Weekly Market Commentary

Your weekly update on risks and opportunities in the financial markets.

January 28, 2008

Fed Up!
Jeffrey Kleintop, CFA • The catalysts we have cited as needed to turn the market around began to unfold last week,
Chief Market Strategist, including the Federal Reserve lowering interest rates by 75bps and incoming earnings reports
LPL Financial
reflecting broad strength in earnings.
• Late last week, the Federal Funds futures market reflected lowered expectations for Fed rate cuts
this week. Financial and retailing stocks slid as these expectations were priced in, suggesting
these sectors may be vulnerable to Fed inaction.
• We continue to believe that a prolonged downturn is unlikely. Instead, a mid-cycle slowdown and
accompanying V-shaped stock market correction is most likely.
• Bolstered by stocks’ beginning to show signs of a turnaround last week, we still believe 2008
will be a good year for investors, with much of the gain coming in the fourth quarter, and that the
current pullback presents long-term investors with a buying opportunity as the S&P 500 trades at
valuations in line with 17 year lows.

Underlying last week’s modest gain was a big reversal in market behavior. In recent commentaries,
we noted that the peak-to-trough decline in the stock market could total 19%, based on the
We continue to believe market’s behavior in a similar environment in 1998. In fact, the futures were pointing to that full
that a prolonged 19% slide before the Fed cut rates by 75bps before the market opened on Tuesday of last week.
downturn is unlikely. The market rebounded sharply after the Fed took action. We continue to believe that a prolonged
Instead, a mid- downturn is unlikely. Instead, a mid-cycle slowdown and accompanying V-shaped stock market
cycle slowdown correction is most likely.
and accompanying
V-shaped stock market The catalysts we have cited as needed to turn the market around began to unfold last week, including
correction is most likely. the Federal Reserve lowering interest rates by 75bps and incoming earnings reports reflecting broad
strength in earnings outside of the early reporting companies in the Financial sector. (Excluding
Financials, year-over-year earnings per share growth for S&P 500 companies is a solid gain of 13%.)

In contrast to the subprime writedown driven losses in the Financial sector, results in key growth
So far, 63% of sectors like Information Technology and Industrials are strong. So far, 63% of companies in the
companies in the S&P S&P 500 have exceeded analyst expectations. Guidance has been mixed, with first quarter estimates
500 have exceeded in line with our expectation for low single-digit gains.
analyst expectations.

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Page 1 of 3

Late last week, market
participants in the
Federal Funds futures
market went from
pricing in a 50bps rate
cut with a chance of a
75bps rate cut at this
week meeting to a
25bps rate cut with a
chance of 50bps.
Bolstered by stocks’
beginning to show signs
of a turnaround last
week, we still believe
2008 will be a good year
for investors, with much
of the gain coming in
the fourth quarter, and
that the current pullback
presents long-term
investors with a buying
opportunity as the S&P
500 trades at valuations
in line with 17 year lows.
LPL Financial Member FINRA/SIPC
S&P 500 Companies by Sector
# Beating # In Line # Missing Reported % Change
Estimates with Estimates Estimates / Total Year-over-Year
Information Technology 27 2 3 32/71 33
Industrials 18 5 0 23/56 15
Health Care 13 3 1 17/51 12
Materials 10 1 1 12/28 4
Consumer Discretionary 10 3 6 19/88 108
Consumer Staples 5 4 1 10/39 4
Energy 2 0 3 5/35 32
Financials 16 2 26 44/92 -136
Telecom Services 0 1 0 1/9 81
Utilities 1 1 0 2/31 29
Source: Bloomberg
Past performance is no guarantee of future results.
The Fed has now taken aggressive action to help stem the decline. How dependent is the stock
market upon the Fed cutting rates again this week? Late last week, market participants in the Federal
Funds futures market went from pricing in a 50bps rate cut with a chance of a 75bps rate cut at this
week meeting to a 25bps rate cut with a chance of 50bps. Financial and retailing stocks slid as these
expectations were priced in, suggesting these sectors may be vulnerable to Fed inaction. We expect
additional rate cuts by the Fed, but it is possible that they may wait until Friday’s key economic
releases before enacting additional cuts.
The bulk of fourth quarter earnings reports and the Fed’s meeting on Wednesday are not the only
key data affecting the market this week. On Friday, the potential for a surprisingly solid increase in
job creation reflected in the employment report and an upward revision to last month’s data (the data
that kicked off the second leg of the market correction in early January as a recession became built
into equity prices) would likely act as a positive catalyst for stocks.
The S&P 500 is now down 14% from the all-time high on October 9, after extending to a 16%
decline during last week. The peak-to-trough decline in the stock market could total 19%, as
measured by the S&P 500, based on the market’s behavior in a similar environment in 1998, leaving
the potential for 4-5% more downside for stocks in the short term. However, the breadth of the
sell-off limits its duration. It is very rare for everything to go down together for very long. Unlike
narrow bear markets like the one in 2000–2002, broad-based market sell-offs are typically sharp
and short-lived, as we saw in 1998, and result in a V-shaped pattern as markets rebound. Bolstered
by stocks’ beginning to show signs of a turnaround last week, we still believe 2008 will be a good
year for investors, with much of the gain coming in the fourth quarter, and that the current pullback
presents long-term investors with a buying opportunity as the S&P 500 trades at valuations in line
with 17 year lows.
Weekly Market Commentary | January 28, 2008 | Page 2 of 3
This report has been prepared by LPL Financial from sources believed to be reliable but no guarantee can be made as to its accuracy or
completeness. The opinions expressed herein are for general information only, are subject to change without notice, and are not intended to
provide specific advice or recommendations for any individuals. Please contact your advisor with any questions regarding this report.

Investing in Mutual Funds involve risk, including possible loss of principal. Investments in specialized industry sectors have additional risks,
which are outlines in the prospectus.

Investing in international and emerging markets may entail additional risks such as currency fluctuation and political instability. Investing in
small-cap stocks includes specific risks such as greater volatility and potentially less liquidity.

Stock investing involves risk including loss of principal

Past performance is not a guarantee of future results.

Indices are unmanaged and cannot be invested into directly.

High yield/ junk bonds are not investment grade securities, involve substantial risks, and generally should be part of the diversified portfolio
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LPL Financial does not engage in investment banking services nor has LPL Financial or the analyst(s) been compensated during the previous 12
months by any company mentioned in this Report for any non-investment banking securities-related services and non-securities services.

INDEX DESCRIPTIONS
Dow Jones Average - 30 Industrial
Prepared and published by Dow Jones & Co. It’s one of the oldest and most-widely quoted of all the market indicators. 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.

NASDAQ Composite Index

The Nasdaq Composite Index measures all Nasdaq domestic and non-U.S. based common stocks listed on The Nasdaq Stock Market. The
Index is market-value weighted. This means that each company’s security affects the Index in proportion to its market value. The market
value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of
the Index

S&P 500 Index

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 index was developed with a
base level of 10 for the 1941-43 base period.

Russell 3000 Index

Russell 3000® Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents
approximately 98% of the investable U.S. equity market. As of the latest reconstitution, the average market capitalization was approximately
$4.8 billion; the median market capitalization was approximately $944.7 million. The index had a total market capitalization range of
approximately $386.9 billion to $182.6 million.

This research material has been prepared by LPL Financial.

The LPL Financial family of affiliated companies includes LPL Financial, UVEST Financial Services
Group, Inc., IFMG Securities, Inc., Mutual Service Corporation, Waterstone Financial Group, Inc.,
and Associated Securities Corp., each of which is a member of FINRA/SIPC.
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Weekly Market Commentary | January 28, 2008 | Page 3 of 3
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