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Economic/Market Outlook late 2007—early 2008

Penn MutualPenn MutualNovember 6November 6thth, 2007, 2007

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Rob MorganRob MorganInvestment Strategist

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• Full service Securities Broker/Dealer

• 1832, Headquartered in Philadelphia

• Regional Firm but National Client Base

• 2nd Oldest NYSE Seat

• 1,000 Financial Consultants, 2,000 Employees

• 100 Branch Offices along US East Coast

• Top 10% of all US Securities Broker/Dealers

• Primarily Private Client Focused but Active Capital Markets/Institutional Functions

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-Financial Planning-Trust & Estate Planning-Investment Advisory-Money Management-401(k) & Qualified Plans-Lending, Cash Management-Business Advisory Services-Tax Planning-Asset Allocation-Performance Reporting

Serving Client Needs through Serving Client Needs through “Wealth Management”“Wealth Management”

-Individual Equities-Individual Fixed Inc.-Securities-Mutual Funds-Unit Investment Trusts-Closed-end Funds-Hedge Funds-Life Insurance-Annuities-Exchange Traded Funds

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The EconomyThe Economy

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Economic Uncertainties-2007Economic Uncertainties-2007

• Will credit problems cause recession?• How high will inflation go?• How many times will Fed cut rates?• Earnings still strong in ’07?

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Will Credit Problems Cause Recession?

• Magnitude of the problem• Sub prime problem and housing market

slowdown-creeping into economy?• Resolution

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How High Will Inflation Go?How High Will Inflation Go?

• The Bad News—commodity prices are skyrocketing

• The Good News—wages are not skyrocketing

• Bottom Line—inflation trending downward.

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How Many Times Will The Fed Cut Rates?How Many Times Will The Fed Cut Rates?

• We think neutral level is 4%.• Mindset of Fed chairman and Fed

governors• Will the Fed overshoot to the downside?

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EarningsEarnings• 2007 should be slower than 2006.• 2007- still high single digit EPS

growth.• Companies very conservative in post-

Enron environment.• Even with slower growth, stocks can

advance if expectations are exceeded.

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Equity Markets During a Equity Markets During a Fed PauseFed Pause

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January 2nd, 2007—October 1st, 2007

Sector Returns•Energy33.62•Materials 22.98•Telecom 18.35•Industrials 16.79•Info Tech 15.84•Utilities 10.54•Staples9.52•Healthcare 7.24•Discretionary -3.86•Financials -5.23

January 2nd, 2007—October 1st, 2007

•Large Cap vs. Mid/SmallCap Returns•Mid Cap 9.49•Small Cap 3.13•Large cap 9.13Growth vs. Value•Value 7.79•Growth10.54

•International vs. Domestic•MSCI EAFE 13.56•S&P 500 9.13

Equity Market ReturnsEquity Market Returns

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Equity Market Forecast 2007Equity Market Forecast 2007• In a fairly-valued market, equity total

return should follow EPS growth.• PE of S&P 500 approximately 15 times

2007 EPS.• Earnings growth deceleration, but still

high single digits.

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Equity Market StrategyEquity Market Strategy• Overweight stocks versus bonds.• Within stocks:

• Overweight technology, basic materials and industrials

• Underweight healthcare, consumer staples and consumer discretionary

• Overweight large cap versus small cap• Overweight international• Overweight growth versus value

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Fixed IncomeFixed Income

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Yield CurveYield Curve January 2January 2ndnd, 2007—October 1, 2007—October 1stst, 2007, 2007

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Fixed Income Forecast 2007Fixed Income Forecast 2007

• Fed is probably above neutral level now. • 2% real rates + 2% inflation= 4%

Fed Funds.• If inflation continues to trend lower, Fed is

too high on rates.

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Fixed Income StrategyFixed Income Strategy

• Keep duration less than benchmarks.

• Stay in higher quality names if possible.

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Favorite Names In…Favorite Names In…

• Technology

• Basic Materials

• Industrials

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QuestionsQuestions

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