Citigroup Smith Barney Affluent Investor Poll Outlook 2006; Investment Climate Observations and Impact of Energy Costs

Citigroup Smith Barney has announced the results of a new monthlypoll of affluent investors. The poll was conducted with investors whohave at least $100,000 in financial assets (excluding real estate andemployer retirement plans), a definition that describes approximatelyone-quarter of all U.S. households. Investors with $1 million or morerepresent 44% of the interviews.

Investor Poll Highlights

-- Nearly half of affluent investors feel today's investment climate is better than a year ago, and almost two-thirds are optimistic about the next six months. Those investors with portfolios greater than $1 million have a particularly positive take on today's economy and the future performance of their personal investment portfolio.

-- Investors name health care as the biggest economic problem facing America today, followed by the federal budget deficit and energy costs.

-- Investors are reassessing which sectors of the economy they believe will be strong in 2006. For example, while half of investors claim real estate was 2005's strongest growth sector, less than one-third think it will perform as well in the new year.

-- Energy costs are beginning to encroach on investors' sense of financial security, with many having changed their driving behavior or lowered the thermostat in their homes to save money. However, 85% say these rising costs have little or no impact on their savings or investments.

-- The majority of investors predict U.S. energy companies will see even higher profits in the upcoming year; yet, many think energy costs will have a negative impact on the overall stock market.

Investors are Upbeat about the Current Investment Climate

Nearly half of the investors surveyed in the Citigroup SmithBarney Affluent Investor Poll believe that the investment climate inthis country is better today compared to a year ago, and almosttwo-thirds maintain a positive outlook for the next six months.Investors predict energy and technology will see the strongest growthover the next 12 months; health care and real estate are alsoidentified as solid prospects. The survey respondents, individualinvestors with at least $100,000 in investable assets, report thatonly a small portion of their investments have performed worse thenexpected over the last 12 months. About three-quarters say that in2005 their personal investments performed either on par or better thantheir initial expectations, and an equal proportion believe they willbe in even better shape financially six months from now than they aretoday.

Rising Interest Rates and Inflation

Although investors are optimistic about the value of theirportfolio keeping pace with their expectations, three-quarters believeinterest rates will increase and more than half expect that inflationwill rise in 2006. Over the next 12 months, only about one-third ofinvestors foresee an increase in overall economic growth.

Less than 5% of all investors say that the inflation rate will belower at this time next year, and few also believe interest rates andprices on consumer goods will decrease. There are a portion ofinvestors who believe the unemployment rate will have decreased bythis time next year (24%), however, about half say it will remainabout the same.

Still, given their encouraging personal forecasts, it follows thatabout two-thirds of investors believe today's climate is good forbuying major products like big screen televisions and furniture fortheir home.

Positive Outlook for Wealthiest Respondents

The Poll's wealthiest respondents express particularly positiveviews regarding today's economy. The Citigroup Smith Barney AffluentInvestor Poll included 255 investors who have at least $1 million infinancial assets, and more than half of them believe the investmentclimate is better now than a year ago, and more than two-thirdsbelieve the climate will be right for investing over the next sixmonths. 60% of investors with more than $1 million say they aregetting along better financially today compared to one year ago.

Many of this group expect that they will continue to experiencefinancial growth over the long term. Over the past year, 44% say theirinvestments have done better than they expected, and 57% say they willbe better off financially six months from now when compared to theirfinancial status today. Eight out of ten describe themselves as atleast somewhat optimistic regarding the future of their overallinvestment portfolio, including one in seven who feel very optimistic.Only 16% of this segment are pessimistic about their financialsuccesses in the year ahead, compared with 26% among all investors.

The wealthiest respondents provide a more positive outlookregarding specific factors that influence the U.S. economy. Theoutlook for the stock market in 2006 (58% higher) is somewhat higheramong this set compared to all investors (41%), and they believeeconomic growth will be higher than what the other investor groupsperceive. The wealthiest also expect that inflation and theunemployment rate will be lower this time next year, and most expectoverall economic growth to increase over the next 12 months.

President Bush's Impact on the Economy

Investors provide mixed reviews of President Bush's management ofthe economy. Nearly half of all investors are dissatisfied with hisfinancial stewardship and, among those, 27% describe themselves asvery dissatisfied. Though nearly as many report being either satisfied(10%), or somewhat satisfied (30%) with the President.

Specifics of "financial stewardship" include the fact that nearlythree-quarters are dissatisfied with the way he is handling thefederal budget deficit, and about half say they are dissatisfied withhis handling of the issues relating to personal income tax. Manyinvestors also express dissatisfaction with spending on Iraq (57%) andhomeland security (44%).

Economic Problems

Investors feel that health care is the biggest economic problemfacing the United States right now. Nearly three-quarters of allinvestors believe health care is among the top three economic problemsin the United States, followed by the federal budget deficit (58%) andenergy costs (51%). About one quarter see military spending and taxesas being a problem for today's economy.

Among the Poll's most affluent, the federal budget deficitsurpasses health care as the biggest economic problem facing theUnited States today. Three-quarters of this group mention the budgetdeficit followed closely by health care and energy costs, with nearlyone-third mentioning military spending.

New Areas of Strength

Last year's investments are just that; the strongest growinginvestment sectors from 2005 are not necessarily seen as the bestplaces to invest in the upcoming year. Investors point to real estate(49%) as the strongest growth sector of the U.S. economy in 2005, butless than one-third believe it will be a good place to invest theirmoney in the coming months. Likewise, only 11% see home constructionas a strong future investment opportunity, compared to the 30% who sawit as one of the strongest economic sectors for 2005.

Still, energy is believed to be an area of continued strength;investors saw it as one of the fastest growing sectors last year andalso believe that it will be among the strongest sectors in the U.S.in 2006. In fact, energy stocks, along with high tech companies suchas Microsoft, dominate the list of what affluent investors consider tobe the best buy and hold stocks of 2006.

Manufacturing and health care are considered to be the two weakestsectors of the U.S. economy. About 40% say health care andmanufacturing have been the weakest over the past year, while lessthan one-third say energy and transportation. Wealthiest respondentsbelieve transportation is a weaker economic sector than health care,but still see manufacturing as the biggest problem.

Investment Opportunities in Asia

China is the region of the world that investors believe will havethe fastest growing economy over the next 12 months, named twice asoften as India (37%), Japan (22%), or any other region. Only 15% ofthe investor population believes North America will be among thefastest growing economies throughout 2006. China also tops the list ofregions seen as growing strongly five years from now (selected by67%).

The survey's most affluent believe India to be among the fastestgrowing economies over the next 12 months compared to all investors(63% wealthiest group, 37% all investors), and similar numbers foreseethis being the case over the next five years.

A small group of investors say that North America will be amongthe slowest growing economies in the next 12 months (22%). Investorsbelieve that the Middle East, Latin America and Western Europe leadthe list of slowest growing economies for 2006.

Half of the most affluent respondents say they will change theirinvestment strategies in order to take advantage of what they areseeing based on these regional trends.

Changing Investment Behavior

In making financial resolutions for the new year, investorsexpress mixed feelings regarding changing their investment behavior.Many mention the need to "become a little more conservative", and evenmention specific vehicles like fixed income assets or mutual funds tohelp them achieve their goals.

Others have set themselves a goal of becoming "more aggressive" intheir investment strategies, specifically regarding retirementportfolios. Some have identified appropriate vehicles that are moreaggressive, while also setting targets in which to increase theiroverall portfolio value.

One common resolution for the new year is the desire to pay closerattention to their portfolio and work on preserving capitol in thelong term. In many cases, investors regret holding on to a particularinvestment product for too long. Not cashing out early enough on someof the winning opportunities, along with identifying loosingopportunities early enough, are both issues investors hope to changefor the better in 2006.

In Their Own Words: Personal Finance Resolutions for 2006-- Be more conservative; invest in mutual funds-- Don't take chances; have realistic expectations-- Be as aggressive as possible-- Earn a minimum of an 8% return across my portfolio-- Invest 15% more than last year-- Pay more attention to my investments and financial news; save more aggressively-- Stick to the strategy and not lose sight of the goal

In describing their biggest investment mistake in 2005, numerousinvestors express frustration at not having stayed the course withpast investment strategies that have been successful. Others lament onnot moving forward on some opportunities they knew to be profitable.

A number of investors mention their inability to get in on theGoogle IPO as one of their regrets from 2005, along with not beingmore aggressive with their portfolio and not putting sufficient fundsinto their savings plans. Having too much of their portfolio in cashis another area frequently mentioned by investors where they hope tomake changes in the coming years.

In Their Own Words: Biggest Investment Mistake of 2005-- Keeping too much in low paying safe funds-- Not buying into certain stocks I liked that ended up doing very well for the year-- Not paying enough attention to my portfolio-- Not pulling the trigger when I felt it was time to buy or sell-- Holding on to big winners too long-- Not investing in Google-- Staying in a small cap fund for too long

Energy Costs Impacting Investors Near Term

Rising energy costs seem to be affecting investors' short-rangefinancial experiences without having significant influence on longerterm plans. For nearly two-thirds of investors, energy costs arehaving at least a minor impact on overall feelings of financialsecurity and day-to-day lifestyle, while having little or no impact onmost investors' ability to set aside money for savings or investments(85% say little or no impact on savings and investments).

Considering half of investors identify energy costs as one of thetop three problems facing the U.S., it's not surprising thatthree-quarters are taking at least small, simple steps to helpmitigate the impact of increasing energy costs. Among the most commonactions undertaken, half of investors are cutting back on theirdriving and another half are lowering their thermostats; one-quarterare not taking any steps as a result of current energy costs.

When surveyed in early December, most investors had experienced nomore than two months of winter weather in 2005. Nevertheless, morethan half of investors indicate that the cost to heat their home hasrisen, but by less than 50%, over the past year. Looking forward,however, 85% expect their heating costs to increase over the next 12months.

In comparison, investors seem slightly more optimistic about theprice they pay for gasoline. Although nearly all have experienced anincrease in the amount spent on gas in the past year (94%), fewerbelieve gas prices will continue to increase (59%); this is also fewerthan believe heating costs will increase.

Impact on the Economy

Two-thirds expect U.S. energy companies will be even moreprofitable over the next 12 months, but nearly half predict this willhave a negative impact on the overall stock market; a quarter believeenergy companies' profitability will have little or no impact on thestock market. Regardless, two-thirds suggest they will not change theallocation of energy investments in their portfolios as a result.

In light of their experiences with mounting energy costs,investors are ready and willing to see the country reduce itsdependence on foreign oil. Many suggest stepping up domesticproduction of energy through increased domestic and Arctic drilling,cutting the red tape, regulations and restrictions, and building newrefineries nationwide. Others emphasize the need for alternativefuels, particularly more fuel-efficient automobiles. Some also pointto conservation as a growing, even absolute, necessity.

In Their Own Words: How the U.S. Should Reduce Dependence onForeign Oil-- Allow oil companies to drill in ANWR and reduce environmental regulations on companies willing to invest in additional refineries-- Auto companies should make more fuel-efficient cars, like using... electric cars. Get rid of the big gas burning vehicles. We don't have a need for them-- Conserve, conserve, conserve. If every citizen would make a concerted effort to use less gasoline and look for ways to conserve energy in our homes, then the immutable law of supply and demand will kick in and moderate things-- Find new sources of energy. Solar and wind energy have proven to be effective; all we need to do is make it more cost-efficient-- Find alternative sources of energy, and give tax deductions for people that use them-- Significantly more expensive fuel will force Americans to find new ways to accomplish what they want, will force us to be innovative in coming up with ways to conserve

Background and Methodology

Greenwald & Associates and Synovate conducted the Citigroup SmithBarney Affluent Investor Poll December 8 to December 13. Interviewingwas conducted online with 577 investors who are members of theSynovate Consumer Opinion Panel. In order to qualify forparticipation, panel members had to have at least $100,000 infinancial assets (excluding real estate and employer retirementplans), a definition that describes approximately one-quarter of allU.S. households. Survey results include 159 interviews with householdsthat have $100,000 to $499,999 in savings and investments, 163interviews with those in the $500,000 to $999,999 asset range, and 255interviews with investors who have $1 million or more. Survey resultshave been weighted by age and asset level to reflect nationalpopulation norms. The results of the Citigroup Smith Barney InvestorPoll have a maximum margin of sampling error (at the 95% confidencelevel) of plus or minus four percentage points.

All results are specifically from those investors interviewed forthe Citigroup Smith Barney Affluent Investor Poll between December 8and December 15. Poll does not reflect Citigroup Smith Barneypredictions or recommendations.

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