Outlook & Opportunities Terry Sandven Christian Heitzman July 2007

1. Outlook & Opportunities Terry Sandven Christian Heitzman July 2007

2. Mid-Year Review & Outlook • Overview • Performance • Interest rates • Inflation • Housing • Earnings

3. Mid-Year Review & Outlook • Recap of First Quarter Outlook • First quarter Outlook • Pro-growth thesis remains intact. • Inflation will remain contained. • Economic expansion will continue, albeit at a slower rate. • Fed is not likely to move until second half of 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. • Mid-Year Outlook • Largely the same as the first quarter. • Evidence of some global inflation. • Fed may not move in 2007. • Equities are likely to outperform bonds in the second half of 2007.

4. Performance

5. Performance • Seasonality

6. Interest Rates • Secular Change? • The 10-year Treasury topped 5.0% for the first time since July 2006 before peaking at 5.31%.

7. Interest Rates • U.S. Treasury Yield Curve • Yield curve has flattened. Source: FactSet Research Systems Inc.

8. Inflation • Consumer Price Index (CPI) • On an annual basis, CPI increased 2.7% in May versus 2.6% in April; core prices rose 2.2%.

9. Inflation • Personal Consumption Expenditures (PCE) • Core PCE increased 1.9% in May, down from 2.0% in April.

10. Inflation • Fed Funds Versus CPI • Adequate spread between fed funds and the CPI is arguably intact, suggesting that the Fed’s monetary policy will remain unchanged.

11. Inflation • CRB Commodity Index • Showing weakness, or at least is pulling back from recent highs.

12. Inflation • Institute for Supply Management (ISM) • Both ISM manufacturing and non-manufacturing are reflecting growth.

13. Housing • Pending Home Sales of Existing Homes • Pending sales of existing homes, a leading indicator because it tracks contract signings, continues to trend downward.

14. Housing • New Home Sales • New home sales continue to decline.

15. Housing • Existing Home Sales • Existing homes sales continue to trend downward.

16. Housing • Delinquencies • Housing—subprime deterioration—remains a predominant concern.

17. Housing • Conclusion • Too early to conclude that housing has bottomed; the housing environment remains challenging. • Distinction between “weak” versus “collapse” • Predominant view and evidence suggests potential for further weakness. • Company results: • Home Depot cut its annual profit forecast, citing the slumping U.S. housing market. • Sears Holdings said its second quarter profit may decline by as much as 46%. • D.R. Horton said it will report a third quarter loss after orders declined 40%. • Implications and impact on consumer spending remain of concern.

18. Earnings • S&P 500 Earnings Projections • S&P 500 earnings growth is expected to modestly accelerate in 2008. • Valuations are reasonable.

19. Earnings • S&P 500 Earnings Projections

20. Earnings • S&P 500 Valuation Levels (July 2007)

21. Conclusion • Outlook • Pro-growth thesis remains intact, driven largely by favorable employment conditions and earnings outlook. • Core U.S. inflation will remain contained; global growth and foreign interest rates seem biased toward further upside. • Economic expansion will continue, albeit at a slower rate. • Housing, company earnings and employment are key. • Fed is not likely to move until the fourth quarter, if at all in 2007. • Adequate liquidity, increased merger and acquisition activity, and attractive valuations present a favorable backdrop for equities to outperform bonds.

22. The Fed Stays The Course • We believe, and Fed Funds Futures corroborate the idea, that the Fed will be on hold through the balance of the year.

23. Credit Markets • Sub-Prime woes continue to dominate credit markets • We don’t know the extent of the damage • Credit spreads are moving out • Caution is still warranted

24. Rates And The Curve • Two stories here – domestic and global • Domestic story is continued economic expansion versus the housing drag • Global story is focused on other central banks raising rates and the need for a market adjustment in US rates to continue to attract capital • Both stories at this juncture seem to point toward mild upward pressure on US rates • A risk to this view is a major sub-prime event spurring a flight to quality

25. The Muni Market • Increased supply matched by new market participants • Spreads are tighter, but could tighten further as new markets are assimilated • International demand is present and increasing • Judicial issues on the horizon, but not impacting the market as yet

26. Final Thoughts • Rates have a modest bias upward, but there are overhanging fears of sub-prime fallout • We appear to be in a new trading range – 5 year notes above 5.05% seem attractive • Credit instruments still seem rich versus the risk, but are adjusting • The muni market continues to evolve and become more dynamic – we believe that this is and will continue to be positive and we remain constructive on munis.

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