Fourth Quarter Economic and Interest Rate Update & Outlook

Date:

Tuesday, October 2, 2007

Time:

3:00 p.m. CT 1:00 p.m. PT

Since 1895. Member SIPC and NYSE.

Terry Sandven Christian Heitzman October 2007

Dial-in information:

Conference call number: 888 369-9065 Conference ID: 17864716 1

2 2

Market Insights & Perspectives

Market and Sector Performance Index

S&P 500 Dow Jones Industrials NASDAQ Composite * Russell 2000 MSCI EAFE MSCI Emerging Markets Shanghai Composite Lehman U.S. Aggregate Lehman U.S. Govt. & Credit - Intermediate Lehman U.S. Govt. & Credit - Long Lehman U.S. Short Treasury - Bills Lehman Municipal Bond

Close 9/30/07

1,526.75

13,895.63

2,701.50

805.45

2,300.38

1,204.90

5,064.60

1,241.44

1,354.29

1,814.97

90.23

644.78

Total Return 2007 YTD

9.1% 13.3% 11.8% 3.2% 13.6% 34.8% 173.7% 3.8% 4.4% 2.6% 3.9% 2.0%

Q1

0.6% -0.3% 0.3% 1.9% 4.1% 2.3% NA 1.5% 1.6% 1.0% 1.2% 0.8%

Q2

6.3% 9.1% 7.5% 4.4% 6.7% 15.1% NA -0.5% -0.1% -1.8% 1.3% -0.7%

Q3

2.0% 4.2% 3.8% -3.1% 2.2% 14.5% NA 2.8% 2.9% 3.5% 1.3% 1.8%

2006

15.8% 19.0% 9.5% 18.4% 26.9% 32.6% NA 4.3% 4.1% 2.7% 4.8% 4.8%

Percent of S&P 500 Sector

Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services

S&P 500

9.3% 10.2% 11.5% 19.7% 11.5% 11.3% 16.4% 3.2% 3.7% -3.6% 10.0% 28.7% -5.0% 7.2% 17.5% 16.2% 22.4% 17.9% -0.7% 2.2% 2.1% -2.8% 1.0% 1.1% -0.9% 9.0% 7.3% 3.7% 2.7% 14.8% 2.1% 5.0% 9.8% 10.4% 7.1% 7.6% -6.3% 4.8% 9.8% -4.3% 1.0% 5.9% 6.3% 4.9% 2.1% Utilities 3.4% 11.0% 9.3% -0.4% 2.0% * Performance of NASDAQ and Shanghai Composites are percent change; excludes dividends.

Source: Piper Jaffray & Co.

18.6% 14.4% 24.2% 19.2% 7.5% 13.3% 8.4% 18.6% 36.8% 21.0%

3 3

Fourth Quarter Update & Outlook

Recap of Mid-Year Outlook

• Pro-growth thesis remains intact.

– Economic expansion will continue, albeit at a slower rate.

– Evidence of some global inflation.

– Fed may not move in 2007; should sub-prime deterioration continue, next move is likely to cut; Fed is not under any immediate pressure to change its stance.

– Bonds and stocks will likely trend within a relatively narrow trading range, with an upward bias.

– Biased toward a pro-growth economy, driven largely by favorable employment conditions – Equities are likely to outperform bonds in the second half of 2007.

4 4

Fourth Quarter Update & Outlook

Fourth Quarter Outlook

• Overall economic expansion is likely to continue, albeit at a slower rate.

– Risk of a recession has increased.

– Fundamental indicators suggest inflation appears generally contained.

– U.S. Treasury yield curve suggests future inflation may be an issue.

• • Employment and company earnings are key.

Bonds are likely to trade sideways into the new year, caught between conflicting signals of a recession and potential inflation.

• Equity markets should grind higher, led by favorable employment conditions and company earnings.

• Increased volatility, at a minimum, is likely to be the norm versus the exception.

5 5

Market Insights & Perspectives

Overview

• Interest Rates • Housing • Inflation • Employment • Earnings

6 6

Interest Rates

The Fed Effect

•

Question: Did the Fed overreact?

•

September 18 FOMC meeting

– Fed funds; 5.25% to 4.75% – Discount rate: 5.75% to 5.25% – Statement:

“…the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally.” “The Committee judges that some inflation risks remain.” “Developments in financial markets…have increased the uncertainty surrounding the economic outlook."

•

Upcoming FOMC meetings

– October 30-31; December 11

7 7

Interest Rates

U.S. Treasury Yield Curve

• Yield curve has steepened since the 9/18/97 Fed rate cuts.

8 8

Interest Rates

LIBOR

• The LIBOR rate has recently trended lower, providing some relief for adjustable rate mortgage rate holders.

9 9

Interest Rates

U.S. Dollar —Near 20-Year Lows

• In theory, lower dollar implies increased exports.

U nited States D ollar Ind ex (D XY.Z)

30-Oc t-19 87 to 2-Oct-2007 (Monthl y) Local Currency 50 Day Moving Average 200 Day Moving A verage High: 120.920

Low: 77.914

Last: 78.280

120 115 110 105 100 95 90 85 80 88

Data Source: Prices / Exshare

90 92 94 96 98 00 02 04 06

©FactSet Research Systems 2007

10 10

Housing

Pending Home Sales of Existing Homes

• August sales fell 6,5% over July levels and 21.5% over year-ago levels.

• Pending homes sales are a leading indicator because it tracks contract signings.

11 11

Housing

Existing Home Sales

• Existing homes sales continue to trend downward.

– Sales of previously owned U.S. homes fell in August to a five year low, declining 13% over year ago levels to an annual rate of 5.5 million.

12 12

Housing

New Home Sales

• New home sales continue to trend downward.

13 13

Housing

Housing Starts

• Housing starts continue to trend downward.

– August housing starts declined 2.6% to 1.331 million, a 12-year low; August permits declined 5.9%.

14 14

Housing

Home Inventories

• Inventories continue to increase.

15 15

Housing

Delinquencies

• Delinquencies continue to increase and remain a predominant concern.

16 16

Housing

Home Builders & Mortgage-Related Companies

(9/25/07) To ll B ro th ers Inc. (T OL )

19-S ep-2005 to 20-S ep-2007 (Daily) U.S . Do llar High: 46.390

Low: 18.850

Last: 21.440

D .R. H orto n Inc. (D H I)

23-S ep-2005 to 25-S ep-2007 (Daily) U.S . Do llar High: 41.660

Low: 12.840

Last: 13.220

50 Day Moving Average 200 Day Moving A verage 50 Day Moving Average 200 Day Moving A verage

Toll Brothers

50

D.R. Horton

45 40 35 40 30 35 25 30 20 25 15 20 9/05 12/05

Data Source: Prices / Exshare

3/06 6/06 9/06 12/06 3/07 6/07

©FactSet Research Systems 2007

9/05 12/05

Data Source: Prices / Exshare

3/06 6/06 9/06 12/06 3/07 6/07

©FactSet Research Systems 2007

C oun tryw ide F inan cial Co rp. (C FC )

23-S ep-2005 to 25-S ep-2007 (Daily) U.S . Do llar 50 Day Moving Average 200 Day Moving A verage

Countrywide Financial

9/05 12/05

Data Source: Prices / Exshare

3/06 6/06 9/06 12/06 Source: FactSet Research Systems Inc.

3/07 High: 45.260

Low: 15.000

Last: 17.675

45 40 35 30 25 20 15 6/07

©FactSet Research Systems 2007

Wells Fargo & C o. (WFC )

23-S ep-2005 to 25-S ep-2007 (Daily) U.S . Do llar 50 Day Moving Average 9/05 12/05

Data Source: Prices / Exshare

3/06 High: 37.990

Low: 28.810

Last: 35.730

6/06 200 Day Moving A verage 9/06

Wells Fargo

12/06 3/07 38 37 36 35 34 33 32 31 30 29 6/07

©FactSet Research Systems 2007

17 17

Housing

Conclusions

• Too early to conclude that housing has bottomed; the housing environment remains challenging.

– Distinction between “weak” versus “collapse.” • Valuations have improved.

• Visibility remains unclear.

– Predominant view and evidence suggests potential for further weakness.

• Implications and impact on consumer spending remain of concern.

18 18

Inflation

Producer Price Index (PPI)

• August headline PPI declined 1.4% with core PPI increasing 0.2%; both year-over-year headline and core PPI increased 2.4%.

19 19

Inflation

Consumer Price Index (CPI)

• On an annual basis, headline and core CPI increased 2.0% and 2.1%, respectively, in August.

– Trend lines suggest overall inflation remains generally contained.

20 20

Inflation

PCE

• Recent data suggests inflation has slowed.

– The headline and core personal consumption expenditures— Fed favorites—are at benign levels at the upper end of the Fed’s targeted 1.0% and 2.0% range.

21 21

Inflation

Institute of Supply Management

• Both the ISM manufacturing and non-manufacturing indices are above 50, reflecting economic expansion; much of the strength is attributed to overseas growth.

22 22

Inflation

CRB Commodity Index

• Basket of 22 commodities—textiles, metals, grains, livestock, etc.

• Index has pulled back; appears to have stabilized.

23 23

Inflation

Energy

• Oil remains a wildcard; crude is near record levels.

Lig ht C ru de Oil - Historical Fu tu res (1263P00)

4-Oct-200 2 to 2-Oct-2007 (W eekly) U.S . Do llar 50 Day Moving Average 200 Day Moving A verage High: 83.760

Low: 24.820

Last: 80.240

80 70 60 50 40 30

Data Source: Prices / Exshare

03 04 05 06 07

©FactSet Research Systems 2007

24 24

Inflation

Energy/Consumer

• Declining energy prices in the second half of 2006 greatly contributed to favorable holiday sales.

25 25

Inflation

Energy

30.0% 25.0%

24.1% Oil Consumption

20.0% 15.0% 10.0%

9.0% 6.0%

5.0%

3.3% 3.2% 3.1% 2.7% 2.5% 2.4% 2.4%

0.0% USA China Japan Russian Federation Germany India South Korea Canada Brazil France Source: BP Statistical Review of World Energy June 2007; reflects percentage of total world oil consumption.

2.2%

Italy

26 26

Inflation

China

• Population • Infrastructure • World stage – World Olympics (2008) – World 2010 Expo • Oil—auto ownership – China: 3% – World average: 13% – U.S.: 75%

27 27

Employment

U.S. Employment

• Employment is key to economic expansion.

– August worst-than-expected employment report (loss of 4000 jobs) arguably set the stage for the Fed rate cut on September 18.

– Presents anecdotal evidence that risks of a recession have increased.

28 28

Employment

U.S. Employment

• Jobless claims decreased to 298,000 for the week ending September 22.

– Jobless claims in the 375,000 range are widely believed to be where claims become of increased concern.

– Jobless claims, in theory, need to increase to have a recession.

29 29

Earnings & Valuation

S&P 500 Earnings Projections

• S&P 500 earnings growth is modest in 2007 and 2008 over 2006 levels.

• Valuations are reasonable.

Earnings Projections Close 10/1/07

S&P 500

Earnings 2006 P/E

1,526.75

$88.18

17.3x

Earnings 2007E P/E Earnings 2008E P/E

$94.67

16.1x $100.50

15.2x

S&P 500 Earnings Growth* 15.6% 7.4% 6.2% Actual and estimated earnings are on an operating basis.

*Year-over-year Source: First Call Corporation estimates

30 30

Earnings & Valuation

S&P 500 Valuation Levels —50-Year Trend Line

31 31

Catalysts/Opportunities

32 32

Catalysts/Opportunities

Seasonality

AVERAGE S&P 500 MONTHLY PERFORMANCE 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

Jan. 1950 to April 2007 Jan. 1975 to April 2007 Data Source: Ibbotson Associates and FactSet Research Systems, Inc.

Jan. 1995 to April 2007

33 33

Market Insights & Perspectives

Conclusions

• Overall economic expansion is likely to continue, albeit at a slower rate.

– Risk of a recession has increased.

– Fundamental indicators suggest inflation appears generally contained.

– U.S. Treasury yield curve suggests future inflation may be an issue.

• • Employment and company earnings are key.

Bonds are likely to trade sideways into the new year, caught between conflicting signals of a recession and potential inflation.

• Equity markets should grind higher, led by favorable employment conditions and company earnings.

• Increased volatility, at a minimum, is likely to be the norm versus the exception.

34 34

Interest Rate Takeaways

• Market is consolidating with no distinct direction • Many calls are now being exercised by issuers – activity could increase • Market participants are seeing value at these levels • Extend duration at these levels with bullet agencies or treasuries

35 35

Credit Takeaways

• • • Credit spreads widening, but still tight historically The mortgage market will continue to be the driver of this market Uncertain economic direction should lead to greater risk premiums • Stay in higher rated investment grade credits

36 36

Muni Takeaways

• • Munis look attractive as a percent of treasuries Default rates remain extremely low • Number of market participants continues to expand

37 37

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