January 14, 2014

2014 Volatility Forecast

Options Research

S&P 500 realized volatility of 11 in 2014. Average VIX levels 13-16.

Our View: S&P 500 realized volatility of 11 in 2014 Krag Gregory, Ph.D.
(212) 357-3770 krag.gregory@gs.com
The combination of above trend growth, moderate inflation, and declining Goldman, Sachs & Co.
unemployment should be supportive for another year of low realized
volatility. Based on our U.S. economic teams views, our forecast for S&P Jose Gonzalo Rangel
(212) 357-6538 josegonzalo.rangel@gs.com
500 realized volatility is 11 over calendar year 2014. Goldman, Sachs & Co.

Equity vol and the business cycle: expect low volatility

Benchmarking S&P 500 realized volatility relative to ISM, GDP growth, GDP
relative to potential, and phases of above/below trend growth and
above/below target inflation, tells a story consistent with our vol forecast.

Volatility and the macroeconomy have become more linked

We re-examine the links between economic variables, VIX and S&P 500
volatility to assess how those relationships have changed over time. No
matter how we slice it (correlations, betas or statistical significance), the
sensitivity of vol to macro factors has more than doubled in recent years.

Implications for VIX: 13 to 16

We provide a unique framework to quantify how changes in the economic
landscape affect VIX levels. Forecasting VIX based solely on economic
variables suggests average monthly VIX levels of 13-16 in 2014. Our core
forecast for S&P 500 realized volatility would put the VIX in a 14-16 range if
we apply the 3-5 point post crisis vol spread to our monthly forecast levels.
Our economic outlook for 2014 points to monthly VIX levels of 13-16.
Data from January 2000 to January 10, 2014.

75
65
Avg calendar month VIX
55 Macro model predicted
2014
45 Forecast

35
25
15
5
Jan-00 May-02 Sep-04 Jan-07 May-09 Sep-11 Jan-14
Goldman Sachs Global Investment Research.

Goldman Sachs 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. For Reg AC certification and other
important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by
non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. This report is intended for
distribution to GS institutional clients only.

The Goldman Sachs Group, Inc. Global Investment Research

January 14, 2014 United States

Economic strength will keep volatility low in 2014

Our forecast: S&P 500 realized volatility of 11 in 2014

Our economists expect: (1) real US GDP growth of 3%-3.5% over 2014; (2) the jobless rate
to fall to 6.1%; (3) core inflation to remain low at 1.1%-1.4% (year-to-year); and (4) the Fed
to remain on hold. The combination of stronger growth, moderate inflation, and
accommodative monetary policy should be conducive for another low volatility year. Using
the macro views of our U.S. Economics team and our economic model for realized
volatility, our forecast for S&P 500 realized volatility is 11 over 2014.

Low volatility is consistent with the current economic landscape

As we have argued many times in prior research, equity volatility shows clear links to the
business cycle with stronger manufacturing data and higher GDP growth associated with
lower levels of equity volatility. Benchmarking S&P 500 realized volatility relative to key
macro variables tells a story consistent with our formal forecast.

Volatility vs. ISM: The ISM manufacturing index averaged 54 in 2013, ranging from 49
to 57.3, and ended 2013 at 57. Our analysis shows that S&P 500 realized volatility has
averaged 11.6% in months when the ISM is 55-60.

Volatility vs. GDP: Our economists expect real GDP growth of 3% (qoq annualized) in
Q1 2014 with acceleration to 3.5% from Q2 through Q4 2014. S&P 500 realized volatility
is typically 12.8% in quarters when US GDP growth rates are in the 2.5%-4% range.

Volatility is low when growth is above trend and inflation below target: Our US
economics team expects above trend growth and inflation levels below the Feds 2%
target in 2014. Our results suggest that realized volatility has typically been 12.6%
when the economy is growing above trend and inflation is below 2%.

Bottom line: Our macro model for realized volatility suggests levels of 11 for realized
volatility over 2014. Benchmarking relative to ISM manufacturing, GDP and inflation
tell a similar story, with monthly and quarterly run rates of 11-13.

Exhibit 1: Our macro model for S&P 500 realized volatility suggests a forecast level of 11 for 2014.

S&P 500 Calendar Month

Realized Volatility = + 1 * Unemployment (yoy chg) + 2 * ISM new orders + 3 * Nondurable PCE (qoq % chg)

Economic Directional Impact on Sensitivity to

Variable S&P 500 Realized Volatility S&P 500 Realized Volatility
Unemployment Rate (yoy chg.) Decline in Unemployment Lower Vol -1% yoy chg in unemployment -1 to -2.6 vol pts
ISM New Orders (level) Stronger New Orders Lower Vol +1 point chg in ISM new orders -0.3 to -0.7 vol pts
Nondurables PCE (qoq % chg.) Increase in Spending Lower Vol +1% qoq chg in nondurables PCE -1.4 to -2.7 vol pts

We see low volatility in 2014 given Our S&P 500

strength in spending, employment and Realized Volatility Forecast
manufacturing activity
2014 11

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 2

January 14, 2014 United States

Historical perspective and risks to higher and lower volatility

S&P 500 calendar year realized volatility dropped from 41 in 2008 to 11 in 2013.
Has volatility come in too far, too fast? We dont think so. Our top-down model
and analysis of volatility relative to growth and other economic cycle indicators
suggest that vol levels of 11-13 are in line with the current economic landscape.

Our S&P 500 vol forecast of 11 for 2014 is 2.5 points below the long-run median:
To put our volatility forecast in perspective, the median level of calendar year realized
volatility back to 1929 is 13.5. If our forecast of 11 for SPX realized volatility is correct,
that would suggest vol levels 2.5 points below the long-run median or 30th percentile in
a rank order of calendar year realized volatility back to 1929.

Is lower vol possible? Months with sub-10 realized vol were common in 2013. In
2013 S&P 500 calendar month realized volatility closed below its historic mean of 15.2
in all months except June when it reached 17.3 on fears of Fed tapering. Realized
volatility was sub-10 in 6 out of 12 calendar months, reaching a low of 6.9 in July and
ending December 2013 at 9.5. Our models began suggesting sub-10 realized volatility
in September and as we enter 2014 our monthly forecasts for January through March
point to 10, suggesting a continuation of low volatility levels.1 In our full year forecast,
we input what we believe to be somewhat conservative economic assumptions which
push our full year forecast to 11 (see page 16).

Risks to higher volatility: As we show later in this report, no matter how we slice it
(correlations, betas or statistical significance), the sensitivity of volatility to macro
factors has more than doubled in recent years. While strength in the vol-macro link has
helped to explain the sharp decline post-crisis, it also highlights the increasing
sensitivity of equity volatility to macroeconomic risks.

Exhibit 2: Our forecast: S&P 500 calendar year realized volatility of 11 in 2014.
S&P 500 calendar month, quarter, and year volatility 1929-2013. Standard deviation of daily log returns.

S&P 500 Calendar Year Realized Volatility: 1929 - 2013

S&P 500 Realized Volatility Stats by:

`
50 2012: 12.8 1929- Calendar Calendar Calendar
2013: 11.1 Present Month Quarter Year
Median 1929-2013: 13.5 Current 9.5 10.3 11.1
Min 3.1 3.7 5.2
40 25th %ile 9.0 10.0 10.1
Median 12.2 12.9 13.5
Average 15.2 15.6 16.2
75th %-ile 17.3 17.7 18.2
30 Max 97.1 69.0 51.0
* Current statistics for: December 2013; 4Q13; full year 2013
Our 2014 Forecast: 11
S&P 500 Realized Volatility Stats by:
Calendar Month Calendar Year
20 Period Min Avg Max Min Avg Max
1929 10.0 29.6 85.5 37.6 37.6 37.6
1930's 10.7 28.1 75.1 16.2 29.7 51.0
1940's 5.4 13.5 47.1 8.6 14.4 21.5
10 1950's 5.1 10.5 27.6 7.9 11.0 14.9
1960's 3.1 8.7 34.1 5.2 9.5 16.6
1970's 5.8 12.6 31.8 9.1 13.2 21.8
1980's 7.6 14.9 97.1 10.1 16.3 33.7
0 1990's 4.9 13.0 34.8 7.8 13.5 20.3
2000's 6.8 17.9 79.9 10.0 19.1 41.0
1929

1934

1939

1944

1949

1954

1959

1964

1969

1974

1979

1984

1989

1994

1999

2004

2009

Overall 3.1 15.2 97.1 5.2 16.2 51.0

Source: Goldman Sachs Global Investment Research.

1
See The Buzz: Our views on equity volatility, September 15, 2013.

Goldman Sachs Global Investment Research 3

January 14, 2014 United States

Implications for VIX: Average monthly levels of 13 to 16

2013 VIX Retrospective: Peak VIX level was historically low
The VIX averaged 14.2 in 2013, its lowest level since the VIX averaged 12.8 in 2006. VIX
levels in 2014 ranged from 11.3 in March to 20.5 during the height of the taper tantrum in
June; a spike just barely above the average VIX level of 20.2 back to 1990. In our view
what made 2013 an anomaly was the lack of a significant move higher. The maximum
closing VIX level of 20.5 in 2013 was the 4th lowest in 24 years; only 1993 (17.3), 1995 (15.7)
and 2005 (17.7) witnessed lower highs (Exhibit 3).

Vol Risk Premium: VIX-realized vol spread compressed in 2013

Investors often point to low VIX levels as a proxy for market complacency. In our view, a
focus solely on the absolute level of the VIX loses sight of fact that the VIX is intended to
provide a market expectation for S&P 500 realized volatility. As such, it should be linked to
the level of actual realized volatility plus a risk premium. An analysis of the spread between
the VIX and trailing realized volatility can offer clues as to how much risk premium the
options market is baking in, or how complacent the market really is.

We expect average monthly VIX levels of 13-16 in 2014: The average spread between
VIX and 1m realized volatility was 3.2 in 2013, the lowest level over the past five years and
over a vol point below the long run average of 4.4 (Exhibit 3). Our forecast for realized
volatility would put the VIX in a 14 to 16 range if we apply the 3-5 point post crisis implied
to realized volatility spread to our realized volatility forecast of 11. Forecasting VIX based
solely on economic variables suggests average monthly VIX levels of 13-16 in 2014 (see
page 14), more in-line with prior low vol years like 2004-2006 and well below the long-run
average of 20.2.

Exhibit 3: We expect average monthly VIX levels of 13-16 in 2014.

Data from January 1990 to December 31, 2013.

Avg VIX by Calendar Year

35 33
31
30 VIX Avg VIX - Average : VIX - SPX 1m realized volatility
27 Year
26 26 Min Avg Max 1m rlzd vol -2 0 2 4 6 8
25 23 24 24 1990 14.7 23.1 36.5 7.6
23 23
22 22 7.6
1991 14.0 18.4 36.2 4.7 4.7
20 18 18 18 1992 11.5 15.5 21.0 5.5 5.5
16 1993 9.3 12.7 17.3 4.2
15 15 4.2
15 14 14 1994 9.9 13.9 23.9 4.3
13 13 13 4.3
12
1995 10.4 12.4 15.7 4.8 4.8
10 1996 12.0 16.4 22.0 5.2 5.2
1997 17.1 22.4 38.2 5.0 5.0
5 1998 16.2 25.6 45.7 7.1 7.1
1999 17.4 24.4 33.0 6.2 6.2
0 2000 16.5 23.3 33.5 2.1 2.1
2001 18.8 25.8 43.7 4.8
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013

4.8
2002 17.4 27.3 45.1 2.9 2.9
2003 15.6 22.0 34.7 5.3 5.3
90 2004 11.2 15.5 21.6 4.5 4.5
80 2005 10.2 12.8 17.7 2.7 2.7
S&P 500 1m realized vol 2006 9.9 12.8 23.8 3.0 3.0
70 2007 9.9 17.5 31.1 2.8 2.8 Avg: 4.4
VIX 2008 16.3 32.8 80.9 -1.6 -1.6
60
2009 19.5 31.5 56.7 5.5 5.5
50 2010 15.5 22.5 45.8 5.6 5.6
40 2011 14.6 24.2 48.0 3.7 3.7
2012 13.5 18.0 26.7 5.1 5.1
30 2013 11.3 14.2 20.5 3.2 3.2
Avg 9.3 20.2 80.9 4.4
20
10
0
Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Jan-11

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 4

January 14, 2014 United States

Identifying the strongest macro links to realized volatility

Understanding the interplay between volatility and the economic cycle has been a core
theme underlying our volatility framework. We have argued that risk metrics such as
realized market volatility, VIX, and correlation are cyclical; increasing during periods of
rising jobless claims, weaker growth and contraction in industrial activity and falling as
these factors stabilize. That said, a lot has changed since we first wrote our report A
macro model of volatility across the business cycle in 2009.

In this section we re-examine the links between macroeconomic variables and equity
volatility with the goal of understanding which economic variables have shown the
strongest correlations to equity volatility and how those relationships have changed over
time. We find strong correlations between S&P 500 realized volatility and economic series
representing manufacturing, spending, labor and growth. Exhibit 4 also highlights that
these correlations have grown stronger over time.

Exhibit 4: Consumer spending and manufacturing strength coupled with declining unemployment all point to lower
equity volatility.
Correlations of macro series vs. S&P 500 calendar month realized volatility (Jan. 1960 and Jan. 2000 December 2013).

Correlations between macro series and S&P 500 calendar month realized volatility
Economic Variable 1960 - 2013 2000 -2013 Correlation 2000 - 2013
Spending
Services PCE (yoy % chg) -0.32 -0.25 -.25
Durables PCE (yoy % chg) -0.27 -0.54 -.54 Increase in spending
PCE (yoy % chg) -0.35 -0.46 -.46
Nondurables PCE (yoy % chg) -0.38 -0.56 -.56
Vehicle Sales (yoy % chg) - -0.50 -.50
Retail Sales (yoy % chg) - -0.53 -.53 Lower Vol
Production
Industrial production (yoy % chg) -0.30 -0.44 -.44
Ind. prod. manufacturing (yoy % chg) -0.31 -0.46 -.46
ISM survey -0.30 -0.59 -.59 Production and
housing sector strength
ISM new orders survey -0.34 -0.61 -.61
ISM new orders less inventories -0.19 -0.37 -.37
ISM nonmanufacturing - -0.64 -.64
Housing Lower Vol
Housing starts (yoy % chg) -0.25 -0.39 -.39
Home Builders Index - -0.29 -.29
Labor
Initial claims (yoy % chg) 0.28 0.53 .53
Unemployment (yoy chg) 0.26 0.45 .45
Average Weekly Hours (yoy % chg) - -0.35 -.35
Labor market and
Nonfarm payrolls (yoy % chg) -0.31 -0.39 -.39 GDP growth strength
Civilian Employment (yoy % chg) - -0.38 -.38
Growth
Lower Vol
GDP (yoy % chg) -0.33 -0.63 -.63
Inflation
PPI Capital Equipment (yoy % chg) 0.04 0.22 .22
CPI index (yoy %chg) 0.03 -0.07 -.07 No clear link
.09 between
CPI core index (yoy % chg) 0.01 0.09
vol and inflation
PCE Index (yoy % chg) 0.01 -0.11 -.11
Sentiment
Improving
University of Michigan index - -0.26 -.26 market sentiment
Consumer Confidence - -0.44 -.44
Small Business Optimism Index - -0.35 -.35
Lower Vol

Source: Haver Analytics, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 5

January 14, 2014 United States

Among manufacturing variables: ISM new orders shows the

strongest correlation to equity volatility
In the manufacturing category, industrial production and the ISM manufacturing survey are
both highly correlated with equity volatility. The correlation of the ISM new orders
subcomponent is stronger than both, at -0.34 back to 1960 and at -0.61 back to 2000.

The ISM manufacturing index is released on the first business day of each month and is
one of the most important economic indicators in terms of both market impact and ability
to forecast future economic activity. The ISM release contains the headline number, as well
as a variety of subcomponents which capture different phases of the manufacturing
process. The level of the index is already a growth concept or measure of change with
survey respondents asked whether current activity was better than, the same as, or worse
than the prior month.

In a report out last year, our US economics team showed ISM new orders to be the most
correlated with GDP among ISM subcomponents.2 New orders from manufacturers directly
affect the level of both unfilled orders and inventories that firms must monitor before
making production decisions. Rising orders suggest consumer demand is strengthening,
which is likely to result in increased production and employment, while falling orders
signal the opposite. Not only is new orders highly correlated to GDP, it also shows the
strongest link back to equity volatility, with correlations 2x higher over the 2000-present
sample than over the period back to 1960.

Exhibit 5: Among ISM manufacturing subcomponents, new orders shows the strongest correlation to both GDP growth
and equity volatility.
Data from January 1960 to December 2013. Correlations to realized volatility use monthly observations; correlations to GDP use
quarterly obs and average ISM levels over the quarter.

Correlation of ISM Components vs Correlation of ISM

S&P 500 Realized Volatility and GDP growth Components (2000-Present)
vs
1960-present 1980-present 2000-present
ISM component
Rlzd Vol GDP Rlzd Vol GDP Rlzd Vol GDP Rlzd vol GDP growth

New orders ISM New Orders Index -0.34 0.67 -0.30 0.67 -0.61 0.67 -0.61 0.67
shows the ISM Production Index -0.33 0.67 -0.28 0.66 -0.58 0.66 -0.58 0.66
highest -0.56 0.53
ISM Employment Index -0.28 0.52 -0.22 0.49 -0.56 0.53
correlation to
GDP growth ISM Inventories Index -0.20 0.33 -0.15 0.42 -0.41 0.38 -0.41 0.38

and ISM new orders less inventories -0.18 0.44 -0.23 0.51 -0.37 0.47 -0.37 0.47
equity volatility ISM Supplier Deliveries Index -0.06 0.25 -0.04 0.46 -0.29 0.35 -0.29 0.35

ISM Manufacturing (headline) -0.30 0.61 -0.25 0.65 -0.59 0.62 -0.59 0.62

-0.80 -0.40 0.00 0.40 0.80

7.5
60
5
55
2.5
ISM
manufacturing 50
0
linked to
GDP growth 45
-2.5

-5 40
Real GDP growth (yoy %)
ISM manufacturing index, 12m average (RHS)
-7.5 35
Mar-00 Mar-02 Mar-04 Mar-06 Mar-08 Mar-10 Mar-12

Source: Haver Analytics, Goldman Sachs Global Investment Research.

2
See US Daily: The ISMs Signal Private Sector Strength, October 24, 2013.

Goldman Sachs Global Investment Research 6

January 14, 2014 United States

ISM manufacturing and new orders point to monthly realized volatility of 11-12
As growth rebounds and manufacturing improves, equities typically rally and equity
volatility declines. Benchmarking S&P 500 calendar month realized volatility relative to ISM
manufacturing and ISM new orders points to volatility levels right in line with our forecast
for S&P 500 calendar month realized volatility of 11.

S&P 500 realized volatility has averaged 11.6 in months when the ISM has been
between 55-60: From a business cycle perspective the ISM currently stands at 57, near
its multi-year high of 59.4 reached in April 2011. S&P 500 realized volatility has
typically averaged 11.6 in months when the ISM has ranged between 55-60.

S&P 500 realized volatility has averaged 11.5 in months when the ISM new orders
has been between 60-65: The ISM new orders index currently stands at 64.2, its
highest level since April 2010. S&P 500 realized volatility has typically averaged 11.5 in
months when new orders landed between 60-65.

Impact on equity vol: ISM manufacturing is negatively correlated to volatility. An

increase is associated with positive GDP growth, which contributes to lower volatility.

Exhibit 6: Stronger manufacturing activity ==> lower vol Exhibit 7: SPX realized vol has averaged 11.5 in months
Average S&P 500 calendar month realized volatility by ISM when new orders landed between 60 and 65.
level from January 1960 December 2013. Average S&P 500 calendar month realized volatility by ISM
new orders level from January 1960 December 2013.

23.9 22.0

17.1

14.5 14.9
13.7 14.6

11.6 11.8
12.2 12.5
11.5

< 40 40 - 45 45 - 50 50 - 55 55 - 60 > 60 < 45 45 - 50 50 - 55 55 - 60 60 - 65 > 65

ISM level ISM New Orders

Source: Haver Analytics, Goldman Sachs Global Investment Research. Source: Haver Analytics, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 7

January 14, 2014 United States

Among spending variables: volatility is most correlated with

nondurable goods PCE
Of all the macro variables with data back to 1960, nondurable goods consumer expenditure
(PCE) was most strongly correlated with equity volatility. PCE is the most comprehensive
measure of consumer spending and the largest component of GDP. Large changes in PCE
have a direct impact on the length and magnitude of a downturn in the business cycle; a
decline in consumption implies a decline in GDP. Given the strong, positive link between
GDP and corporate profit growth, a decline in consumption will translate into weaker
profits, driving equity returns down and volatility higher.

The nondurable goods subcomponent represents a larger share of PCE than durable goods
(though both represent a lesser share than services) and has been more highly correlated
to equity vol (Exhibit 8). The correlation between nondurable goods PCE and volatility has
been -0.38 back to 1960 and -0.56, or 1.5x higher, back to 2000.

Impact on equity vol: Consumer spending is negatively related to vol. Increased

consumption translates into lower equity volatility.

Exhibit 8: Increases in consumer spending translate to lower volatility.

S&P 500 calendar month realized vol vs. yoy percent changes in nondurable goods PCE

Correlation of PCE vs S&P 500 Realized Volatility

by Subsample

0.00

-0.10
-0.17

-0.20 -0.23 -0.25 -0.25

-0.27 -0.27

-0.30 -0.34
-0.28
-0.32
-0.40 -0.38 -0.37 -0.37
-0.41
-0.50 -0.54
PCE: Nondurables PCE: Durables PCE: Services
-0.60 -0.56
1960-2013 1970-2013 1980-2013 1990-2013 2000-2013
Sample period

Source: Haver Analytics, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 8

January 14, 2014 United States

Measures of change in the labor market are strongly related to vol

While the absolute level of unemployment has shown nearly zero correlation to volatility
over time, variables which capture changes in the labor market (unemployment, nonfarm
payrolls and aggregate hours worked) are highly correlated with equity vol. In effect, the
labor market serves as a proxy for the stage of the business cycle. While nonfarm payroll
growth shows the strongest correlation to vol back to 1960, changes in the unemployment
rate show the strongest link over the more recent period back to 2000. Our economists
expect another year of steady declines in the unemployment rate over the course of 2014,
which would argue for another year of low volatility.

Impact on equity vol: Changes in the unemployment rate are positively correlated
equity to volatility. A decline in the annual change in unemployment translates to
lower volatility.

Exhibit 9: Declines in unemployment translate to lower volatility.

S&P 500 calendar month realized vol vs. changes in unemployment and growth in nonfarm
payrolls.

S&P 500 Realized Volatility vs

65 Changes in the Unemployment Rate
4.5
SPX 6m realized vol (LHS)
55
Unemployment rate (yoy chg) 3.5
45
2.5

35
1.5

25 0.5

15 -0.5

5 -1.5
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12

Correlation of Employment vs S&P 500 Realized Volatility

by Subsample

0.5 Unemployment rate (yoy chg) 0.45

0.42
0.4 Nonfarm payrolls (yoy % chg)
0.27 0.29
0.3 0.26
0.2
0.1
0
-0.1
-0.2 -0.30 -0.29 -0.30
-0.3 -0.39 -0.41
-0.4
-0.5
1960-2013 1970-2013 1980-2013 1990-2013 2000-2013
Sample period

Source: Haver Analytics, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 9

January 14, 2014 United States

Stronger growth; lower vol: Our US growth outlook points to S&P

500 realized volatility around 12
Growth clearly matters too - it shows one the highest correlations to vol, especially over
the recent 2000-present period. That follows from a positive link between corporate profit
growth and GDP. Strength or weakness in corporate profits often foreshadows increases or
decreases in the contribution of capital spending to real GDP growth. This translates into a
relationship where stronger growth contributes to lower volatility via improvements in
businesses activity.

Impact on equity vol: GDP growth is negatively correlated to equity vol with periods
of higher growth tending to coincide with lower volatility.

Volatility of 12 in quarters when GDP growth is above trend

US growth is gaining momentum and our economists expect above trend growth in 2014.
Benchmarking S&P 500 realized volatility relative to: (1) the level of GDP growth, and (2)
GDP relative to potential, points to quarterly volatility levels of 12, on par with our full year
forecast (Exhibits 10 and 11).

S&P 500 realized volatility has averaged 12.8 in quarters when US real GDP is
between 2.5%-4%: Q3 real US GDP growth was revised up to +4.1% and our US
economics team is predicting 3%-3.5% quarterly growth rates in 2014. Realized
volatility has averaged 12.8 in quarters when GDP growth rates were between 2.5%-4%.

Above trend growth points to 11.6 realized volatility: Our economics team expects
US growth to rise above trend for the first time in the recovery. Coupling our growth
forecast with the US Congressional Budget Offices (CBO) measure of potential growth,
suggests the economy will be growing roughly 1.5% above potential by year-end 2014.
S&P 500 realized volatility has averaged 11.6 when the economy is growing 1.5% or
more above its potential level, which is also in line with our forecast.

While growth clearly matters, its impact on vol may be captured by other indicators:
GDP, because of its quarterly release, is not the timeliest of economic indicators and in our
view is more of a catch-all. Spending, manufacturing and the labor market all flow through
to affect growth and PCE alone represents approximately 70% of GDP. Therefore, from a
modeling perspective, to speak of both factors together may be duplicative as they capture
overlapping information.

Exhibit 10: S&P 500 realized vol has been 12.8 in quarters Exhibit 11: Vol is lower when GDP growth is above trend.
when real GDP growth rates are between 2.5% and 4%. Data from 1960 Q1 2013 Q3. X-axis: 4 quarter moving
Average S&P 500 calendar quarter realized vol by real GDP average of real GDP growth - trend growth. Trend estimates
growth rate (qoq % chg. annualized) from 1960 - 2013 Q3. are taken from the US Congressional Budget Office (CBO).

17.7
20.3

14.4

14.7
12.5
12.8 12.6 11.6

< 0% 0% - 2.5% 2.5% - 4% >4% < -1.5% - 1.5% - 0% 0% - 1.5% > 1.5%
Real GDP growth Real GDP growth - Trend Growth

Source: Haver Analytics, Goldman Sachs Global Investment Research. Source: Haver Analytics, CBO, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 10

January 14, 2014 United States

Growth above trend/inflation below trend: expect low volatility

The link between inflation and equity volatility is tricky, as this relationship has evolved
with changes in monetary policy (i.e., whether the Fed targets inflation). Correlations of
inflation variables to realized volatility over the long run are very low. In our view it is the
interaction between growth and inflation which matters more.

While the Fed made the 2% inflation target explicit in 2012, exhibit 12 shows that inflation
stabilized around the 2% level beginning in the late 90s. We use quarterly CPI core inflation
and CBO trend growth data back to 1998 and estimate median realized volatility levels
across four phases: inflation above/below 2%; GDP above/below trend (Exhibit 13).

Periods of above trend growth and inflation below 2% => low volatility: Our 2014
economic outlook points to an environment of above trend growth and inflation below
the Feds 2% target. Past environments with this combination have been characterized
by low volatility.

Our analysis suggests realized volatility has historically been 12.6 in environments with
above trend growth and inflation below 2%. That number jumps to 21.4 or 1.7x higher
in states of below trend growth and above target inflation.

While these results are based on a small sample (the number of observations per
inflation-growth bucket range between 10 and 19), we believe they make economic
sense. Environments of high growth with little pressure to tighten monetary policy
should coincide with periods of lower volatility, in our view.

Exhibit 12: Inflation has fluctuated around the 2% target Exhibit 13: Vol is lower when GDP is above trend.
since late 90s. Quarterly CPI core inflation (annualized) with trend growth
Quarterly CPI core inflation (annualized). Data from 1960 Q1 - estimates taken from the US Congressional Budget Office. Y-
2013 Q3. axis: 4 quarter moving average of real GDP growth - trend
growth. Data from 1998 Q1 2013 Q3.

CPI Core Inflation Median S&P 500 Realized Volatility

16 by Phases of Inflation and Growth
6
14 Above trendgrowth+ Above trendgrowth+

4 Inflationbelowtarget Inflationabovetarget
12
GDP growth - Trend growth (%)

10
2 Median realized vol Median realized vol
8 12.6 13.6

6 0

4 Below trendgrowth+ Belowtrendgrowth+

-2 Inflationbelowtarget Inflationabovetarget
2
0 -4 Median realized vol Median realized vol
17.6 21.4
-2
-6
-4 -2 0 2 4
CPI core inflation - 2% target

Source: Haver Analytics, Goldman Sachs Global Investment Research. Source: Haver Analytics, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 11

January 14, 2014 United States

ISM non-manufacturing shows the highest correlation to vol back

to 2000, but it is also highly correlated to the other macro variables
The ISM non-manufacturing survey shows the highest correlation to realized volatility
across all of our macro variables back to 2000. Many investors have asked us why the ISM
non-manufacturing survey is not one of the inputs into our official vol model given its
strong correlation to volatility and the high weight of the services sector in the US
economy. Our rationale has been that the ISM non-manufacturing survey is also highly
correlated to manufacturing, consumption expenditure and labor variables (Exhibit 15). In
fact, if we add ISM non-manufacturing to our baseline economic model, it does not show
statistical significance. Replacing ISM manufacturing by non-manufacturing in our baseline
model for realized volatility affects the statistical significance of employment and spending
variables given the high collinearity among the explanatory variables.

Exhibit 14: The ISM non-manufacturing index is highly correlated to SPX realized volatility.
Data from July 1997 to January 10, 2014.

75
80 SPX calendar month realized volatility
70
70 ISM non-manufacturing index (RHS)
65
60
60
50
55
40

30 50

20 45

10 40

0 35
Jul-97 Jul-99 Jul-01 Jul-03 Jul-05 Jul-07 Jul-09 Jul-11 Jul-13

Source: Haver Analytics, Goldman Sachs Global Investment Research.

Exhibit 15: ISM non-manufacturing is highly correlated to manufacturing, consumption

expenditure and employment trends.
Data from July 1997 to January 10, 2014.

Correlations among macro variables (July 1997 - December 2013)

ISM ISM PCE Nondurables Unemployment Nonfarm Payrolls
Non-manufacturing Manufacturing (yoy % chg) (yoy chg) (yoy % chg)
ISM non-manufacturing 1.00 0.78 0.75 -0.72 0.67
ISM manufacturing 0.78 1.00 0.52 -0.49 0.35
PCE (yoy % chg) 0.75 0.52 1.00 -0.67 0.69
Unemployment (yoy chg) -0.72 -0.49 -0.67 1.00 -0.92
Nonfarm payrolls (yoy % chg) 0.67 0.35 0.69 -0.92 1.00

Source: Haver Analytics, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 12

January 14, 2014 United States

Our economic framework for modeling S&P 500 realized volatility

Formalizing the links between equity volatility and the economy

In the prior section we showed evidence of the strong links between volatility and the
business cycle. We now take a step back for readers less familiar with our economic model
and revisit our framework for quantifying how changes in the economic landscape affect
S&P 500 one-month realized volatility.

Our process: Starting with over 40 economic series related to production, spending, the
labor market, sentiment and inflation, we estimated nearly 8,000 regression models. We
ran best subsets regressions, ranked models based upon highest R-squared and selected a
three-variable model that uses information from broad economic categories, provides
meaningful results and shows high explanatory power for modeling S&P 500 1-month
realized volatility.

Our model forecasts S&P 500 realized volatility using:

1. Year-over-year changes in the unemployment rate;
2. The level of the ISM new orders survey; and
3. Quarterly percent changes in nondurable goods PCE.

Exhibit 16: The directional impact of economic variables on S&P 500 realized volatility.
Data from January 1960 to January 10, 2014.

S&P 500 Calendar Month

= + 1 * Unemployment (yoy chg) + 2 * ISM new orders + 3 * Nondurable PCE (qoq % chg)
Realized Volatility

Economic Directional Impact on Jan 1960-Dec 2013 Jan 2000-Dec 2013

Variable S&P 500 Realized Volatility Coeff T-Value Coeff T-Value
Unemployment Rate (yoy chg) Lower unemployment Lower Vol 0.96 3.1 2.56 4.6
ISM New Orders (level) Stronger New Orders Lower Vol -0.26 -5.9 -0.66 -7.5
Nondurables PCE (qoq % chg) Increase in Spending Lower Vol -1.38 -4.0 -2.69 -3.3
R-Squared: 0.15 from 1960, 0.49 since 2000

Source: Haver Analytics, Goldman Sachs Global Investment Research.

The betas: Assessing the impact of macro factors on volatility

Our model explains about 50% of the variation in volatility back to 2000 and 15% back to
1960. The betas allow us to quantify the impact of changes in economic variables on equity
volatility and their signs make intuitive sense:

Changes in the unemployment rate are positively correlated to volatility: As the

labor outlook relative to one year ago improves, volatility declines. We estimate that
baseline volatility tends to decline about a vol point for every one point yoy decline in
the unemployment rate, all else equal. This effect has been 2.5x higher since 2000.

ISM new orders and consumer spending are negatively related to volatility with
improvements in manufacturing and spending translating to lower volatility. We
estimate that baseline volatility tends to drop about one-quarter of a vol point for every
one point rise in ISM new orders and 1.4 vol points for every 100 bp quarterly increase
in nondurable PCE. These affects are roughly 2x higher over the 2000-present sample.

Goldman Sachs Global Investment Research 13

January 14, 2014 United States

Economic landscape suggests VIX levels of 13-16 in 2014

Estimating VIX levels from economic variables. In this section we look at how VIX levels
relate to the economic landscape. Our approach is simple. We use the same three variables
included in our realized volatility model to estimate how much of the change in VIX can be
explained solely by the economic environment. To handle the different data frequencies
between VIX and macro variables, we ran regressions of average calendar month VIX
levels on our economic variables back to 1990 and the more recent 2000-present period.

Higher R2s for VIX than for realized volatility: Our regression for VIX explains 56% of
monthly VIX variation back to 2000 and 39% back to 1990. These R2s are higher than
those from our realized volatility model (49% back to 2000 and 34% back to 1990).

Declines in the unemployment rate suggest lower VIX levels and the beta is
higher for VIX than realized vol: We estimate that average calendar month VIX levels
tend to decline over 3 vol points for every one point yoy decline in the unemployment
rate, all else equal. This effect is about of a vol point larger than the impact of the
same unemployment decline on realized volatility. This may suggest the risk premium
tends to drop as the labor market improves, in line with what we saw in 2013.

Improvements in manufacturing point to lower VIX levels. Relative to

manufacturing activity, we estimate that monthly VIX levels tend to drop about one-
half of a vol point for every one point rise in ISM new orders.

Spending growth shows a weaker effect on VIX than on realized volatility. While
consumer spending growth is also negatively related to VIX, with a 100 bp increase in
nondurable PCE shaving about 1.3 vol points off average VIX levels, this variable does
not show statistical significance for VIX back to 1990.

Economics supports a VIX level of 13-16: If we use the same forecasting

assumptions on the variables underlying our economic model for realized volatility, we
forecast VIX levels of 13-16 for 2014. This range is consistent with a volatility risk
premium of 2-3 vol points, similar to the average premium in 2013 and 2005-2007.

Exhibit 17: Declines in the unemployment rate and manufacturing strength => lower VIX levels.
Data from January 1990 to January 10, 2014.

Average
= + 1 * Unemployment (yoy chg) + 2 * ISM new orders + 3 * Nondurable PCE (qoq % chg)
Calendar Month VIX

75
Economic Directional Impact on 1990- 2013 2000-2013
Variable Avg Calendar Month VIX Coeff T-Value Coeff T-Value 65 Avg calendar month VIX
Unemployment Rate (yoy chg) Lower unemployment Lower VIX 2.84 7.3 3.11 7.5 Predicted
ISM New Orders (level) Stronger New Orders Lower VIX -0.41 -7.5 -0.52 -8.1 55
Nondurables PCE (qoq % chg) Increase in Spending Lower VIX -0.52 -1.1 -1.25 -2.1
R-Squared: 0.39 from 1990, 0.56 since 2000 45
2014
Forecast
35

Average VIX
25
Forecast for 2014
13-16
15

5
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 14

January 14, 2014 United States

Globalizing our economic model using our global leading indicator

Our base model for realized volatility only includes US economic variables. If we extend
our US model and include our Global Leading Indicator (GLI), specifically GLI momentum
or the monthly change in the GLI, to capture shifts in the global industrial cycle we find that
GLI momentum is statistically significant. The model coefficients are also of the right sign
suggesting that positive shifts in the global industrial cycle translate into lower volatility
levels. The globalized model explains about 60% of the variation in realized volatility back
to 2000 and is currently estimating a sub-10 volatility level for January 2014.

Exhibit 18: Our extended model including our Global Leading Indicator (specifically GLI
momentum) aims to capture the impact of shifts in the global cycle on volatility.
GLI momentum is the month-over-month change in the Goldman Sachs Global Leading
Indicator. Data from January 2000 to January 10, 2014.

Economic Directional Impact on Jan 2000-Dec 2013

Variable S&P 500 Realized Volatility Coeff T-Value
Unemployment Rate (yoy chg) Lower unemployment Lower Vol 4.04 7.3
ISM New Orders (level) Stronger New Orders Lower Vol -0.21 -2.0
Nondurables PCE (qoq % chg) Increase in Spending Lower Vol -1.43 -1.9
GLI Momentum Positive momentum Lower Vol -8.79 -6.2
R-Squared: 0.59
2.0
1.5 GS GLI momentum indicator
1.0
Improvements in the global
0.5
industrial cycle as measured by
0.0 our GLI momentum indicator
-0.5
-1.0
-1.5
-2.0 Lower volatility levels
-2.5
Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12

S&P 500 1m Realized Volatility: Actual vs Predicted

Model: US Econ Model + GLI Momentum

85
S&P 500 calendar month realized volatility
75 Predicted

Current
65 Predicted rlzd = 9.3
ISM = 57
55 New Orders = 64.2
GLI in expansion

45

35

25

15

5
Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07 Jan-09 Jul-10 Jan-12 Jul-13

Source: Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 15

January 14, 2014 United States

More detail on our S&P 500 realized volatility forecast

Our economists expect a sustained pickup in US GDP growth to an above-trend rate in
2014. They expect US GDP growth of 3% in Q1 2014 and 3.5% over the rest of 2014 . We
outline the baseline economic assumptions used in our S&P 500 volatility forecast below:

ISM New Orders: The ISM new orders survey is currently at 64.2, its highest level
since April 2010 and screens in its 88th %-ile over non-recession periods back to 1960.
While new orders may remain high in the coming months, we assume that ISM new
orders reverts from its current level of 64.2 to 57.6 at the end of 2014, its non-recession
median back to 1960. A drop in ISM new orders below our forecast path would point to
a higher level for equity volatility than our forecast suggests, all else equal.

Unemployment Rate: Our economists expect that the unemployment rate will
continue to decline in 2014 as the economy improves. Using their forecast, we assume
that the US unemployment rate will hit 6.5% in 2014Q2, trending down to 6.1% by
year-end 2014.

Spending: On the consumption side, our economists expect spending to accelerate in

2014 as the impact of the tax hikes fade and clear the way for consumption growth to
accelerate. We assume nondurable goods PCE will improve at the same pace as overall
consumption and grow at an annualized rate of 2.5% in Q1 2014 and 3% over the final
three quarters.

Our base case economic assumptions put calendar month realized volatility for the
S&P 500 between 10 and 12 throughout 2014. All three model inputs reflect a positive
shift in the macroeconomic picture, and suggest that realized volatility will hover
near 2013 levels in 2014.

Like all models there are pros and cons to our approach
Model Pros: Our macroeconomic volatility model estimates trend volatility based purely
off of economic data. That allows us to benchmark the current level of equity volatility
relative to key macro drivers. It also uses inputs which economists actually forecast. Many
academic models have used sentiment and the volatility of macro variables to explain
equity volatility. Although these models may work well there are not consensus estimates
for the volatility of inflation, vol of industrial production etc. making them harder to use in
practice.

Model Cons: Our model, by construction, uses only economic inputs. It therefore reflects
no jump risk, and cannot account for sentiment driven moves unrelated to the economic
outlook. As such, it does not tend to capture extremes well, as volatility can remain high
even when the economics are not poor. We tend to look at cross asset relationships during
periods of stress, in an effort to benchmark whether S&P 500 realized volatility and the VIX
may be over- or undershooting the stress in another asset class. We also understand that
our approach is very US centric reflected in the fact that our model inputs are US economic
variables. That is one reason we also benchmark using both our base model and overlay
our Global Leading Indicator in an effort to provide a broader global perspective.

Goldman Sachs Global Investment Research 16

January 14, 2014 United States

Exhibit 19: We see monthly S&P 500 realized volatility levels between 10 and 12 in 2014.
Calibrated on 1960- present and 2000- present data

S&P 500 Calendar Month Realized

Macro Economic Assumptions
Volatility Forecasts
Unemployment Unemployment Nondurable goods 1960 - present 2000 - present
Period end ISM new orders
rate rate, yoy PCE, qoq % model model
Dec 2013 6.7 -1.2 64.2 1.0 9.7 7.5
Mar 2014 6.6 -0.9 61.6 0.6 11.2 9.9
Jun 2014 6.5 -1.0 59.9 0.7 11.4 10.5
Sep 2014 6.3 -0.9 58.7 0.7 11.8 11.5
Dec 2014 6.1 -0.6 58.0 0.7 12.3 12.4

Source: Goldman Sachs Global Investment Research. Nondurable goods PCE data for December 2013 is forecast.

Exhibit 20: Our view: S&P 500 realized will continue to Exhibit 21: Consumer spending path
below average levels in 2014 We expect nondurable goods PCE to accelerate in Q2.
Model predicted uses 1960-December 2013 parameter
estimates

30 30 2.0
SPX calendar month Nondurable goods PCE (qoq % chg)
realized volatility
25 25 Nondurable goods PCE assumed for
Our forecast for SPX 1m realized vol 1.5 base case volatility forecast
10-11 over 1H 2014
20 11-12 over 2H 2014 20
1.0
15 15
0.5
10 10

0.0
5 5
Average since 1960: 13.7 Model Predicted
0 0 -0.5
Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jan-11 Jan-12 Jan-13 Jan-14

Source: Goldman Sachs Global Investment Research. Source: Haver Analytics, Goldman Sachs Global Investment Research.

Exhibit 22: ISM new orders path Exhibit 23: Unemployment will keep its declining pace
Our base case scenario builds in a gradual reversion of ISM We expect the unemployment rate to decline to 6.5% in Q2.
new orders to its non-recession average of 57.6.

70 10
ISM new orders
Unemployment rate
ISM new orders assumed for
65 base case volatility forecast 9 Unemployment rate assumed for base case
volatility forecast

60
8
55

7
50

45 6
Jan-11 Jan-12 Jan-13 Jan-14 Jan-11 Jan-12 Jan-13 Jan-14

Source: Haver Analytics, Goldman Sachs Global Investment Research.. Source: Haver Analytics, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 17

January 14, 2014 United States

Disclosure Appendix
Reg AC
We, Krag Gregory, Ph.D. and Jose Gonzalo Rangel, hereby certify that all of the views expressed in this report accurately reflect our personal views
about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or
indirectly, related to the specific recommendations or views expressed in this report.

Disclosures
Option Specific Disclosures
Price target methodology: Please refer to the analysts previously published research for methodology and risks associated with equity price
targets.
Pricing Disclosure: Option prices and volatility levels in this note are indicative only, and are based on our estimates of recent mid-market
levels(unless otherwise noted). All prices and levels exclude transaction costs unless otherwise stated.
General Options Risks The risks below and any other options risks mentioned in this research report pertain both to specific derivative trade
recommendations mentioned and to discussion of general opportunities and advantages of derivative strategies. Unless otherwise noted, options
strategies mentioned in this report may be a combination of the strategies below and therefore carry with them the risks of those strategies.
Buying Options - Investors who buy call (put) options risk loss of the entire premium paid if the underlying security finishes below (above) the
strike price at expiration. Investors who buy call or put spreads also risk a maximum loss of the premium paid. The maximum gain on a long call or
put spread is the difference between the strike prices, less the premium paid.
Selling Options - Investors who sell calls on securities they do not own risk unlimited loss of the security price less the strike price. Investors who
sell covered calls (sell calls while owning the underlying security) risk having to deliver the underlying security or pay the difference between the
security price and the strike price, depending on whether the option is settled by physical delivery or cash-settled. Investors who sell puts risk loss of
the strike price less the premium received for selling the put. Investors who sell put or call spreads risk a maximum loss of the difference between the
strikes less the premium received, while their maximum gain is the premium received.
For options settled by physical delivery, the above risks assume the options buyer or seller, buys or sells the resulting securities at the
settlement price on expiry.

Distribution of ratings/investment banking relationships

Goldman Sachs Investment Research global coverage universe
Rating Distribution Investment Banking Relationships
Buy Hold Sell Buy Hold Sell
Global 32% 54% 14% 53% 45% 36%
As of January 1, 2014, Goldman Sachs Global Investment Research had investment ratings on 3,637 equity securities. Goldman Sachs assigns stocks
as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell
for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.

Disclosures required by United States laws and regulations

See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager
or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-
managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs usually makes a
market in fixed income securities of issuers discussed in this report and usually deals as a principal in these securities.
The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts,
professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of
coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking
revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their
households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S.
Analysts: Non-U.S. analysts may not be associated persons of Goldman, Sachs & Co. and therefore may not be subject to NASD Rule 2711/NYSE
Rules 472 restrictions on communications with subject company, public appearances and trading securities held by the analysts.

Additional disclosures required under the laws and regulations of jurisdictions other than the United States
The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws
and regulations. Australia: Goldman Sachs Australia Pty Ltd and its affiliates are not authorised deposit-taking institutions (as that term is defined in
the Banking Act 1959 (Cth)) in Australia and do not provide banking services, nor carry on a banking business, in Australia. This research, and any
access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act, unless otherwise agreed by Goldman
Sachs. Brazil: Disclosure information in relation to CVM Instruction 483 is available at http://www.gs.com/worldwide/brazil/area/gir/index.html.
Where applicable, the Brazil-registered analyst primarily responsible for the content of this research report, as defined in Article 16 of CVM Instruction
483, is the first author named at the beginning of this report, unless indicated otherwise at the end of the text. Canada: Goldman, Sachs & Co. has
approved of, and agreed to take responsibility for, this research in Canada if and to the extent it relates to equity securities of Canadian issuers.
Analysts may conduct site visits but are prohibited from accepting payment or reimbursement by the company of travel expenses for such
visits. Hong Kong: Further information on the securities of covered companies referred to in this research may be obtained on request from
Goldman Sachs (Asia) L.L.C. India: Further information on the subject company or companies referred to in this research may be obtained from
Goldman Sachs (India) Securities Private Limited; Japan: See below. Korea: Further information on the subject company or companies referred to
in this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. New Zealand: Goldman Sachs New Zealand Limited and its
affiliates are neither "registered banks" nor "deposit takers" (as defined in the Reserve Bank of New Zealand Act 1989) in New Zealand. This research,
and any access to it, is intended for "wholesale clients" (as defined in the Financial Advisers Act 2008) unless otherwise agreed by Goldman
Sachs. Russia: Research reports distributed in the Russian Federation are not advertising as defined in the Russian legislation, but are information
and analysis not having product promotion as their main purpose and do not provide appraisal within the meaning of the Russian legislation on

Goldman Sachs Global Investment Research 18

January 14, 2014 United States

appraisal activity. Singapore: Further information on the covered companies referred to in this research may be obtained from Goldman Sachs
(Singapore) Pte. (Company Number: 198602165W). Taiwan: This material is for reference only and must not be reprinted without permission.
Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. United
Kingdom: Persons who would be categorized as retail clients in the United Kingdom, as such term is defined in the rules of the Financial Conduct
Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer
to the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial
terms used in this report, are available from Goldman Sachs International on request.
European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/126/EC is available
at http://www.gs.com/disclosures/europeanpolicy.html which states the European Policy for Managing Conflicts of Interest in Connection with
Investment Research.
Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer registered with the Kanto Financial Bureau under registration number Kinsho
69, and a member of Japan Securities Dealers Association, Financial Futures Association of Japan and Type II Financial Instruments Firms
Association. Sales and purchase of equities are subject to commission pre-determined with clients plus consumption tax. See company-specific
disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese
Securities Finance Company.

Ratings, coverage groups and views and related definitions

Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy
or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as
a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a
global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage
group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment
recommendations focused on either the size of the potential return or the likelihood of the realization of the return.
Return potential represents the price differential between the current share price and the price target expected during the time horizon associated
with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each
report adding or reiterating an Investment List membership.
Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at
http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst's investment outlook
on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12
months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the
following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over
the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation.
Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an
advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman
Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis for
determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and
price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended
coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The
information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.

Global product; distributing entities

The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global
basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on
macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd
(ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Corretora de Ttulos e Valores Mobilirios S.A.; in Canada by Goldman, Sachs & Co.
regarding Canadian equities and by Goldman, Sachs & Co. (all other research); in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman
Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul
Branch; in New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore)
Pte. (Company Number: 198602165W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this
research in connection with its distribution in the United Kingdom and European Union.
European Union: Goldman Sachs International authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority
and the Prudential Regulation Authority, has approved this research in connection with its distribution in the European Union and United Kingdom;
Goldman Sachs AG and Goldman Sachs International Zweigniederlassung Frankfurt, regulated by the Bundesanstalt fr
Finanzdienstleistungsaufsicht, may also distribute research in Germany.

General disclosures
This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we
consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as
appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large
majority of reports are published at irregular intervals as appropriate in the analyst's judgment.
Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have
investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research
Division. Goldman, Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org).
Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our
proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, our
proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views
expressed in this research.
The analysts named in this report may have from time to time discussed with our clients, including Goldman Sachs salespersons and traders, or may
discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity
securities discussed in this report, which impact may be directionally counter to the analyst's published price target expectations for such stocks. Any
such trading strategies are distinct from and do not affect the analyst's fundamental equity rating for such stocks, which rating reflects a stock's
return potential relative to its coverage group as described herein.

Goldman Sachs Global Investment Research 19

January 14, 2014 United States

We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in,
act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research.
This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be
illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of
individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if
appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them
may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.
Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.
Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors.
Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at
http://www.theocc.com/about/publications/character-risks.jsp. Transaction costs may be significant in option strategies calling for multiple purchase
and sales of options such as spreads. Supporting documentation will be supplied upon request.
In producing research reports, members of the Global Investment Research Division of Goldman Sachs Australia may attend site visits and other
meetings hosted by the issuers the subject of its research reports. In some instances the costs of such site visits or meetings may be met in part or in
whole by the issuers concerned if Goldman Sachs Australia considers it is appropriate and reasonable in the specific circumstances relating to the
site visit or meeting.
All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all
research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our
research by third party aggregators. For research or data available on a particular security, please contact your sales representative or go to
http://360.gs.com.
Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY
10282.
2014 Goldman Sachs.
No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior
written consent of The Goldman Sachs Group, Inc.

Goldman Sachs Global Investment Research 20