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					                                                                                                    Global Equity Research

UBS Investment Research
                                                                                                       Equity Strategy
US Equity Strategy: Sector Positioning
                                                                                                       Investment Strategy

Time to Head Home
                                                                                                                                  22 February 2010
 Recent data calls for a shift in portfolio positioning
Since establishing our 2010 targets, the U.S. economy and earnings have been
better than expected, European data has been relatively weaker, and the dollar has
strengthened. As a result, we are shifting our portfolio positioning and sector
recommendations to capitalize upon the strong cyclical earnings recovery in the                                              Jonathan Golub, CFA
U.S. from a more domestic angle.                                                                                                               Strategist
 De-emphasizing Foreign Sales in the face of rising macro risks                                                                        +1-212-713 8673

Our work on market leadership indicates that tilting portfolios toward Foreign                                               Chip Miller, CFA, CPA
Sales generally adds 50-70bps of alpha on an annual basis. However, this Return                                                                 Strategist
Driver is not rewarded during recessions and periods of market stress. We believe                                         
                                                                                                                                        +1-212-713 3531
that global macro concerns, including sovereign debt worries and Chinese
tightening, will undermine the success of Foreign Sales in 2010.                                                                   Manish Bangard
                                                                                                                                     Associate Strategist
 Downgrading Materials from Overweight to Market Weight                                                             
Our call is largely based on the widening growth differential between the U.S. and                                                      +1 212 713 3036
Europe, as well as recent dollar strength. We now have Market Weight ratings on                                      Thomas M. Doerflinger, Ph.D.
the three cyclical sectors with the highest Foreign Sales exposure — Energy,                                                                    Strategist
Materials, and Tech. We maintain our Overweight ratings on the two cyclical                                           
sectors that are more domestically oriented — Consumer Cyclicals and Industrials.                                                       +1-212-713 2540
                                                                                                                                Natalie Garner, CFA
 Upgrading Health Care from Market Weight to Overweight                                                                                        Strategist
Health Care stocks are compelling cheap, in our view. Additionally, of the four                                        
non-cyclical sectors, Health Care has the best growth prospects over the next two                                                        +1-212-713 4915
years, which has been broadly demonstrated in solid 4Q reports.

This report has been prepared by UBS Securities LLC
UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making
their investment decision.
US Equity Strategy: Sector Positioning 22 February 2010

Time to Head Home
Increased Conviction in Cyclical Recovery
We continue to believe that a cyclical earnings recovery — fueled by an
improving economy, easy comps, efficient cost cutting, and strong margin
expansion — will lead U.S. stocks higher through the remainder of 2010.

On the U.S. economic front, data has been coming in better-than-expected,
particularly for readings on manufacturing activity and the industrial economy.          U.S. economic data has been better-
(ISM New Orders hit 65.9 in January!) This positive trend has been reflected by          than-expected, particularly for
our U.S. economist, Maury Harris, who has raised his 2010 real GDP forecast              manufacturing
from 2.6% to 3.0% since the beginning of the year.

On the earnings front, 4Q results have been very strong. Overall, S&P 500
companies (excluding Financials) have beaten analyst expectations by 10% and             Cyclical sectors have posted
posted earnings growth of roughly 14%. Cyclical sectors have put up                      spectacular 4Q results
spectacular results, beating analyst expectations by 15% and posted earnings
growth just shy of 25%. Importantly, strong 4Q reports have been driven by
more than just cost cutting, with top lines registering a positive print for the first
time since 3Q08.

On the back of these strong results, we have increased conviction in the cyclical
recovery story, and are increasing our S&P 500 operating EPS estimates for               We have increased conviction in the
2010 (from $81 to $83) and 2011 (from $91 to $92). (For additional details,              cyclical earnings recovery
please see our separate note out this morning, Raise ’10/’11 S&P EPS $81/$91
to $83/$92.)

We are maintaining our year-end 2010 price target of 1,250, which assumes that
multiples hold their ground through the remainder of the year.

                            Exhibit 1: S&P 500 Price & Earnings Target
S&P 500 Price Level                                          Price       % Change
 Current (as of 2/19/10)                                     1,109
                                                                                         Raising our S&P 500 operating EPS
 2010 Year-End Target Price                                  1,250        12.7%
                                                                                         estimates for 2010 from $81 to $83 and
Operating Earnings                                            EPS        Y/Y Growth      for 2011 from $91 to $92
 2008 Actual                                                 61.85
 2009 Estimate                                               62.72        1.4%
 2010 Estimate                                               81.00        29.1%
 2011 Estimate                                               91.00        12.3%

                                                            Current      Year-End
P/E Multiple                                                 Price        Price
  on 2009 EPS                                                17.7x
  on 2010 EPS                                                13.7x         15.4x
  on 2011 EPS                                                12.2x         13.7x

Source: Standard & Poor’s and UBS

                                                                                                                          UBS 2
US Equity Strategy: Sector Positioning 22 February 2010

Murkier Outlook Abroad
While U.S. economic readings have generally been stronger than expected,
                                                                                            Economic readings out of Europe have
European data has come in weaker. This has been reflected by our Eurozone
                                                                                            been weaker than expected
economist, Stephane Deo, who recently lowered his 2010 real GDP forecast
from 2.4% to 1.5%. Our sense is that the Eurozone may face on-going
headwinds from sovereign debt concerns and an elevated level of uncertainty.

Additionally, China’s actions to rein in bank lending and liquidity provide an              Additionally, China has reined in
additional headwind to global growth and have acted to further increase                     lending
investors’ risk aversion. The divergences in economic expectations and rising
risk aversion have led the dollar to strengthen by roughly 6% since the                     The result? Dollar strength
beginning of the year.

These developments have also led us to change our views on market leadership
for the remainder of 2010, as well as our sector recommendations.

Portfolio Positioning
Stick with Operating Leverage & Revisions
We define market leadership by those investment characteristics (such as Size,
Valuation, Growth, Momentum, and Volatility) that are likely to lead the broad
market. We analyze ten such statistics, which we have dubbed “UBS Return
Drivers.” (See the Appendix of this note for additional details on our UBS
Return Driver calculations.)

When we originally formulated our 2010 targets and sector recommendations,
we identified three Return Drivers likely to define market leadership in 2010 —
Operating Leverage, Earnings Revisions, and Foreign Sales.

Given our continued belief in the cyclical recovery story, we are maintaining our
                                                                                            Operating Leverage and Earnings
recommendation to tilt portfolio toward companies with high Operating
                                                                                            Revisions should continue to be
Leverage and Earnings Revisions. These Return Drivers are cyclical in nature,
and should continue to outperform as the economy and earnings recover. By
way of example, our Operating Leverage Return Driver Index, illustrated in
Exhibit 2 below, measures the pattern of returns achieved by tilting portfolios
toward companies with the most economically-sensitive margins.

                         Exhibit 2: Operating Leverage Return Driver Index

                                                                                            Most of our UBS Return Drivers are
                                                                                            cyclical in nature


        00                  02                 04                 06                   08

Source: Compustat, Standard & Poor’s, Thomson Financial, Worldscope, FactSet and UBS

                                                                                                                                UBS 3
US Equity Strategy: Sector Positioning 22 February 2010

Foreign Sales Less Likely to Lead
However, due to better than expected growth in the U.S., weaker than expected
readings out of Europe, and recent dollar strength, we no longer believe that                            Risk has increased for companies with
Foreign Sales will be a key Return Driver throughout the remainder of the year.                          high Foreign Sales

According to our work, of our ten key Returns Drivers, Foreign Sales has
contributed positive alpha on the most consistent basis over time, adding
roughly 50-70 bps of outperformance on an annual basis.

               Exhibit 3: Foreign Sales Return Driver Index with Recession Lines

 120                                                                                                     Foreign Sales does not get rewarded
                                                                                                         when risk aversion is elevated




        91        93        95        97         99        01        03        05       07        09

Source: Compustat, Standard & Poor’s, Thomson Financial, Worldscope, FactSet and UBS

Contrary to popular belief, the Foreign Sales Return Driver has not been a
function of the dollar over time. We believe that the driver’s relatively
consistent outperformance can be attributed to a number of other factors, not the
least of which is a cross boarder tax arbitrage exploited by CFOs.

                    Exhibit 4: Foreign Sales Return Driver Index vs. EUR/USD
 125                                           S&P 500                                            1.60
                                                                        EUR/USD ►
                                            ◄ Foreign Sales
 120                                          Return Driver                                       1.44   Our S&P 500 Foreign Sales Return
                                                   ▼                                                     Driver has not been driven by the dollar
                                                                                                  1.28   over time

   95                                                                                             0.80
        91        93        95       97        99         01       03       05         07    09

Source: Compustat, Standard & Poor’s, Thomson Financial, Worldscope, FactSet and UBS

However, as illustrated in Exhibit 3 above, Foreign Sales is not rewarded during
recessions or other periods of market stress. We believe that a number of macro
concerns, including sovereign debt worries and Chinese tightening, will
undermine the success of Foreign Sales over the course of 2010.

                                                                                                                                           UBS 4
US Equity Strategy: Sector Positioning 22 February 2010

Shifting Sector Recommendations
Our sector calls are based upon our views on market leadership, valuation, and
analyst-driven insights. We are changing our recommendations to play the                        We are downgrading Materials and
strong U.S. recovery from a more domestic angle. As such, we are (1)                            upgrading Health Care
downgrading Materials from Overweight to Market Weight; and (2) upgrading
Health Care from Market Weight to Overweight.

             Exhibit 5: Foreign Sales Exposure (%) and Sector Recommendations

                                              26          26
                                                                   18    18


   Tech     Energy Matrls          Indls    Cons       Cons        Fin   Hlth   Utils   Telcm
                                            Stpls      Disc              Care
    MW        MW         MW       Over      Under       Over       MW    Over   Under   Under

Source: Worldscope, Standard & Poor’s, FactSet and UBS
Note: Over = Overweight; MW = Market Weight; Under = Underweight

Within cyclical sectors, we now have a Market Weight rating on the three areas
with the highest Foreign Sales exposure, Energy, Materials, and Tech. We have                   In cyclicals, we are overweight the two
maintained an Overweight rating on the two cyclical areas that are more                         most domestically-oriented sectors,
domestically-oriented, Consumer Cyclicals and Industrials. We continue to                       Consumer Cyclicals and Industrials
view Financials as the biggest wild card in the market, and maintain our Market
Weight rating on the sector.

Within non-cyclical sectors, we maintain our Underweight ratings on Consumer
Staples, Telecom, and Utilities. While these sectors, especially Utilities and                  We remain underweight Staples,
Telecom, tend to be more domestically oriented, we believe that they will                       Telecom, and Utilities
produce lackluster results compared to cyclical sectors throughout 2010. As
discussed in further details below, we have decided to upgrade Health Care to
Overweight due to a combination of very compelling valuations, as well as the
strongest earnings prospects amongst non-cyclical sectors over the next two

Downgrading Materials — Overweight to Market Weight
We are downgrading the Materials sector for three reasons, (1) high foreign
sales exposure, as illustrated in Exhibit 5 above; (2) recent dollar strength; and              We are downgrading Materials based
(3) a negative shift in investor sentiment.                                                     on high foreign sales, recent dollar
                                                                                                strength, and negative sentiment
While Foreign Sales for the overall S&P 500 has not been driven by the dollar
over time, the same cannot be said for this Return Driver for the Materials sector
on a stand-alone basis, as it tends to underperform when the dollar rises. We are
not making a dollar call; however, we believe that many investors will
extrapolate the divergence between U.S. and European growth rates and recent
dollar strength as trends that will continue to play out through the remainder of
the year.

                                                                                                                                  UBS 5
US Equity Strategy: Sector Positioning 22 February 2010

                 Exhibit 6: Dollar vs. Materials Foreign Sales Return Driver Index
 150                                                                                             1.60
                                                                       EUR/USD ►
 135                                                   Materials                                 1.44   In Materials, our Foreign Sales Return
                                                     Foreign Sales                                      Driver has generally moved in-line with
 120                                                ◄ Return Driver                              1.28   the dollar

 105                                                                                             1.12

   90                                                                                            0.96

   75                                                                                            0.80
         90       92       94        96        98     00     02       04        06     08

Source: Compustat, Standard & Poor’s, Thomson Financial, Worldscope, FactSet and UBS

It is easy to see why Materials stocks are so highly correlated with movements
in the dollar after examining the relationship between commodity prices and the
greenback. We believe that if investors extrapolate recent currency movements,
the Materials sector will likely underperform. While each commodity has its
own unique dynamic, commodity prices are highly correlated with the dollar in
general. By way of example, the relationship between copper prices and the
dollar is illustrated below.

                                     Exhibit 7: EUR/USD vs. Copper
 1.6                                                                                               5

 1.5                                                                                               4

 1.4                                                                                               3
                                                       Copper ►

 1.3                                                                                               2

 1.2              ◄ EUR/USD                                                                        1

 1.1                                                                                               0
        05                      06                   07                    08               09

Source: Wall Street Journal, FactSet and UBS

Sentiment Toward Materials Worsens

In our view, the price action in Materials stocks following 4Q earnings reports is
indicative of the recent negative turn in sentiment toward the group. Thus far
                                                                                                        Price action following 4Q reports
during 4Q reporting season, companies that have both beaten top- and bottom-
                                                                                                        strong suggests sentiment has turned
line estimates have seen positive price action, except in the Materials sector.
                                                                                                        decidedly negative
For the most part, no matter how good 4Q reports were, Materials stocks sold
off. Our sense is that concern over a rising dollar and its potential impact on
long-term profitability more than offset significantly better than expected near-
term results.

                                                                                                                                          UBS 6
US Equity Strategy: Sector Positioning 22 February 2010

           Exhibit 8: 4Q09 Earnings Beats and Revenue Surprises — Price Action (%)
                                          EPS Beat with                       EPS Beat Price Action (%)
                                    Rev Beat (#) Rev Miss (#)                  Rev Beat      Rev Miss
Cyclicals (ex-Finls)                      127                    42                   1.2                -0.8
  Cons. Cyclicals                          33                    12                   3.0                 0.3
                                                                                                                    No matter how good reports were,
  Energy                                   13                      1                  0.9                 3.5       Materials companies took it on the chin
  Industrials                              21                    15                   1.7                -0.5       following 4Q reports
  Materials                                14                      4                  -0.8               -1.5
  Technology                               46                    10                   0.4                -2.5

Non-Cyclicals                              27                    35                   2.4                 0.4
  Cons. Staples                              6                   13                   2.4                 1.5
  Health Care                              20                    10                   2.2                -0.5
  Telecom                                    0                     0                  NA                  NA
  Utilities                                  1                   12                   5.3                -0.1

S&P 500 ex-Finls                          154                    77                   1.4                -0.2

Source: Compustat, First Call, IBES, Standard and Poor’s, and UBS
Note: Price action represents the average relative price return of stocks in the S&P 500, measured from the close
one day prior to each company’s report date, to the close two days after each company’s report date

Upside Risks

We have downgraded the Materials sector to Market Weight — not
Underweight — and continue to see a number of positive factors working for the

Specifically, Materials companies have posted strong results in 4Q earnings
season, beating analyst expectations by roughly 12% in aggregate. However,
consensus EPS estimates for 2010 have only been upwardly revised by 3% thus
far. This is not dissimilar to the analyst behavior we have seen for cyclical
sectors in general coming out of 4Q reports. In our view, this should set the
sector up for another strong quarter of earnings surprises in 1Q10 reporting

                       Exhibit 9: 4Q Earnings Surprise vs. 2010 EPS Revisions
                        21                4Q09 EPS Surprise (%)
                                                                                                                    In cyclical sectors broadly, modest EPS
                                                                                                                    revisions should set up another quarter
                                                   2010 EPS Chg (%)
                                           12                                                                       of big beats in 1Q reporting season
                                                    3                             2                  3

     Cons.           Technology           Materials         Industrials           Energy             Non-
    Cyclicals                                                                                      Cyclicals

Source: Compustat, First Call, IBES, Standard and Poor’s, and UBS

                                                                                                                                                     UBS 7
US Equity Strategy: Sector Positioning 22 February 2010

Additionally, our inter-sector relative valuation work indicates that the Materials
sector has gone from being significantly overvalued to reasonably valued as
earnings have snapped back relatively quickly over last three quarters.

                                   Exhibit 10: Materials Inter-Sector Relative Valuation
                        4                              Overvalued
                        3                                                                             The Materials sector looks reasonably
  P/E Multiple Points

                                                                                                      valued following the quick snapback in


                             97     99            01           03           05              07   09

Source: Standard & Poor’s, Thomson Financial, FactSet and UBS

Upgrading Health Care — Market Weight to Overweight
We are upgrading the Health Care sector for three reasons, (1) compelling cheap
valuations, which have started to mean-revert; (2) strong earnings prospects over                     We are upgrading Health Care based on
the next two years relative to other non-cyclical sectors; and (3) the potential for                  valuation, good earnings prospects,
a relief rally if fears begin to dissipate over the potential for health care reform                  and the potential for a relief rally
to negatively impact long-term sector profitability.

Valuation Is Compelling

Our inter-sector relative valuation work indicates that the sector is
approximately one standard deviation cheap relative to its historical relationship
to the S&P 500. As illustrated in the exhibit below, inter-sector relative
valuations are mean-reverting over time.

                                  Exhibit 11: Health Care Inter-Sector Relative Valuation
                        1                                                                             Health Care remains over one standard
  P/E Multiple Points

                                                                                                      deviation cheap relative to the market


                             97     99            01           03           05              07   09

Source: Standard & Poor’s, Thomson Financial, FactSet and UBS

                                                                                                                                       UBS 8
US Equity Strategy: Sector Positioning 22 February 2010

Earnings Growth Highest Amongst Non-Cyclical Sectors

Of the four non-cyclical sectors in the S&P 500, Health Care has the highest
anticipated earnings growth over the next two years.

               Exhibit 12: Consensus Earnings Growth by Sector, 2009-2011 (%)


                                                                                                      Health Care is expected to post the
                                                                       Non-Cyclical Sectors           highest earnings growth amongst non-
                                                                                                      cyclical sectors
                                                                19         18       14

   Matrls     Energy       Cons        Tech        Indls        Hlth      Cons    Telcm       Utils
                           Disc                                 Care      Stpls

Source: Standard & Poor’s, Thomson Financial, FactSet and UBS

As illustrated below, 4Q earnings results have been particularly strong in the
Health Care Equipment & Services. With 25 of the Industry Group’s 36
companies reported, the group has posted 6% positive earnings growth and has
beaten analyst’s expectations by 7% in aggregate. While this pales in
comparison to results in many cyclical areas of the market, the performance is
very strong, particularly relative to less economically sensitive stocks.

                                                                                                                                     UBS 9
US Equity Strategy: Sector Positioning 22 February 2010

              Exhibit 13: S&P 500 4Q09 Earnings Season Summary by Industry Group
                                                   Earnings Growth              Earnings Surprise
                             Rptd     Total      YoY (%) Pos     Neg           Pct (%) Beat Miss

Cyclicals (ex-Finls)          233      285           24.9      132       93     15.0    184   32

  Cons. Cyclicals               54       79        185.4            40    13    25.4     49    3
  Autos                          3        4        151.6             2     1    60.0      2    1
  Dur. & Apparel                16       16       2182.9            14     2    58.6     13    2
  Cons. Services                11       13          8.6             7     4     8.6     11    0
  Media                         12       16         14.5             6     5    17.4     11    0
  Retailing                     12       30         40.1            11     1    16.5     12    0
  Energy                        30       39         -27.5            9    21     2.5     19    8
  Materials                     29       31        172.2            19     9    11.7     19    9
  Industrials                   52       60          -3.4           16    34     9.4     38    9
  Capital Goods                 33       38           1.7           13    20    11.6     28    4
  Services                      10       12          -7.8            2     7     0.8      4    2
  Transportation                 9       10         -20.2            1     7     2.8      6    3
  Technology                    68       76         57.6            48    16    21.0     59    3
  Software                      27       32         27.5            16    10    13.5     21    2
  Hardware                      24       26         44.7            17     4    17.5     23    0
  Semiconductors                17       18       3561.2            15     2    68.9     15    1
Non-Cyclicals                 100      137           -0.7           66   32      2.5     66   17
                                                                                                    Health Care Equipment & Services
  Health Care                   44       52           2.8           33    10     3.1     31    5
                                25                    5.8           22           6.6
                                                                                                    companies posted solid 4Q results
  Equip. & Services                      30                                2             17    2
  Pharma/Biotech                19       22           1.8           11     8     1.9     14    3
                                                                                                    Pharma & Biotech has been less
  Cons. Staples                 33       42           6.2           23     9     4.0     21    7    impressive
  Food & Stpls Retail            6        9           7.6            4     2     2.6      5    0
  Food Bev. & Tob.              20       26          10.4           13     6     4.8     12    5
  Hhld Products                  7        7           0.3            6     1     3.3      4    2
  Telecom                        4        9         -35.3            0     4    -11.3     0    2
  Utilities                     19       34          -1.1           10     9     7.7     14    3
S&P 500 (ex-Finls)            333      422           14.4      198       125    10.2    250   49
Source: Compustat, First Call, IBES, Standard and Poor’s, and UBS

Health Care Reform Overhang

While the Administration continues to push for Health Care reform since the
election of Republican Senator Scott Brown in Massachusetts, we believe that
any Health Care reform legislation that is passed will have a benign impact on
long-term sector profitability. As such, there should be upside available to
Health Care stocks as concerns over onerous reforms dissipate.

Downside Risks

We believe that the main risk to our Health Care upgrade is that cyclical sectors
post earnings results which exceed our expectations. If this were to occur, while
Health Care may hold up well relative to other non-cyclical sectors, the group
would most likely underperform the overall market.

                                                                                                                                     UBS 10
US Equity Strategy: Sector Positioning 22 February 2010

Appendix: UBS Return Drivers
We define market leadership by specific stock characteristics, such as Size (large vs. small), Valuation (expensive vs.
cheap), Growth, Momentum, and Volatility. We track ten such characteristics, which we have dubbed “UBS Return
                                                               UBS Return Drivers
                        Size (Capitalization)                                         Foreign Sales
                        Valuation (Forward P/E)                                       Volatility
                        Earnings Growth                                               Financial Leverage
                        Price Momentum                                                Operating Leverage
                        Earnings Revisions                                            Dividend Yield
Source: UBS

Each Return Driver is calculated as a hypothetical long/short portfolio built around a single quantitative decision
variable. Our calculations assume monthly rebalancing and no transaction or borrowing costs. For each Return Driver,
the computation process has four steps:
(1) Break Stocks into Industry Groups. While our Return Drivers are reported at the sector and index level, our
    process starts by breaking the S&P 500 into its 24 GICS industry groups.
                                                    S&P 500 GICS Sectors and Industry Groups
 Sectors                          Industry Groups
 Energy                           Energy
 Materials                        Materials
 Industrials                      Capital Goods; Commercial & Professional Services; Transportation
 Consumer Cyclicals               Autos; Consumer Durables & Apparel; Consumer Services; Media; Retailing
 Consumer Staples                 Food & Staples Retailing; Food Beverage & Tobacco; Household & Personal Products
 Health Care                      Health Care Equipment & Services; Pharmaceuticals, Biotech & Life Sciences
 Financials                       Banks; Diversified Financials; Insurance; Real Estate
 Technology                       Software & Services; Hardware & Equipment; Semiconductors & Equipment
 Telecom                          Telecommunication Services
 Utilities                        Utilities
Source: Standard and Poor’s and UBS

(2) Rank Based on Return Drivers. Within each industry group, stocks are ranked from top to bottom by the Return
    Driver in question (e.g., largest to smallest market capitalization). The list is then broken into three groups: top-
    third, middle-third, and bottom-third. Our calculations assume that the top-third of stocks are bought and the
    bottom-third of stocks are sold.
                                                   Ranking and Return Calculation Methodology
                                                   Buy (Top 1/3).
                              Top 1/3
                                                   Stock returns equal-weighted within industry group

                            Middle 1/3

                                                   Sell (Bottom 1/3).
                           Bottom 1/3
                                                   Stock returns equal-weighted within industry group
Source: UBS

                                                                                                                     UBS 11
US Equity Strategy: Sector Positioning 22 February 2010

(3) Calculate Returns. Monthly returns are then calculated by subtracting the returns of the bottom-third (sells) from
    the top-third (buys). The result is then divided by two to put the outperformance in a long-only context. This
    analysis is done on an equal-weighted basis within each Industry Group.
                                                Return Driver Calculation — Hypothetical Example
                          Foreign Sales Calcualtion — Industry Group Example
                             Long: Highest Foreign Sales Stocks (Top 1/3)                               9.8%
                             Short: Lowest Foreign Sales Stocks (Bottom 1/3)                            4.6%
                             Difference                                                                 5.2%
                             Divide by 2                                                                  ÷2
                             Factor Result                                                              2.6%
Source: UBS

(4) Aggregate Results. At the sector level, Returns Drivers are calculated as a weighted average of industry group
    returns based on S&P 500 index weights. S&P 500 index results are a weighted average of sector results. We
    also index monthly returns as a time series for further analysis.
                                                  GICS Sectors and Industry Groups — S&P 500

                                                                             Cap-weighted result
                                        S&P 500                              of Sector Average

                                                                                             Cap-weighted result of
                      Sector                              Sector
                                                                                             Industry Group Average

                                      Industry Group                 Industry Group

Source: Standard and Poor’s and UBS

(5) Analytics. There are several ways that UBS Return Drivers can be used in investment decision making. We have
    listed a few below:
          Identify Winning Investment Characteristics.      UBS Return Drivers identify which specific equity
           characteristics have outperformed and underperformed during a specific time period. This data is available at
           the industry group, sector, and index level. Additionally, investors can get a sense for the magnitude of
           outperformance or underperformance of Return Drivers relative to one another.

          Track Historical Trends. In our analysis, we track the performance of each one of our Return Drivers over
           time. This allows us to identify the types of market environments in which each Return Driver tends to
           outperform or underperform.

          Avoid Crowded Trades. Our work also helps identify over-loved and under-loved investment themes. For
           each UBS Return Driver, we track the valuation spread between the top-third of companies and the bottom-
           third of companies over time. As such, we can help identify points when particular portfolio tilts or trades
           appear to be “crowded” or “priced in.” Alternatively, we can also identify points when upside opportunities
           appear outsized.

                                                                                                                      UBS 12
US Equity Strategy: Sector Positioning 22 February 2010

Appendix: Inter-Sector Valuation
The goal of our inter-sector valuation work is to gauge whether each S&P 500 sector is undervalued or overvalued
relative to the overall market. Our analysis is based upon the historical valuation relationships between sectors.
Importantly, we normalize sector valuations for three dynamics that could potentially provide spurious results, if not
accounted for correctly:

   Some sectors tend to be more expensive than others on a systematic basis (e.g., Tech consistently trades at a higher
    P/E than Financials).

   The valuation dispersion between sectors is wide in some environments (e.g., the late-90s) and tight in others (e.g.,
    2008-09). In other words, a multiple point today is not necessarily the same as a multiple point yesterday.

   Sector dynamics change over time. For example, Health Care carried a premium multiple throughout the 90’s, but
    has traded at a discount over the past decade.

Our inter-sector valuation work suggests that relative sector valuations are mean-reverting over medium-term time
frames. As such, we view our inter-sector valuation rankings as a good starting point in determining sector
recommendations. However, we note that sectors can stay cheap or expensive for multi-year time periods.

Ranking Overview
In order to properly normalize inter-sector valuations over time, our analysis focuses on how many standard deviations
away each sector’s P/E is from the market’s P/E. (For our fellow math geeks, this is known as cross-sectional standard
deviation analysis.) We then put this calculation into a historical context on a sector-by-sector basis.

In the table below, we provide an overview of the calculations behind our inter-sector valuation rankings. On the
following page, we walk though our calculations on a step-by-step basis.

                                           Inter-Sector Valuation Ranking Overview — Hypothetical Example
                                   (A)              (B)    (C=A-B)     (D)      (E=C/D)     (F)     (G=E-F)      (H)
                                  Sector          S&P 500 Premium S&P 500 Z Score         Avg Z      Net Z
Sector                           Fwd P/E          Fwd P/E (Current) Std Dev     Current (Trail 36M) Current    Rank
Utilities                         11.8x            14.1x     -2.3      1.7        -1.4      0.0      -1.4       1
Health Care                       11.7x            14.1x     -2.5      1.7        -1.5     -0.2      -1.3       2
Cons. Staples                     14.0x            14.1x     -0.1      1.7        -0.1      0.8      -0.9       3
Telecom                           12.7x            14.1x     -1.5      1.7        -0.9     -0.2      -0.7       4
Technology                        15.7x            14.1x      1.6      1.7         0.9      1.2      -0.3       5
Cons. Discretionary               15.6x            14.1x      1.4      1.7         0.9      0.7       0.2       6
Energy                            13.4x            14.1x     -0.7      1.7        -0.4     -0.8       0.4       7
Financials                        13.9x            14.1x     -0.2      1.7        -0.1     -0.7       0.6       8
Industrials                       16.2x            14.1x      2.1      1.7         1.2      0.2       1.0       9
Materials                         17.4x            14.1x      3.2      1.7         1.9      0.8       1.1       10
(1) Represents the standard deviation of the S&P 500’s Forward P/E
Source: First Call, Standard and Poor’s, and UBS

                                                                                                                       UBS 13
US Equity Strategy: Sector Positioning 22 February 2010

Step-by-Step Calculations
(1) Aggregate P/Es and Standard Deviations (columns A, B and D). First, we calculate a forward P/E for the S&P
    500 and all ten of its sectors, using consensus EPS estimates over the next twelve months. We also calculate the
    weighted average standard deviation of the market’s forward P/E.

(2) Calculate Z-Scores (column C). Next, we calculate a Z-Score for each sector. This expresses each sector’s P/E as
    a number of standard deviations away from the market’s P/E. This is calculated by subtracting the market’s P/E
    from each sector’s P/E and dividing the result by the weighted average standard deviation of the market’s forward
                                                                            Z-Score Calculation

                                                                                  (P/E Sector  P/E Market )
                                                            Sector Z - Score 
                                                                                         σ P/E Market
Source: UBS

(3) Put Current Valuations in Historical Context (columns E, F and G). A Net Z-Score is then calculated for each
    sector by comparing current Z-Scores to average Z-Scores over the prior 36 months. We perform our analysis on
    a rolling 36-month basis to account for secular changes in sector dynamics (e.g., new governmental regulations).
                                                                Net Z-Score — Valuation in Historical Terms

                                          Net Z - Score  Z - Score                   minus Z - Score
                                                                            Current                      36 - Month Average

Source: UBS

(4) Rank Sectors from Most to Least Expensive (column H). We then rank all ten sectors based upon their Net Z-
    Scores (i.e., how expensive or cheap each sector’s current Z-Score is in comparison to its historical average).
    Sectors with negative scores are cheap on a relative basis. Sectors with positive scores are expensive.
(5) Convert Net Z-Scores into Current P/E Multiple Points. To make the visual interpretation of our analysis easier
    to understand, we covert each sector’s historical Net Z-Scores into current P/E multiple points (cheap or
    expensive). This is done by multiplying the historical Net Z-Scores by the current weighted average standard
    deviation of the market’s forward P/E.
                                                              Health Care — Multiple Points Cheap / Expensive
                            P/E Multiple Points



                                                       97     99          01           03          05           07       09

Source: Standard & Poor’s, Thomson Financial, FactSet and UBS

                                                                                                                              UBS 14
US Equity Strategy: Sector Positioning 22 February 2010

   Analyst Certification

Each research analyst primarily responsible for the content of this research
report, in whole or in part, certifies that with respect to each security or issuer
that the analyst covered in this report: (1) all of the views expressed accurately
reflect his or her personal views about those securities or issuers; and (2) no part
of his or her compensation was, is, or will be, directly or indirectly, related to
the specific recommendations or views expressed by that research analyst in the
research report.

                                                                                       UBS 15
US Equity Strategy: Sector Positioning 22 February 2010

Required Disclosures

This report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and
affiliates are referred to herein as UBS.

For information on the ways in which UBS manages conflicts and maintains independence of its research product;
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please visit The figures contained in performance charts refer to the past; past performance is
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UBS Investment Research: Global Equity Rating Allocations
 UBS 12-Month Rating                    Rating Category                                     Coverage1                     IB Services2
 Buy                                    Buy                                                        48%                            40%
 Neutral                                Hold/Neutral                                               40%                            35%
 Sell                                   Sell                                                       13%                            26%
 UBS Short-Term Rating                  Rating Category                                     Coverage3                     IB Services4
 Buy                                    Buy                                               less than 1%                            17%
 Sell                                   Sell                                              less than 1%                            67%
1:Percentage of companies under coverage globally within the 12-month rating category.
2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within
the past 12 months.
3:Percentage of companies under coverage globally within the Short-Term rating category.
4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided
within the past 12 months.

Source: UBS. Rating allocations are as of 31 December 2009.
UBS Investment Research: Global Equity Rating Definitions
 UBS 12-Month Rating                    Definition
 Buy                                    FSR is > 6% above the MRA.
 Neutral                                FSR is between -6% and 6% of the MRA.
 Sell                                   FSR is > 6% below the MRA.
 UBS Short-Term Rating                  Definition
                                        Buy: Stock price expected to rise within three months from the time the rating was assigned
                                        because of a specific catalyst or event.
                                        Sell: Stock price expected to fall within three months from the time the rating was assigned
                                        because of a specific catalyst or event.

                                                                                                                                 UBS 16
US Equity Strategy: Sector Positioning 22 February 2010

 Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12
 Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a
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 Short-Term Ratings reflect the expected near-term (up to three months) performance of the stock and do not reflect any
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UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management,
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debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating.
When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece.

Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not
registered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained in
the NASD and NYSE rules on communications with a subject company, public appearances, and trading securities held by a
research analyst account. The name of each affiliate and analyst employed by that affiliate contributing to this report, if any,
UBS Securities LLC: Jonathan Golub, CFA; Chip Miller, CFA, CPA; Manish Bangard; Thomas M. Doerflinger, Ph.D.; Natalie
Garner, CFA.

Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report.

                                                                                                                             UBS 17
US Equity Strategy: Sector Positioning 22 February 2010

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