Conference Call

1
Conference Call

• February 5, 2007

2
The Economy

• Federal funds rate remained at 5.25
• GDP grew at 3.5 in Q406
• versus 2.0 in the 3rd quarter
• 4.4 increase in consumer spending
• 10 increase in exports for the quarter.
• Inflation, measured by the core personal
  consumption expenditure index, rose only 2.1 in
  the 4th quarter
• 2.3 for the year
• Business spending on new investment declined
  0.4?leading indicator and warning of slowing
• Business spending on equipment and software
  declined 1.8 Q406.

3
The Economy

• The Labor Department report
• Nonfarm payroll employment posted a 111,000 gain
  in January (consensus 160,000)
• Revised 206,000 increase in December and 196,000
  rise in November
• Payroll is not slowing down?unchanged over year
• Jobs were added in the services, government and
  non-residential construction
• Jobs were lost in the manufacturing and
  residential construction
• The jobs added in non-residential construction
  (126,000) offset those lost in residential
  construction (-104,000) for all of 2006

4
The Economy

• Institute for Supply Management
• reported manufacturing index fell to 49.3 in
  January 2007
• Was 51.40 in December 2006
• Weakness in manufacturing is consistent with the
  payroll data
• Although manufacturing is a small part of the US
  economy, it has been an excellent leading
  indicator in past business cycles for overall
  economic activity

5
The Markets

• Fed says US economy is growing moderately and
  inflation pressures are slowly dissipating
• Major indexes rose sharply for the week
• Leading sector was energy and oil and gas
  industry group rose 3.42 for the week.

6
The Markets

• Corporate earnings for Q406 still growing? 10
  over the same quarter in 2005
• Analysts forecast slower earnings growth in the
  first half of 2007
• United Parcel Service (UPS) issued a profit
  warning for Q107?short term correction??
• However, Lowrys Net Advances and its Buying
  Power Index (technical indicators) imply higher
  stock prices in the next few months.

7
QInsight Thoughts

• QInsights business cycle model?in PLUNGE
• Financial, Financial Services, Basic Materials,
  Consumer Discretionary and Consumer Staples
  sectors have historically led the broad stock
  market indexes during the PLUNGE phase
• BUT QInsight is worried investors are predicting
  a possible cut in short-term rates earlier than
  Fed indicates

8
Plunge Industry Groups that have Historically
Outperformed SP 500 on a Risk/Return Basis
(QInsight)

• Retail - General MerchandiseApparelHealth Care
  -- Medical Products  Containers -- Metal and
  Plastic  Textiles -- Apparel  Beverages --
  Non-Alcoholic  Oil -- International  Foods 
  SemiconductorsBeverages -- Alcohol  Retail --
  Food Chains  Railroads  Waste Management 

• Retail -- Dept. Stores  Consumer Products 
  Chemicals -- Diversified  Cosmetics 
  Chemicals  Health Care -- Diversified 
  Insurance -- Property  Household Products 
  Aerospace/Defense  Toys  Truckers  Office
  Equipment  Electrical Equipment 

9
Outperforming Sectors based on Dr. Nawrocki
10
Outperforming Sectors during Ease-off

• Healthcare
• Consumer Staples
• Consumer Discretionary
• Financials
• Information Technology
• Industrials
• Utilities
• Telecom

11
Outperforming Sectors during Plunge

• Industrials
• Consumer Discretionary
• Consumer Staples
• Healthcare
• Materials
• Information Technology

12
Outperforming Sectors during Revival

• Consumer Discretionary
• Industrials
• Financials
• Consumer Staples
• Materials
• Energy
• Healthcare
• Utilities
• Information Technology

13
Overlapping Sectors between Ease off and Plunge

• Industrials
• Consumer Discretionary
• Consumer Staples
• Healthcare
• Information Technology

14
Overlapping Sectors for Plunge and Revival

• Consumer Discretionary
• Industrials
• Financials
• Consumer Staples
• Healthcare
• Utilities
• Information Technology