customers and the weakened spending environment creating more downside sales risk to OMX vs. its competitors; an irrational pricing
environment pressuring margins beyond expectations.
57
December 2010
Retailing – Specialty
In an Uncertain Group Lies a “Tailor-Made” Opportunity
Brian J. Tunick AC Rebounding off of trough valuations (excluding the late ’08, early ’09 crisis) with the
(1-212) 622-6449 return of private equity to the softlines space (GYMB, JCG), specialty retail stocks
brian.tunick@jpmorgan.com have surged 35% over the past few months (far outpacing the 10% increase in the
Anna A. Andreeva S&P 500). However, with multiples now more in line with historical levels (15-16x)
(1-212) 622-6577 and the likelihood for margin pressure across the retail spectrum in 2011 (growing
anna.a.andreeva@jpmorgan.com inventories against record merchandise margins, material input cost inflation), we
Ike Boruchow, Jr. find it increasingly more difficult to get excited about the group at current levels, as
(1-212) 622-9758 the likelihood for downward EPS revisions seems fairly high when we consider all
ike.boruchow@jpmorgan.com the looming issues in conjunction with Street estimates that appear overly aggressive
J.P. Morgan Securities LLC (just one of our 30 companies under coverage forecasted for down EPS in 2011).
That said, there are still a few company-specific stories out there, and we choose to
Brian J. Tunick
Abercrombie & Fitch ANF N focus on a name that should be less impacted by cotton/input cost inflation, has less
Aeropostale ARO N leverage to apparel (pricing wars), is not at peak product margins, has a company-
American Eagle Outfitters AEO N
Ann Taylor Stores ANN N specific story, and has comp momentum.
Bebe Stores BEBE N
Chico's FAS, Inc. CHS N Best Idea – Men’s Wearhouse (MW)
Citi Trends, Inc. CTRN N
Coach, Inc COH OW Our favorite idea heading into an uncertain 2011 is Men’s Wearhouse (MW).
J. Crew Group, Inc. JCG N
JoS. A. Bank Clothiers Inc JOSB N Rebounding off of 2009 trough margin and productivity levels, MW has several
Limited Brands, Inc. LTD OW company-specific drivers heading into 2011 and is in the early innings of a multi-
Men's Wearhouse MW OW
Ross Stores ROST N year recovery that could drive EPS power above the prior peak of $3.00, in our view.
rue21, inc. RUE OW
The Dress Barn, Inc. DBRN N In the near term, comps at the core MW have turned positive for the first time in over
The Gap, Inc. GPS N
The Talbots, Inc. TLB N
two years, driven by a combination of strength in its tuxedo business (MW rents one
Tiffany & Co TIF N out of every three tuxedos in the U.S. at 82% gross margins), closure of
TJX Companies TJX N
Ulta Salon, Cosmetics & ULTA OW
underperforming stores and recapture of traffic at existing locations, and a shift in
Fragrance, Inc. promotional strategy to a more event-driven high/low pricing model. Coming off of a
Urban Outfitters URBN OW
record-volume Labor Day sale event, management is learning how to promote more
Anna A. Andreeva efficiently around key events and should be able to save $10-15 million in
Carter's CRI OW advertising spend next year as they run more targeted events.
Fossil, Inc. FOSL N
Hot Topic, Inc. HOTT N
Pacific Sunwear of California, Inc. PSUN N Longer term, as the company sheds ~150 of its money-losing, mall-based After
The Buckle Inc. BKE UW Hours locations over the next three years, the potential for traffic recapture/positive
The Children's Place PLCE OW
The Wet Seal, Inc WTSLA OW comps on a lower occupancy/expense base could drive meaningful bottom-line
results. Also, on August 6, 2010, MW formed a U.K. holding company through its
acquisition of two leading providers of corporate clothing uniforms and workwear in
the United Kingdom. MW expects the business (before integration and deal costs) to
be accretive in 2011 and to ramp over the next few years. By 2013, MW believes that
EBIT margins for this business could double from where they stand today (~5%),
meaning a low-double-digit EBIT margin by 2013 on roughly $250 million in
revenues. This could equate to $0.35-0.40 in incremental EPS over the next three
years. If MW can successfully integrate these acquisitions while sustaining the top-
line momentum, comping positively at TMW while driving margins higher, gaining
occupancy and expense leverage (merch margins may be pressured due to mix shift),
an 8-10% margin now seems very achievable, which would put EPS power in the
$2.50-3.00 range.
Men’s Wearhouse (MW) – Overweight – Dec 11 Price Target: $28*
$23.42 $29.62 $17.66 January $1.11 $1.48 $1.75 15.8 13.4 $1,220
* Price target and EPS estimates as of 12/9/10.
58
December 2010
Tobacco
Continuing to Deliver
Rae Maile AC The tobacco sector continues to offer scope for profit growth which is related to, but
(44-20) 7155 6102 not wholly dependent upon, the broader economy. As a result of consolidation in the
rae.maile@jpmorgan.com global market there are just four major players, while in the U.S. the industry is
J.P. Morgan Securities Ltd. dominated by just three players. Each of these companies has a stated target of
Bloomberg JPMA MAILE <GO> consistently delivering medium-term profit growth to shareholders driven by product
innovation, firm pricing, cost control, and operating and financial leverage. Through
Altria Group MO OW
British American Tobacco BATS.L OW
the downturn demand in the sector has proven recession resistant although not
Imperial Tobacco Group IMT.L N wholly recession proof, and so improving (or at least not worsening) economic
Lorillard Inc LO UW
Philip Morris International PM N
conditions in the U.S. and globally should encourage further up-trading in emerging
Reynolds American RAI OW markets, and lessening pressure on down-trading in developed markets.
Swedish Match SWMA.ST UW
Pricing remains the key driver for overall industry profitability, but manufacturers’
price increases are increasingly masked by higher direct taxes and duties. If, for
example, 70% of the retail price is tax (and more in many global markets), a 7%
increase in manufacturers’ price amounts to only a 2% increase in retail price. With
the industry majors focusing more on product innovation—in packaging, filters,
slims and superslims, blends, etc.—price has become a much reduced area of
competition with the industry focusing on value growth not volume growth.
Philip Morris International (PM) should see more modest organic volume declines
in 2011 than the 2.0-2.5% decline expected in 2010, but with any decline more than
offset by the benefit of continued firm pricing. With the added benefit of a currency
translation tailwind, and the ongoing benefit of share repurchases, we expect double-
digit EPS growth.
In the U.S. domestic market we also expect a continued focus on firm pricing over
volume or market share targets, in an industry in which cigarette volume declines are
likely to slow towards historical trend (-2 to -3% per annum). For the group we
believe that earnings growth in high-single digits can be delivered, with that earnings
growth matched by dividend growth driven by the continued strong cash generation
of the businesses.
Best Idea – Reynolds American (RAI)

Reynolds American (RAI) remains our top pick in the sector given the expectation
of high-single-digit EPS growth over the medium term deriving from modest revenue
growth, further cost-cutting, operating leverage, and an expectation for use of the
balance sheet in share repurchases. Consensus estimates (from Bloomberg) continue
to assume that EPS growth will slow to 6% in 2011 and less than 5% in 2012 despite
company guidance for high-single-digit growth in 2010 and over the medium term.
We believe that little credit is being given to the company despite consistent delivery.
Reynolds American (RAI) – Overweight

$32.62 $33.41 $18.18 December $2.35 $2.52 $2.68 12.9 12.2 $19,019
59
December 2010
60
December 2010
Electric Utilities & Independent Power Producers
Energy
Improving Economy Sets the Stage for Utility Outperformance
Andrew Smith AC We expect electric utilities to outperform in 2011.

(1-713) 216-7681
andrew.l.smith@jpmorgan.com We believe improving economic conditions will benefit utility companies two ways.
Stefka Gerova, CFA First, demand for electricity has been improving for the past several quarters and is
(1-212) 622-0549 up almost 4% YTD versus 2009 through 11/12/10. Industrial demand for electricity
stefka.g.gerova@jpmorgan.com continues to improve as the economy recovers, but has not yet regained the ~30%
J.P. Morgan Securities LLC retrenchment in demand at the peak of the financial crisis. Residential demand has
Bloomberg JPMA SMITH <GO>
also risen sharply. This has partly been driven by favorable weather, but we believe
this also puts to rest a concern from last year, which was that conservation efforts
Andrew Smith were structurally cutting residential demand, whereas we believed weak residential
AGL Resources AGL rs
Ameren Corp AEE UW
demand actually resulted from unfavorable weather last year. Second, underlying
American Electric Power AEP OW economic growth also benefits utilities because it reignites the need for utilities to
American Water Works AWK N
Black Hills Corp. BKH N
invest in their infrastructure, which drives earnings growth. We believe an improving
CenterPoint Energy CNP OW economy aids this dynamic as well because we expect regulators to have less of a
CMS Energy Corp CMS OW
Consolidated Edison ED N
focus on rising utility rates required to support incremental investment when the
Constellation Energy Group CEG rs economy is growing. One wrinkle in this thesis that we will watch as 2011 unfolds is
Covanta Holding Corp. CVA OW
Dominion Resources D N
that J.P. Morgan’s economic forecast calls for unemployment to remain relatively
Duke Energy Corp. DUK N high, which continues to be a cause of concern for regulators. As an added benefit,
Dynegy, Inc. DYN OW
Edison International EIX OW
falling commodity prices (~70% of the rate customers pay) help keep rates low
Entergy Corp. ETR OW despite increased economic recovery by the utility.
Exelon Corp. EXC UW
Great Plains Energy GXP N We believe utility stocks offer investors total return potential of 10-12% with a low
Integrys Energy Group TEG rs
NextEra Energy Inc. NEE OW beta, with about one-half of the return earned through dividends (J.P. Morgan
Northeast Utilities NU N expects current dividend tax rates will be extended). J.P. Morgan’s equity strategist
NRG Energy NRG OW
Pepco Holdings POM N expects a volatile year for the S&P 500, and we believe utilities could be attractive in
PG&E Corp. PCG OW such an environment given their stability. We also believe a 10-12% total return will
Progress Energy PGN N
Sempra Energy SRE be attractive long term if structural delevering of household balance sheets
Southern Company SO N materializes.
UIL Holdings Corporation UIL N
Vectren Corp VVC UW
Wisconsin Energy Corp WEC N Finally, the group trades at 13.5x 2011E EPS versus the group’s valuation range of
Xcel Energy XEL N 12.5-16.5x NTM P/E over the past six years (excluding valuations in the peak of the
Stefka Gerova, CFA
economic crisis).
ITC Holdings ITC OW
NV Energy Inc. NVE OW Best Idea – NRG Energy (NRG)
Pinnacle West Capital Corp PNW N
PNM Resources Inc PNM N NRG Energy (NRG) for strong FCF. We recommend investors own NRG Energy
Portland General Electric Co. POR OW
UniSource Energy UNS N as the stock offers some of the best leverage in the sector to improving market
Westar Energy Inc WR N fundamentals. We believe the company’s leverage to the fundamental outlook was
illustrated by it raising guidance ~20% through 3Q10. The shares offer investors a
~25% FCF yield based on 2010 cash flow expectations, and still offer investors a
~20% FCF yield based on the company’s 2011 outlook. We believe the company can
beat its guidance (as it has historically) and expect the shares to yield ~25% again in
2011. The company has effectively managed its cash flow as it has redeployed cash
into stock buybacks as well as attractive cash flow and EBITDA accretive
acquisitions.
NRG Energy (NRG) – Overwieght – Dec 11 Price Target: $33

$18.85 $26.15 $18.85 December $1.50 $3.15 $2.75 6.0 6.9 $4,660
61
December 2010
Energy MLPs
Valuations Near All-Time Highs; Recommend Stable, Fee-Based Names
Xin Liu, CFA AC Valuations remain high under a low interest rate environment and healthy
(1-212) 622-4915 capital markets. With the AMZ MLP index reaching its all-time high in November
xin.liu@jpmorgan.com 2010 and up ~25% YTD, MLPs have outperformed the broader market by ~20% on a
J.P. Morgan Securities LCC total return basis. This outperformance has been driven by the low interest rate
Alistair J Meadows environment, strong capital markets, and the launching of multiple MLP-focused
(1-212) 622-6442 fund products. MLPs have taken advantage of this market environment to raise
alistair.j.meadows@jpmorgan.com record amounts of capital year-to-date with equity issuance volumes increasing as
J.P. Morgan Securities LLC yields improved. With investors moving into the space due to the relatively attractive
Ashwin Ravikumar yields afforded by MLPs in this interest rate environment, unit prices may continue
(91-22) 6157-3271 to increase. We recommend investors stay with defensive names.
ashwin.x.ravikumar@jpmorgan.com
Infrastructure build-out in liquids-rich plays. With producers shifting drilling into
J.P. Morgan India Private Limited
liquids-rich areas, infrastructure needs are likely to grow in liquids-rich plays such as
Bloomberg JPMA LIU <GO> the Eagle Ford, the Bakken, and the Niobrara. In gassy areas, high-return plays such
Boardwalk Pipeline Partners, L.P BWP OW
as the Marcellus are likely to see continuing infrastructure build-out. Companies with
Buckeye Partners BPL N exposure to these areas are likely to benefit from high demand for their systems and
Energy Transfer Partners, L.P. ETP N
Enterprise Products Partners L.P. EPD OW
growth from organic project developments.
Inergy, L.P. NRGY N
Kinder Morgan Energy Partners LP KMP OW C-Corps likely to continue to sell assets to MLPs. With a high valuation for the
Magellan Midstream Partners MMP OW
MarkWest Energy Partners LP MWE OW
sector and healthy capital markets, we think C-Corps will continue to sell assets to
NiSource, Inc. NI N MLPs. MLPs that have GPs with MLP-qualifying assets should benefit from drop-
NuStar Energy NS N
ONEOK Inc. OKE N
down transactions. Other MLPs may benefit from acquiring assets from majors.
ONEOK Partners, LP OKS N
Penn Virginia GP Holdings, L.P. PVG OW Distribution growth likely to remain modest into 2011. For the MLPs in our
Penn Virginia Resource Partners PVR N
Plains All American Pipeline L.P. PAA N
coverage universe, we expect distributions to grow, on average, at the modest rate of
Questar Corp. STR N 3.4% in 2011 compared to the 6.1% CAGR from 2007 to 2009. Assuming valuations
Regency Energy Partners LP RGNC N
Southern Union SUG OW
for the group remain stable over the next year, we expect the total return for the
group to be in the single-digit to low-double-digit range.
Best Idea – Enterprise Product Partners (EPD)

Our top pick is Enterprise Products Partners (EPD) as we think EPD is uniquely
positioned to utilize its asset base across the NGL value chain and benefit from NGL
infrastructure development. EPD has approximately $5 billion of organic projects in
the development phase which should sustain its growth over the next few years. In
addition, EPD recently announced a merger with its general partner, EPE, which will
lower EPD’s cost of capital and improve its long-term growth prospects. We forecast
EPD will grow its distribution at an above-average rate of 5% in 2011 while
maintaining a healthy coverage ratio of 1.14x. We think the unit should trade at a
premium due to its strong asset base, ample liquidity position, and sound distribution
coverage ratio.
Enterprise Products Partners (EPD) – Overweight – Dec 11 Price Target: $42

$40.82 $44.32 $29.05 December $1.65 $1.86 $1.62 21.9 25.2 $34,512
62
December 2010
Integrated Oil & Gas

Oil Price Leverage and Stock-Specific Catalysts to Differentiate 2011 Performance
We maintain a favorable stance on the U.S. integrated and Canadian oils as we look
Katherine Lucas Minyard, CFA AC
(1-212) 622-6402
to 2011. We see solid valuation support across the board based on our long-term
katherine.l.minyard@jpmorgan.com $80/bbl oil price outlook, with higher near-term oil prices supporting the case for
earnings momentum as a potential driver of near-term performance. Given our equity
Ashley Hanna-Holloway
(1-212) 622-1505
strategy bias toward turnaround stories and stocks at trough valuations, as well as
ashley.hanna-holloway@jpmorgan.com lingering skepticism as to the quality of the recent market rally, we believe the
relative laggards among the group may command a greater level of investor attention
in the coming year. Finally, we believe stock-specific catalysts play a key role in
Bloomberg JPMA MINYARD >GO>
differentiating performance in a sector ordinarily dominated by commodity prices.
Canadian Natural Resources CNQ.TO N
Cenovus Energy CVE.TO OW Oil price leverage. Our commodity team is forecasting an average WTI crude oil
ConocoPhillips COP N price of nearly $90/bbl in 2011E, implying an oil price increase of 13% over 2010E.
Hess HES OW
Husky Energy HSE.TO UW With our economics team anticipating the Fed’s LSAP program will continue
Marathon Oil MRO OW through mid-2011, we see the potential for a weaker currency to contribute to
Murphy Oil MUR UW
Nexen NXY.TO OW sustained strength in oil prices. This should drive not only earnings momentum, but
Occidental Petroleum OXY N also share price performance, especially among the higher-beta names, favoring the
Suncor Energy SU.TO N
Talisman Energy TLM.TO OW Canadian oils as well as Overweight-rated HES and Neutral-rated OXY.
Turnarounds as a theme. Over the last year, the market has seen the power of a
turnaround story in driving share price outperformance, as Neutral-rated COP
increased more than 30% in the first year of a two-year turnaround. We see the
potential for management-driven turnarounds in other names as well, such as that
recently announced by Underweight-rated HSE. The other type of turnaround we
would look for is one in investor sentiment, as stock overhangs lift on improving
fundamentals, as we expect with Overweight-rated NXY.
Stock-specific catalysts. We expect catalysts across the sector in 2011, from
exploration activity, especially as Gulf of Mexico drilling resumes; to the
advancement of major investments, especially in oil sands; to increased activity
levels in unconventional resource bases. We also believe non-core asset divestitures
may continue, especially if assets are able to capture higher transaction values than
those embedded in the portfolios.
Best Idea – Nexen (NXY)
Among our coverage universe, we believe the name that best meets our criteria for
2011 is Overweight-rated Nexen (NXY). The stock offers one of the highest oil price
betas in the group and stands to enjoy 38% growth in earnings on our higher 2011 oil
prices. In addition, NXY has lagged the peers over the past year, down 7% while the
group is up 15%, on average. We attribute the relative underperformance to project
challenges that have captured a disproportionate level of investor attention at the
expense of the broader portfolio. Moreover, we see events in 2011 underscoring the
depth of the portfolio as NXY advances major developments such as Golden Eagle
and Knotty Head, appraises recent discoveries at Appomattox and Owowo, and tests
exploration prospects, including in the Gulf of Mexico. With NXY offering 24%
upside to our Dec 2011 price target, we see a compelling investment choice for 2011.
Nexen (NXY.TO) – Overweight – Dec 2011 Price Target: C$28
C$22.65 C$26.91 C$18.33 December C$1.11 C$1.55 C$2.15 14.5 10.5 C$11,904
Note: Target based on discounting estimated segment-level FCF at a WACC of 8.6%. Risks: Failure to extend contract in Yemen; oil
price retreat; unsuccessful exploration; outside-operated project slate; currency exchange rate risk.
63
December 2010
Oil & Gas Exploration & Production

In 2011, Overweight Oily and Large-Cap E&Ps
Joseph Allman, CFA AC We would recommend overweighting oily and large-cap E&Ps.
(1-212) 622-4864
joseph.d.allman@jpmorgan.com Due to the continued oversupply of natural gas, we think the oily E&Ps again will
Xin Liu, CFA outperform the gassy E&Ps. In 2009, the ten most oily E&Ps on our list
(1-212) 622-4915 outperformed the ten most gassy names by 5,400 basis points. In 2010, the
xin.liu@jpmorgan.com outperformance has been about the same. We think the gas oversupply will be as bad
Ronny M Eisemann in 2011 as it has been in 2010. Our model suggests that, in order to balance the
(1-212) 622-6756 market, we need 60 rigs to move from dry gas plays like the Haynesville to liquids-
ronny.m.eisemann@jpmorgan.com rich plays like the Eagle Ford.
Jessica Lee The majority of investors with whom we have spoken are eager to be bullish on
(1-212) 622-9812
jessica.s.lee@jpmorgan.com
natural gas but they hesitate because they are concerned about the oversupplied
market. That eagerness has and likely will continue to lead to volatility. Any
seemingly positive natural gas market data points can cause quick, sharp moves in
Bloomberg JPMA ALLMAN >GO>
the gassy stocks. We think these moves will be fleeting, though.
Joseph Allman
Anadarko Petroleum APC OW
On valuation, the large caps appear to be more attractive than the mid- and small
Apache Corporation APA caps. With the potential volatility we predict with gassy names, and our equity
Approach Resources AREX N
Atlas Energy ATLS N
strategist’s forecast for stock market volatility, we think that the large caps probably
ATP Oil & Gas ATPG UW will be the relatively more secure names among the E&Ps.
Berry Petroleum BRY OW
Brigham Exploration Company BEXP N
Cabot Oil & Gas COG N
Best Idea – Devon Energy (DVN)
Carrizo Oil & Gas Inc. CRZO N
Chesapeake Energy CHK OW Devon Energy (DVN) is our best idea for 2011. On an NAV basis, the company has
Cobalt International Energy CIE OW the most expected upside among all of the oily names. Operational catalysts include
Concho Resources, Inc. CXO N
Continental Resources, Inc. CLR N the following: improved industry results in the Cana-Woodford Shale; positive news
Delta Petroleum Corporation DPTR UW on its Permian plays, including the Bone Spring; and the unveiling of its stealth
Denbury Resources Inc. DNR OW
Devon Energy DVN OW unconventional oil play. The balance sheet is now the strongest in our coverage
El Paso Corp. EP OW universe.
EOG Resources, Inc. EOG OW
EQT Corporation EQT OW
EXCO Resources, Inc. XCO rs Devon Energy (DVN) – Overweight – Dec 11 Price Target: $100
Goodrich Petroleum GDP OW
McMoRan Exploration Company MMR OW
Newfield Exploration Company NFX OW 12/7/2010 High Low FY End Last (A) Cur (E) Next (E) Cur Next (mil.)
Noble Energy NBL OW $73.68 $76.79 $58.58 December $(6.11) $6.30 $6.94 11.7 10.6 $31,822
PDC Energy PETD UW Note: Target based on our estimate of NAV, which we calculate using a DCF model. Risks: Commodity price volatility, oilfield service
Penn Virginia Corporation PVA OW cost inflation, and exploration failures; asset divestitues fetching less than expected or being delayed; leverage to crude.
Petrohawk Energy HK OW
PetroQuest Energy, Inc. PQ OW
Pioneer Natural Resources PXD OW
Plains Exploration & Production PXP
QEP Resources QEP N
Quicksilver Resources Inc KWK N
Range Resources Corp RRC OW
SandRidge Energy Inc. SD N
SM Energy SM N
Southwestern Energy Company SWN OW
Swift Energy Company SFY N
Ultra Petroleum Corp UPL N
Venoco, Inc. VQ UW
Whiting Petroleum Corporation WLL N
Williams Companies WMB OW
Ronny Eisemann
Cimarex Energy Co. XEC OW
64
December 2010
Oilfield Services
All the Pieces Are Coming Together
J. David Anderson, PE, CFA AC We expect 2011 to be the turning point for oilfield services, with the only question
(1-212) 622-6684 being when. As seen in the 1990 and 2000 energy cycles, oilfield service stocks tend
jdavid.anderson@jpmorgan.com to trade in line with the broader market for the first 18-36 months of the cycle, then
Adam Aron outperform for multiple years. The trigger for this outperformance is very
(1-212) 622-0144 fundamental in nature: sustained increases in upstream spending on oil and gas
adam.aron@jpmorgan.com projects driving earnings progressively higher. We think we are getting closer to that
Samantha Hoh, CFA inflection point—all the pieces are in place, however, spending levels remain
(1-212) 622-5248 subdued in international markets.
samantha.k.hoh@jpmorgan.com
J.P. Morgan Securities LLC Why are we confident spending levels will increase in 2011? Importantly, we expect
Bloomberg JPMA ANDERSON <GO>
global oil demand to outstrip supply sometime next year to support stronger oil
prices. At the moment, national oil companies are reluctant to spend with too much
Baker Hughes BHI OW spare oil capacity, while major oil companies are looking for more supportive oil
Cameron Int'l CAM OW
Diamond Offshore DO UW
prices. Effectively, it should just be a matter of time as weak demand has masked a
Dresser-Rand DRC OW number of underlying secular trends: ageing reservoirs, the focus on deepwater, and
Dril-Quip DRQ OW
Ensco plc ESV N
increasing service intensity of wells.
Exterran Holdings EXH N
FMC Technologies FTI N Over the past year, North America has been a phenomenal market for oil service
Halliburton HAL OW
National Oilwell Varco NOV OW
companies, driven by onshore oil and liquid-rich gas drilling. Although additional
Noble Corp. NE N equipment capacity is being added and we do expect some weakness in gas drilling,
Pride International PDE N
Rowan Companies RDC OW
the North American market should remain strong. But the true inflection point for the
Schlumberger SLB OW group should occur once international land activity picks up and deepwater rigs are
Transocean RIG UW
Weatherford International WFT N
signed to begin a new phase of exploration activity.
Best Idea – Halliburton (HAL)

Halliburton (HAL) has emerged a stronger company out of the downturn, clearly
dominating the North American market as it gained market share, while its
international business has gained considerable ground on Schlumberger in recent
years. While there is some headline risk as the Macondo investigation is completed
next year, its business is running on all cylinders and the stock has the most attractive
valuation in the group.
Halliburton (HAL) – Overweight – Dec 11 Price Target: $49

$40.38 $41.69 $21.10 December $1.35 $1.97 $2.75 20.5 14.7 $36,727
65
December 2010
66
December 2010
Asset Managers
Financials
As Goes January So Goes the Year
Kenneth B. Worthington, CFA AC Recently we have seen some signs of life in fund flows. Since the second week of
(1-212) 622-6613 October equity fund sales have generally been positive. While domestic equity funds
kenneth.b.worthington@jpmorgan.com have generally remained in redemption, the magnitude of the redemptions has shrunk
Timothy Shea significantly and there have been some positive blips. This indicates to us that some
(1-212) 622-5707 retail investors are starting to toy with the idea of getting back into mutual funds.
timothy.j.shea@jpmorgan.com This is likely the result of more stable markets in the second half of 2010.
Historically equity fund sales have been the strongest in January, as individuals
Bloomberg JPMA WORTHINGTON <GO>
rebalance portfolios after year-end and contribution limits are reset. We see the
Artio Global Investors ART N potential for January to be a strong month for fund sales if markets remain strong
Charles Schwab SCHW OW through year-end. If this happens we think it could set the tone for the year and help
Eaton Vance Corp EV N
Evercore Partners Inc. EVR N drive higher valuation for the asset manager group. We note the group currently
Federated Investors, Inc. FII UW trades at 15.0x, significantly below the historical average of 17.0x, based mainly on
Franklin Resources BEN OW
Invesco Ltd. IVZ OW concerns over retail mutual fund sales. A strong sales month in January could
Janus Capital Group JNS N alleviate some of this concern.
Och-Ziff Capital Management OZM OW
Penson Worldwide PNSN N
Pzena Investment Management PZN N
Finally, with expectations for an extended period of low rates, investors likely will
T. Rowe Price Group, Inc TROW OW progressively move back into equities, as we expect currently high returns in fixed
income funds to be unsustainable long term. We thus favor asset managers with
equity exposure.
Best Idea – Invesco Ltd. (IVZ)
Invesco Ltd. (IVZ) is our best idea in an uncertain market. While we see the
potential for a strong January to help the asset manager group, we can not be sure.
Therefore, we look to companies that should be able to drive earnings growth in
2011 even in a flat market. The name that we like most is Invesco. We expect deal
synergies from the Van Kampen transaction to continue to be additive to earnings in
2011 and see other earnings drivers such as potential performance fees, a new
WL Ross fund, falling U.K. tax rates, and other cost savings. Any organic sales
growth would represent additional upside to the story.
Invesco Ltd. (IVZ) – Overweight – Dec 11 Price Target: $30.50
$22.98 $24.38 $16.37 December $0.78 $1.36 $1.84 16.9 12.5 $10,618
67
December 2010
Banks – Large Cap & Trust and Processors

First Half Marked by Dividend Increases, Second Half by Recovery Stories
Vivek Juneja AC Large-Cap Banks: We expect 2011 to be a tale of two halves with a slow recovery
(1-212) 622-6465 in bank stocks—the first half highlighted by capital return and banks early in doing
vivek.juneja@jpmorgan.com so and the second half by recovery in some of the weaker-credit names but with
Thomas W. Curcuruto, CFA better capital positions. Valuations are attractive but the plethora of regulatory and
(1-212) 622-5158 political issues plus revenue pressures and a weak economy have stymied the sector.
thomas.w.curcuruto@jpmorgan.com With a weak revenue outlook, we expect consolidation to pick up with smaller banks
Polly P. Sung, CFA and those with weaker asset quality sellers and some of our banks potential buyers.
(1-212) 622-0551
polly.p.sung@jpmorgan.com Credit costs should decline further in 2011, but moderately, as decreases in some
loan categories are offset by continued high residential real estate-related chargeoffs.
Reserve releases should slow but foreclosure-related expenses should decline.
Bloomberg JPMA JUNEJA <GO>
We expect revenues to be weak with tough comps in mortgage banking post the
Bank of America BAC OW
Bank of New York Mellon Corp. BK OW
surge in refis in 2010, mixed net interest margin trends, a slow recovery in loans, and
BB&T Corporation BBT N some impact from the Dodd-Frank Act but likely less than initially feared due to
Citigroup Inc. C OW
Fifth Third Bancorp FITB UW
political changes. The revenue outlook could improve in second half if the economy
Northern Trust NTRS N picks up, which would benefit loan growth and eventually result in higher interest
PNC Financial PNC OW
Regions Financial RF N
rates. Economic recovery would also help the housing market, reducing credit losses.
State Street STT N
SunTrust Banks, Inc. STI N We expect some banks to begin returning capital (i.e., raising dividends) in 2Q—
U.S. Bancorp USB OW these include WFC, USB, and PNC. However, initial dividends are likely to be
Wells Fargo WFC OW
modest and therefore dividend yields should remain below long-term averages. Some
regional banks are likely to repay TARP which could result in capital raises but
likely with lower dilution than previously feared.
Trust Banks: Slow revenue recovery should continue, led by custody and asset
management fee growth with new business wins, recent acquisitions, and improved
markets. The drag from net interest income, FX trading, and securities lending
should moderate but continue. Trust banks are likely to be active acquirers due to
strong capital positions. Better y/y EPS comparisons and dividend increases for BK
and STT should drive gradual recovery in the stocks given their attractive valuations.
Best Ideas – Wells Fargo (WFC) and Citigroup (C)
We recommend Wells Fargo (WFC) as our best idea for the first half of 2011 due to
potential dividend raise, lower exposure to some headwinds such as Dodd-Frank and
mortgage putbacks, expected improvement in credit costs, additional cost savings
from Wachovia, and attractive valuation at 8.2x 2012E EPS.
We recommend Citigroup (C) as our best idea for the second half of 2011 with
recovery driving next leg of credit improvement and greater visibility into capital
return factoring in Dodd-Frank and Basel 3, which should add to continued good
international revenue growth and attractive valuation at 1.0x TBV.
Wells Fargo (WFC) – Overweight – Dec 11 Price Target: $43
$28.47 $34.25 $23.02 December $1.89 $2.17 $2.60 13.1 11.0 $149,432
Citigroup (C) – Overweight – Dec 11 Price Target: $6

$4.62 $5.07 $3.11 December $(0.76) $0.39 $0.49 11.8 9.4 $134,212
68
December 2010
Banks – Mid- and Small Cap

Double-Digit Return Potential, with Focus on Banks Uniquely Positioned to Grow
Steven Alexopoulos, CFA AC Double-digit return potential through YE11. Generally speaking, our macro
(1-212) 622-6041 assumptions for 2011 and 2012 are fully aligned with J.P. Morgan’s economic
steven.a.alexopoulos@jpmorgan.com forecast. As our economics team has moderated expectations for GDP growth and
Preeti S Dixit pushed out expectations for rising rates, this has a pronounced impact on how we
(1-212) 622-9864 view sector valuations. Consequently, looking to YE11, with Fed Funds forecast to
preeti.s.dixit@jpmorgan.com be held at ZIRP through the entire year, we see the group trading in the range of 1.4-
Jared W Baker, CPA 1.6x TBV, with our price targets based on the group trading at 1.5x TBV. On a
(1-212) 622-6718 normalized earnings basis, we see the current 9.3x valuation improving to the 10-11x
jared.w.baker@jpmorgan.com range, and use 10.5x as our base case. Note that the group currently trades at 9.3x
Noah Schneider normalized EPS estimates and 1.3x TBV. Assuming the regional banks trade at 1.5x
(1-212) 622-6536 TBV by YE11 and roughly 10.5x normalized (or 2014) EPS estimates, expected total
noah.s.schneider@jpmorgan.com
return on average for our stocks is in the 11% range, comprising mostly price
J.P. Morgan Securities LLC appreciation with only about 1% coming from dividend yields.
Bloomberg JPMA ALEXOPOULOS <GO>
Given expected slow economic growth, distressed bank acquisitions could be an
Astoria Financial AF N opportunity to create value. Based on our outlook for sluggish economic growth,
BancorpSouth BXS UW we tend to favor banks in a position to pursue acquisitions, particularly of distressed
CapitalSource CSE N
City National Corp CYN OW assets. These banks include FMER, MBFI, PBCT, and UMPQ which are in a
Comerica Incorporated CMA OW strong competitive position to each drive EPS growth via purchasing FDIC as well as
Cullen/Frost Bankers Inc. CFR N
First Horizon National FHN N distressed-bank opportunities.
FirstMerit Corporation FMER OW
KeyCorp KEY OW C&I lenders could be in the minority of banks positioned to grow organically.
M&T Bank MTB N
Marshall & Ilsley Corporation MI N
We thought one of the untold stories of the third quarter came from a tidbit out of
MB Financial MBFI OW Comerica which reported that the bank’s approval for lines (which are commitments
New York Community Bank NYB N
People's United Financial PBCT OW
until drawn) had increased to $871 million in 3Q, up 50% quarter/quarter. Although
PrivateBancorp, Inc. PVTB N line utilization rates have not increased for many, it does appear that companies may
Signature Bank SBNY N
Susquehanna Bancshares SUSQ N
be paying to have more credit available heading into 2011. As the holdup for
SVB Financial SIVB OW commercial borrowers tapping lines seems to be more from a lack of confidence
Synovus Financial Corp. SNV N
TCF Financial Corporation TCB N
rather than a fundamental issue (as might be the case with consumers), improved
Trustmark Corporation TRMK N confidence in 2011 could benefit the C&I lenders in our group, such as Comerica,
Umpqua Holdings Corporation UMPQ OW
Valley National Bancorp VLY UW
City National, Cullen Frost, PrivateBancorp, and SVB Financial (note: given
Washington Federal, Inc. WFSL N SIVB’s focus on tech companies loan growth has already materialized, increasing
Webster Financial Corporation WBS N nearly 40% annualized in 3Q10). We would note that banks positioned to grow
Whitney Holding Corp. WTNY N
Zions Bancorporation ZION N organically as well as via acquisition include CYN, FMER, MBFI, and UMPQ.
Best Idea – MB Financial (MBFI)
Looking into 2011, we think the stock with the potentially highest risk/reward is
MB Financial (MBFI). We believe MB Financial is well positioned to benefit from
credit normalization, organic growth, and M&A. Although the credit picture remains
pressured, with its strong capital levels and a considerable pipeline of potential FDIC
failures in its backyard, MB appears to have plentiful opportunities to add on
deposits via FDIC deals. At 7.1x our normalized EPS estimate of $2.29, not only do
the shares trade at a 24% discount to peers, but they also trade at around half of the
historical P/E of 13.4x. On a P/TBV basis the shares trade at 1.2x, also a discount to
peers at 1.3x.
MB Financial (MBFI) – Overweight – Dec 11 Price Target: $20
Price 52-wk range FY EPS P/E Mkt Cap
$15.82 $28.18 $13.93 December $(0.18) $(0.72) $0.54 (22.0) 29.3 $854
69
December 2010
Exchanges
Expect Lackluster Volume Growth
Kenneth B. Worthington, CFA AC Volumes showed some signs of life in 4Q after a drop sharper than the seasonal norm
(1-212) 622-6613 during the summer months. We expect the exchanges will continue to see tepid
kenneth.b.worthington@jpmorgan.com trading volume during 2011 in the wake of continued quantitative easing, as well as
Funda Akarsu coming regulation in OTC trading and potentially high-frequency trading.
(1-212) 622-5319
funda.m.akarsu@jpmorgan.com We believe the pace of the recovery in volumes will be slow, but see the possibility
J.P. Morgan Securities LLC that expectations of higher rates in early 2012 could start to positively impact trading
Bloomberg JPMA WORTHINGTON <GO>
volumes in 2H11. Given the expected launch of OTC clearing in 2H11 should lead to
an initial contraction in volumes, we think the upside from the end of quantitative
BM&F Bovespa BVMF3.SA OW easing driving volumes meaningfully higher will be muted.
CBOE Holdings CBOE N
CME Group Inc. CME OW
Investment Technology Group ITG N
We see equity exchanges continuing to underperform futures exchanges, and among
Knight Capital Group KCG N futures exchanges expect commodities and emerging markets exchanges to
MF Global MF OW
NASDAQ Stock Market NDAQ N
overperform peers.
NYSE Euronext NYX N
The Intercontinental Exchange ICE OW Best Ideas – BM&F Bovespa and The Intercontinental Exchange
Among the commodities-focused exchanges, we see The Intercontinental
Exchange (ICE) as a favorite long-term investment, due to strong management and
a strong, growing business mix. ICE’s futures revenue is growing at a 20% pace, and
its OTC franchise at a 10% pace. In part, this growth is being driven by the inherent
characteristics of commodities trading. We believe that ICE continues to win share of
energy trading, and has a meaningful pipeline of products that can grow quickly to be
a meaningful contributor to earnings.
We also favor BM&F Bovespa (BVMF3.SA) as a long-term investment. We believe

trading volumes will rise meaningfully with co-location, and we see the deal calendar
further driving equity volumes to more robust levels. Our basis for recommending
BVMF3 post the increase in IOF is three-fold. First, we don’t see the changes in
terms of letters of credit or the elimination of stock lending by domestic banks to
foreigners as being particularly negative to trading engagement by foreign investors.
Second, we see valuation as attractive at current levels. Lastly, we see the recent drop
in the Real as reducing the risk of further currency controls near term.
BM&F Bovespa (BVMF3.SA) – Overweight – Dec 11 Price Target: R$17

R$13.28 R$15.70 R$9.81 December R$0.44 R$0.80 R$0.96 16.6 13.8 R$27,145
The Intercontinental Exchange (ICE) – Overweight – Dec 11 Price Target: $136

$116.20 $129.53 $92.18 December $4.50 $5.64 $6.44 20.6 18.0 $8,500
70
December 2010
Insurance – Life
Low Rates Remain a Concern, but Fundamentals Improving and Valuations Attractive
Jimmy S. Bhullar, CFA AC Our outlook for the life insurance sector is positive. Operating fundamentals are
(1-212) 622-6397 mixed, but we expect them to improve as 2011 progresses. Balance sheet health has
jimmy.s.bhullar@jpmorgan.com improved considerably, helped by the market recovery and equity and debt raises.
Erik J Bass, CFA Also, we expect returns to expand gradually as companies begin to deploy capital. In
(1-212) 622-2295 addition, sales and net flows in most products have stabilized and are expected to rise
erik.bass@jpmorgan.com in 2011. Low interest rates present a key risk, but we feel that this is already reflected
J.P. Morgan Securities LLC in 2011 EPS estimates, and sentiment on the group is relatively cautious.
Bloomberg JPMA BHULLAR <GO>
Balance sheets healthier. In our view, most insurers have adequate capital to
AFLAC, Inc. AFL OW withstand a market pullback, as evidenced by higher RBC ratios, an increase in
American International Group AIG rs holding company liquidity, and a less cautious stance by the ratings agencies.
Assurant, Inc. AIZ N
CNO Financial Group CNO N
Genworth Financial, Inc. GNW N
Returns improving. We project a sector ROE of 9.8% in 2010 and 10.1% in 2011.
Hartford Financial Services HIG OW Returns should improve slightly beyond next year, primarily via capital deployment
Lincoln National LNC N
MetLife, Inc. MET OW
towards share buybacks and acquisitions. We project the sector to generate an ROE
National Financial Partners NFP N of 10-12% long term, below the 13-15% expectation prior to the financial crisis, as
Phoenix Companies PNX UW
Principal Financial Group PFG UW
returns are held back by more conservative capital management, increased borrowing
Protective Life PL N costs, lower net investment income, and the drag from business sold in 2006-2008.
Prudential Financial PRU rs
Reinsurance Group of America RGA OW Sales/flows expected to pick up. Production in individual life and variable annuity
Symetra Financial SYA N
Torchmark Corp TMK OW products began to recover in 2010 and should increase further in 2011, driven by an
Unum Group UNM N improving economy, fewer concerns about the financial health of insurance carriers,
and relatively easy comparisons. Sales in group products (group life, disability, and
401(k) plans) are likely to be pressured by high unemployment, but our outlook is
less cautious than at the beginning of 2010. Although certain insurers remain
aggressive, overall competition is more rational as most companies have raised prices
on individual life and annuity products over the past year.
Low rates present a headwind. We believe that 2011 estimates reflect the current
interest rate environment but are concerned that sustained low rates could result in
downside to 2012 projections.
Valuations attractive. Multiples are no longer severely depressed but still seem
relatively attractive with the sector currently trading at 1.0x BV and 8.6x 2011E EPS.
Our analysis indicates that a 10-12% long-term ROE merits a P/BV multiple in the
1.0-1.2x range. We expect modest multiple expansion and steady book value growth
to drive upside in life insurance stocks over the next year.
Best Idea – AFLAC (AFL)
We expect strong momentum in Japan and a resumption of share buybacks to enable
AFLAC (AFL) to sustain a superior ROE and deliver consistent EPS growth. In our
view, concerns about AFL’s exposure to European investments should ease over time
given its strong balance sheet. The company’s robust capital position (RBC ratio
above 580% at 9/30/10) and strong free cash flow generation (~$1bn annually)
should allow it to absorb losses and still buy back considerable stock in 2011. Our
Dec 2011 price target of $65 implies ~20% upside from current levels.
AFLAC (AFL) – Overweight – Dec 11 Price Target: $65
$53.73 $58.31 $39.91 December $4.85 $5.56 $6.18 9.7 8.7 $25,321
Note: Target based on blended multiples of 9.5x 2012E EPS (75%) and 2.5x YE11E BV (ex. AOCI) (25%). Risks: Deterioration in
European credit markets; prolonged weakness in U.S. economy; material strengthening of Japanese Yen.
71
December 2010
Insurance – Non-Life
Not Enough Fear in the Market to Be Bullish on Sector or Fundamentals
Matthew G. Heimermann AC The U.S. non-life insurance industry is awash in capital, which is the result of limited
(1-212) 622-6545 reinvestment options within the industry due to poor pricing fundamentals as well as
matthew.g.heimermann@jpmorgan.com surplus earnings from prior-year reserve development. As a result, fundamentals are
Keith Alexander likely to deteriorate for some time, in our view. We now see significant earnings
(1-212) 622-2984 risks to the sector from a combination of underwriting margins (both accident-year
keith.x.alexander@jpmorgan.com and calendar-year) as well as net investment income (both yields and average assets).
Donald H. Chen For example, our 2011-2012 EPS estimates, which may prove optimistic, are below
(1-212) 622-2874 consensus by an average of almost 10%. The sector appears fairly valued given
donald.h.chen@jpmorgan.com current returns are only meeting cost of capital hurdles, and are still falling. We
J.P. Morgan Securities LLC believe our cautious view is also warranted in light of positive economic and equity
Bloomberg JPMA HEIMERMANN <GO> market outlooks by our strategists given insurance underwriters have very little
leverage to the broader economy. The only exceptions to this view are: 1) certain
Matthew G. Heimermann
ACE Limited ACE OW
stocks with exposure to markets in which fundamentals are close to trough levels and
Allied World Assurance AWH N could improve, such as personal lines—Allstate (ALL); 2) stocks with significant
Company Holdings, Ltd.
Allstate Corp. ALL OW
exposure to non-P&C products or international markets—ACE Limited (ACE); and
Aon Corporation AON N 3) the insurance brokers, which should see improving organic growth entering 2012
Arch Capital Group, Ltd. ACGL UW
Axis Capital Holdings, Ltd. AXS N
as stable economic trends more than offset negative pricing headwinds.
Chubb Corp. CB UW
Endurance Specialty Holdings ENH OW Best Idea – Allstate (ALL)
Everest Re Group, Ltd. RE N
Marsh & McLennan Cos., Inc. MMC N We believe the most attractive risk/reward, and contrarian, investment opportunity in
PartnerRe Ltd. PRE OW
Platinum Underwriter Holdings, PTP N our sector is Allstate (ALL). We believe the significant capital and operating issues
Ltd. that have affected the stock in recent years, and curtailed valuation, are largely in the
The Progressive Corp. PGR N
Transatlantic Holdings TRH N past. In addition, we believe that earnings are bottoming and could improve over the
Travelers TRV N next 12 months, helped by all three major business lines—auto, home, and life
Validus Holdings VR N
Willis Group Holdings Limited WSH N insurance. Meanwhile, capital levels are now healthy enough to not only allow the
XL Group PLC XL N company to absorb unexpected volatility—investment or operational—but also to
Keith Alexander eventually allow the company to return capital down the road, in our view. More
Brown & Brown, Inc BRO N specifically, we believe: 1) sentiment is too negative given progress on operating and
Montpelier Re Holdings, Ltd. MRH N
capital issues; 2) negative earnings revisions are likely over, with positive revisions
possible; and 3) capital flexibility is returning, which improves the risk/reward
equation. Meanwhile, valuation appears to be backwards-looking rather than
forward-looking. Shares are currently trading at 7.4x 2011E EPS versus a normal
multiple of 9.6x and 0.86x current book value versus a historical average of 1.53x. In
addition, relative valuation also represents a significant discount to past levels, an
exception within the sector.
Allstate (ALL) – Overweight – Dec 11 Price Target: $40

$30.45 $35.51 $26.86 December $3.48 $3.27 $4.10 9.3 7.4 $16,388
72
December 2010
REITs / Real Estate Services

Core and External Growth Should Improve Through 2011; Capital Rotation Key Stock Risk
Michael W. Mueller, CFA AC We think REITs are poised to deliver near-double-digit total returns in 2011 based on
(1-212) 622-6689 our view that earnings growth should pencil out to 5-6% and dividend yields should
michael.w.mueller@jpmorgan.com
approximate 4%, after considering a current yield of 3.8% and 3-5% dividend growth
Anthony Paolone, CFA AC in the next year. This growth/return profile should keep a fairly broad investor
(1-212) 622-6682 audience—and particularly income investors—engaged in the group as long as the
anthony.paolone@jpmorgan.com
economic recovery is slow, interest rates remain low, and S&P 500 earnings growth
J.P. Morgan Securities LLC is in the mid/high-single-digit range. We think it will be hard for REITs to
Bloomberg JPMA MUELLER <GO> outperform the market as notably as they have in 2010, but think they can “stay in
Bloomberg JPMA PAOLONE <GO> the game” if the aforementioned backdrop persists. The key risk to the stocks, in our
view, is capital rotation out of REITs if the economic recovery proves stronger than
Michael W. Mueller
Acadia Realty Trust AKR N expected, S&P earnings growth accelerates, and/or interest rates move up notably.
AMB Property Corporation AMB N The group’s roughly 20x cash flow multiple, which in our view is warranted in the
CBL & Associates Properties CBL N
DCT Industrial Trust DCT UW current environment, could look expensive to investors if other areas of the market
Developers Diversified Realty DDR N show faster improvement.
Equity One Inc. EQY UW
Federal Realty Investment Trust FRT OW
First Industrial Realty Trust FR UW From a fundamental perspective, we think 2011 will be a grind, with modest core
General Growth Properties GGP rs growth. Landlords will work hard to claw back lost occupancy, at the expense of
HCP, Inc. HCP rs
Health Care REIT HCN OW rental rates. But until job growth is more robust and consistent, core growth likely
Healthcare Realty Trust HR N will be in the 0-3% range for the group as a whole. Apartment REITs and mall
Jones Lang LaSalle Inc JLL N
Kimco Realty Corporation KIM UW REITs have the best internal growth prospects, in our view, with suburban office and
Macerich MAC OW industrial REITs continuing to have a tough time maintaining cash flows as rental
Medical Properties Trust MPW UW
Nationwide Health Properties NHP OW rates remain under pressure and occupancy is challenged. We expect that by late in
Pennsylvania REIT PEI UW 2011, occupancy and rental rates should largely be stabilized across most all property
ProLogis PLD N
PS Business Parks PSB N types and companies should be set up for a stronger 2012.
Public Storage PSA OW
Ramco-Gershenson Properties RPT N From an external growth perspective, REITs should continue to find acquisition
Trust
Regency Centers REG N opportunities in the private market. Commercial real estate transaction volume has
Simon Property Group SPG OW picked up dramatically in 2H 2010 and we expect this level of deal flow to continue
Tanger Factory Outlet Centers SKT OW
Taubman Centers TCO N into 2011. The “bad” news is that asset pricing is far richer than was expected at this
Weingarten Realty Investors WRI N point in the cycle (i.e., cap rates are lower), but low capital costs and strong access to
Anthony Paolone a variety of funding sources should give REITs an edge over private market
AIMCO AIV UW participants. Deals should be accretive to earnings and—along with rolling debt
Alexandria Real Estate Equities ARE OW
American Campus ACC N down to lower market rates—represent a portion of our expected 5-6% bottom-line
Communities FFO growth in 2011; robust transaction volume could drive upside to this growth.
AvalonBay Communities AVB N
Boston Properties BXP OW
Brandywine Realty Trust BDN OW Best Idea – UDR Inc. (UDR)
Brookfield Properties BPO UW
Camden Property Trust CPT N We like UDR Inc. (UDR) going into 2011 as it represents a discounted way to invest
CB Richard Ellis Group, Inc. CBG OW in the apartment REIT sector. We think apartment REIT core growth will top the
Corporate Office Properties OFC OW
Douglas Emmett, Inc. DEI OW REIT industry at about 5% in 2011, and the ramp-up of development programs and
Duke Realty DRE N acquisitions should provide added visibility into 2012. The company’s core
Education Realty Trust EDR UW
Entertainment Properties Trust EPR OW performance should stack up well against its peers’ yet the stock trades at a discount
Equity Residential EQR N of roughly 5%.
Essex Property Trust ESS OW
Getty Realty GTY N
Kilroy Realty KRC N UDR, Inc. (UDR) – Overweight – Dec 11 Price Target: $23
Lexington Realty Trust LXP N
Liberty Property Trust LRY N Price 52-Wk Range FY FFO P/E Mkt Cap
Mission West Properties MSW UW 12/7/2010 High Low FY End Last (A) Cur (E) Next (E) Cur Next (mil.)
Piedmont Office Realty Trust PDM OW
$22.80 24.10 14.47 December $1.14 $1.09 $1.16 NM NM $4,153
Post Properties PPS UW
Realty Income O N
SL Green Realty Corp. SLG N
UDR, Inc. UDR OW
Vornado Realty Trust VNO N
Washington Real Estate WRE N
Investment Trust
73
December 2010
74
December 2010
Biotechnology
Health Care
Sector Trends Improving; Gilead Top Pick
Geoffrey Meacham, Ph.D. AC Given the winding pace of economic recovery in the United States and the
(1-212) 622-6531 uncertainty in the European Union, investors over the past 12-18 months have taken
geoffrey.c.meacham@jpmorgan.com much more of a macro rather than fundamental approach to stock-picking.
Anupam Rama Healthcare, in general, and biotech specifically have not fared well in this period, yet
(1-212) 622-0105 the fundamentals in biotech have looked attractive and continue to look strong going
anupam.rama@ jpmorgan.com forward. Indeed, healthcare reform and pricing erosion (which plagued the sector
Michael E Ulz previously) are now well characterized, and the recent Republican victory in the
(1-212) 622-0900 House should limit risk of negative legislation headlines. This, combined with strong
michael.e.ulz@jpmorgan.com earnings momentum for many profitable biotechs, new product cycles, and M&A
G Krishna Gorti, MD activity, should put biotech on the radar in 2011. We recognize that the macro picture
(1-212) 622-4986 still matters and, as a result, we remain selective, not broadly bullish on the biotech
krishna.gorti@ jpmorgan.com
group. The larger-cap biotechs are thought to be more defensive plays which should
J.P. Morgan Securities LLC work in 2011. Indeed, J.P. Morgan’s U.S. Equity Strategist, Thomas Lee, is no
Bloomberg JPMA MEACHAM <GO> longer broadly recommending cyclical stocks over defensive stocks in 2011. Our
preference is for the profitable large- and SMid-cap biotechs with an earnings base
Acorda Therapeutics Inc. ACOR OW
Allos Therapeutics ALTH OW
that provides downside support but also with optionality in the form of new clinical
AMAG Pharmaceuticals AMAG OW data, label expansion, or new product cycles.
Amgen Inc AMGN OW
Amicus Therapeutics FOLD N
AVEO Pharmaceuticals, Inc. AVEO OW
Best Idea – Gilead Sciences (GILD)
Biogen Idec BIIB N
Celgene CELG OW Our top pick for 2011 is Gilead Sciences (GILD), as we believe the frameworks for
Genzyme Corporation GENZ rs both earnings momentum and multiple expansion are in place. Related to earnings
Gilead Sciences GILD OW
InterMune ITMN N momentum, on the back of positive trends in Gilead’s HIV franchise in 3Q, we
Ironwood Pharmaceuticals IRWD OW believe treatment guidelines should enable further new treatment starts and a
Medivation MDVN N
PDL BioPharma PDLI N shortening of time to initiation of antiretroviral therapy should continue to drive top-
Pharmasset VRUS OW line growth. In addition, multiple expansion is likely in 2011, in our view, given
United Therapeutics UTHR OW
Vertex Pharmaceuticals VRTX N multiple data catalysts. Gilead currently trades at a discount to its peers (9x our 2011
estimate vs. 14x for peers). Key catalysts in 2011 for TMC278/Truvada and the Quad
pill should help investors become more comfortable with Gilead’s HIV life-cycle
management. Regulatory approval of TMC-278/Truvada in the United States and the
European Union is expected in 2Q11 and 4Q11, respectively, while Phase 3 data for
the Quad pill is expected in 2H11. With clear potential catalysts, and our expectation
for continued top-line growth, we recommend owning GILD shares in 2011.
Gilead Sciences (GILD) – Overweight – Dec 11 Price Target: $45

$37.16 $49.50 $31.73 December $3.06 $3.61 $4.14 10.3 9.0 $30,169
75
December 2010
SMid Biotechnology
Anticipated M&A Uptick Could Finally Materialize as Perfect Storm Continues to Gather
Cory Kasimov AC We have a relatively optimistic outlook for the small/mid-cap biotech group going
(1-212) 622 5266 into 2011. To date in 2010, the Nasdaq Biotechnology Index (NBI) has modestly
cory.w.kasimov@jpmorgan.com outperformed the broader market (NBI +9.9% vs. S&P 500 +9.7%) and we would
Karen Jay, Ph.D. note that SMid biotechs are not as reliant as most industries on the performance of
(1-212) 622 4668 the overall economy so long as they have access to capital. With that backdrop, we
karen.e.jay@jpmorgan.com still expect investor risk appetite for the SMid biotechs to continue to be driven by
Matthew J. Lowe, Ph.D. high-profile clinical and regulatory catalysts, and the potential for M&A activity. An
(1-212) 622 0848 anticipated uptick in M&A activity, expected by many, did not fully materialize in
matthew.j.lowe@jpmorgan.com the space in 2010. According to Bloomberg, year-to-date there have been 68 deals
J.P. Morgan Securities LLC completed for U.S. therapeutic companies, representing a total market cap of
Bloomberg JPMA KASIMOV <GO> ~$16 billion and for which an average premium of 51% was paid. Notable
acquisitions included OSI Pharmaceuticals, Abraxis BioScience, Zymogenetics, and
Alkermes, Inc. ALKS OW
Amylin Pharmaceuticals AMLN N
Facet Biotech. While this represents a decline from the 90 deals reported by
Arena Pharmaceuticals, Inc. ARNA N Bloomberg for 2009 (total market cap of $47.4 billion), we would note that the
Ariad Pharmaceuticals ARIA OW
Array BioPharma ARRY OW
$44bn acquisition of Genentech by Roche skewed the figure that year. For additional
Biodel Inc. BIOD N context, in 2008, Bloomberg reported 87 deals representing a total market cap of
BioMarin Pharmaceuticals BMRN OW
Dendreon DNDN OW
$19.5 billion, which included the $7.7bn and $6bn acquisitions of Millennium and
Emergent BioSolutions EBS OW ImClone, respectively. We do see a reasonable chance that M&A activity involving
Exelixis, Inc EXEL N
Human Genome Sciences HGSI OW
SMid biotechs could pick up in 2011, primarily driven by a clustering of factors
ImmunoGen IMGN N including: 1) significant patent cliffs for large pharma being one year closer; 2) plush
Incyte Corporation INCY OW
Lexicon Pharmaceuticals LXRX OW
pharma balance sheets; and 3) further maturation of biotech pipelines.
MannKind Corporation MNKD UW
Nektar Therapeutics NKTR OW Best Idea – Dendreon (DNDN)
Onyx Pharmaceuticals ONXX OW
Orexigen Therapeutics OREX OW Going into 2011, we reiterate our Overweight rating on Dendreon (DNDN)
Savient Pharmaceuticals SVNT OW
Seattle Genetics SGEN N following a favorable CMS Medicare Evidence Development & Coverage Advisory
The Medicines Company MDCO N Committee (MEDCAC) meeting on November 17. We believe the panel’s high level
VIVUS, Inc VVUS OW
of confidence in the survival benefit of Provenge strongly suggests that CMS will
reimburse the product according to its label, and we believe this should give
investors far greater comfort with the story going forward. Notably, the formal
implementation of an NCD could also force all local MACs to update their policies,
which would be a positive development given that one has refused coverage to date.
Key upcoming potential catalysts for Dendreon include plans for Europe and a
manufacturing ramp. We expect a favorable update on the EU regulatory strategy by
early 2011 (potentially in conjunction with the J.P. Morgan Healthcare Conference in
January), and do not expect a requirement for new Phase 3 trials. In the United
States, we anticipate full licensure of the entire NJ manufacturing facility in March
2011. In addition, Provenge sales guidance for 2011 ($350-400 million, with
approximately half of those sales in 4Q11) indicates a significant run rate into 2012
(first year at full capacity) and gives us greater confidence in our outer-year
forecasts—a critical factor as we view the product as the key driver of value.
Dendreon (DNDN) – Overweight – Dec 11 Price Target: $66

$37.36 $57.67 $25.05 December $(0.94) $(3.04) $0.06 (12.3) 622.7 $5,392
76
December 2010
Healthcare Technology & Distribution

Strong Underlying Visibility; Cyclical Lift Could Drive Potential Upside
Lisa C. Gill AC Underlying earnings visibility remains strong, while a cyclical lift could drive
(1-212) 622-6466 incremental prescription usage and earnings upside. We remain positive on the
lisa.c.gill@jpmorgan.com pharmaceutical supply channel in general, based on favorable demographic trends
Michael Minchak, CFA and the near-term generics opportunity. Beginning in 2011, the first of the baby
(1-212) 622-6506 boomers will reach age 65, which is important, as prescription utilization among the
michael.minchak@jpmorgan.com elderly is significantly higher than the overall average. In addition, generic launches
J.P. Morgan Securities LLC are expected to ramp significantly in late 2011, and we note that generics are
Bloomberg JPMA GILL <GO> generally more profitable across the pharmaceutical supply channel. While the weak
economy has contributed to a slowdown in prescription growth, we do point to the
Lisa C. Gill
AmerisourceBergen ABC N
projection for a cyclical lift in the near term, although the positive impact could be
Animal Health International, Inc. AHII N tempered by an ongoing elevated unemployment rate, and potential risks to the
Cardinal Health CAH OW
CVS Caremark Corp. CVS OW
economic expansion story. In our view, should prescription utilization growth
Express Scripts, Inc. ESRX OW rebound based on a gradual acceleration in growth and hiring driven by an economic
Henry Schein Inc HSIC UW
McKesson Corporation MCK OW
recovery, this could provide a potential source of upside to the companies across the
Medco Health Solutions, Inc. MHS OW pharmaceutical channel.
MWI Veterinary Supply, Inc. MWIV N
Omnicare Inc. OCR OW
Owens & Minor, Inc. OMI N
The PBMs continue to be our favorite subsector, based on strong near-term
Patterson Companies PDCO N visibility. In our view, the outlook for the PBMs remains strong, based on two key
PSS World Medical, Inc. PSSI N
Rite Aid RAD N
drivers: generics and specialty pharmacy. We believe the weak economy has led to
Walgreen Company WAG N plan designs that promote utilization of mail and generics, which are more profitable
Michael Minchak
for PBMs. Importantly, the next generic wave will build significantly in late 2011. In
Catalyst Health Solutions, Inc. CHSI OW addition, the specialty pharmacy opportunity remains strong, based on a robust
SXC Health Solutions SXCI OW biotech pipeline and ongoing demand from plan sponsors looking to rein in rising
specialty drug costs. For the pharmaceutical distributors, the longer-term trend
remains favorable as well, especially if there is incremental prescription growth from
a gradual recovery in the labor market. The drug distributors have highly fixed cost
structures and therefore incremental scripts are very accretive to the model, while the
upcoming generics wave should also be an incremental positive. For the retail
pharmacies, while top-line growth slowed with the economy, same-store-sales trends
are expected to improve in 2011 versus 2H10 (partly due to the timing shift around
flu), although increasing prescription utilization and consumer spending driven by a
cyclical recovery could drive upside. In addition, margins should continue to benefit
from generic utilization and private-label sales. Finally, the weak economy has
created consolidation opportunities for the large chains, as small chains and
independents find it increasingly difficult to compete.
Best Idea – Express Scripts (ESRX)

Our best idea for 2011 is Express Scripts (ESRX). With the positive fundamental
outlook for the PBM industry as a backdrop, in our view, accretion from the NextRx
transaction provides Express Scripts with significant near-term earnings visibility
and should allow the company to deliver earnings growth in excess of peer levels.
The company has previously pointed to more than $1bn in incremental EBITDA
contribution in 2011, which we believe could be conservative, based on the ongoing
opportunity to drive mail and specialty utilization in the WellPoint book.
Express Scripts (ESRX) – Overweight – Dec 11 Price Target: $69

$54.23 $54.68 $37.75 December $1.79 $2.50 $3.20 21.7 16.9 $28,536
77
December 2010
Healthcare Information Technology

HCIT Spending Has Grown Despite a Weak Economy; Expected to Continue in 2011
Atif Rahim AC Elevated unemployment along with a generally weak economy has reduced doctor
(1-212) 622-6671 and hospital visits, which in turn have crimped healthcare providers’ capital spending
atif.a.rahim@jpmorgan.com budgets. Despite this backdrop, spending on HCIT initiatives has grown, aided in
J.P. Morgan Securities LLC part by government incentives offered as part of the 2009 Stimulus bill. With the first
Bloomberg JPMA RAHIM <GO> stimulus dollars slated to be paid out beginning May 2011, we expect demand for
electronic health records (EHRs) to continue to grow at least through 2012, after
Accretive Health AH OW
Allscripts Healthcare Solutions MDRX OW
which incentive payments begin declining. We expect names with EHR exposure
athenahealth ATHN N (ATHN, CERN, MDRX, and QSII) to continue to benefit from this secular growth
Cerner Corp CERN OW
MedAssets MDAS N
opportunity as adoption of EHRs, which currently hovers around 20%, grows to
Quality Systems QSII OW around 60-80% by 2015. Overall, the Stimulus has had the effect of not only
shielding EHR-related initiatives from spending cuts, but has also resulted in a slight
acceleration in investment in EHRs, which we expect to continue in 2011.
The revenue cycle management (RCM) companies in our coverage universe—AH,
ATHN, and MDAS—have experienced slower top-line growth either due to lower
utilization or providers’ focus on EHRs, but they still continue to post double-digit
top- and bottom-line growth. Accretive Health’s top-line growth has also been
affected by lower CPI inflation, which is tied to wages paid to hospital staff. If
inflation remains subdued in 2011, Accretive’s top line could continue to be
impacted but it is important to note that revenue exposed to inflation has a negligible
effect on margins. As such, the company’s profitability is not materially affected by
lower inflation. Also, if there is a mild recovery in unemployment, we should begin
to lap the slowdown in healthcare utilization around mid-2012, which should in turn
create easier year-on-year comparisons in the back half of 2012.
Best Idea – Allscripts Healthcare Solutions (MDRX)

Allscripts Healthcare Solutions (MDRX) is our best idea for 2011. We believe
management is conservative in its guidance for 2011, particularly around potential
revenue synergies from the merger with Eclipsys. Valuation also appears attractive at
current levels, with the stock trading at a 23% discount to closest peer Cerner partly
due to integration risk associated with Eclipsys. As 2011 progresses, we expect
investor concerns around integration to abate, which should allow for multiple
expansion. This, coupled with earnings upside prospects from potential revenue
synergies, should set the stage for decent stock upside relative to current levels.
Allscripts Healthcare Solutions (MDRX) – Overweight – Dec 11 Price Target: $25

$17.94 $22.55 $15.65 December $0.65 $0.74 $0.90 24.2 19.9 $3,341
78
December 2010
Managed Care
Getting Stability in the Playbook
John Rex AC Moving beyond the regs. This was really what 2010 was all about—that is,
(1-212) 622-6600 obtaining some definition around the playbook/regulations that will govern the new
john.rex@jpmorgan.com health reform provisions that begin in 2011. The process consumed the majority of
Scott Hansen the year and dominated the stocks, although the operating reports were actually quite
(1-212) 622-2250 good, with significant earnings upside shown by most. In the end, the outcome was
scott.hansen@jpmorgan.com much in line with our expectations, and quite manageable as we look ahead.
The election was the tone check and should assist view for future initiatives.
Bloomberg JPMA REX <GO>
Maybe it’s just gridlock, but with the rules so very much in flux for the past year,
John Rex most importantly, we see the need for stability and some conviction that any future
Aetna Inc. AET OW rewrites likely will look more toward the private sector as a solution, this to underpin
AmeriGroup Corp. AGP N
Centene Corp. CNC N a longer-term earnings view. It’s really at the core of what any fundamental investor
Cigna Corp. CI OW has to consider when allocating capital to the U.S. healthcare sector. This reform bill
Community Health Systems Inc. CYH N
Coventry Health Care Inc. CVH N was mostly about regulating insurers, while it did not even begin to approach the
Health Management Associates HMA N system’s cost and structural issues. So a persistent longer-term question will be how
Inc.
Health Net Inc. HNT N future initiatives attempt to address these—that is, will these bias toward utilizing
Humana Inc. HUM N market mechanisms or more government control? It’s a political-orientation question
LifePoint Hospitals Inc. LPNT N
Molina Healthcare Inc. MOH N but core for the growth outlook and valuations, as reliance upon the former expands
Tenet Healthcare Corp. THC OW the addressable market, while the latter more likely to diminish. At the very least, the
UnitedHealth Group UNH OW
Universal Health Services Inc. UHS N November election outcome should bias toward stability in the rules—key for
WellCare Health Plans Inc. WCG N visibility/predictability—and some added confidence that future initiatives may be
WellPoint Inc. WLP OW
more biased to private sector—key for growth—both important valuation elements.
Scott Hansen
HealthSouth Corp HLS N For 2011, a bias for earnings upside—this in part as the insurers’ outlooks assume
Kindred Healthcare, Inc. KND N the current slack medical utilization quickly reverses in the first half. As a result,
Select Medical Corp. SEM N
Skilled Healthcare Group SKH N pricing has held in reasonably firm, while we increasingly believe that a rebound in
Sun Healthcare Group, Inc. SUNHD N consumption will develop more slowly than anticipated in the models, as higher out-
of-pocket costs continue to suppress utilization. Notably here, the average deductible
has moved from $500 four years ago to an estimated $1,300 for 2011, a factor that
we believe has a longer-lasting, or more secular, impact on discretionary healthcare
consumption decisions. The result for 2011, against the current outlook, is potential
earnings upside, this even after considering the potential impact of the new minimum
MCR regulations. In addition, labor market stability should assist the revenue comps
in 2011, these having been impacted by declines in employer-sponsored coverage,
with each 100bps change in unemployment worth about 2 million lives.
Best Idea – WellPoint (WLP)
Among factors impacting our outlook is the company’s proportionately higher
exposure to the markets that have been most threatened by reform—specifically the
individual and small group segments—and a considerable overhang for the stocks.
As a result, we believe that shares of WLP will benefit disproportionately as the
rules/playbook stabilize, and indications that future health policy will look toward
market mechanisms rather than heightened government control. We therefore rate
WellPoint (WLP) Overweight with a price target of $70, 9x our 2012 EPS outlook.
WellPoint (WLP) – Overweight – Dec 11 Price Target: $70
$55.75 $70.00 $46.52 December $6.09 $6.53 $6.50 8.5 8.6 $21,944
Risks: Highest concentration of individual and small group business; scrutiny by state regulators on individual market rate increases; in
general, increasingly difficult regulatory environment for health insurers.
79
December 2010
Medical Technology & Devices

Outlook for 2011
Michael Weinstein AC MedTech stocks were a tale of two cities in 2010. Large-cap stocks struggled in the
(1-212) 622-6635 face of slower end markets and an increasing array of cyclical and secular pressures,
mike.weinstein@jpmorgan.com while small caps enjoyed the benefits of robust growth and M&A. Year-to-date,
Christopher Pasquale large-cap stocks have underperformed the S&P 500 by 12.6%, while small caps have
(1-212) 622-6590 outperformed the Russell by 3.7%.
christopher.t.pasquale@jpmorgan.com
Kimberly Gailun Looking to 2011, we expect concerns around healthcare consumption/demand in

(1-617) 310-0740 both the United States and Europe to weigh on stocks early in the year. As such, we
kimberly.w.gailun@jpmorgan.com start the year as we spent much of 2010, recommending an underweight position in
Ross Comeaux the group. Large caps will, in our view, struggle, pending a pickup in demand or, at a
(1-212) 622-1895 minimum, better visibility on 2011 growth.
ross.w.comeaux@jpmorgan.com
Our preference within the space is toward the supplier names over cardiovascular and
orthopedics stocks, but note that could evolve as we move through the year,
Bloomberg JPMA WEINSTEIN <GO.
dependent upon the outlook for 2H growth. Europe is a notable concern heading into
Michael Weinstein
the year, and we expect the prospects for demand and pricing in Europe and the
Abbott Laboratories ABT OW United States to be at the forefront of the debate on these stocks throughout 2011.
Alcon, Inc ACL N
Baxter Intl BAX N
Becton, Dickinson & Co BDX N
Best Idea – St. Jude Medical (STJ)
BioMimetic Therapeutics BMTI OW
Boston Scientific Corporation BSX N Our top pick as we enter 2011 is St. Jude Medical (STJ). St. Jude is coming off a
C.R. Bard Inc. BCR OW strong 2010 in which organic revenues should grow 8.7%, EPS should grow 23%,
CareFusion CFN N
Covidien COV OW and Street consensus has increased by 10% over the course of the year. As we enter
Edwards Lifesciences EW UW 2011, St. Jude faces tougher comps, but Street estimates are still $0.15 too low, in
Heartware International HTWR OW
Integra LifeSciences IART OW our view. New products should drive share gains in CRM and the emergence of new
Johnson & Johnson JNJ N opportunities in neuromodulation, atrial fibrillation, and structural heart disease
Kinetic Concepts, Inc KCI N
Medtronic MDT N should increase confidence in long-term growth.
NuVasive, Inc. NUVA UW
St Jude Medical STJ OW St. Jude Medical (STJ) – Overweight – Dec 11 Price Target: $52
Stryker Corp SYK N
Talecris Biotherapeutics TLCR N Price 52-Wk Range FY EPS P/E Mkt Cap
The Cooper Companies, Inc. COO N 12/7/2010 High Low FY End Last (A) Cur (E) Next (E) Cur Next (mil.)
Zimmer Holdings ZMH OW
$40.24 $42.87 $34.00 December $2.43 $2.99 $3.38 13.5 11.9 $13,797
Christopher Pasquale
Hansen Medical HNSN N
Thoratec Corp. THOR N
Volcano Corporation VOLC OW
Kimberly Gailun
Insulet Corp PODD OW
Mako Surgical MAKO OW
NxStage Medical, Inc. NXTM N
Wright Medical Group WMGI N
80
December 2010
SMid Medical & Life Sciences Technology

It’s Time to Buy the Laggards
Tycho W. Peterson AC The tools space has been dominated by macro themes since 2008, with near-uniform
(1-212) 622-6568 underperformance vs. healthcare in 2008 and near-universal outperformance vs.
tycho.peterson@jpmorgan.com healthcare in 2009 and 2010. With that in mind, we expect that 2011 will be more of
Evan Lodes a stock-picker’s market, and in general may feature a convergence of multiples
(1-212) 622-5650 across the group.
evan.lodes@jpmorgan.com
From a high-level perspective, we continue to favor those companies with emerging
markets exposure and strong cash generation. For the first half of the year, we
Bloomberg JPMA PETERSON <GO>
continue to prefer tools to diagnostics and CROs, although the second half of the
Accuray ARAY N year may be kinder to diagnostics due to easy comps and more difficult on tools due
Affymetrix AFFX N to the stimulus roll-off expected in 2012.
American Medical Systems AMMD OW
Beckman Coulter BEC OW
Bruker Corporation BRKR OW
With easy access to inexpensive financing, strong cash flows, and generally
Charles River Laboratories CRL N overcapitalized balance sheets, companies are also expected to increase capital
Covance CVD OW
Gen-Probe GPRO OW
deployment in the year ahead in the form of M&A and additional share buybacks.
Genomic Health GHDX N
Hologic HOLX OW Best Idea – Life Technologies (LIFE)
ICON Plc ICLR OW
Illumina, Inc. ILMN OW Within the Life Science Tools & Diagnostics space, our best idea is
Intuitive Surgical, Inc. ISRG N
Life Technologies Corporation LIFE OW
Life Technologies (LIFE), an inexpensive, out-of-favor laggard with strong (and
Luminex LMNX N accelerating) free cash flow. Furthermore, while the recent Ion Torrent acquisition is
Mettler-Toledo MTD OW
Myriad Genetics Inc. MYGN N
unlikely to be a major driver of numbers in the near term, we think it could improve
Pacific Biosciences Inc. PACB OW investor sentiment, which appears to us near an all-time low. The company continues
Qiagen N.V. QGEN N to be levered to rapidly growing end markets in stem cell research, sequencing, and
ShangPharma Corp. SHP OW
Sirona Dental Systems Inc SIRO OW synthetic biology.
SonoSite SONO OW
Thermo Fisher Scientific TMO rs With management focused on improving ROIC and returning cash to shareholders
Varian Medical VAR N
Waters WAT N rather than any large, transformative acquisitions, we think there is minimal risk of
WuXi PharmaTech WX OW further multiple compression. LIFE is among the most inexpensive stocks in our
universe, trading at 14.0x our 2011 estimate, a steep discount to its historical high-
teens multiple and a 2.1x discount to the peer group.
Life Technologies (LIFE) – Overweight – Dec 11 Price Target: $62
$53.03 $56.19 $41.10 December $3.04 $3.52 $3.78 15.1 14.0 $9,902
81
December 2010
Pharmaceuticals – Major
Positioned for a Recovery in 2011
Chris Schott, CFA AC We see the major pharma group positioned for recovery in 2011 as the group’s
(1-212) 622-5676 business model rapidly evolves in anticipation of a major 2012-2015 patent
christopher.t.schott@jpmorgan.com expiration cycle. This view is based on the combination of inexpensive valuation and
Jessica Fye the potential for increased clarity on post-patent cliff earnings power for the sector
(1-212) 622-4165 due to accelerating pipeline newsflow/business development activity.
jessica.m.fye@jpmorgan.com
Dewey Steadman, CFA We believe an acceleration in pipeline newsflow across the group coupled with
(1-212) 622-5350 expected significant cost reductions, particularly for Pfizer and Merck, will increase
dewey.d.steadman@jpmorgan.com the Street’s confidence in the longer-term earnings power for the sector. In addition,
J.P. Morgan Securities LLC we see capital deployment as an underappreciated catalyst for the group over the next
Bloomberg JPMA SCHOTT <GO>
year and view nearly all capital redeployment options (business development, share
repurchase, dividend increases) as more attractive than the scenario that we (and the
Bristol-Myers Squibb Company BMY N Street) currently have modeled—namely significant growth of cash on the balance
Eli Lilly & Company LLY UW
Merck & Co., Inc. MRK OW
sheet.
Pfizer Inc. PFE OW
Finally, on the macro/political front, we see many of the overhangs that affected the
sector in 2010 as largely reflected in estimates (and valuations) heading into 2011,
although concerns about industry pricing likely will persist given the increasing
budgetary constraints across the global healthcare system.
Best Idea – Pfizer (PFE)

With the Wyeth integration well under way, Pfizer (PFE) is increasingly
diversifying its business model away from one centered on traditional “patent cliff–
exposed” small molecules to one with growing exposure to longer-duration, non-cliff
assets including biologics and emerging markets, and we continue to believe that this
more stable, diversified business post-2012 leaves room for multiple expansion from
the current 7.3x multiple. Further, we believe business development could represent a
potential catalyst for PFE shares in 2011 and view the company’s strong cash flow
profile as providing ample funding for bolt-on acquisitions in addition to planned
dividend increases and opportunistic share repurchase.
Pfizer (PFE) – Overweight – Dec 11 Price Target: $24

$16.77 $20.36 $14.00 December $2.02 $2.22 $2.29 7.6 7.3 $134,327
82
December 2010
Pharmaceuticals – Specialty
Business Development Remains Key Driver; Generics Well Positioned
Chris Schott, CFA AC Generics

(1-212) 622-5676 We see the generics group as well positioned for continued strong earnings growth in
christopher.t.schott@jpmorgan.com 2011 driven by a combination of new product introductions, ongoing, favorable
Dewey Steadman, CFA underlying dynamics in the United States, and improving international comparisons.
(1-212) 622-5350 With the sector now trading at roughly 11x 2011 EPS estimates despite the potential
dewey.d.steadman@jpmorgan.com for mid-teens EPS growth over the next 3-5 years, we continue to see the opportunity
Jessica Fye for multiple expansion—along these lines, we are broadly overweight the sector.
(1-212) 622-4165
jessica.m.fye@jpmorgan.com Specialty Pharmaceuticals
J.P. Morgan Securities LLC After an active 18 months on the business development front, merger integration will
Bloomberg JPMA SCHOTT >GO>
be a focus for a number of names in the sector (VRX, WCRX, ENDP, etc.) and we
see the potential for greater-than-expected synergies for several of these names. In
Allergan AGN N addition, as we have seen over the past several years, further business development
Cephalon, Inc. CEPH OW
Endo Pharmaceuticals ENDP OW
represents a potentially meaningful catalyst for the group, in our view. Warner
Forest Laboratories, Inc FRX UW Chilcott (an execution story with little clinical or regulatory risk trading at 5.8x our
Hospira, Inc. HSP OW
Impax Laboratories IPXL OW
2011 EPS estimate) represents our top pick in the sector.
Medicis Pharmaceutical Corp. MRX N
Mylan Inc. MYL OW Best Idea – Warner Chilcott (WCRX)
Perrigo Company PRGO N
Teva Pharmaceuticals TEVA OW Entering 2011, we view Warner Chilcott (WCRX)—one of the lowest-valued
Valeant Pharmaceuticals VRX OW
Warner Chilcott WCRX OW companies in our coverage universe trading at 5.8x our 2011 EPS estimate of
Watson Pharmaceuticals WPI OW $3.55—as an execution story with three core product launches and ongoing cost-
cutting following the P&G Pharma acquisition. The recent approvals for Atelvia and
Lo Loestrin have largely removed FDA risk from the Warner Chilcott story and these
introductions, coupled with the continued Asacol HD conversion, represent key
potential catalysts for 2011. We anticipate solid performance from Warner Chilcott
on all three.
Warner Chilcott (WCRX) – Overweight – Dec 11 Price Target: $30

$20.45 $25.32 $15.19 December $1.89 $3.43 $3.55 6.0 5.8 $5,163
83
December 2010
84
December 2010
Chemicals – Specialty, Commodity & Agricultural
Materials
Commodity Strength
Jeffrey J. Zekauskas AC The positive spread between natural gas and oil-based feedstocks should
(1-212) 622-6644 provide a significant benefit to flexible North American commodity producers,
jeffrey.zekauskas@jpmorgan.com such as Overweight-rated LyondellBasell and Eastman, which process large
Silke Kueck volumes of natural gas liquids, such as ethane and propane, for production of
(1-212) 622-6503 petrochemicals. The domestic natural gas market is likely to remain oversupplied in
silke.x.kueck@jpmorgan.com 2011, resulting in discounted natural gas prices relative to crude oil.
Olga Guteneva
(1-212) 622-6488
Fertilizer companies are well positioned for 2011, given strong crop prices and,
olga.v.guteneva@jpmorgan.com as a result, higher farmer disposable income. Demand for all nutrients (potash,
phosphate, nitrogen) has returned to normal. High prices for corn, soy, cotton, wheat,
Ben Richardson
(1-212) 622-6455
and rice are likely to lead to a stronger year for fertilizer demand in 2011. Nitrogen
ben.richardson@jpmorgan.com producers are benefiting from North American natural gas feedstock prices trading
well below natural gas prices in Eastern Europe. Phosphate is also strong for 2011,
although longer-term pricing trends are more difficult to project, given significant
Bloomberg JPMA ZEKAUSKAS <GO>
new capacity in the Middle East and North Africa expected over the next few years.
Jeffrey J. Zekauskas Should grain yields disappoint in 2011 due to weather or other factors, additional
Agrium AGU OW upward movement in crop prices and additional strength in fertilizer demand and
Air Products and Chemicals APD rs
Albemarle Corporation ALB N pricing are likely, given very low stocks-to-use ratios. We rate Potash, Agrium, and
Amyris, Inc. AMRS N Scotts Miracle-Gro Overweight; we rate Mosaic and CF Industries Neutral.
Ashland Inc. ASH OW
Avery Dennison AVY N
Cabot Corporation CBT N
Specialty Chemical companies are likely to experience margin pressures at the
CF Industries Holdings, Inc. CF N beginning of 2011. These companies are focused on raising product prices as basic
Compass Minerals Int’l CMP N
Dow Chemical DOW N
inputs such as ethylene, propylene, and titanium dioxide rise in cost. Volume growth
DuPont DD OW probably will slow sequentially and year-over-year with quarterly comparisons
Eastman Chemical Company EMN OW
Ecolab Inc. ECL OW
becoming more difficult due to inventory building effects that took place in 2010.
Ferro Corp FOE N Leaner cost structures stemming from lower headcounts after cost-cutting measures
Georgia Gulf GGC N
H.B. Fuller FUL OW
taken last year should help margins as operating leverage gradually improves. We
Huntsman Corporation HUN N rate most Specialty companies Neutral, but rate DuPont, Ecolab, and Ashland
International Flavors & IFF N
Fragrances
Overweight due to attractive valuation and good free cash flow generation.
Lubrizol Corporation LZ N
LyondellBasell Industries LYB OW Best Idea – Scotts Miracle-Gro (SMG)
Minerals Technologies MTX OW
Monsanto MON N Scotts Miracle-Gro (SMG) is an overlooked value for 2011. Scotts manages an
Nalco NLC N
Novozymes NZYMb.CO N
exceptionally strong collection of brands that are gaining market share. SMG should
Pall Corporation PLL N experience minimal raw material cost inflation in F2011, despite sharp rises in
Polypore International PPO N benchmark urea prices, having forward purchased 70% of its urea and other fertilizer
Potash Corp. POT OW
Praxair PX N requirements during July when prices were low. Scotts is likely to have a range of
RPM International Inc. RPM N opportunities at its disposal to either increase price or accelerate volume growth
Scotts Miracle-Gro Co. SMG OW
Sherwin-Williams SHW N through more minimal price change.
Synthesis Energy Systems, Inc. SYMX N
The Mosaic Company MOS N Scotts trades at 13.7x F2011 estimated earnings and at a 6.9x multiple of
Valspar Corp VAL N
WD-40 Company WDFC N EV/EBITDA. Its free cash flow yield is 8%, its net debt-to-total capital ratio is 42%,
Westlake Chemical Corp. WLK N and its return on capital is 17%. Many comparable chemical companies with lower
Silke Kueck free cash flow generation, worse balance sheets, and lower returns on capital trade at
Rockwood Holdings, Inc. ROC N EV/EBITDA multiples in a range of 6.8-10.0x. Our December 2011 price target of
$59 reflects an EV/EBITDA multiple of ~8.0x based on our F2011 forecast.
Scotts Miracle-Gro (SMG) – Overweight – Dec 11 Price Target: $59
$51.33 $54.99 $37.50 September $3.41 $3.75 $4.15 13.7 12.4 $3,418
Risks: Weather and seasonal concentration of sales; high market share in highly competitive markets; and pesticide regulations.
85
December 2010
Coal
Coking Coal Is King While Natural Gas Is a Contrarian Investment
John Bridges CFA, ACSM AC Supply/demand fundamentals of coking coal remain strong. Steelmakers have
(1-212) 622-6430 been in the market buying coal reserves. Initially the steelmakers were looking for
john.bridges@jpmorgan.com assets in Australia, but that country’s surprise move to raise taxes has encouraged
Sadhak Bindal steelmakers to look elsewhere. This has resulted in interest in Appalachian coal
(1-212) 622-2684 reserves.
sadhak.x.bindal@jpmorgan.com
J.P. Morgan Securities LLC Central Appalachia has been supplying the best-quality coking coal for many
Bloomberg JPMA BRIDGES <GO>
years, but after a century of intensive mining, the reserves are becoming strained and
more expensive to extract. This puts upward pressure on costs which have been
Arch Coal, Inc. ACI OW rising at high-single-digit rates due to more difficult geology and tougher safety
CONSOL Energy CNX OW
International Coal Group ICO N
regulations after recent accidents. We expect coal production in CAPP to fall, though
Massey Energy MEE N elevated prices for coking coal should support the economics of this segment into the
Peabody Energy BTU OW
medium term.
We expect new coking coal supplies in the next five years from Mozambique,
Mongolia, and Siberia. In the meantime, tight supplies of coking coal mean prices are
likely to be volatile, influenced by weather and operational problems.
U.S. natural gas prices have been depressed by the new shale gas discoveries.
We expect new LNG export and reduced drilling in higher-cost fields will tighten
supplies and raise prices in two to three years. We believe shale gas is a revolution
for the U.S. energy space and we expect demand for this high-quality fuel will grow
either within the United States, as exports, or both.
Best Idea – CONSOL Energy (CNX)

We believe CONSOL Energy (CNX) with its coal, and its recently acquired and
growing gas reserves, is a play on the whole energy sector. The company has
significant growth potential in gas and perhaps coal too. The stock underperformed
due to increased exposure to (the currently lower) natural gas prices which have been
on a downtrend. The company’s gas leases do not require production, which means
CNX is not obligated to produce in a weak market, unlike its competitors which
could lose their leases because of “drill it or lose it” clauses.
We estimate CNX’s EV/EBITDA ratio stands at 8.1x for 2011E and 5.7x for 2012E
compared with the average 6.8x (2011E) and 5.6x (2012E) for major (non-CAPP)
U.S. coal producers. Applying a 6.0x EV/EBITDA multiple on our 2012 EBITDA
estimate of $2,359 million, we arrive at our Dec 2011 price target of $48.
Risks: 1) a delay in the expected global and U.S. recovery from the current crisis;
2) inability to ramp up gas production in line with expectations; and 3) high medical
inflation or a lower forecast rate of return on pension plan assets could have a short-
term negative impact on cash flow.
CONSOL Energy (CNX) – Overweight – Dec 11 Price Target: $48

$44.70 $58.00 $31.08 December $2.95 $1.99 $2.54 22.5 17.6 $10,095
86
December 2010
Gold
Insurance Policy for Uncertain Times
John Bridges CFA, ACSM AC Gold: More currency than commodity at present. J.P. Morgan forecasts a
(1-212) 622-6430 somewhat stronger economic recovery in 2011 with continued risks that a downside
john.bridges@jpmorgan.com shock could lead to deflation. We believe gold is currently trading like a
Sadhak Bindal currency/insurance policy, offering the potential for wealth preservation in uncertain
(1-212) 622-2684 times. Investor inflows are supporting gold prices, even though jewellery demand is
sadhak.x.bindal@jpmorgan.com being depressed. We continue to feel portfolios benefit from a gold component; the
J.P. Morgan Securities LLC potential for extra value could be added through trading around a core long position.
Our work suggests gold is a hedge for both inflationary and deflationary times.
Agnico-Eagle Mines AEM N We analyzed performance of silver (as a proxy for gold) during the depression in the
Barrick Gold ABX OW 1930s, and found it outperformed the DJIA even without the re-pricing that helped
Compania de Minas BVN N
Buenaventura gold.
Gold Reserve GRZ N
Goldcorp Inc GG OW Figure 20: Asset Performance in a Deflation
Jaguar Mining JAG N
Kinross Gold KGC OW
Newmont Mining NEM OW
NovaGold Resources NG OW
Source: Bloomberg, GFMS, and J.P. Morgan.
It’s a challenge for investors to decide between the metal and the equities.
Owning equities can provide leverage and the potential for added value through
growing reserves or the prospect of dividends. Our Commodities Strategy team is
also positive on the metal, driven by QE2 and sovereign risk.
Best Idea – Kinross Gold (KGC)
Kinross Gold (KGC) recently bought Red Back Mining for its prolific Tasiast
project in West Africa’s Mauritania. Kinross now has an 80% growth profile with
plans to raise production to a level of 4.5-4.9moz per annum by 2015. We don’t
believe this growth is fully represented in the stock’s valuation.
Applying a conservative probability-weighted average gold price of $1,300/oz to the
gold forward curve and based on our estimates of gold sales over the life of the
known assets and the forecast cost structure, we calculate a Black-Scholes call option
value to arrive at our Dec 2011 target price of $27.
Risks: 1) delays with the development of the Red Back mines; 2) sovereign risk at
mines; and 3) disappointments with the new mining code in Ecuador.
Kinross Gold (KGC) – Overweight – Dec 11 Price Target: $27
$18.60 $21.12 $14.84 December $0.44 $0.57 $0.67 32.6 27.8 $21,042
87
December 2010
Metals & Mining

Cost Push to Kick Start Steels in Year of Recovering Demand; X Remains Top Pick
Michael F. Gambardella AC After a year characterized by overcapacity fears, structural changes to key raw
(1-212) 646-6446 material contracts, and an ever-changing political and economic environment, we are
michael.gambardella@jpmorgan.com positive on the 2011 outlook for the steel sector. In the near term, we expect higher
Tyler J. Langton steel sheet pricing in 1Q11 as increasing global iron ore and scrap prices should
(1-212) 622-5234 continue to push sheet and stock prices higher. In our view, real demand
tyler.j.langton@jpmorgan.com improvement is a prerequisite for a sustained move higher by steel stocks later in
Brian P. Ossenbeck, CFA 2011. The combination of stronger 2011 economic activity, domestic steel raw
(1-212) 622-1023 material cost advantages, and supply discipline should benefit U.S. steelmakers as
brian.p.ossenbeck@jpmorgan.com demand continues to rebound toward long-term average levels.
The U.S. remains a low-cost location to make steel given it is long critical raw
Bloomberg JPMA GAMBARDELLA <GO>
materials, which China is notably short. While targeted energy reduction goals by the
AK Steel AKS N Chinese government should temper November and December production levels,
Alcoa AA OW J.P. Morgan’s China Steel analyst, Nathan Zibilich, still expects production growth
Allegheny Technologies ATI OW
Arcelor Mittal MT OW to continue through 2012. As a result, China’s elevated steel production should result
Carpenter Technology CRS N in higher iron ore, met coal, and scrap prices, pushing up the cost curve and
Century Aluminum Company CENX N
Cliffs Natural Resources CLF OW benefiting vertically integrated producers. A weak dollar also opens up export
Commercial Metals CMC N possibilities for U.S. producers, although continued FX volatility is likely in 2011.
Dynamic Materials BOOM N
Freeport-McMoRan Copper & FCX OW
Gold
Despite a favorable position on the cost curve, overcapacity concerns have weighed
Globe Specialty Metals GSM OW on U.S. producers of late. While new carbon sheet capacity in a market operating at
GrafTech International GTI N
Haynes International HAYN N
low utilization should clearly have a negative impact on all carbon sheet producers,
Metals USA MUSA OW we believe the market is probably too negatively discounting its impact for the
Molycorp MCP N
Nucor Corp. NUE OW
following reasons: 1) Thyssen Alabama’s new capacity will probably be one of the
Reliance Steel & Aluminum RS OW highest-cost sheet producers in North America; 2) the additions could displace some
Steel Dynamics, Inc. STLD OW
Teck Resources TCKb.TO OW
imports over time; 3) the new tonnage could potentially force the closure of higher-
Thompson Creek Metals TC OW cost mills; 4) demand is likely to recover and reduce the impact of new capacity; and
U.S. Steel Corp X OW 5) domestic producers could increase exports given their cost advantages.
Worthington Industries WOR N
Steel demand remains well below the historical average, even with the bounce back
in 2010 numbers over the depressed levels seen in 2009. While we expect 2010 total
steel consumption to be up 37% over 2009, it should still be about 23% below
average levels since 1992. As a result, we believe steel demand has considerable
room for improvement just to get back to mid-cycle levels. Given the cost advantages
and supply discipline outlined above, steel demand does not need to get back to peak
levels for steel prices and company earnings to rebound significantly, in our view.
Best Idea – U.S. Steel (X)
While these drivers will generally benefit all of our steel names, we reiterate our
preference for integrated steelmakers with U.S. Steel (X) as our Best Idea. We think
the company’s higher levels of fixed costs and raw material self-sufficiency, as well
as lower dependence on non-residential construction, should give it the most earnings
leverage to a demand rebound. U.S. Steel trades at 6.4x our 2011 EBITDA estimate.
U.S. Steel (X) – Overweight – Dec 11 Price Target: $59
$52.96 $70.95 $36.93 December $(9.78) $(2.62) $3.40 -20.2 15.6 $7,606
88
December 2010
Platinum & Palladium

The Best Fundamentals of Any of the Metals We Cover
John Bridges CFA, ACSM AC Palladium has the best fundamentals of any metal we cover. Both metals have
(1-212) 622-6430 done well as global growth expectations have expanded, but palladium has
john.bridges@jpmorgan.com outperformed, helped by its new market in diesel autocatalysts, demand from market-
Sadhak Bindal listed metal instruments, and the potential for lower sales from Russian stockpiles.
(1-212) 622-2684 Robust demand and the potential absence of Russian stockpile sales (which have
sadhak.x.bindal@jpmorgan.com averaged around 1moz per annum) could lead to a deficit in the market in 2011.

Platinum demand prospects remain strong as economic recovery/BRIC country
growth could lead to an increase in demand for diesel vehicles. South African mines,
Stillwater Mining SWC OW the main supplier of the metal, are struggling with six issues: 1) safety—ongoing
safety-related production cuts; 2) costs—mining costs have increased for years now
at well in excess of CPI inflation; 3) capex—curtailed growth capex as a result of the
2008 metal prices collapse; 4) electricity supply—Eskom has fallen behind schedule
in bringing new capacity online; 5) water supply—a concern of similar or even
greater severity than electricity supply; and 6) politics.
We see robust demand for both metals helped by the economic recovery, but our
favorite remains palladium.
Best Idea – Stillwater Mining (SWC)

Stillwater Mining (SWC) is one of only two primary palladium producers. We
believe SWC is currently focused on building a strong foundation for sustainably
larger production levels. It is planning to maintain production at 500,000oz in
Montana until it is incentivized to grow via sustained higher prices or perhaps
renewed floor price contracts which we believe is the right path considering the
volatility of the metal prices. The installed productive capacity is probably in excess
of 700,000oz.
It is also working on expanding the option’s size. It is completing the purchase of

Marathon which could add more than 200,000oz of palladium plus 39mlbs of copper
annually beginning in 2014. It is also working on developing new access points to
the ore-bearing JM reef at the two operating mines in Montana.
Stillwater’s nearest comparable peer groups are the North American gold and the
South African platinum producers. We have a calculated NPV of $27 for SWC using
a 2.5% discount rate. However, we feel that at the higher palladium price levels,
some investors may feel that the metal is already delivering on the higher prices they
had hoped for and may look for a more meaningful discount rate. At a 5% rate, our
estimate of Stillwater’s NPV would be $19 per share. We believe the correct range
for Stillwater is between these two prices and our price target is $25.
Risks: 1) failure to generate a sustained recovery in auto demand and thus PGM
prices; and 2) a further leg to the economic recession that forces investors in
commodities like palladium to liquidate positions.
Stillwater Mining (SWC) – Overweight – Dec 11 Price Target: $25

$20.45 $22.86 $8.37 December $(0.09) $0.46 $0.98 44.5 20.9 $2,002
89
December 2010
Silver
High-Beta Gold
John Bridges CFA, ACSM AC Silver typically has twice the volatility of gold and has delivered twice the
(1-212) 622-6430 percentage return since the credit market lows in 2008. Silver is at 30-year highs,
john.bridges@jpmorgan.com However, unlike gold, it is still below its 1979/80 highs in dollars of the day.
Sadhak Bindal
(1-212) 622 2684 Gold Fields Mineral Services (working for the Silver Institute) reports a significant
sadhak.x.bindal@jpmorgan.com excess of metal compared with fabrication demand; however, the surplus metal is
J.P. Morgan Securities LLC supplying the investment segment. Investment demand is being driven by fear of QE-
driven inflation. The major market-listed silver instruments currently hold about
490moz or a remarkable 49% of the 997moz estimate of above-ground stocks GFMS
Coeur d'Alene CDE N identified at the end of 2009. The figure below shows the long swings in investment
Hecla Mining HL N
Pan American Silver PAAS UW
flows in (positive) and out (negative) of above-ground silver investment holdings.
Silver Wheaton SLW OW
Figure 21: Investment Flows in Silver
300 Inv estment Demand (moz) Silv er Price ($/oz) $35

$30
200
$25
100 $20
0 $15
$10
-100
$5
-200 $0
1978 1983 1988 1993 1998 2003 2008
Source: GFMS and J.P. Morgan.
Silver’s electrical conductivity, reflectivity, and biocide qualities are leading to new
demand. It has long been used in electrical switches but its reflectivity yields a role in
solar cells. Its ability to suppress biological activity has given it a new function as a
biocide, against which microbes cannot build resistance (unlike antibiotics).
Best Idea – Silver Wheaton (SLW)

We like Silver Wheaton’s franchise value which it has created by becoming the
“go to” equity for investors looking for pure silver exposure. It operates through a
unique business model under which it buys a partial or whole silver stream from a
base metal/gold mine in exchange for providing liquidity for building the mine. It has
limited exposure to operational risks, exposure to industry cost inflation is limited to
+/-1% per annum, much lower than the average, and it has no currency risk.
Applying a conservative probability-weighted $23/oz silver forward curve to our
estimates of silver sales over the life of the known assets and the forecast cost
structure, we calculate a Black-Scholes call option value and arrive at our Dec 2011
price target of $36. Higher market prices will likely yield higher valuations.
Risks: 1) SLW might lose its tax advantage (currently SLW pays no income taxes as
all of its silver trading activities are performed by its wholly owned subsidiary based
in the Cayman Islands); and 2) at current silver prices SLW may face trouble in
getting new silver streaming partners.
Silver Wheaton (SLW) – Overweight – Dec 11 Price Target: $36

$39.28 $42.34 $13.04 December $0.38 $0.69 $1.25 56.9 31.4 $13,605
90
December 2010
Advertising & Marketing Services

Look for Continued Ad Market Strength in 2011
Alexia S. Quadrani AC Robust ad market expected to continue into 2011 as advertisers use their
(1-212) 622-1896 stronger cash position to drive revenue growth. The ad market recovered at a
alexia.quadrani@jpmorgan.com faster clip in 2010 than was expected. While comparisons will be more challenging
Townsend Buckles, CFA, CPA in 2011, we still expect a very healthy ad market which should benefit most media.
(1-212) 622-0461 We believe all major verticals will continue to spend and expect ad budgets to be up
townsend.buckles@jpmorgan.com approximately 5% in the U.S. in 2011. National will still likely lead local in the 2011
Stan Meyers recovery. Many local businesses did not survive the downtown and others are still
(1-212) 622-1697 relatively fragile and will likely be more cautious with their spending plans. National,
stan.meyers@jpmorgan.com we believe, is generally in a strong position and we expect major advertisers will
J.P. Morgan Securities LLC continue to spend to gain market share. On a global level, ad spending most likely
Bloomberg JPMA QUADRANI >GO> will be up at a stronger rate reflecting earlier-stage recoveries in many European
markets and ongoing strength in Asia and Latin America.
Alexia S. Quadrani
Arbitron ARB OW
Cinemark CNK OW
Focus returns to secularly favored media. We expect media companies operating
Clear Channel Outdoor CCO N in secularly favored areas to outperform in 2011 as investor focus moves away from
Gannett Company GCI N
Harte-Hanks, Inc HHS OW
the cyclical bounce-back and back toward fundamentals. Within our universe, we
Interpublic Group of Companies IPG OW continue to favor the ad agencies that are media-agnostic, have global exposure, and
Lamar Advertising Co. LAMR OW
Monster Worldwide Inc MWW OW
through excellent cost management in the downturn should benefit from nice
National CineMedia, Inc. NCMI OW leverage as revenues continue to grow. Also, we favor cable networks and outdoor
New York Times Company NYT N
Omnicom Group OMC OW
companies as both are secularly well positioned and have continued to steadily gain
Regal Entertainment RGC OW share from other, more challenged media, including broadcast, newspapers, and
Scripps Networks Interactive SNI OW
The E.W. Scripps Company SSP OW
radio.
The McClatchy Company MNI N
Valassis Communications VCI N Best Idea – Interpublic Group (IPG)
WPP Group WPP.L N
After its strong performance in 2010 (up 44% through the first eleven months), we
Townsend Buckles
ValueClick VCLK N are sticking with Interpublic Group (IPG) as our top pick into 2011 as we believe
the valuation gap versus peers will narrow as investors continue to see fundamental
results on the higher end of the group. With its significant improvement in margins in
2010, we believe investors are also gaining confidence that IPG will be able to reach
peer-like profitability in coming years. We have seen an impressive turnaround at
many of its “troubled” areas such as the media buying business and top agency
Lowe. We expect to see ongoing improvements in Europe where operations should
still lag the company average in 2011. We look for the company to begin using some
of its $1.6 billion in NOLs in 2011 (largely in Europe) as that region improves,
helping boost overall cash flow. In addition, we expect the bottom line to benefit
from lower interest expense as more credit rating upgrades are expected in coming
quarters; we would be surprised to see IPG still rated at below investment grade this
time next year. In terms of its use of cash, we anticipate a buyback program to be
announced shortly which should boost EPS growth but also send a positive message
to equity holders that the company is focusing on utilizing its strong balance sheet
and growing cash balance to return cash to shareholders. At 6x 2011E EBITDA, the
stock is trading at the low end of our universe despite significant operational and
financial improvements in recent years, and one of the best earnings growth profiles
in our group.
Interpublic Group (IPG) – Overweight – Dec 11 Price Target: $15

$10.96 $12.25 $6.21 December $0.41 $0.45 $0.62 24.4 17.7 $5,357
91
December 2010
Entertainment
We See Further Recovery in Advertising Revenue
Imran Khan AC We expect the cable television advertising recovery in the U.S. and internationally to
(1-212) 622-6693 carry into 2011 and drive earnings and stock performance. We believe that, despite
imran.t.khan@jpmorgan.com some investors’ concerns, international pay-TV growth is secular in nature and will
Vasily Karasyov prove to be resistant to uneven macro trends in Europe.
(1-212) 622-5401
vasily.d.karasyov@jpmorgan.com The domestic advertising recovery in cable and broadcasting markets was largely
Lev Polinsky, CFA driven by scatter price increases and improving sellout rates in the first nine months
(1-212) 622-8343 of 2010. Even companies with flat or down audiences such as Time Warner saw a
lev.x.polinsky@jpmmorgan.com rebound in advertising revenue. We think that the new upfront year which started in
Shelby Taffer October should further help y/y trends since, unlike in 2009, networks were able to
(212) 622-6518 lock in y/y price increases for the new period.
shelby.x.taffer@jpmorgan.com
We expect continued growth in international pay television markets. Despite current
Bridget Weishaar concerns over the eurozone macro situation, we expect companies in our coverage
(1-212) 622-5032
bridget.a.weishaar@jpmorgan.com
universe to benefit from continued expansion of pay television offerings worldwide.
We believe the growth trend is secular in nature and is driven by subscriber base
growth and reallocation of advertising budgets from free TV to cable channels.
Jigar Vakharia
(91-22) 6157-3281 Best Idea – Viacom (VIAb)
jigar.r.vakharia@jpmorgan.com
Our best pick for 2011 is Viacom (VIAb). We think that Viacom shares will
J.P. Morgan India Private Limited
outperform the group as the valuation gap closes driven by accelerating domestic
Bloomberg JPMA KHAN <GO>
advertising revenue growth, improved profitability, and share buybacks.
Imran Khan
Amazon.com AMZN OW We believe that the current valuation discount of 25.6% to the group average 2011E
AOL Inc. AOL N P/E multiple reflects investors’ concerns over the company’s ability to improve
Blue Nile NILE UW
Dice Holdings, Inc. DHX N
margins as well as lingering doubts about the sustainability of MTV ratings
Discovery Communications, Inc. DISCA OW improvements. In our view, the planned sale of Harmonix and resulting
eBay, Inc EBAY N
Expedia, Inc. EXPE N
deconsolidation of its financials should highlight the core profitability of the Media
Google GOOG OW Networks segment and we think that our estimate of flat y/y margin for FY11 leaves
IAC/InterActive Corp. IACI N
MediaMind MDMD OW
room for upside given affiliate and advertising revenue growth.
MercadoLibre, Inc. MELI N
Netflix Inc NFLX OW Our analysis shows that audience recovery at MTV appears sustainable. The network
News Corporation, Inc. NWSA rs
Orbitz Worldwide, Inc. OWW N
is on track to post y/y growth in each quarter of 2010. Though we think much of the
Priceline.com PCLN OW growth can be attributed to Jersey Shore, ex-Jersey Shore ratings are also up. For
QuinStreet, Inc. QNST OW
ReachLocal RLOC OW
example, when excluding the reality show from MTV’s Q3 performance (+32%), we
Shutterfly, Inc. SFLY OW estimate audience growth would have been roughly 17%. We believe new scripted
The Walt Disney Co. DIS N
Time Warner TWX N
programming and the return of Jersey Shore in early 2011 will help the network
Viacom Inc VIAb OW maintain its strength. However, we note that comps will get tougher beginning in
Yahoo Inc YHOO OW
December 2010 due to the lapping of last year’s Jersey Shore season.
Vasily Karasyov
DreamWorks Animation SKG DWA N Viacom (VIAb) – Overweight – Dec 11 Price Target: $48.50
Lions Gate Entertainment Corp LGF N
Madison Square Garden, Inc. MSG N Price 52-Wk Range FY EPS P/E Mkt Cap
RealNetworks, Inc. RNWK N 12/7/2010 High Low FY End Last (A) Cur (E) Next (E) Cur Next (mil.)
Lev Polinsky $39.40 40.25 27.89 September $2.38 $3.02 $3.27` 13.0 12.0 $24,145
Sirius XM Radio Inc. SIRI N
Bridget Weishaar
Liberty Capital (A) LCAPA N
Liberty Interactive LINTA OW
RHI Entertainment, Inc. RHIE N
Tivo TIVO OW
92
December 2010
Information Services / Radio & TV Broadcasting

Information Services Names Positioned Well in 2011; TV Ad Trends Likely to Moderate
Michael A. Meltz, CFA AC We believe Information Services stocks should outperform in a tepid economic
(1-212) 622-0416 recovery given exposure to rising secular demand for data and analytics,
michael.meltz@jpmorgan.com improving credit/financial markets, and significant operating leverage. Most of
David Lewis, CPA AC the Infomation Services names have strong competitive positions and attractive
(1-212) 622-6435 expansion opportunities. These companies (including credit rating agencies, credit
david.m.lewis@jpmorgan.com bureaus, financial databases, etc.) provide “need-to-have” information for
Nadia Lovell professionals, thus typically enjoy good pricing flexibility and high customer renewal
(1-212) 622-4885 rates. Modest recoveries in jobs, capital markets, and M&A could imply upside to
nadia.s.lovell@jpmorgan.com estimates for many of these stocks—with improving revenue growth bolstered by
J.P. Morgan Securities LLC highly fixed cost bases. On the negative side, a few educational/book publishers
Bloomberg JPMA MELTZ <GO> (such as McGraw-Hill and John Wiley) are the most exposed names to state budget
pressures—although we think both operators are diversified and benefiting from
Michael A. Meltz
Belo Corp. BLC N
share gains. The Information Services stocks have performed relatively well in 2H10,
CBS Corporation CBS OW and investor rotation (to high-quality, subscription-oriented names) has likely been a
D&B DNB N
Equifax EFX OW
positive (especially for FactSet, Solera, IHS, etc.). In addition, the Infomation
Experian plc EXPN.L OW Services names tend to have a mid-cap “GARP-y” skew—so potential M&A “halo”
IHS Inc. IHS N
Martha Stewart Living Omni. MSO N
could also remain favorable. We remain positive on the ratings agencies (Moody’s,
Meredith Corporation MDP N McGraw-Hill) and credit bureaus (Experian, Equifax), and also like a handful of
Moody's Corp. MCO OW
Primedia PRM N
esoteric database/analytics providers such as Verisk and Solera.
Sinclair Broadcast Group SBGI N
The McGraw-Hill Companies MHP OW TV & Radio Broadcasters and Magazine publishers will face more challenging
Thomson Reuters TRI N comparisons in 2011. Most operators benefited in 2010 from an economic recovery,
Verisk Analytics VRSK OW
a pickup in auto advertising, and heavy Political spending. For TV, we expect
David Lewis industry ad revenues to decline roughly 5% due entirely to a big drop-off in Political
FactSet Research Systems FDS N
Gartner Inc. IT OW spending (which is typical in “odd years” following major elections). We’re
John Wiley & Sons JWa OW assuming 2-3% growth in underlying core TV advertising—with National spending
Solera Holdings SLH OW
continuing to outpace Local. We’re keeping a close eye on Washington, D.C.
Nadia Lovell newsflow regarding retransmission consent battles (between broadcasters and
The Knot, Inc. KNOT N
cable/telco operators), but generally view the issue as headline noise. For Magazine
publishers, we expect just modest advertising growth industrywide. Rising paper
prices (via lagged demand/supply dynamic) could temper margins somewhat. While
most publishers have been slow to develop/announce mass tablet/iPad strategies, our
sense is that a flood of activity will occur in 2011.
Best Idea – John Wiley & Sons (JWa)
We think John Wiley & Sons (JWa) is well positioned to benefit from the ongoing
shift of content to digital distribution platforms. The transition could help Wiley post
accelerating unit sales and profits—as new distribution channels increase content
accessibility and eliminate traditional publishing costs. Globally, Wiley is benefiting
from secular trends of 1) increased spending on professional and higher education
and 2) rising demand for “knowledge” services. We find JWa’s valuation attractive
at 14.5x C2011E EPS, with a free cash flow yield of 9%. We also believe the stock
could get a boost near term from a potential strong Holiday season for e-readers/
tablets and e-books. Our December 2011 price target is $49, 14x our C2012E EPS.
John Wiley & Sons (JWa) – Overweight – Dec 11 Price Target: $49
$45.27 $45.75 $34.96 April $2.58 $2.77 $3.20 16.3 14.1 $2,728
Risks: Open access legislative policies; a sustained economic downturn; technology diminishing the value of Wiley content; foreign
currency exposure; potential exposure to credit risk. * EPS estimates and price target as of 12/10/10.
93
December 2010
94
December 2010
Alternative Energy
Technology
Revved Up on LEDs for General Lighting, Solar Seeing Clouds on the Horizon
Christopher Blansett AC Looking ahead to 2011, we continue to support a portfolio approach to alternative
(1-415) 315-6708 energy investing within our coverage universe. In this context, we remain positive on
christopher.r.blansett@jpmorgan.com LED-related investment themes and negative on solar-related investments. While
Brian K Lee both groups exhibit secular growth characteristics that are apt to drive multiple
(1-415) 315-6710 expansion in an improving market environment next year, we see a better risk/reward
brian.k.lee@jpmorgan.com profile for LED names over the next 12 months. This is being driven by our view of
J.P. Morgan Securities LLC renewed momentum in LCD-backlighting demand and an upcoming inflection point
Bloomberg JPMA BLANSETT <GO> for LED technology in the broader general lighting end market. Moreover, we view
the LED sector as much more secularly investable given the absence of any need for
Applied Materials, Inc. AMAT OW
Ascent Solar Technologies ASTI N
government subsidization or regulatory drivers to spur demand growth. This bodes
Broadwind Energy BWEN N well, in our view, for overall risk/reward relative to other groups in our coverage
Cree CREE OW
Energy Conversion Devices, Inc. ENER UW
universe.
Evergreen Solar ESLR N
First Solar, Inc. FSLR UW On solar, we believe fundamentals are likely to take somewhat of a breather in 2011
MEMC Electronic Materials Inc. WFR UW given the blistering pace of demand this year. Moreover, we believe there is still
Rubicon Technology RBCN OW
SunPower SPWRA UW another significant leg down with respect to the German regulatory framework for
Varian Semiconductor VSEA OW supporting solar PV over the next 12 months. In short, we believe Germany’s already
Veeco Instruments VECO OW
outsized and growing liability for solar subsidies will require the country to make
another larger structural reduction to its financial support of solar PV and/or
implement an outright cap on installations. Given that Germany represents >50% of
the overall demand for solar, we see this as a significant risk to the overall health of
the sector that is currently not being fully factored into most investors’ expectations
at this time.
Best Idea – Cree (CREE)
Cree (CREE) remains our top pick within Alternative Energy heading into 2011.
Our positive outlook for Cree dovetails with our LED industry call that the general
lighting market will undergo a demand inflection point in its adoption of LED
technology over the next 12 months. With general lighting estimated to account for
70-80% of sales by the end of 2011, Cree is by far the most levered LED stock to this
emerging investment theme. We believe the company will soon release next-gen
LED products that will further reduce the cost of LED-based general lighting
products driving acceleration in the adoption rate. As the company’s exposure to the
lower-margin and more volatile consumer electronics sector decreases, we think
investors will increasingly associate the company with the significant long-term
growth opportunity that exists for LED demand for the general lighting application.
We believe growth investors will increasingly become interested in CREE stock
likely driving multiple expansion and outperformance in the stock.
Cree (CREE) – Overweight – Dec 11 Price Target: $77
12/7/2010 High Low FY End Last (A) Cur (A) Next (E) Cur Next (mil.)
$67.98 83.38 47.30 June $0.52 $1.56 $2.21 43.6 30.8 $7,373
95
December 2010
Applied & Emerging Technologies

Getting Smart About the Grid
Paul Coster, CFA AC We believe that the transition to a smart electric grid will return to the forefront with
(1-212) 622-6425 investors in 2011. The economy is running below full capacity, and natural gas prices
paul.coster@jpmorgan.com are down 36% year-to-date, so an energy crisis appears to have been postponed;
Mark Strouse, CFA smart grid pure plays are trading at depressed multiples and investor interest in the
(1-212) 622-8244 Smart Grid has ebbed. That said, the leading pure plays have been posting strong
mark.w.strouse@jpmorgan.com sales growth in 2010 and financials, backlog, and visibility have improved, stimulus
Marija Krgovic funds are flowing, and the regulators are supportive. The disconnect is partly
(1-212) 622-5552 explained by competitive rivalry, and partly by adoption risks, with limited visibility
marija.krgovic@jpmorgan.com into 2012. In 2011, we expect European meter contracts to be awarded that will yield
J.P. Morgan Securities LLC visibility into 2012-13 growth. We believe J.P. Morgan forecasted GDP growth
Bloomberg JPMA COSTER <GO> should also lead to higher y/y capex spending by domestic utilities. Any hint of an
energy crisis and multiples should expand across the space, so we think investors
Avid Technology AVID OW
Coinstar Inc. CSTR N
should be building a portfolio now.
Comverge, Inc. COMV OW
Cubic Corp CUB N Best Idea – Itron (ITRI)
Diebold, Incorporated DBD UW
DigitalGlobe, Inc. DGI OW Itron (ITRI) is our top pick for 2011. We believe there are several catalysts on the
Dolby Laboratories, Inc. DLB OW
DTS, Inc. DTSI UW horizon for ITRI including domestic smart meter contracts (primarily coop/multi-
Echelon Corporation ELON N utilities) and large international contracts. Backlog will likely decline through mid-
Elster Group SE ELT OW
EnerNOC Inc. ENOC OW 2011 as ITRI executes under existing domestic contracts; however, we expect this
ESCO Technologies Inc. ESE N trend to reverse in 2H11 as ITRI is well positioned to participate in “mega”-contracts
FLIR Systems Inc FLIR N
Garmin Ltd. GRMN UW in Europe (France, United Kingdom, Italy, Spain, etc.) as well as domestic
GeoEye, Inc. GEOY N coop/multi-utility contracts across electric, gas, and water. We believe investor
iRobot Corporation IRBT N
Itron, Inc ITRI OW concerns regarding visibility into 2012 revenues have depressed ITRI’s multiple,
Ituran Location and Control ITRN UW presenting an opportunity for long-term investors to add to positions.
L-1 Identity Solutions ID N
LoJack Corp LOJN OW
NCR Corporation NCR N Itron (ITRI) – Overweight – Dec 11 Price Target: $95
Nice Systems NICE OW
Novatel Wireless NVTL UW
OmniVision Technologies OVTI N 12/7/2010 High Low FY End Last (A) Cur (E) Next (E) Cur Next (mil.)
Plantronics Inc PLT N $54.22 $81.95 $52.03 December $2.12 $4.07 $4.55 13.3 11.9 2,191
RealD Inc. RLD OW
Sierra Wireless Inc. SWIR N
Sonic Solutions SNIC OW
Synaptics Inc. SYNA OW
TASER International Inc. TASR N
TeleCommunication Systems, TSYS OW
Inc.
TeleNav, Inc. TNAV N
Trimble Navigation TRMB N
Verint Systems, Inc. VRNT N
Zebra Technologies ZBRA UW
Zoran Corp ZRAN OW
96
December 2010
Business & Education Services

Temp Help Continues to Shine; Regulatory Uncertainty in Education Should Diminish in 2011
Andrew C. Steinerman AC U.S. temp help shows continued strength despite lethargic labor sentiment.
(1-212) 622-2527 Staffing companies have displayed collective optimism in recent months, reflecting
andrew.steinerman@jpmorgan.com strong improvements in global temp help fundamentals. We have long maintained
Jeffrey Y. Volshteyn that temp help is concurrent with the economy and a leading read on the labor
(1-212) 622-2940 market. Although we have yet to see a sustained inflection in full-time labor
jvolshteyn@jpmorgan.com sentiment, both temp-help and perm-placement fees have shown significant
Molly R. McGarrett improvements. Staffers are poised to benefit from both cyclical and secular
(1-212) 622-5841 resurgence, as companies continue to maintain flexibility in a period of permissive,
molly.r.mcgarrett@jpmorgan.com but uncertain, economic growth.
Most recently, light industrial staffing, which had led the resurgence in temp help in
Bloomberg JPMA Steinerman <GO>
2010, appears to be leveling off (albeit at high rates). IT staffing, the first
Andrew C. Steinerman professional staffing segment to show year-over-year growth in 2010, remains strong
American Reprographics ARP N going into 2011. We are also encouraged that accounting staffing has rebounded to
Company
Apollo Group APOL OW positive y/y growth in 3Q10 and we expect strong growth to continue throughout this
Bridgepoint Education BPI N cycle.
Capella Education CPLA N
CDI Corp. CDI N
Cintas CTAS N
We believe the base-case scenario laid out by J.P. Morgan economists remains
DeVry DV OW conducive for temp help growth in 2011. We expect bill rates to increase when the
Education Management EDMC N
G&K Services GKSR UW
unemployment rate decreases, which will likely improve staffing gross margins.
Iron Mountain IRM OW
ITT Educational Services Inc ESI N Regulatory/legislative worries in education should diminish in 2H11. Despite the
Manpower Inc MAN OW malaise of the education stocks in 2010, we remain net constructive on selective for-
Resources Global Professionals RECN N
Robert Half International RHI OW profit education services (4PES) companies. We favor the education services
SFN Group SFN UW companies with less regulatory exposure and most ability to evolve (APOL, DV,
Strayer Education STRA OW
UniFirst UNF N STRA).
Jeffrey Volshteyn The pullback in education stocks in 2010 was due to the protracted uncertainty
Towers Watson TW OW related to the scope and timing of the Education Department’s gainful employment
proposal. We continue to think that this proposal (which is likely to become a rule in
early 2011) will 1) try to keep a formulaic relationship between student debt and
post-graduation earnings and 2) try to avoid unintended consequences. That said,
increasing Congressional opposition to the rule, particularly after the elections, could
still make the proposal somewhat more balanced. We believe that once the regulatory
items shift from the foreground to middle ground, education services stocks should
lift. We note that the sector now trades at 9x NTM P/E, the lowest level in a decade.
Best Idea – Robert Half (RHI)
Robert Half (RHI) is the “King Kong” of accounting staffing with ~20% market
share in the U.S. and should benefit from much faster growth and higher profitability
than most staffing companies through the cycle. In addition, Robert Half primarily
addresses mid-market companies, enabling it to avoid client concentration and hence
command better pricing power over time. As we look at valuation, RHI is trading at
1.3x EV/S, which represents a discount of ~20% to its normal expansionary cycle
multiple of 1.6x. So, assuming a conducive economy, RHI should see expanding
multiples, better margins, and strong revenue growth during 2011.
Robert Half (RHI) – Overweight – Dec 11 Price Target: $38
$29.73 $32.25 $21.16 December $0.24 $0.43 $1.02 69.1 29.1 $4,375
97
December 2010
Communications Equipment & Data Networking

Smartphones Remain the Bright Spot; Government Spending Shadow Likely to Lengthen
Rod Hall, CFA AC Our coverage universe is influenced by several key issues: 1) carrier capex;
(1-415) 315-6713 2) enterprise spending; and 3) consumer demand for handsets. Beginning with carrier
rod.b.hall@jpmorgan.com capex, a significant historical driver has been carrier top-line trajectory which we
J.P. Morgan Securities LLC believe is influenced heavily by employment levels. Given the J.P. Morgan outlook
James M Kisner for U.S. unemployment to decrease just modestly, we would expect U.S.-based
(1-415) 315-5627 communication equipment carriers to remain cautious in their investments with a
james.m.kisner@jpmorgan.com focus toward spending that corresponds to expected revenue growth. However, we
J.P. Morgan Securities LLC highlight two significant sector subtrends that should overwhelm the macro picture.
Rajat Gupta First, we forecast that wireless infrastructure spending will decline 2%y/y in 2011 as
(91-22) 6157-3347 North American carriers digest significant WCDMA and CDMA builds in 2010.
rajat.gupta@jpmorgan.com Second, we believe the optical market will benefit from continued internet traffic
J.P. Morgan India Private Limited growth and will grow 5% y/y.
Bloomberg JPMA HALL <GO> Turning to enterprise demand, we believe that continued economic recovery and
data-center investments will likely be a tailwind for the Enterprise Switching and
Alcatel-Lucent ALUA.PA OW
Ciena Corp. CIEN UW Routing markets. However, we believe these product segments will be most affected
Cisco Systems CSCO OW by potential fiscal drag (particularly from strains in state/local government budgets)
Corning GLW N
Ericsson ERICb.ST UW discussed in the J.P. Morgan outlook. We’ve balanced these factors in our forecasts
Ericsson ADR ERIC UW for CSCO, which represents 69% and 58% of the global Switching and Routing
F5 Networks FFIV OW
Juniper Networks JNPR OW markets, respectively. We currently model Cisco’s CY11 Switching revenue to grow
Motorola Inc. MOT UW 9.4% y/y vs. our estimate of +19.9% for 2010. We forecast CSCO’s CY11 Routing
Nokia NOK1V.HE OW
Nokia ADR NOK OW sales to increase just 1.7% y/y in 2011 vs. +14.5% in 2010.
QUALCOMM QCOM OW
Research in Motion RIMM OW Finally, we believe the key theme in handsets will be the continued global adoption
Tellabs TLAB N
of smartphones. We forecast 2011 handset shipments to increase 8.6% y/y, while we
forecast smartphone shipments to grow by 48.7% in the same period. We expect the
smartphone segment to benefit as vendors work to drive down the cost of mobile
computers. We also believe QCOM is planning to cut prices of its 3G chipsets in
2011, another potential driver of lower handset prices and increasing penetration.
Best Idea – Qualcomm (QCOM)
We believe the best way for investors to play the ongoing growth in smartphone
penetration is Qualcomm (QCOM), which benefits from the market trends on two
fronts. First, roughly two-thirds of QCOM’s earnings come from royalties that are
directly related to industry handset revenues. We believe that demand for
smartphones is highly elastic, and therefore we expect that industry revenues will
grow as price declines in handsets and smartphones are more than offset by unit
volume increases. We in turn anticipate that Qualcomm’s royalty (QTL) business
could continue to surprise investors to the upside as industry revenues grow.
Qualcomm is also rapidly gaining ground in its other key business—mobile chipsets
(QCT). Qualcomm’s Snapdragon integrated application processor/baseband chipsets
offer excellent performance combined with good battery efficiency. We believe this
combination along with a potentially aggressive pricing strategy and integration with
the major mobile OSs will help QCOM to continue gain ground in the mobile
semiconductor space.
Qualcomm (QCOM) – Overweight – Dec 11 Price Target: $53
$48.47 $49.80 $31.63 September $2.36 $2.82 NM 17.2 NM $78,411
98
December 2010
Communications Infrastructure Technology

EMS Looks Better Positioned for 2011 than Electronic Components and Enterprise Voice
Steven J. O’Brien AC Amid one of least-liked and least-trusted bull markets and tech market recoveries,
(1-212) 622-6554 electronic manufacturing services (EMS) remains one of the least-liked and least-
steven.obrien@jpmorgan.com trusted technology industries. We believe the U.S. EMS vendors, in particular Jabil
J.P. Morgan Securities LLC Circuit and Flextronics, may be underappreciated despite posting continued
Bloomberg JPMA OBRIEN <GO> operating profitability and positive free cash flow through the economic downturn.
Current inventory levels remain healthy with Jabil’s and Flextronics’s both below the
Amphenol APH N
CommScope CTV rs
historical average of 50 days. ROIC for both is greater than 25% and looks
Flextronics FLEX OW sustainable driven by improving mix of high-margin industrial, medical, and
Jabil Circuit JBL OW
Mitel Networks MITL N
cleantech outsourcing, and healthy, but not overheated, facility utilization.
Molex MOLX UW
Powerwave Technologies PWAV N Despite having perhaps the most solid foundations in their histories, EMS companies
ShoreTel SHOR OW are, by and large, trading near trough valuations which we believe implies forecasts
Tyco Electronics TEL UW
could be subject to major correction. On the contrary, we believe the economic
backdrop looks fairly stable—J.P. Morgan economists expect real GDP growth to
accelerate gradually through 2011, while growth in business investment in equipment
is forecast to remain at 10-12% in 2011, averaging 11% for the year, albeit down
from 2010’s 18% growth.
Furthermore, the J.P. Morgan Equity Strategist expects S&P 500 multiple expansion
in 2011. If there were a broader market expansion, we believe EMS vendors which
are already trading at trough levels could be beneficiaries. We calculate a one-point
P/E expansion represents 13% upside to Jabil’s share price and 12% to Flextronics’s.
Electronic component vendors, Amphenol, Molex, and Tyco Electronics, should
also benefit from healthy business investment, but each have peaking-to-declining
operating margin and currently face a headwind of 1-2 quarters from elevated
distribution inventories. In addition, all have significant exposure to European capital
investment and the potentially dampening effects of the reemerging sovereign crisis.
While we expect enterprise voice vendors to capitalize on healthy business
investment as enterprises typically capture a compelling short-term payback on new
VoIP systems, we continue to believe employment levels are the primary catalyst for
system upgrades. Hence, with J.P. Morgan’s expectation for just modest
improvement in unemployment, ShoreTel and Mitel could face another challenging
year in 2011. Tight state and local finances are also a headwind—we estimate
ShoreTel and Mitel derive 18% and 14% of revenue, respectively, from the
government and education verticals.
Best Idea – Jabil Circuit (JBL)
We are attracted by Jabil Circuit’s large relative exposure to the high-margin, long-
product-lifecycle industrial and medical end markets as well as its lower relative
exposure to computing and consumer electronics where margins are thin. While its
EMS business has returned to normal margins, we expect additional margin lift and
earnings growth driven by its rapidly growing components business. Jabil trades at a
steep discount valuation compared to historical metrics—therefore, we see strong
potential for multiple expansion in the event of modest economic improvement.
Jabil Circuit (JBL) – Overweight – Dec 11 Price Target: $18
$17.05 $18.49 $10.17 August $1.52 $2.08 $2.39 8.2 7.1 $3,714
99
December 2010
Computer Services & IT Consulting

Mixed Outlook for a Defensive Group; Play Offense with CTSH
Tien-tsin Huang, CFA AC Given the J.P. Morgan Economics and Strategy views for 2011, which call for
(1-212) 622-6632 continued economic growth with minimal job growth, and a rising stock market, we
tien-tsin.huang@jpmorgan.com expect outperformance to likely come from higher-beta stocks with strong balance
Reginald L Smith, CFA sheets and expect our sector, which tends to be viewed as defensive, to record mixed
(1-212) 622-6743 performance. For the payment processors, regulation will be the focus, with winners
reginald.l.smith@jpmorgan.com and losers likely to be better understood by mid-year. Regulation will also be the
Puneet Jain theme for FinTech, as spending on regulation compliance could be offset by debate
(1-212) 622-1436 over price concessions. For the low-beta payroll/HR providers, economic growth
puneet.x.jain@jpmorgan.com even without an improving employment outlook would be neutral to positive, in our
Stephanie Davis view, as sales execution and innovation can offset a low base established by the
(1-212) 622-6591 tough macro backdrop. For the IT and BPO Services providers, we see a more
stephanie.j.davis@jpmorgan.com
favorable trend toward outsourcing and offshoring (absent a shock, we are of the
J.P. Morgan Securities LLC view that the secular trends can overcome a contracting or softer-than-forecast
Bloomberg JPMA HUANG <GO> economy) which should drive above-average growth for companies that are closer to
their clients and have higher exposure to clients spending on regulatory compliance.
Tien-tsin Huang
Accenture plc ACN OW
The real benefit, in our view, to a rising stock market for the IT and BPO Services
Automatic Data Processing ADP N providers should be the opportunity to sustain multiples over rising earnings.
Broadridge BR N
Cognizant CTSH OW
Computer Sciences CSC N
Best Idea – Cognizant (CTSH)
ExlService Holdings Inc. EXLS N
FIS FIS N Given the J.P. Morgan Economics and Strategy views for 2011, which call for
Fiserv, Inc. FISV N economic growth and a rising stock market, our best idea is Cognizant (CTSH) for
Genpact G N
Global Cash Access GCA N its premium growth and relatively low earnings risk. CTSH has consistently
Global Payments GPN OW demonstrated the ability to outgrow the market through its investments in sales and
Green Dot GDOT OW
Heartland Payment Systems HPY N marketing functions and strong offshore delivery model. We think these investments
MasterCard MA OW will continue to drive premium growth in 2011—we expect top-line growth in the
Paychex Inc PAYX UW
VeriFone PAY rs mid-twenties in 2011 compared to mid- to high-teens growth in the offshore IT
Visa Inc. V OW services industry. Furthermore, the company should also benefit from a secular trend
Western Union WU OW
WNS Holdings Ltd. WNS UW toward offshoring driven by clients’ desire to capture lower IT costs. Moreover,
Wright Express WXS N increased regulations in its clients’ industries (notably financial services and
Reginald Smith healthcare make up ~68% of revenues) should result in increased client spending on
Alliance Data ADS OW technology. Finally, we think that CTSH can hold its margins (of 19-20% on non-
Cardtronics, Inc CATM OW
TNS, Inc TNS OW GAAP basis) steady given its lower exposure to Indian rupee appreciation and
potentially rising wages. In a growing economy and rising stock market, we see little
Puneet Jain
Syntel, Inc. SYNT N downside risk to the CTSH 2011E P/E multiple (of 26x), which is about in line with
Virtusa Corp. VRTU N current growth expectations. However, if the economy deteriorates, we see risk of
multiple contraction (although we still have confidence in earnings absent another
economic shock).
Cognizant (CTSH) – Overweight – Dec 11 Price Target: $80

$69.18 $71.29 $42.08 December $1.90 $2.36 $2.67 29.3 25.9 $20,995
100
December 2010
IT Hardware
Enterprise Reinvestment Cycle to Grind on with or Without Full Macro Recovery
Mark Moskowitz AC In 2011, the macroeconomic road to recovery may not be pothole-free, but we
(1-415) 315-6704 believe that parts of IT Hardware will motor on. The key driver is the ongoing
mark.a.moskowitz@jpmorgan.com enterprise reinvestment cycle related to data center efficiency. Here, important
Anthony Luscri drivers will be increasing investments in storage, servers, virtualization, and security,
(1-415) 315-6702 as well as business analytics and intelligence solutions. In contrast, PCs and printers
anthony.s.luscri@jpmorgan.com should start to exhibit late-cycle doldrums. PCs stand to be under pressure from the
Mike Kim tablet invasion and elongating useful lives. Meanwhile, printers stand to exhibit signs
(1-415) 315-6755 that the laggard recovery in install activity is ending.
mike.j.kim@jpmorgan.com
J.P. Morgan Securities LLC We expect data center efficiency projects to prop up enterprise IT spending with or
Bloomberg JPMA MOSKOWITZ <GO>
without a full macro recovery. For end customers, data center efficiency stands to be
an important metric for evaluating internal costs, productivity, and thereby
Agilent Technologies A N competitiveness. We think that end customers increasingly will regard information
Apple Inc. AAPL OW
Brocade BRCD OW
technology as a utility that underpins their competitiveness. In other words, as long
Dell Inc. DELL UW as the lights (technology) work, things are good. If there is a blackout (part of the
EMC EMC N
Emulex Corp. ELX UW
data center goes down), then competitiveness has been hurt.
Hewlett-Packard HPQ OW
IBM IBM OW Separately, we believe that systems, services, and software companies will steadily
Lexmark International LXK N
National Instruments NATI N
move to becoming full-fledged one-stop IT shops. The impetus will be to establish a
NetApp NTAP OW diverse model to address the mega-shift to data center efficiency solutions. We think
QLogic Corporation QLGC N
Seagate Technology STX N
that the shift could result in best-of-breed providers becoming highly prized. In our
STEC STEC N view, storage, networking, and security pure plays are key tactical assets.
Voltaire VOLT rs
Western Digital WDC N
Xerox Corporation XRX N
Set against these shifts to data center efficiency and one-stop IT shop capabilities, we
believe that there is suitable downside support to stocks having enterprise IT
exposure. We think that companies with high exposure to networked storage and
server virtualization projects will be the lead beneficiaries. Examples include
NetApp and EMC.
Best Idea – NetApp (NTAP)

NetApp (NTAP) is our best idea for 2011, owing to its growth stature and pure-play
status in networked storage, one of the faster-growing enterprise subsegments. The
enterprise reinvestment cycle and increasing dependence on utility-like models stand
to increase the need for 1) networked storage and 2) plug-and-play solutions. We
believe that NetApp’s scalable, software-centric storage solutions fit in well. In
particular, the company’s ability to provide a plug-and-play experience for the
customer should sustain NetApp’s 20%-plus top-line growth potential. Key reasons:
1) the company’s solutions run on a singular operating system and file structure; and
2) its solutions are easily integrated into virtualization environments.
NetApp (NTAP) – Overweight – Dec 11 Price Target: $61

$53.63 $57.96 $28.92 April $1.51 $2.06 $2.26 26.0 23.7 $19,383
101
December 2010
Semiconductors
Looking Ahead to 2011: Inventory Correction in Progress; Waiting on Fundamental Bottom
Christopher Danely AC Looking ahead to 2011, we believe we are in the middle of a semiconductor
(1-415) 315-6774 inventory correction similar to 2004 and 2006, which typically occurs in three stages.
chris.b.danely@jpmorgan.com The first stage is when a semiconductor company lowers revenue estimates but
Venk Nathamuni doesn’t lower utilization rates or spending or inventory and does not acknowledge
(1-415) 315-6783 the downturn. The second stage is when the company acknowledges the downturn
venkatesh.r.nathamuni@jpmorgan.com and cuts utilization rates and spending and inventory—and is also when earnings
Shaon Baqui drop the most. The third stage is when the company lowers estimates again, but its
(1-415) 315-6766 earnings do not decline as much since the bulk of the earnings revisions are done.
shaon.i.baqui@jpmorgan.com
J.P. Morgan Securities LLC Many semi companies have gone through stage one
Many semiconductor companies have gone through stage one, as the downturn has
Bloomberg JPMA DANELY <GO>
already hit companies with exposure to the PC and consumer end markets (~58% of
Christopher Danely semi demand combined) such as INTC, AMD, and TXN. We believe the inventory
Advanced Micro Devices AMD N correction started as INTC and AMD lowered 3Q10 estimates on PC end market
Altera ALTR N
Analog Devices ADI N weakness. TI followed by guiding 4Q10 below the seasonal norm, citing slower
Avago Technologies AVGO N orders from the PC and consumer end markets.
Cypress Semiconductor CY UW
Intel INTC N
Linear Technology LLTC OW Expect weakness to spread to communications and industrial segments
Maxim Integrated Products MXIM UW We expect the weakness to spread next to the communications and industrial end
Microchip Technology MCHP N
National Semiconductor NSM N markets (~35% of total semi demand), which is typical of a downturn. We expect
ON Semiconductor Corporation ONNN N ALTR and XLNX to lower estimates as ZTE and Cisco reported slowing demand
RF Micro Devices RFMD UW
Texas Instruments TXN N and rising inventory.
Xilinx XLNX N
We believe the time to transition could occur in 1Q11
Venk Nathamuni
Fairchild Semiconductor FCS OW We believe the best time to buy semiconductor stocks is after the second stage of the
Intersil Corporation ISIL N downturn, after semiconductor companies lower utilization rates, which generally
sets in motion a fundamental bottom as it usually means most of the negative
earnings revisions have occurred. We expect this to happen some time during 1Q11.
Semiconductor revenues to increase 5% in 2011

We expect total semiconductor revenues to increase 5% y/y in 2011 to $314 billion,
with total units increasing 6% y/y and ASPs decreasing 1% y/y. Our 2011 estimate
equates to normal seasonal growth every quarter.
Capacity to outgrow wafer demand in 2011

For 2011 we expect total capacity to increase 8% y/y, slightly above the normal
y/y increase of 7%. We expect wafer demand to increase 4% y/y, below the normal
y/y increase of 8%.
Best Idea – Linear Technology (LLTC)

Our top relative pick in semiconductors continues to be Linear Technology (LLTC)
due to its history of outperformance during downturns and its exposure to the Apple
food chain, which appears to be a bright spot for technology demand.
Linear Technology (LLTC) – Overweight – Dec 11 Price Target: $31

$34.13 $34.62 $25.87 June $1.70 $2.20 $2.41 15.5 14.2 $7,693
102
December 2010
SMid Semiconductors
Focus on Product Cycle and Market Share Gains
Harlan Sur AC Although our global semiconductor team forecasts semiconductor industry revenues
(1-415) 315-6700 to grow a modest 5% in C2011, we continue to focus on those companies that are
harlan.sur@jpmorgan.com leveraged to new product cycle ramps, share gain opportunities, and exposure to
John S. Ahn connectivity, content, and storage segments of the semiconductor market.
(1-415) 315-6758
john.s.ahn@jpmorgan.com Best Idea (Mid-Cap) – Marvell Technology (MRVL)
We remain confident that Marvell will grow faster than the overall
Bloomberg JPMA SUR <GO> semiconductor market in 2011. Solidly positioned as the largest supplier in the hard
disk drive (HDD) semiconductor market, the company is poised to gain share as the
Atheros Communications ATHR N
Broadcom Corporation BRCM OW competitive environment consolidates, in our view, and we believe the company’s
Cavium Networks CAVM OW wireless and embedded processing segments will exhibit strong growth as design
Entropic Communications ENTR OW
LSI Corporation LSI N wins that started to ramp in 2010 continue to ramp to full run rate in 2011.
Marvell Technology Group MRVL OW
Mellanox Technologies MLNX rs Benefiting from HDD share gains at Hitachi and Seagate; wireless ramp into
NVIDIA Corporation NVDA UW
NXP Semiconductors NXPI N RIM continues and China wireless should contribute to revenues in 2011.
PMC-Sierra PMCS OW Marvell commenced its ramp into Hitachi in July (2.5” form factor drives,
SanDisk Corp SNDK N
320GB/disk) and since then has started to ramp into Hitachi’s 375 GB/disk program
as well. We estimate the total opportunity for Marvell at Hitachi is around 55-
65 million units per year. The company is on track to start to ramp share into Seagate
in mid-2011. In the wireless markets, Marvell is in the midst of ramping share into
RIM (Curve 3G, Pearl 3G, Bold, and Torch models) and has commenced production
shipments of its TDSCDMA basebands into China Mobile. In embedded processors,
the company’s initial ramp is targeted for game consoles (Microsoft Kinect) and
consumer electronic systems—we expect processor shipments into tablets will
commence in 2011.
Marvell Technology (MRVL) – Overweight – Dec 11 Price Target: $24

$20.19 $22.87 $13.87 January $0.99 $1.65 $1.74 12.2 11.6 $13,136
Best Idea (Small Cap) – Entropic Communications (ENTR)

Entropic Communications (ENTR) is one of the best ideas in our universe to
take advantage of the proliferation of high-definition and multimedia content
within the home, in our view. Telco, satellite, and cable pay TV operators in the
U.S. are adopting Entropic’s MoCA (multi-media over coax) chip solutions to enable
multi-room DVR and over-the-top services. We estimate the MoCA semiconductor
market is growing at a 35-40% rate per year and Entropic should grow revenue and
earnings at a 25%-plus rate over this same period.
Entropic Communications (ENTR) – Overweight – Dec 11 Price Target: $12

$10.28 $10.50 $2.91 December $.00 $0.53 $0.80 19.4 12.9 $863
103
December 2010
Software
A Time for Value
John DiFucci AC While the domestic IT spending environment appears to be improving modestly in
(1-212) 622-2341 the private sector, state and local governments look to experience continued pressure,
john.s.difucci@jpmorgan.com and the U.S. Federal government continues to do what it has for some time—spend.
J.P. Morgan Securities LLC Even as effects from the federal stimulus package wane, our greatest concern is
Bloomberg JPMA DIFUCCI <GO> rooted in international markets, primarily Europe. We believe that governments
account for a surprisingly much greater portion of IT spending (both direct and
BMC Software, Inc. BMC UW
CA Technologies CA OW
indirect) in Europe, perhaps 30-40% of spending in the region. Since Europe
Citrix Systems, Inc. CTXS N accounts for about a third of worldwide Software spending, European governments
LogMeIn LOGM OW
McAfee MFE N
account for a material percentage of worldwide Software spending—about 10-15%.
Microsoft MSFT N More than half of Software spending in Europe comes from three countries: the
Novell Inc NOVL rs
Oracle Corp. ORCL OW
United Kingdom, Germany, and France. Though Germany’s economy is healthier
PROS Holdings PRO N than most, the governments of all three of these countries have announced budget
Qlik Technologies Inc. QLIK OW
Quest Software QSFT OW
cuts, and the bailouts of first Greece, now Ireland, and the potential for others to
Red Hat Inc RHT N falter will incrementally stress the public coffers of these three leaders. We believe
SolarWinds SWI OW the first half of 2011 could be particularly challenging as Germany starts a new fiscal
Symantec SYMC OW
Taleo TLEO OW year in January, while the United Kingdom and France start anew in April. See our
TIBCO Software Inc TIBX OW previous notes on the subject: “The Other European Exposure,” dated September 29,
VMware VMW N
and “Europe and the Public Sector, Part II,” dated November 17.
In this context, we believe that richly valued Software names with significant
European exposure, a high percentage of transactional business (license), and high
public sector exposure are most vulnerable. In addition, this backdrop sets a stage for
increased market volatility. Hence, we believe investors are best served by
considering more value-oriented names at this time.
Best Idea – CA Technologies (CA)

Large-cap names rated Overweight that meet these criteria in some form or another
include CA, ORCL, and SYMC. Smaller-cap names rated Overweight with little
exposure overseas include LOGM, QSFT, SWI, and TLEO. Some of the small-cap
names may continue to see material upside from here, but not all investors can invest
enough to make a difference in their portfolio’s performance. Of the large-cap
names, we believe Oracle is perhaps the best-run business in the industry, though it
does have material exposure in Europe. In addition, it is difficult to identify potential
catalysts for Symantec.
Of all these names, CA Technologies (CA) remains deep-value, trading at an
estimated 11% CY10 free cash flow yield (excluding acquisitions), and cash flow
should increase from there. It also has identifiable potential catalysts at least through
the first half of 2011, as bookings should accelerate through a period with favorable
timing of renewals. In addition, the company is embarking on a quest to secure a
portion of the evolution of what could be a meaningful expansion of its core market
of data center management—virtualization management and cloud computing.
CA Technologies (CA) – Overweight – Dec 11 Price Target: $27

$24.02 $24.39 $17.70 March $1.62 $1.90 $2.06 12.6 11.7 $12,289
104
December 2010
Software Technology
Riding Recovery to Another Year of Growth
Sterling Auty, CFA AC In our Software Technology universe, 2010 was a big year highlighted by a strong
(1-212) 622-6389 rebound in top- and bottom-line growth, albeit partially from easy comparisons, and
sterling.auty@jpmorgan.com resurgence in M&A activity. This has led to our coverage group advancing 32%
Lauren Choi year-to-date compared to only 13% for the NASDAQ and 10% for the S&P 500.
(1-212) 622-6102 Looking ahead to 2011, we believe our group will once again outperform the market
lauren.choi@jpmorgan.com as a number of our companies are leveraged to both domestic and global economic
Saket Kalia, CFA recovery. An improving employment picture should shift focus back to software
(1-212) 622-6477 application names, and we believe a lot of attention will be paid to companies with
saket.kalia@jpmorgan.com large offshore cash balances in the hopes that another reprieve on taxes for
J.P. Morgan Securities LLC repatriation could lead to large share repurchases driving shares higher. There are a
Bloomberg JPMA AUTY <GO> number of names we think are well suited to benefit from this environment, including
Cadence Design, Synopsys, and Verisign, but our favorite name for 2011 is
Sterling Auty
Advent Software ADVS UW
Blackboard.
Akamai Technologies, Inc. AKAM N
Amdocs DOX OW Best Idea – Blackboard (BBBB)
ANSYS, Inc. ANSS N
Aspen Technology AZPN OW We have never been one to shy away from controversy and our recommendation of
Autodesk ADSK N
Blackbaud Inc BLKB N Blackboard (BBBB) is no different. Key to 2011 performance in our mind will be
Blackboard BBBB OW the 37% of float that is short, with 25 days to cover based on trading volumes. We
Cadence Design Systems CDNS OW
Check Point Software CHKP N believe cash flow will get better in December with improved collections, and the
Comverse Technology CMVT N organic growth in contract value will actually improve 1-2% in 2011, not contract
CSG Systems CSGS N
Fortinet, Inc FTNT N sharply as many of the short-sellers believe. We think such metrics will be enough to
Intuit INTU OW drive short covering and stock outperformance. The main risk is the tough budgetary
Motricity, Inc MOTR OW
Neustar NSR N environment at the state level constraining public university funding which could
Parametric Technology Corp. PMTC OW impact education as a whole and IT in particular. However, we feel such risk is more
Rovi ROVI N
SS&C Technologies SSNC OW than adequately reflected in the stock at these levels.
Synopsys Inc SNPS OW
VeriSign VRSN OW Blackboard (BBBB) – Overweight – Dec 11 Price Target: $52
Websense WBSN UW
Lauren Choi 12/7/2010 High Low FY End Last (A) Cur (E) Next (E) Cur Next (mil.)
Ariba, Inc ARBA OW
Smith Micro Software SMSI OW $42.70 $46.50 $32.55 December $1.42 $1.59 $1.87 26.9 22.8 $1,469
Synchronoss Technologies SNCR N
Syniverse SVR N
Saket Kalia
Mentor Graphics MENT N
Monotype Imaging TYPE OW
105
December 2010
Staff List
Macro
Economics Robert Mellman (1-212) 834-5517 robert.e.mellman@jpmorgan.com
Equity Strategy Thomas J Lee, CFA (1-212) 622-6505 thomas.lee@jpmorgan.com
Equity Technical Strategy Michael Krauss (1-212) 834-5103 michael.krauss@jpmorgan.com
Equity Derivatives & Delta One Strategy Marko Kolanovic (1-212)272-1438 mkolanovic@jpmorgan.com
Accounting & Valuation Dane Mott, CFA, CPA (1-415) 315-5905 dane.mott@jpmorgan.com
Capital Goods/Industrials
Aerospace & Defense Joseph B Nadol III (1-212) 622-6548 joseph.b.nadol@jpmorgan.com
Airfreight & Surface Transportation Thomas R Wadewitz (1-212) 622-6461 thomas.r.wadewitz@jpmorgan
Electrical Equipment & Multi-Industry C. Stephen Tusa, Jr, CFA (1-212) 622-6623 stephen.tusa@jpmorgan.com
Environmental Services / Engineering & Construction Scott Levine (1-212) 622-5609 scott.j.levine@jpmorgan.com
Machinery Ann Duignan (1-212) 622-0381 ann.duignan@jpmorgan.com
Marine Transportation Jonathan B Chappell, CFA (1-212) 622-6412 jonathan.chappell@jpmorgan.com
Consumer
Airlines Jamie Baker (1-212) 622-6713 jamie.baker@jpmorgan.com
Autos, Auto Parts & Tires Himanshu Patel, CFA (1-212) 622-3906 himanshu.patel@jpmorgan.com
Beverages / Household & Personal Care Products John Faucher (1-212) 622-6443 john.faucher@jpmorgan.com
Gaming & Lodging Joseph Greff (1-212) 622-0548 joseph.greff@jpmorgan.com
Homebuilding & Building Products Michael Rehaut, CFA (1-212) 622-6696 michael.rehaut@jpmorgan.com
Packaged Food Terry Bivens (1-212) 622-0326 terry.bivens@jpmorgan.com
Restaurants John Ivankoe (1-212) 622-6487 john.ivaankoe@jpmorgan.com
Retailing – Broadlines & Department Stores / Food Charles Grom, CFA, CPA (1-212) 622-6527 charles.grom@jpmorgan.com
Retailing – Hardlines Christopher Horvers, CFA (1-212) 622-1316 christopher.horvers@jpmorgan.com
Retailing – Specialty Brian J Tunick (1-212) 622-6449 brian.tunick@jpmorgan.com
Tobacco Rae Maile (44-20) 7155 6102 rae.maile@jpmorgan.com
Energy
Electric Utilities & Independent Power Producers Andrew Smith (1-713) 216-7681 andrew.l.smith@jpmorgan.com
Energy MLPs Xin Liu, CFA (1-212) 622-4915 xin.liu@jpmorgan.com
Integrated Oil & Gas Katherine Lucas Minyard (1-212) 622-6402 katherine.l.minyard@jpmorgan.com
Oil & Gas Exploration & Production Joseph Allman, CFA (1-212) 622-4864 joseph.d.allman@jpmorgan.com
Oil Services & Equipment J. David Anderson, PE, CFA (1-212) 622-6684 jdavid.anderson@jpmorgan.com
Financials
Banks – Large Cap & Trust and Processors Vivek Juneja (1-212) 622-6465 vivek.juneja@jpmorgan.com
Banks – Mid- and Small Cap Steven Alexopoulos, CFA (1-212) 622-6041 steven.a.alexopoulos@jpmorgan.com
Brokers, Asset Managers & Exchanges Kenneth B Worthington, CFA (1-212) 622-6613 kenneth.b.worthington@jpmorgan.com
Insurance – Life Jimmy S Bhullar, CFA (1-212) 622-6397 jimmy.s.bhullar@jpmorgan.com
Insurance – Non-Life Matthew G Heimermann (1-212) 622-6545 matthew.g.heimermann@jpmorgan.com
REITs / Real Estate Services Michael W. Mueller, CFA (1-212) 622-6689 michael.w.mueller@jpmorgan.com
REITs / Real Estate Services Anthony Paolone, CFA (1-212) 622-6682 anthony.paolone@jpmorgan.com
Health Care
Biotechnology Geoffrey Meacham, Ph.D (1-212) 622-6531 geoffrey.c.meacham@jpmorgan.com
Healthcare Information Technology Atif Rahim (1-212) 622-6671 atif.a.rahim@jpmorgan.com
Healthcare Technology & Distribution Lisa C. Gill (1-212) 622-6466 lisa.c.gill@jpmorgan.com
Managed Care John Rex (1-212) 622-6600 john.rex@jpmorgan.com
Medical Technology & Devices Michael Weinstein (1-212) 622-6635 mike.weinstein@jpmorgan.com
Pharmaceuticals – Major & Specialty Chris Schott, CFA (1-212) 622-5676 christopher.t.schott@jpmorgan.com
SMid Biotechnology Cory Kasimov (1-212) 622-5266 cory.w.kasimov@jpmorgan.com
SMid Medical & Life Sciences Technology Tycho W Peterson (1-212) 622-6568 tycho.peterson@jpmorgan.com
Materials
Chemicals – Specialty, Commodity & Agricultural Jeffrey J Zekauskas (1-212) 622-6644 jeffrey.zekauskas@jpmorgan.com
Coal / Gold & Precious Metals John Bridges, CFA, ACSM (1-212) 622-6430 john.bridges@jpmorgan.com
Metals & Mining Michael F Gambardella (1-212) 622-6446 michael.gambardella@jpmorgan.com
Advertising & Marketing Services Alexia S. Quadrani (1-212) 622-1896 alexia.quadrani@jpmorgan.com
Entertainment / Internet Imran Khan (1-212) 622-6693 imran.t.khan@jpmorgan.com
Information Services / Radio & TV Broadcasting Michael A Meltz, CFA (1-212) 622-0416 michael.meltz@jpmorgan.com
Technology
Alternative Energy Christopher Blansett (1-415) 315-6708 christopher.blansett@jpmorgan.com
Applied & Emerging Technologies Paul Coster, CFA (1-212) 622-6425 paul.coster@jpmorgan.com
Business & Educational Services Andrew C Steinerman (1-212) 622-2527 andrew.steinerman@jpmorgan.com
Communications Equipment & Data Networking Rod Hall, CFA (1-415) 315-6713 rod.hall@jpmorgan.com
Communications Infrastructure Technology Steven J O’Brien (1-212) 622-6554 steven.obrien@jpmorgan.com
Computer Services & IT Consulting Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin.huang@jpmorgan.com
IT Hardware Mark Moskowitz (1-415) 315-6704 mark.a.moskowitz@jpmorgan.com
Semiconductors Christopher Danely (1-415) 315-6774 chris.b.danely@jpmorgan.com
SMid Semiconductors Harlan Sur (1-415) 315-6700 harlan.sur@jpmorgan.com
Software John DiFucci (1-212) 622-2341 john.s.difucci@jpmorgan.com
Software Technology Sterling Auty, CFA (1-212) 622-6389 sterling.auty@jpmorgan.com
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December 2010
Stock ratings and prices of companies discussed in this report
Ratings and prices for analysts’ second half “best ideas” appear on the corresponding sector page. Stock prices and ratings
are as of the close on December 7, 2010.
Company Name Ticker Rating Price Company Name Ticker Rating Price
3M MMM UW $84.19 Flextronics FLEX OW $7.78
Accretive Health AH OW $14.00 Fluor Corp FLR N $60.86
ACE Limited ACE OW $59.24 Goodyear Tire & Rubber GT OW $10.50
Advanced Micro Devices AMD N $8.02 Hansen Natural Corp. HANS N $52.94
Agrium AGU OW $83.22 Hess HES OW $75.44
AirTran Holdings, Inc. AAI N $7.45 Hub Group HUBG OW $36.40
Altera ALTR N $37.24 Husky Energy HSE.TO UW C$24.73
Amphenol APH N $52.96 Hyatt Hotels Corporation H OW $45.30
Apollo Group APOL OW $36.97 IHS Inc. IHS N $77.30
Ashland Inc. ASH OW $50.44 Intel NTC N $21.58
athenahealth ATHN N $42.78 J. Crew Group, Inc. JCG N $43.82
Bank of New York Mellon Corp. BK OW $28.14 J.B. Hunt Transport Services, Inc. JBHT OW $40.27
Boeing Company BA N $66.23 Jacobs Engineering JEC OW $41.68
Cadence Design Systems CDNS OW $8.24 Johnson Controls, Inc. JCI OW $39.00
Caterpillar Inc. CAT rs $90.35 Kimberly-Clark KMB N $61.94
Cerner Corp CERN OW $91.79 Kohl's Corporation KSS OW $54.58
CF Industries Holdings, Inc. CF N $122.62 LogMeIn LOGM OW $46.01
Church & Dwight CHD N $67.21 LyondellBasell Industries LYB OW $31.60
Cisco Systems CSCO OW $19.39 Macy's Inc. M OW $25.58
City National Corp CYN OW $56.80 Magna International, Inc. MGA OW $51.22
Clorox CLX OW $62.18 Marriott International MAR OW $40.89
Coca-Cola Co. KO OW $64.14 MedAssets MDAS N $19.56
Coca-Cola Enterprises CCE N $25.59 Merck & Co., Inc. MRK OW $35.37
Colgate-Palmolive CL N $78.17 Mitel Networks MITL N $5.45
Comerica Incorporated CMA OW $38.76 Modine Manufacturing Company MOD OW $15.58
Commercial Vehicle Group CVGI OW $16.80 Molex MOLX UW $22.08
ConocoPhillips COP N $64.37 Molson Coors Brewing Company TAP OW $49.31
Cott Corp COT N $8.14 Moody's Corp. MCO OW $26.72
Cullen/Frost Bankers Inc. CFR N $56.58 Nu Skin Enterprises NUS OW $31.50
Delta Air Lines, Inc. DAL OW $13.12 Occidental Petroleum OXY N $92.72
DeVry DV OW $43.98 Oracle Corp. ORCL OW $29.05
Dollar General DG N $31.60 PACCAR Inc. PCAR OW $55.82
Dover DOV N $57.61 People's United Financial PBCT OW $13.06
Dr Pepper Snapple Group DPS N $36.73 Philip Morris International PM N $59.40
DuPont DD OW $48.96 PNC Financial PNC OW $57.86
Eastman Chemical Company EMN OW $82.47 Potash Corp. POT OW $141.87
Ecolab Inc. ECL OW $47.22 Precision Castparts PCP OW $141.40
EMC EMC N $21.89 PrivateBancorp, Inc. PVTB N $12.99
Endo Pharmaceuticals ENDP OW $35.97 Procter & Gamble PG N $62.15
Energizer Holdings ENR OW $71.75 Quality Systems QSII OW $66.89
EnergySolutions ES N $5.44 Quest Software QSFT OW $27.43
Equifax EFX OW $35.45 Schlumberger SLB OW $81.00
Experian plc EXPN.L OW 786p ShoreTel SHOR OW $7.50
FactSet Research Systems FDS N $93.84 SolarWinds SWI OW $18.74
Family Dollar Stores, Inc. FDO OW $50.89 Solera Holdings SLH OW $50.23
FedEx Corp FDX OW $92.66 Southwest Airlines Co. LUV N $12.95
FirstMerit Corporation FMER OW $18.44 Starbucks SBUX OW $32.78
107
December 2010
Ratings and prices for analysts’ second half “best ideas” appear on the corresponding sector page. Stock prices and ratings
are as of the close on December 7, 2010.
Company Name Ticker Rating Price Company Name Ticker Rating Price
State Street STT N $45.51 Tyco Electronics TEL UW $33.37
Strayer Education STRA OW $142.59 U.S. Bancorp USB OW $24.37
SVB Financial SIVB OW $49.27 Umpqua Holdings Corporation UMPQ OW $11.05
Symantec SYMC OW $16.94 United Continental Holdings, Inc. UAL OW $25.78
Synopsys Inc SNPS OW $26.45 URS Corporation URS OW $42.51
Taleo TLEO OW $31.82 US Airways Group, Inc. LCC OW $10.55
Target Corporation TGT OW $59.09 Valeant Pharmaceuticals VRX OW $28.05
Texas Instruments TXN N $33.41 VeriSign VRSN OW $35.26
The McGraw-Hill Companies MHP OW $35.91 Verisk Analytics VRSK OW $32.51
The Mosaic Company MOS N $69.17 Wal-Mart Stores, Inc. WMT OW $55.09
The Shaw Group, Inc SHAW UW $33.32 Xilinx XLNX N $28.59
Time Warner TWX N $31.20
108
December 2010
109
December 2010
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110
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North America Equity Research

U.S. Year Ahead 2011

For a complete list of contributors,

Bloomberg JPUS2011 <GO>

We designed this report as a sector-by-sector guide to equity investing in the United

Economics (Robert Mellman) .......................................................................................7

Equity Strategy (Thomas J Lee, CFA)........................................................................11

Equity Technical Strategy (Michael Krauss) ...............................................................17

Accounting & Valuation (Dane Mott, CFA, CPA) ........................................................21

Equity Derivatives (Marko Kolanovic) .........................................................................26

Delta One Strategy (Marko Kolanovic) .......................................................................33

Capital Goods / Industrials

Aerospace & Defense (Joseph B. Nadol III) ...............................................................39

Airfreight & Surface Transportation (Thomas R. Wadewitz) .......................................40

Electrical Equipment & Multi-Industry (C. Stephen Tusa, Jr CFA)..............................41

Engineering & Construction (Scott Levine).................................................................42

Environmental Services (Scott Levine).......................................................................43

Machinery (Ann Duignan)...........................................................................................44

Marine Transportation (Jonathan B Chappell, CFA)...................................................45

Airlines (Jamie Baker) ................................................................................................47

Autos & Auto Parts (Himanshu Patel, CFA) ...............................................................48

Beverages (John Faucher) .........................................................................................49

Gaming & Lodging (Joseph Greff)..............................................................................50

Homebuilding & Building Products (Michael Rehaut, CFA) ........................................51

Household & Personal Care Products (John Faucher)...............................................52

Packaged Food (Terry Bivens)...................................................................................53

Restaurants (John Ivankoe) .......................................................................................54

Retailing – Food (Charles Grom, CFA, CPA) .............................................................56

Retailing – Hardlines (Christopher Horvers, CFA)......................................................57

Retailing – Specialty (Brian J. Tunick) ........................................................................58

Tobacco (Rae Maile) ..................................................................................................59

Electric Utilities & Independent Power Producers (Andrew Smith).............................61

Energy MLPs (Xin Liu, CFA) ......................................................................................62

Integrated Oil & Gas (Katherine Lucas Minyard) ........................................................63

Oil & Gas Exploration & Production (Joseph Allman, CFA)........................................64

Asset Managers (Kenneth B. Worthington, CFA) .......................................................67

Banks – Large Cap & Trust and Processors (Vivek Juneja).......................................68

Banks – Mid- and Small Cap (Steven Alexopoulos, CFA) ..........................................69

Exchanges (Kenneth B. Worthington, CFA) ...............................................................70

Insurance – Life (Jimmy S. Bhullar, CFA)...................................................................71

Insurance – Non-Life (Matthew G Heimermann) ........................................................72

Biotechnology (Geoffrey Meacham, Ph.D.) ................................................................75

SMid Biotechnology (Cory Kasimov) ..........................................................................76

Healthcare Technology & Distribution (Lisa C. Gill)....................................................77

Healthcare Information Technology (Atif Rahim)........................................................78

Managed Care (John Rex) .........................................................................................79

Medical Technology & Devices (Michael Weinstein) ..................................................80

SMid Medical & Life Sciences Technology (Tycho W. Peterson) ...............................81

Pharmaceuticals – Major (Chris Schott, CFA) ............................................................82

Pharmaceuticals – Specialty (Chris Schott, CFA) ......................................................83

Chemicals – Specialty, Commodity & Agricultural (Jeffrey J. Zekauskas)..................85

Coal (John Bridges CFA, ACSM) ...............................................................................86

Gold (John Bridges CFA, ACSM) ...............................................................................87

Metals & Mining (Michael F. Gambardella).................................................................88

Platinum & Palladium (John Bridges CFA, ACSM).....................................................89

Silver (John Bridges CFA, ACSM)..............................................................................90

Media & Telecommunications

Advertising & Marketing Services (Alexia S. Quadrani)..............................................91

Entertainment (Imran Khan) .......................................................................................92

Information Services / Radio & TV Broadcasting (Michael A. Meltz, CFA) .................93

Alternative Energy (Christopher Blansett) ..................................................................95

Applied & Emerging Technologies (Paul Coster, CFA) ..............................................96