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November 13, 2012

2012 and Beyond: Navigating the New Economy. Presented by John B. Jung Jr. Senior Managing Director, BB&T Capital Markets. FGFOA – Sarasota, FL. November 13, 2012. Important Disclosures.

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November 13, 2012

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  1. 2012 and Beyond: Navigating the New Economy Presented by John B. Jung Jr. Senior Managing Director, BB&T Capital Markets FGFOA – Sarasota, FL November 13, 2012

  2. Important Disclosures BB&T Capital Markets is a division of Scott & Stringfellow, LLC. Member FINRA/SIPC. Scott & Stringfellow, LLC, is a wholly-owned, nonbank subsidiary of BB&T Corporation. Securities and insurance products or annuities sold, offered or recommended are not a deposit, not FDIC insured, not bank guaranteed, not insured by any federal government agency and may lose value. The information contained herein, while not guaranteed by BB&T Capital Markets, has been obtained from sources which we believe to be reliable and accurate. This material is not to be considered an offer or solicitation regarding the sale of any security. Discussions of past performance do not imply a guarantee of future results. Comments regarding tax implications are informational only. Scott & Stringfellow and its representatives do not provide tax or legal advice. You should consult your individual tax or legal professional before taking any action that may have tax or legal consequences.

  3. “Never make predictions, especially about the future.” - Casey Stengel

  4. Improving Signs: Consumer Confidence & Spending Consumer confidence has trended up since the all-time low in February 2009 and consumer spending continues to recover. U.S. Consumer Confidence U.S. Consumer Spending Growth Source: FactSet, Reuters, www.MillionaireCorner.com 4

  5. Improving Signs: Industrial Production & Capacity Utilization Industrial Production and Capacity Utilization are key indicators of the health of the U.S. manufacturing sector. After bottoming out in mid-2009 they have continuously improved. U.S. Industrial Production U.S. Capacity Utilization Source: US Federal Reserve - Industrial Production and Capacity Utilization Report 5

  6. Positive Trend: Long-Term GDP Growth Long-Term Real Growth in U.S. GDP Per Capita (1871-2009) 2011 Source: VisualizingEconomics; MorningWorth 6

  7. Average length of recession – 14 months So, Why Doesn’t the Recovery Feel Better? Length of U.S. Recessions (1900-Present) The most recent recession is technically behind us - it was only slightly above average in terms of duration. Source: National Bureau of Economic Research 7

  8. Why Do the Effects Continue To Be Felt? Percentage Change in Economic Indicators Following Recession What is old normal? What we are dealing with? Average, 3 Years After The Start of Recession (1) Current Cycle (4 years from the end of 2007) “This country had a huge, huge wound…It takes time for wounds to heal, regardless of how good the care is.” -Warren Buffet • Covers eight recession cycles going back to 1950 (does not include the truncated 1980 recession) • Source: Haver Analytics, Gluskin Sheff, U.S. Census, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, U.S. Treasury 8

  9. ? The Great Recession? The Great Depression What Drove The Great Recession? U.S. Household Debt as a Percent of GDP Source: U.S. Census, U.S. Federal Reserve Flow of Funds.

  10. Old Normal vs. New Normal Old Economy (1946 – 2007) New Economy (2007 - ?) 1. Rising Asset Prices 1. Stabilizing Asset Prices 4. Reduced Leverage 2. Increasing Risk Premium 4. Increased Leverage 2. Declining Risk Premium 3. Aggressive Investing 3. Need for Liquidity • Strong Growth • Low Unemployment – Low Inflation • Aggressive Consumer Spending • Limited Growth • High Unemployment – Deflation? • Lower Consumer Spending

  11. “New Normal” Characteristics - Employment • The average length for an unemployed person is 40.5 weeks – the longest period ever • 6.3 million people have been unemployed for over six months • 7 million jobs below peak employment • Although the U.S. has lost nearly 8 million factory jobs since manufacturing employment peaked in mid-1979, the U.S. remains the No. 1 manufacturing country in the world, out-producing No. 2 China by a staggering 25% • U.S. Labor Productivity is up over 50% in the last two decades Employment – Percent of Previous Peak U.S. Labor Productivity – Real Output ($ in billions) Source: U.S. Department of Labor; Bureau of Labor Statistics; FactSet, Associated Press

  12. “New Normal” Characteristics – Asset Re-pricing U.S. Real Wage Growth Home Price Indices • Foreclosures on homes amount to roughly one-quarter of existing home sales and roughly 25% of mortgage holders are underwater on their home loans • U.S. homes are projected to have lost $681 billion in value during 2011…35% less than the $1.1 trillion lost in 2010 • Real estate experts now believe it will take 20 years to recoup the $6 trillion worth of housing value destruction seen in the last five years…after adjusting for inflation, values will never catch up • Housing affordability below pre-recession levels – the ratio of housing prices to annual household income has fallen from 2.3x during the peak of the bubble all the way back to 1.6x (well below the average of 1.9x). Source: U.S. Census Bureau, National Association of Realtors, BBTCM Research, FactSet, Standard & Poor’s, Financial Times, NY Times

  13. “New Normal” Characteristics – De-Leveraging • The S&P 500 has been flat for the last decade; at the same time earnings have risen 75%; resulting in the price to earnings level being down 43% • How much of the growth in earnings is tied to the growth in the international economy? • Is it better to invest at 24 P/E or 12 P/E? Historical Index Performance S&P 500 Price To Earnings Source: FactSet, data as of December, 31 2011

  14. “New Normal” Characteristics – Global Marketplace • Increased Economic Opportunity • The world is our economic oyster! • European Union • Potential for sovereign debt defaults in Europe • China • Headed for a hard or soft landing? • Global Supply Chain Interruptions • Middle East - world’s oil supply • Japan earthquake • Australian floods

  15. “New Normal” Characteristics – Large Public Deficits and Debt • Since the 1950’s we have borrowed on average 2% of GDP / in the four years of the current administration we will average 10% of GDP • Informed constituencies can disagree on the number, but everyone agrees there is a real “debt ceiling”. Current Federal borrowing is unsustainable. Total U.S. Government Spending vs. Revenue as % of GDP Source: Congressional Budget Office

  16. “The nicest thing about not planning is that failure comes as a complete surprise, rather than being preceded by a period of worry and depression.” - Sir John Harvey-Jones

  17. Planning to Grow • Does government have a responsibility to “create” jobs – are there effective policy measures or do we just need to save the money? • Should we support housing or let prices fall where they may – why are rational housing prices bad for the economy? • Even though there is no concrete evidence the stimulus or quantitative easing worked – do we continue to implement fiscal and monetary solutions? Are low interest rates a panacea? • Is the current regulatory environment undermining the recovery – are regulatory costs an anchor around the neck of the economy? • Which do we combat – deflation (asset bubbles bursting – inability to pay collective debt) or inflation (lower standard of living - the seeming ability to pay back our collective debt)?

  18. Continuing to Grow “Is the future what it used to be.” -Yogi Berra (sort of) • The companies and organizations and governments who reacted rationally to the “New Normal” are already the winners – rationalization (re-conceptualization) is a major positive from the great recession • Do we have the ability to control the de-leveraging; or long term will the economy find its own level? “Are we then being realistic about trying to manage the de-leveraging”? • If the financial system is sound and the capitalist system is allowed to work we will continue to recover and grow – “get out of the way and let the process work”

  19. “We can’t solve problems by using the same kind of thinking we used when we created them” - Albert Einstein

  20. Government’s Role in Growth • Regulatory Overhaul • By any measure the regulatory burden and costs to our economy is significant. Many measures were well intentioned but the system has taken on a life of its own and the costs far outweigh the benefits. A top to bottom regulatory review is necessary to insure our global competiveness. • Tax Code Reform • No matter how you feel about the level of taxes a complete reform (overhaul) of the tax code is needed. A cogent and coherent code will lead to a conviction of certainty which will allow capital to make informed decisions. Uncertainty about the present and future code is anathema to a healthy and growing economy. • Fiscal Restraint • The current spending message out of Washington is on point – invest in education and technology and infrastructure to spur growth. • In order to drive the engine of growth two things have to happen; Every program will get less and every taxpayer will pay more – and that has to include defense and entitlements.

  21. A Guide to Successful Discussions in DC • Focus on Growth – Focus on Growth – Focus on Growth • Innovation is essential, especially if it’s disciplined and focused on economic outcomes (Growth!) • Compromise is paramount – my way or the highway is not an option • Get it right the first time – as time goes by our opportunities to be wrong diminish

  22. “Men (or Women) make history, and not the other way around. In periods where there is no leadership, society stands still. Progress occurs when courageous, skillful leaders seize the opportunity to change things (for the better).” - Harry S. Truman

  23. Success starts here.

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