International Business Machines Corporation v. Papermaster

Filing 21

DECLARATION of Stephen S. Madsen ("Supplemental Declaration") in Support re: 3 Order to Show Cause, Preliminary Injunction,,. Document filed by International Business Machines Corporation. (Attachments: # 1 Exhibit 1 to Supplemental Declaration of Stephen S. Madsen, # 2 Exhibit 2 to Supplemental Declaration of Stephen S. Madsen, # 3 Exhibit 3 to Supplemental Declaration of Stephen S. Madsen, # 4 Exhibit 4 to Supplemental Declaration of Stephen S. Madsen, # 5 Exhibit 5 to Supplemental Declaration of Stephen S. Madsen, # 6 Exhibit 6 to Supplemental Declaration of Stephen S. Madsen, # 7 Exhibit 7 to Supplemental Declaration of Stephen S. Madsen, # 8 Exhibit 8 to Supplemental Declaration of Stephen S. Madsen)(Madsen, Stephen)

Exhibit 6

Global Contenders & Defenders
Quant Strategy | Global 03 November 2008

Global Contenders very defensively positioned
Nigel Tupper >> [phone]

Global Contenders
The new Global Contenders are Chubu Electric, Credit Suisse, General Mills, Royal Canada, Deutsche Telekom, and NIKE B. The longest standing Contender is CSX Corp (9 months). The other Global Contenders are Tokyo Electric, Qualcomm, Avon Products, Takeda, HSBC plc, Hitachi, Marsh & McLennan, IBM, Procter & Gamble, Novartis, St Jude Medical, DIRECTV, and AstraZeneca.

Quantitative Strategist Merrill Lynch (Australia) [e-mail]

Carrie Zhao
Quantitative Strategist MLPF&S [e-mail]

[phone]

Girish Nair >>
Quantitative Strategist Merrill Lynch (Australia) [e-mail]

[phone]

Global Defenders
The new Global Defenders are Sprint, Sun Hung Kai, American Express, EOG Resources, and Julius Baer. The longest standing Defender is Fuji Photo Film (7 months). The other Global Defenders are Cathay Financial, Yahoo, Toshiba, Ford Motor, Sony, PPL Corp, Exelon, Fanuc, Sharp, Denso, Philips, Cameco, Wesfarmers, and Texas Instruments.

Table 2: Portfolio Performance Ending 03-October-08 Last Last Month 12-Months
-19.35% -26.26% -14.15% -43.08% -38.82% -31.92%

Portfolio
Global Contenders Global Defenders MSCI AC World Index

Since Inception Jul-02
+37.61% +17.55% +38.36%

Underweight Energy and Materials
The Implied Allocation model remains net positive on stocks in the USA and most underweight Europe stocks (chart 26, page 17). At the sector level, the model has completed its multi-month shift out of Energy and Materials and is now most overweight the defensive Consumer Staples and Health Care sectors. Table 1: The Global Contenders & Defenders Contenders Price Defenders
Tokyo Electric Chubu Electric * Qualcomm Credit Suisse * Avon Products General Mills * Royal Canada * Takeda HSBC plc Hitachi Marsh & McLennan Deutsche Telekom * IBM Procter & Gamble Novartis NIKE B * St Jude Medical CSX Corp DIRECTV AstraZeneca
Source: Merrill Lynch Global Quantitative Strategy

Source: Merrill Lynch Global Quantitative Strategy Note: Please refer to Appendix 1 for detailed Performance Methodology

Price
3.13 65.50 35.25 12.82 351.00 2.19 2220 32.83 54.24 6360 27.50 80.92 687.00 45.02 1864 14.35 19.73 2145 21.47 19.56

2770 2550 38.26 43.42 24.83 67.74 46.84 4830 7.62 453.00 29.28 11.58 92.97 64.54 58.40 57.63 38.03 45.72 21.89 26.30

Sprint * Sun Hung Kai * Cathay Financial Yahoo Toshiba Ford Motor Sony PPL Corp Exelon Fanuc American Express * EOG Resources * Sharp Julius Baer * Denso Philips Cameco Fuji Photo Film Wesfarmers Texas Instr.

Portfolio Definitions The Contenders are stocks with rising earnings expectations and whose PE multiples are stable or improving. The Defenders are stocks whose high PE may be under pressure because of falling earnings expectations. Disclosures Merrill Lynch is aware that the implementation of the ideas expressed in this report may depend upon an investor's ability to "short" securities and that such action may be limited by recently adopted rules prohibiting or restricting "short selling" in many jurisdictions. Investors are urged to seek advice prior to executing any short idea contained in this report.

* New this month (bold). Prices as of October 31 2008.

>> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the NYSE/NASD rules. Refer to "Other Important Disclosures" for information on certain Merrill Lynch entities that take responsibility for this report in particular jurisdictions. Merrill Lynch 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. 10782184 Refer to important disclosures on page 171 to 172. Analyst Certification on Page 170.
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Globa l C o n t e n d e r s & De f e n d e r s 03 November 2008

Global Contenders (Buys)

The Global Contenders are the top twenty companies that have above-average earnings momentum and above-average price momentum, subject to turnover, sector and country constraints.

Tokyo Electric Power Co Chubu Electric Power* Qualcomm Credit Suisse Group AG* Avon Products

Japan Japan United States Switzerland United States United States Canada Japan United Kingdom Japan United States Germany United States United States Switzerland United States United States United States United States United Kingdom

Utilities Utilities Information Technology Financials Consumer Staples Consumer Staples Financials Health Care Financials Information Technology Financials Telecom Information Technology Consumer Staples Health Care Consumer Discretionary Health Care Industrials Consumer Discretionary Health Care

(Pg 137) (Pg 57) (Pg 117) (Pg 63) (Pg 43) (Pg 79) (Pg 120) (Pg 133) (Pg 84) (Pg 83) (Pg 97) (Pg 67) (Pg 85) (Pg 116) (Pg 109) (Pg 106) (Pg 127) (Pg 64) (Pg 68) (Pg 42)

The Global Contenders which were replaced this month are Cummins Inc, K+S AG, Spectra Energy Corp, Vallourec, Vestas Wind Systems and Northern Trust.

General Mills* Royal Bank of Canada* Takeda Pharmaceutical HSBC Holdings Hitachi Ltd Marsh & McLennan Cos Deutsche Telekom* IBM Procter & Gamble Co Novartis NIKE B* St Jude Medical Inc CSX Corporation DIRECTV Group AstraZeneca

* New to the Contenders Portfolio this month

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Global Defenders (Sells)

The Global Defenders are the twenty most expensive companies that have below-average earnings momentum and below-average price momentum, subject to turnover, sector and country constraints.

Sprint* Sun Hung Kai Properties* Cathay Financial Holdings Yahoo! Inc Toshiba Corp Ford Motor Co

United States Hong Kong Taiwan United States Japan United States Japan United States United States Japan United States United States Japan Switzerland Japan Netherlands Canada Japan Australia United States

Telecom Financials Financials Information Technology Information Technology Consumer Discretionary Consumer Discretionary Utilities Utilities Industrials Financials Energy Consumer Discretionary Financials Consumer Discretionary Industrials Energy Information Technology Consumer Staples Information Technology

(Pg 127) (Pg 130) (Pg 54) (Pg 151) (Pg 138) (Pg 76) (Pg 126) (Pg 115) (Pg 73) (Pg 74) (Pg 38) (Pg 73) (Pg 124) (Pg 89) (Pg 66) (Pg 114) (Pg 51) (Pg 78) (Pg 148) (Pg 136)

The Global Defenders which were replaced this month are Fannie Mae, Freddie Mac, Carrefour, Veolia Environment and Lehman Brothers Holdings.

Sony Corporation PPL Corp Exelon Corp Fanuc American Express* EOG Resources* Sharp Corporation Julius Baer Holding Ltd* Denso Corporation Philips Electronics (Koninklijke) Cameco Corp Fuji Photo Film Wesfarmers Texas Instruments

* New to the Defenders Portfolio this month

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Contents
Global Contenders (Buys) Global Defenders (Sells) Overview Methodology Quadrant Analysis Quadrant Persistence Quadrant Analysis by Region Quadrant Analysis by Sector Global Implied Allocation How To Read The Charts A Positive Example ­ HSBC HOLDINGS A Negative Example ­ CATHAY FINANCIAL HOLDINGS Global Contenders Rank Momentum and Value Charts Index Global Quantitative Publications Appendix1: Performance Calculation Methodology Team Page 2 3 5 6 7 9 10 12 17 19 20 21 22 32 153 168 169 170

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Overv i ew
We have drawn upon our analysis of successful investment strategies to produce a global portfolio of stocks which we believe have strong prospects of outperforming. This portfolio ­ The Global Contenders ­ can either be used for individual stock ideas or be traded as an investment strategy. Similarly, we have identified a portfolio of stocks that we believe are unlikely to deliver outperformance ­ The Global Defenders. In global markets, companies with rising earnings forecasts tend to subsequently outperform. Most investors would agree that changing earnings expectations tend to drive share prices. In global markets, companies with rising earnings forecasts tend to subsequently outperform, evidenced by the fact that an earnings revision strategy has been reasonably consistently successful over the period since 1988. But not all companies with rising earnings estimates outperform, so the challenge is to differentiate between companies with rising earnings forecasts that will outperform, and companies with rising earnings expectations that will underperform. By definition, a company's PE is being de-rated if earnings expectations are rising but the price is falling. That is, the "E" in the PE ratio is going up while the "P" is going down. To identify companies with rising earnings expectations that are not being derated, we consider companies that have both above-average earnings momentum and above-average price momentum. Our testing shows that companies with both characteristics outperform portfolios of companies based on just one of those characteristics, on average. A third factor was introduced in our analysis and we examined the effect of a valuation overlay on the model. We found that the model achieved better results with a valuation overlay on the short side of the strategy but not consistently on the long side. Companies with high combined momentum characteristics tend to outperform. The Global Contenders are the twenty companies that have the highest earnings momentum and price momentum, subject to certain sector and country constraints. The Contenders are constrained to hold no more than 20% in each sector and the US and Japan are constrained to be no more than 20% more than the weight of each country in the analysis. Our analysis shows that expensive companies with falling earnings expectations that are not being re-rated tend to consistently underperform. We impose the same sector and country constraints on the Global Defenders as for the Global Contenders mentioned above. We publish the Global Contenders and Defenders on a monthly basis for use as stock selection ideas or a portfolio trading strategy.

Expensive companies with falling earnings expectations that are not being re-rated tend to consistently underperform.

Nigel Tupper 3 November 2008 Note: Prices are to 31 October 2008 unless otherwise stated.

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Methodology
In this analysis, our universe of stocks is large liquid stocks. We use the top 500 stocks by market capitalisation in the MSCI AC World Free Index with median turnover of greater than US$25m / day in the preceding 6 months. The universe is recalculated every 6 months. Portfolios are determined at the end of each month using month-end data. Portfolio performance is calculated as the simple average performance of the stocks within the portfolio in US Dollars. In order that we compare like with like, portfolio performance is compared to an equal-weighted average performance of all stocks in the universe. In this way, we remove any size bias from the analysis, and thereby test whether the factors on which we are focused predict price performance. We found that stocks with above-average earnings momentum tend to outperform, stocks with above-average price momentum tend to outperform, but stocks with both characteristics perform even better. We also found that PE overlay did not add performance consistently to the long side of the strategy but did to the short side. Based on these results, we have constructed The Global Contenders portfolio. The Global Contenders are stocks that have both high earnings momentum and high price momentum. The Global Contenders are twenty stocks with strong earnings momentum and price momentum. A stock drops out of the Global Contenders portfolio when either the Earnings Revision Rank falls below 50 (out of 100) or the Price Momentum Rank falls below 50 (out of 100). When a stock falls out of the Contenders it is replaced by the stock with the highest Contenders Rank that is not already in the portfolio, subject to regional and sector maximum weights. The Contenders Rank, which ranks all stocks in the analysis from 100 (best) to 1 (worst), is a combination of the Earnings Revision Rank, Price Momentum Rank, and PE Rank. The Contender's portfolio is constrained to hold within 20% of the universe country weight in the USA and Japan, and is also constrained to hold no more than 20% in any one of the ten GICS sectors. The Global Defenders are twenty stocks with weak earnings momentum and price momentum. A stock drops out of the global Defenders portfolio when either the Earnings Revision Rank moves above 50 (out of 100) or the Price Momentum Rank moves above 50 (out of 100). When a stock falls out of the Defenders it is replaced by the stock with the lowest Contenders Rank that is not already in the portfolio, subject to regional and sector maximum weights. The Contenders Rank, which ranks all stocks in the analysis from 100 (best) to 1 (worst), is a combination of the Earnings Revision Rank, Price Momentum Rank, and PE Rank. The Defender's portfolio is constrained to hold within 20% of the universe country weight in the USA and Japan, and is also constrained to hold no more than 20% in any one of the ten GICS sectors. The average monthly portfolio turnover rate is 17% for the Global Contenders and 25% for the Global Defenders based on back-testing. In other words, three Contenders and five Defenders will change each month, on average. The turnover rate may be slightly higher when the universe is recalculated every six months if any stocks in the portfolios are removed from the analysis.

The Global Defenders are the twenty most expensive stocks by PE that have both below-average earnings momentum and below-average price momentum.

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Chart 23: Quadrant analysis of Technology Hardware and Equipment
10 0 Earn in g s Momentum Rank (100 = Best) 90 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 Price Momentum Rank (100 = Best) 70 80 90 1 00 Ap p le Ap p lied Materials F u jit su Texas Instr. EMC Kyo cera I n t el No kia Ericsso n (LM) B TS MC S amsu n g Elect. Mo to ro la H i t a ch i Qu alco mm Ju n ip er Networks IBM C isco Systems HP

Source: Source: ML Global Quantitative Strategy, IBES, MSCI

Chart 24: Quadrant analysis of Telecommunication Services
10 0 Earn in g s Momentum Rank (100 = Best) 90 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 Price Momentum Rank (100 = Best) 70 80 90 100 Telen o r Vimp elC o m- ADR Sprint BT Group Mo b ile TeleSystemsADR S o f t b an k Ch in a Mobile HK MTN Group Deu t sch e Telekom TeliaS o n era KDDI Vo d af o n e F ran ce Telecom NTT Telef o n ica American Tower NTT Docomo Ro g ers Comm. America Movil Telstra Verizo n K PN S in g Tel (S'pore) AT&T Inc. Teleco m Italia

Source: Source: ML Global Quantitative Strategy, IBES, MSCI

Chart 25: Quadrant analysis of Utilities
100 Earn in g s Momentum Rank (100 = Best) 90 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 Price Momentum Rank (100 = Best) 70 80 90 1 00 CEZ F o rtu m Oyj En terg y I b erd ro la F PL Group Pu b lic Service Ent Veolia Ed iso n Exelo n PPL Corp E.ON F irstEn erg y To kyo Electric En el Ch u b u Electric K an sai Electric RW E S co t tish & South S u ez PG&E Corp Amer Electric Do min io n Res S o u t h ern Du ke Energy Nat io n al Grid Tr

Source: Source: ML Global Quantitative Strategy, IBES, MSCI

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