Fourth Quarter Economic and Interest Rate Update & Outlook Terry Sandven Christian Heitzman

1Since 1895. Member SIPC and NYSE.

Fourth Quarter Economic and Interest Rate Update & Outlook

Terry SandvenChristian 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: 888 369-9065

Conference ID: 17864716

2 2

Market Insights & Perspectives Market and Sector Performance

Total ReturnClose 2007

Index 9/30/07 YTD Q1 Q2 Q3 2006S&P 500 1,526.75 9.1% 0.6% 6.3% 2.0% 15.8%Dow Jones Industrials 13,895.63 13.3% -0.3% 9.1% 4.2% 19.0%NASDAQ Composite * 2,701.50 11.8% 0.3% 7.5% 3.8% 9.5%Russell 2000 805.45 3.2% 1.9% 4.4% -3.1% 18.4%MSCI EAFE 2,300.38 13.6% 4.1% 6.7% 2.2% 26.9%MSCI Emerging Markets 1,204.90 34.8% 2.3% 15.1% 14.5% 32.6%Shanghai Composite 5,064.60 173.7% NA NA NA NALehman U.S. Aggregate 1,241.44 3.8% 1.5% -0.5% 2.8% 4.3%Lehman U.S. Govt. & Credit - Intermediate 1,354.29 4.4% 1.6% -0.1% 2.9% 4.1%Lehman U.S. Govt. & Credit - Long 1,814.97 2.6% 1.0% -1.8% 3.5% 2.7%Lehman U.S. Short Treasury - Bills 90.23 3.9% 1.2% 1.3% 1.3% 4.8%Lehman Municipal Bond 644.78 2.0% 0.8% -0.7% 1.8% 4.8%

Percent ofS&P 500 Sector S&P 500Consumer Discretionary 9.3% -3.6% -0.7% 3.7% -6.3% 18.6%Consumer Staples 10.2% 10.0% 2.2% 2.7% 4.8% 14.4%Energy 11.5% 28.7% 2.1% 14.8% 9.8% 24.2%Financials 19.7% -5.0% -2.8% 2.1% -4.3% 19.2%Health Care 11.5% 7.2% 1.0% 5.0% 1.0% 7.5%Industrials 11.3% 17.5% 1.1% 9.8% 5.9% 13.3%Information Technology 16.4% 16.2% -0.9% 10.4% 6.3% 8.4%Materials 3.2% 22.4% 9.0% 7.1% 4.9% 18.6%Telecommunication Services 3.7% 17.9% 7.3% 7.6% 2.1% 36.8%Utilities 3.4% 11.0% 9.3% -0.4% 2.0% 21.0%* Performance of NASDAQ and Shanghai Composites are percent change; excludes dividends.Source: Piper Jaffray & Co.

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

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

Market Insights & Perspectives

Overview

• Interest Rates• Housing• Inflation• Employment• Earnings

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

Interest RatesU.S. Treasury Yield Curve

• Yield curve has steepened since the 9/18/97 Fed rate cuts.

8 8

Interest Rates

LIBOR

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

9 9

Interest Rates

U.S. Dollar—Near 20-Year Lows

• In theory, lower dollar implies increased exports.

88 90 92 94 96 98 00 02 04 06

80

85

90

95

100

105

110

115

120

50 Day Moving Average 200 Day Moving Average

United States Dollar Index (DXY.Z)30-Oct-1987 to 2-Oct-2007 (Monthly) High: 120.920Local Currency Low: 77.914

Last: 78.280

Data Source: Prices / Exshare ©FactSet Research Systems 2007

10 10

HousingPending 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 1.331

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

HousingHome Builders & Mortgage-Related Companies (9/25/07)

Source: FactSet Research Systems Inc.

9/05 12/05 3/06 6/06 9/06 12/06 3/07 6/07

20

25

30

35

40

45

50


Toll Brothers Inc. (TOL)19-Sep-2005 to 20-Sep-2007 (Daily) High: 46.390U.S. Dollar Low: 18.850

Last: 21.440


Toll Brothers

9/05 12/05 3/06 6/06 9/06 12/06 3/07 6/07

15

20

25

30

35

40


D.R. Horton Inc. (DHI)23-Sep-2005 to 25-Sep-2007 (Daily) High: 41.660U.S. Dollar Low: 12.840

Last: 13.220


D.R. Horton

9/05 12/05 3/06 6/06 9/06 12/06 3/07 6/07

15

20

25

30

35

40

45


Countrywide Financial Corp. (CFC)23-Sep-2005 to 25-Sep-2007 (Daily) High: 45.260U.S. Dollar Low: 15.000

Last: 17.675


Countrywide Financial

9/05 12/05 3/06 6/06 9/06 12/06 3/07 6/07

29

30

31

32

33

34

35

36

37

38


Wells Fargo & Co. (WFC)23-Sep-2005 to 25-Sep-2007 (Daily) High: 37.990U.S. Dollar Low: 28.810

Last: 35.730


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

InflationProducer 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

InflationConsumer 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

InflationPCE

• 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

InflationInstitute 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

InflationEnergy

• Oil remains a wildcard; crude is near record levels.

03 04 05 06 07

30

40

50

60

70

80


Light Crude Oil - Historical Futures (1263P00)4-Oct-2002 to 2-Oct-2007 (Weekly) High: 83.760U.S. Dollar Low: 24.820

Last: 80.240


24 24

Inflation Energy/Consumer

• Declining energy prices in the second half of 2006 greatly contributed to favorable holiday sales.

25 25

InflationEnergy

Oil Consumption

6.0%

3.3% 3.2% 3.1% 2.7% 2.5% 2.4% 2.4% 2.2%

24.1%

9.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

USA China Japan RussianFederation

Germany India SouthKorea

Canada Brazil France Italy

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

26 26

InflationChina

• Population• Infrastructure• World stage

– World Olympics (2008)– World 2010 Expo

• Oil—auto ownership– China: 3%– World average: 13%– U.S.: 75%

27 27

EmploymentU.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

EmploymentU.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.

Earnings ProjectionsClose Earnings Earnings Earnings

10/1/07 2006 P/E 2007E P/E 2008E P/E

S&P 500 1,526.75 $88.18 17.3x $94.67 16.1x $100.50 15.2x

S&P 500 Earnings Growth* 15.6% 7.4% 6.2%

Actual and estimated earnings are on an operating basis.*Year-over-yearSource: First Call Corporation estimates

30 30

Earnings & Valuation

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

31 31

Catalysts/Opportunities

32 32

Catalysts/OpportunitiesSeasonality

AVERAGE S&P 500 MONTHLY PERFORMANCE

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

Jan. 1950 to April 2007 Jan. 1975 to April 2007 Jan. 1995 to April 2007

Data Source: Ibbotson Associates and FactSet Research Systems, Inc.

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 AAA GO 10 Year - Treasury 10 Year

Source: Piper J affray & Co., Thomson Financial Municipal Market Data

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:

http://www.piperjaffray.com/researchdisclosures.

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 1895. 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.

Fourth Quarter Economic and Interest Rate Update & Outlook Terry Sandven Christian Heitzman

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