Economic Update Richard Rosenthal Senior Economist & Investment Officer

Well Known Financial Clichés Don’t catch a falling knife Sell in May and go away Bulls and bears make money, pigs get slaughtered

Most appropriate cliché for today’s environment If it walks like a duck and quacks like a duck,… it’s a Recession!

Quality of Sales Recent surge in sales of repossessed homes and forced short sales Discounted prices do not prevent further declines US banks repossessed almost three times as many homes in July as a year earlier

Mortgage Rates Assuming today’s rates (6.32%), analysts estimate another 14% drop in home prices If rates fall to 5.5%, prices may only fall another 7% If rates rise to 7.5%, prices are predicted to fall 24% A 24% decline would wipe out the entire home equity for millions of homeowners

Supply There are still too many homes on the market Over 11 months of supply available in July Normal supply is near 6 months Prices will need to drop further to bring demand in line with supply.

Consumers, faced with rising unemployment, soaring food and fuel costs, falling home prices, and stricter lending standards, are cutting back on spending Lower spending leads to a slowing economy which leads to higher credit losses at the banks, which reduces their capital and leads to less lending Less lending further reduces consumer spending, housing continues to fall, and business activity softens This leads to a deeper recession, which in turn, leads to more foreclosures and bankruptcies, which increases credit losses and further declines in housing prices…

How do we break the Negative Feedback Loop? Home prices have to fall sufficiently to ensure that affordability is restored, sales activity increases Bank write-downs become write-ups, earnings replenish capital and lending increases Consumer confidence rises, consumer spending increases, stock market rises

My favorite cliché: Uncertainty creates OPPORTUNITY!!

WATER There is no more water today than there was millions of years ago. There is no less either. We can’t make it or destroy it. What can the human body use in place of water? What can our food crops drink instead? NOTHING! Water is a necessity!

WATER World’s need for water will never go down. Shortage of clean water has devastating effects In the developing nations, 80% of all diseases stem from consumption of and exposure to polluted water More than a third of the world’s population lacks access to rudimentary sanitation Only 20% of the world’s population enjoy the benefits of running water, the remaining 80% live with the anxiety of having to find access to clean water on a daily basis

WATER Global water industry: $400 billion market Developed world: Growth 5-9% Emerging markets: Growth 15-20% Two distinct paths Several specific investment themes: infrastructure, desalination, purification, and transportation

WATER America and Europe: Majority of pipes, valves, and pumps are over 100 years old and in need of repair EPA estimates $280 billion will be needed to rebuild the US water infrastructure over the next 20 years US water industry composed of 55,000 separate systems. Many of the local municipalities don’t have the money for upgrades and repairs Few choices: merge or privatize

WATER China: Has already committed $125 billion for infrastructure over the next 5 years 1/5 world’s population and only 7% of fresh water supply Middle East accounts for 60% of all desalination plants in the world Estimates are for $117 billion to be spent between now and 2015

Conclusion: There is not enough drinkable water on the planet to satisfy demand and the situation is going to get worse before it gets better. Billions of dollars will be spent and they won’t be discretionary dollars that might disappear or waiver because of economic cycles. The money will be spent because, simply put, there is no substitution in the world for water!

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