The Economy and Financial Markets November 15, 2007

1. The Economy and Financial MarketsNovember 15, 2007

2. Economy and Financial Markets:Current Conditions • Economy still strong in Q3, real GDP up 3.9%. • Inflation contained – core falling to, or below, 2%. • Profits / Earnings one time hit likely in Q3 – sub prime related. • Stock price gains expected to match earnings growth. • Risks are the same – terrorism, Iraq, oil prices. • Bond market risk moderate due to good inflation outlook. • Credit market concerns appear overblown, damage limited. • $ exchange rate bouncing off a new record low.

3. * GDP Growth: Q3 GDP Up 3.9%, Employment Growth +1.2% • Quarterly % Change in Real GDP • % Change - Annual Rate • 12-Month % Change in Payroll Employment • % Change - Year to Year • GDP and Employment Growth.EMF (USECON) GDPH / LANAGRA 891-1064

4. * ECRI & Dow Barometer Both Down, Expect Slowdown, Not Recession • ECRI Weekly Leading Index • 1992=100 • Dow Jones U.S. Business Barometer Index • 2000=100 • ECRI and Dow Leading Indices.EMF (WEEKLY) WLIW / MDJBBI 890106-1061229

5. * Real Personal Income Rising, Chain Store Sales Soften. • Real Disposable Personal Income • SAAR, Bil.Chn.2000$ • ICSC-UBS Weekly Retail Chain Store Sales • SA, 1977=100 • Real Income and Chain Store Sales.EMF (USECON) YPDHM / MITS 8901-10612

6. * New Orders & Shipments Flatten – Business Spending Okay • Shipments of Manufacturing Durable Goods • SA, Mil.$ • New Orders for Manufacturing Durable Goods • SA, Mil.$ • Shipments and Orders.EMF (USECON) NMSDG / NMODG 8901-10612

7. * Order Backlog Very High, Inventories Low Relative to Shipments • Shipments of Manufacturing Durable Goods • SA, Mil.$ • New Orders for Manufacturing Durable Goods • SA, Mil.$ • Shipments and Orders.EMF (USECON) NMSDG / NMODG 8901-10612

8. * Home Prices Weak, Income Up, Housing “P / E” Now Way Down • Ratio: Median Home Price / Disposable Income Per Capita • Indicator of Housing P/ E • Median Sales Price For Existing 1-Family Homes • Thous.$ • Housing P E.EMF (BONDINDX) _ / HX1PM 6701-10612

9. * However, New Home Sales and Starts Continue to Plunge • Ratio: Median Home Price / Disposable Income Per Capita • Indicator of Housing P/ E • Median Sales Price For Existing 1-Family Homes • Thous.$ • Housing P E.EMF (BONDINDX) _ / HX1PM 6701-10612

10. * Major Credit Threat? No – Total Bank Problem Loans Remain Low Residential Loan Delinquency 2.3%, Defaults 0.2%, Likely To Rise • Loan Delinquency Rate: All Commercial Banks • SA,% • Loan Charge-Off Rate: All Commercial Banks • SA,% • Loan Charge Off.EMF (USECON) DQ / DY 891-1064

11. * US Trade Upturn Offsets Housing Weakness. Exports Now Rising Four Times as Fast as Imports (13% vs. 3%) • Loan Delinquency Rate: All Commercial Banks • SA,% • Loan Charge-Off Rate: All Commercial Banks • SA,% • Loan Charge Off.EMF (USECON) DQ / DY 891-1064

12. * Claims Lead Unemployment Rate – Steady Indicating Okay Labor Mkt. • Unemployment Rate • SA, % • Weekly Initial Claims for Unemployment Insurance • SA, Thous • UR and Claims.EMF (USECON) LR / LIC 8901-10612

13. Employment Cost Inflation at 3% - Benefit Costs Under Control

14. * Total CPI Inflation Up Due To Oil Prices, Core Still Down at 2.2% • Total CPI Inflation • % Change - Year to Year • Core CPI Inflation (Excludes Food & Energy • % Change - Year to Year • CPI Inflation.EMF (USECON) PCU / PCUSLFE 8901-10612

15. * Fed Target Is (Roughly) Core Inflation + Employment Growth. We Think The Recent Cut to 4.5% Was The Right Policy Action. • Fed Funds Rate Target Set by the Federal Reserve • % • Core CPI Inflation + Payroll Employment Growth • % • Fed funds target and CPI plus employment.EMF (WEEKLY) FFEDTAR / _ 890104-1061227 4.5% fed funds rate still well above 3.4% sum of core CPI inflation of 2.2% and job growth of 1.2%. Fed over did it in late 1999 - 2000

16. * Risks? Sure – Sky High Oil Prices & Lack of Dollar Rebound • Crude Oil Price - West Texas • EOP, $/Barrel • Dollar Exchange Rate - Major Currency Index • Avg, 3/73=100 • PZTEX and Dollar.EMF (WEEKLY) PZTEX / FXTWM 890103-1061226 Record oil price behind us? Nope. Record Dollar lows behind us? Nope.

17. * Company Earnings Outside Financials Strong, But Big Q3 Hit From Sub Primes. “Concensus Forecast” Expects Q3 Hit Then Q4 Rebound • Operating Earnings per Share S&P 500 • $/share • Reported After-tax Earnings per Share S&P 500 • $/share • Earnings Reported and Operating.EMF (USECON) SOE500 / SE500 891-1064

18. * Current Quarter S&P 500 P / E is around 17 – Looks Reasonable Higher Risk on the Value Side, Lower Risk on the Growth Side • S&P 500 Market Cap / Annualized Operating Earnings • Current Quarter P / E • Current Q P E.EMF (USECON) _ 871-1064 Higher Risk Region Lower Risk Region

19. * Record U.S. Net Stock Repurchases - $590 Billion Last Four Quarters • Financial Assets Less Liabilities of All US Nonfinancial Corps. • billions - Net, US companies are now net lenders • Net Financial Assets.EMF (USECON) _ 521-1064

20. * Corp. Balance Sheet – Companies’ Financial Assets Exceed Liabilities by $1.3 Trillion. Now Net Lenders, Usually Are Net Borrowers • Financial Assets Less Liabilities of All US Nonfinancial Corps. • billions - Net, US companies are now net lenders • Net Financial Assets.EMF (USECON) _ 521-1064 Total US non-financial companies net lenders Total US non-financial companies net borrowers

21. S&P 500 Total Return EOM Lehman Bond Index: US Aggregate Total Return EOP, Dec-31-75=100 2500 2500 2000 2000 1500 1500 1000 1000 500 500 0 0 90 95 00 05 Sources: Standard & Poor's, Lehman Brothers/ Haver Analytics 11/15/07 * Equity Total Return Beats Fixed Income, But With Volatility • S&P 500 Total Return • EOM • Lehman Bond Index: US Aggregate Total Return • EOP, Dec-31-75=100 • Stock Bond Total Return.EMF (USECON) SP5TRE / MLDAGI 8901-10612

22. * Value Has Outperformed Growth Since 2000 – Is Now Reversing • Total Return: Russell 3000 Value Index • Avg, 5/31/95=1000 • Total Return: Russell 3000 Growth Index • Avg, 5/31/95=1000 • Value and Growth.EMF (WEEKLY) SPRU3VT / SPRU3GT 940708-1061229

23. About 110% Outperformance of Value Since 2000. Now Reversing

24. * Small Caps Outperformed Large Caps Since 1999 – Now Reversing • Total Return: Russell 1000 Large Cap Index • Avg, 12/31/78=100 • Total Return: Russell 2000 Small Cap Index • Avg, 12/31/78=100 • Small vs Large.EMF (WEEKLY) SPRU1T / SPRU2T 940708-1061229

25. Last 28 Years Small Caps Have NOT Outperformed Large Caps

26. * Long Rates Stable, Short Rates Down, Another Fed Rate Cut? Maybe. • 30-Year Treasury Bond Yield • Avg,% • 2-Year Treasury Note Yield • Avg, % • Yields 2 and 30.EMF (WEEKLY) FTB30Y / FTB2Y 890106-1061229

27. * High Yield – Spreads Up On Sub Prime Worries • Merrill High Yield Rate • - • Spread: High Yield Rate Less 5-Year Treasury Rate • Spread: High Yield Rate Less 5-Year Treasury Rate • High Yield.EMF (BONDINDX) GFMLHY / _ 960308-1061229

28. * Shark Chart: Return of Value & Growth Relative to Total Mkt.

29. Conclusions • GDP growth for 07 would be 4% if oil was in $35 range. • $80+ oil knocks 1%+ off GDP & cut jobs gain by 800,000. • Total inflation up on oil prices, but core inflation remains low. • Earnings are generally okay – expect about 10% 2007 Q4/Q4. • S&P 500 P/E at 17 – low enough for prices to track earnings. • Earnings and Balance Sheet quality look high. • Bond risk moderate, subprime problems not likely to spread. • Dollar exchange rate risk now low (down at new record low). • Fed funds rate cut to 4.5% on Oct. 1. Uncertain on future cuts.

30. Required Disclosures: The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The Russell 1000 Index measures performance of 1000 large cap, US companies. The Russell 2000 Index measures performance of 2000 small cap, US companies. The Russell 3000 Growth and Value Indices measure the performance of growth and value stocks respectively. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries, and widely held by individuals and institutional investors. These 30 stocks represent about a fifth of the $8 trillion-plus market value of all U.S. stocks and about a fourth of the value of stocks listed on the New York Stock Exchange. It is not possible to invest directly in an index. The Lehman Brothers Aggregate Bond Index is composed of securities from the Lehman Government/Credit Bond Index, Mortgage Backed Securities Index and Asset Backed Securities Index. The Merrill Lynch High Yield Index is an unmanaged index consisting of bonds that are issued in U.S. Domestic markets with at least one year remaining maturity. All bonds must have a credit rating below investment grade but not in default. Government bonds and Treasury Bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. High yield/junk bonds are not investment grade securities, involve substantial risks and generally should be part of the diversified portfolio of sophisticated investors. Small cap stocks may be subject to a higher degree of risk than more established companies’ securities. The illiquidity of the small cap market may adversely affect the value of these investments. P/E Multiple: A tool for comparing the prices of different common stocks by assessing how much the market is willing to pay a share of each corporation’s earnings. It is calculated by dividing the current market price of a stock by the earnings per share. Past performance is no guarantee of future results. Indices such as the S&P 500 may not be invested into directly. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing.