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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
??