Raging Bull

An eye on equity market trends

February 20, 2008

Utilities Sector Overview: Stable Fundamental

Outlook Comes At Too High A Price
Jeffrey Buchbinder, CFA
Assistant Vice President • We recommend an underweight allocation to Utilities, primarily due to our interest
Equity Strategy
LPL Financial rate outlook and rich valuations.
• Due to low market interest rates, deleveraging and investor demand for defensive
investments, the Utilities sector has been on a tremendous run during the past several
years.
• Currently, we view the sector's limited sensitivity to the U.S. economy as a negative,
given our macroeconomic view that recession will be averted.
John Canally, CFA • We favor positioning in non-regulated independent power producers, integrated and
Vice President
nuclear power generators, though regulated utilities' relative positioning is improving.
LPL Financial

Jeffrey Kleintop, CFA We recommend an underweight allocation to Utilities. Among the factors driving our
Chief Market Strategist cautious view are: low relative yields, rich valuations, our expectation for a flat-to-rising
LPL Financial
interest rate environment, and political/regulatory changes. Strong capital investment,
Dave Reilly, CFA tightening capacity, and the potential for falling natural gas prices are positive offsets.
Assistant Vice President
Equity Strategy Within the sector, we recommend the relative positioning shown below. Note that the S&P
LPL Financial
sub-sectors don’t match up with how investors analyze Utilities. Accordingly, we divide
the sector by regulated versus non-regulated and by the primary power source. A more
detailed discussion supporting these views can be found at the end of this report.

Utilities Sub-Group Recommendation/

Outlook
Regulated Utilities Neutral to Negative
IMPORTANT Integrated Utilities Neutral to Positive
DISCLOSURE
INFORMATION: Independent Power Producers Neutral to Positive
Please refer to the Natural Gas and Coal Neutral
last two pages for Nuclear Positive
important disclosures. Source: LPL Financial Research

Member FINRA/SIPC

Page 1 of 7
Utilities have been on Utilities have been on quite a run the last Utilities Yield Tracks Treasury Yield
Year on 30-Year Treasury Bond and S&P 500 Utilities Sector Yield
quite a run the last several years. The Utilities sector has been
9.0% 6.5%
several years. on a tremendous run during the past four 30 Year Treasury Yield (left scale)
S&P 500 Utility Index Level (right scale)
years, generating double digit returns and
7.5% 5.5%
outpacing the market during each of those
years. Since the start of 2004, the S&P 6.0% 4.5%
500 Utilities sector index has gained 95%
in total, compared to the 21% increase in 4.5% 3.5%
the S&P 500.
3.0% 2.5%
Utilities have had a solid four-year run
Indexed Price 91 93 95 97 99 01 03 05 07
29-Dec-2000 to 19-Feb-2008 (Weekly)
29-Dec-2000=100; Local
Source:FactSet Research Systems, Bloomberg,
S&P500 (TR) / Utilities - SEC (SP821.R) 119.9 LPL Financial Research
S&P500 (SP50) 102.1

13
12
Looking forward, even with market yields
11 as low as they are, Utilities sector dividend
10
90
yields look relatively less attractive. The
80 chart below shows that as yields for the S&P
70
60
500 have risen, yields for the Utilities sector
50 have fallen. As a result, the relative yield
40

Another factor that has
contributed to Utilities'
recent outperformance,
at least during the last
year or so, is its relative
insensitivity to the U.S.
economy.
01 02 03 04 05
Source: LPL Financial Research, FactSet
The sector’s strong performance has been
driven by several factors. Perhaps the
biggest factor has been low interest rates.
Utility companies are traditionally one
of the best places for equity investors to
look for yield. When yields on alternative
income investment choices are low, the
utility company dividends look especially
attractive. As market yields offered
by bonds and other income oriented
investments such as REITs have fallen
06 07
advantage enjoyed by Utilities over the rest
of the market has diminished, contributing
to our underweight recommendation. In
the flat-to-rising interest rate environment
we foresee in 2008, this sector is likely to
underperform.
Utilities' Relative Yield Advantage is Shrinking
S&P 500:: Divided Yield Close: Utilities
%
S&P 500 Composite: Divided Yield
%
6 6
5 5
4 4

during the past several years, yields on 3 3

utility stocks have looked especially
attractive on a relative basis. The low 2 2

interest rate environment has also 1 1

99 00 01 02 03 04 05 06 07
provided the industry with an opportunity
Source:S&P/H, S&P/ Haver 2/19/08
to deleverage.

LPL Financial Member FINRA/SIPC Raging Bull | February 20, 2008 | Page 2 of 7
Currently, we view
the sector’s limited
sensitivity to the
U.S. economy as a
negative, given our
macro economic view
that recession will be
averted.
LPL Financial Member FINRA/SIPC
Another factor that has contributed to
Utilities recent outperformance, at least
during the last year or so, is its relative
insensitivity to the U.S. economy. Since
the onset of the subprime mortgage crisis in
the summer of last year, which marked the
recent peak in Treasury yields, investors
increasingly looked toward the Utilities
sector for a defensive investment. Since
mid July 2007, the sector has outperformed
the S&P 500 by more than 10 percentage
points.
Further demonstrating the sector’s relative
defensive nature was very strong relative
performance from mid 2000 through mid
2001, during the early part of the last
recession and prior to the onset of the
California electricity crisis and Enron
debacle. Though deregulation and the
bursting of the Tech bubble played a sizable
role in the strong relative performance, it
is noteworthy that the sector outperformed
the S&P 500 by 40% during this time
period. Should a recession occur, which
we do not expect, the Utilities sector may
outperform—though not as dramatically
as in the 2001 recession.
Strong relative performance ahead of
energy crisis and previous recission
Indexed Price
27-Feb-1998 to 20-Feb-2008 (Monthly)
30-Jan-1998=100; Local
S&P500 / Utilities (SP821) 139.1
S&P500 (SP50) 136.5
98 99 00 01 02 03
Source: LPL Financial Research, FactSet
Currently, we view the sector’s limited
sensitivity to the U.S. economy as a
negative, given our macro economic
view that recession will be averted. We
expect the U.S. economy will re-accelerate
during the second half of this year. As a
result, we believe economically sensitive,
growth-oriented areas of the market are
well positioned for growth and attractively
priced. We would focus investments in
these areas, including Technology and
Industrials. Health Care, another growth-
oriented sector, is also favored, though it
offers similar relative insensitivity to the
economy. These sectors are all benefiting
from large international businesses, which
utility companies lack.
We would also point out that utilities
are predominantly consumer oriented
businesses and face some risk on the
demand side if the consumer spending
environment deteriorates further.
For more information on our sector views,
please refer to Jeff Kleintop’s most recent
Sector Strategy report.
Still a proxy for oil prices? A number of
utilities have benefited from higher energy
prices, but this relationship has faded
during the last 12 to 18 months. The utility
companies had been able to pass along
160 higher prices to the end consumer in many
150
140
cases as oil prices rose, while benefiting
130 from cheaper natural gas and coal input
120
110
prices. This relationship held through mid
100 2006 but has broken down since then,
90
80
partly due to higher natural gas and coal
70 prices. Going forward, if utility companies
60
04 05 06 07 get margin support, we believe it is more
likely to come from falling natural gas and
coal prices than rising energy prices.
Raging Bull | February 20, 2008 | Page 3 of 7

The changing political
landscape has weighed
on the group some
recently, and we believe
will continue to do so.
Increasing capacity
utilization suggests
favorable pricing
environment.
LPL Financial Member FINRA/SIPC
Oil Prices and Utilities sector returns have decoupled
S&P 500:Utilities
Dec-30-94=100
Spot Oil Price: West Texas Intermediate (Prior '82=Posted Price)
$/Barrel
225
200
175
150
125
100
75
03 04 05 06
Source:S&P, WST / Haver
Strong performance run has left the
sector richly valued. The Utilities sector
is trading at a premium valuation after its
very strong multi-year run. In addition to
the aforementioned factors that contributed
to the group’s strong performance, the large
and highly publicized private equity buyout
of TXU last year and the repeal of the Public
Utility Holding Company Act in early 2006
sparked acquisition speculation that drove
the group even higher. Acquisitions by non-
utility investors and foreign companies
that were expected to trigger a wave of
consolidation have not materialized, though
the group remains richly valued.
The sector is trading at a premium forward
P/E multiple to the S&P 500, and is now the
fourth most expensive sector on this basis
(behind Technology, Consumer Staples,
and Consumer Discretionary). Relative
to history versus the S&P 500, as the
accompanying chart shows, the group is at
multi-decade high valuations. This price
is a high one to pay given the consensus
expectation for 2008 sector earnings
growth is just 7%, below the nine other
S&P 500 economic sectors. A sector yield
of about 3% is not a big selling point either,
when the entire S&P 500 yields about 2%
and stocks yielding near 3% and higher
are plentiful in other sectors with more
favorable outlooks.
12 Month Forward PE Ratio-Utilities
20
100
15
10
80
5
76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
60
Source: LPL Financial Research, FactSet
40
12 Month Forward Relative PE Ratio-Utilities
1.2
1.1
20
1
07
0.9
2/19/08
0.8
0.7
0.6
0.5
0.4
76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Source: LPL Financial Research, FactSet
The changing political landscape has
weighed on the group some recently,
and we believe will continue to do so.
Depending on who takes the White House,
the tax rate on dividends is likely to increase
as the Bush tax cuts expire in 2010. Given
the importance of dividends to investors in
this sector, this consideration could limit
the group’s advance as investors focus on
the election. Moreover, the likelihood that
more restrictive environmental policies
increase costs for utility companies is high
as they work to become cleaner. These
clean energy initiatives, while positive
environmentally, will hamper profitability
for the non-regulated utilities that are
unable to fully recover these costs.
Increasing capacity utilization suggests
favorable pricing environment. While
most of the factors above suggest only
minimal exposure to Utilities investments,
a look at industry capacity utilization
reveals a potential offset. As shown in
the accompanying chart, the aggregate
capacity utilization rate for the industry has
trended from the mid 80% level to closer to
90% during the past couple of years. Less
Raging Bull | February 20, 2008 | Page 4 of 7
 spare capacity could pave the way for future natural gas power as opposed to coal. Coal
price increases. Additionally, new capacity faces potentially tougher environmental
has been slower to come on line than many restrictions, which is leading many utilities
analysts had expected, providing support to increase spending on cleaner processes.
for electricity prices. We expect natural gas prices to follow oil
prices down in the coming months.
Capacity Utilization: Electric and Gas Utilities
SA, Percent of Capacity
We favor utility stocks with nuclear power
100 100
generation capabilities. Those utilities with
96 96
nuclear power generation currently hold a
cost advantage as input costs increase—an
92 92
advantage that is unlikely to be competed
88 88
away for quite some time.

84 84
Finally, geography is worth considering
80 80
when investing in utility stocks. California
00 01 02 03 04 05 06 07
appears to have cleaned up its act and it
Source:Federal Reserve Board / Haver Analyics 2/19/08 appears that the backlash over higher rates
in states such as Illinois and Maryland has
How should investors be positioned within quieted down.
the sector? In terms of the regulatory
environment, we generally prefer less
regulation to more due to the opportunity
to benefit from the strong pricing
environment and other industry dynamics.
That preference points to independent
power producers and integrated utilities
over the regulated utilities. But with high
and still rising natural gas and coal prices,
the regulated utilities are in relatively good
shape on the margin side because of their
ability to pass along higher costs.

Additionally, regulated utilities are able

to better recover increasing infrastructure
capital investments, increasing the
predictability of earnings. Sector capital
expenditures increased at double-digit
rates during 2006 and 2007. If this trend
continues, it would bode well for the
earnings growth outlook for the sector,
notably for the regulated utilities.

Though natural gas prices have increased

in recent months, we prefer the cleaner

LPL Financial Member FINRA/SIPC Raging Bull | February 20, 2008 | Page 5 of 7
 IMPORTANT DISCLOSURES
Investing in alternative investments may not be suitable for all investors and involve special risks such as risks associated with leveraging
the investment, potential adverse market forces, regulatory changes, potential illiquidity. There is no assurance that the investment objective
will be attained.

Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no
assurance that the investment objectives of this program will be attained.

Small-cap stocks may be subject to a higher degree of risk than more established companies’ securities. The illiquidity of the small-cap
market may adversely affect the value of these investments.

Investing in mutual funds involve risk, including possible loss of principal. Investments in specialized industry sectors have additional risks,
which are outlined in the prospectus.

International investing involves special risks such as currency flucuation and political instability and may not be suitable for all investors.

REQUIRED DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific
investment advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial
advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and
cannot be invested into directly.

Past performance is not indicative of future results. The information set forth above has been obtained from third party sources believed to
be reliable, but LPL Financial does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising
out of errors, omissions or changes to market factors. This material does not purport to contain all of the information that an interested party
may desire and in fact, may provide only a limited view of a particular market.

Alpha: Incremental return due to non-market factors. A positive alpha indicates that the portfolio has produced returns above the expected
level at that level of risk. Alpha measures a fund’s risk-adjusted performance. It represents actual returns less the fund’s risk adjusted
performance as measured by beta, and is expressed as an annualized percentage.

P/E Multiple – A tool for comparing the prices of different common stocks by assessing how much the market is willing to pay for a share of
each corporation’s earnings. It is calculated by dividing the current market price of a stock by the earnings per share.

P/B Multiple - Determined by dividing current stock price by shareholders equity for the most recent quarter.PTB - Stock price divided by
shareholders equity per share.

Book Value - A company total assets minus intangible assets and liabilities, such as debt. A company’s book value might be higher or lower
its market value.

Foward P/E- Price/earnings ratio, using earnings estimates for the next four quarters.
The prices of small company stocks are generally more volatile then those of large company stocks.

LPL Financial Member FINRA/SIPC Raging Bull | February 20, 2008 | Page 6 of 7
DESCRIPTION OF INDICES
Indices are unmanaged and cannot be invested into directly.

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. It is not possible to invest directly in an index.

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 marketvalue 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. It is not possible to invest directly in an 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. It is not possible to invest directly in an index. Past performance is not a guarantee of
future results.

Russell 2000 Growth Index

The Russell 2000 Growth Index is an unmanaged index comprised of those Russell 2000 companies with higher price-to-book ratios and
higher forecasted growth values. Russell 2000 Value Index measures the performance of those Russell 2000 companies with lower price-
to-book ratios and lower forecasted growth values.

This research material has been prepared by LPL Financial.

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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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