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Since 1895. Member SIPC and NYSE. 1 Fourth Quarter Economic and Interest Rate Update & Outlook Terry Sandven Christian Heitzman October 2007 Date: Tuesday,

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Presentation on theme: "Since 1895. Member SIPC and NYSE. 1 Fourth Quarter Economic and Interest Rate Update & Outlook Terry Sandven Christian Heitzman October 2007 Date: Tuesday,"— Presentation transcript:

1 Since Member SIPC and NYSE. 1 Fourth Quarter Economic and Interest Rate Update & Outlook Terry Sandven Christian Heitzman October 2007 Date: Tuesday, October 2, 2007 Time: 3:00 p.m. CT 1:00 p.m. PT Dial-in information: Conference call number: Conference ID:

2 2 2 Market Insights & Perspectives

3 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 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 5 Market Insights & Perspectives Overview Interest Rates Housing Inflation Employment Earnings

6 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 7 Interest Rates U.S. Treasury Yield Curve Yield curve has steepened since the 9/18/97 Fed rate cuts.

8 8 8 Interest Rates LIBOR The LIBOR rate has recently trended lower, providing some relief for adjustable rate mortgage rate holders.

9 9 9 Interest Rates U.S. Dollar—Near 20-Year Lows In theory, lower dollar implies increased exports.

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 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) Source: FactSet Research Systems Inc. Toll Brothers D.R. Horton Countrywide Financial Wells Fargo

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.

24 24 Inflation Energy/Consumer Declining energy prices in the second half of 2006 greatly contributed to favorable holiday sales.

25 25 Inflation Energy Source: BP Statistical Review of World Energy June 2007; reflects percentage of total world oil consumption.

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.

30 30 Earnings & Valuation S&P 500 Valuation Levels—50-Year Trend Line

31 31 Catalysts/Opportunities

32 32 Catalysts/Opportunities Seasonality

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 Disclosures This material is a product of Piper Jaffray Institutional Sales, Trading and Portfolio Strategies Groups and should not be construed as impartial research or a research report. For disclosure information with respect to companies mentioned in the material, please visit: The material regarding the subject companies is based on data obtained from sources deemed to be reliable; it is not guaranteed as to accuracy and does not purport to be complete. This report is solely for informational purposes and is not intended to be used as the primary basis of investment decisions. Because of individual client requirements, it is not, and it should not be construed as, advice designed to meet the particular investment needs of any investor. This report is not an offer or the solicitation of an offer to sell or buy any security. This material is not directed to, or intended for distribution to or use by, any person or entity if Piper Jaffray is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to such person or entity. Additional information is available upon request. Past performance does not guarantee future results. Since Member SIPC and NYSE. Securities and products are offered in the United Kingdom through Piper Jaffray LTD., which is an affiliate of Piper Jaffray & Co., incorporated under the laws of England and Wales, authorized and regulated by the Financial Services Authority, and a member of the London Stock Exchange.


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