Weekly Market Commentary

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

March 10, 2008

On the Edge
Jeffrey Kleintop, CFA • For much of February signs of healing were evident; aggressive policy actions by the Fed
Chief Market Strategist, helped to lower liquidity premiums and contain the widening in credit spreads – and even
LPL Financial
helped the stock market to stabilize.
• Last week brought additional negatives to the economy and markets, putting our outlook
for a classic mid-cycle slowdown scenario for the markets at risk and raising the odds of
recession.
• During the past 20 years, we have only seen three peak-to-trough declines of the current
magnitude or greater - they took place in 1990, 1998, and 2000-02. The declines that took
place in 1990 and 1998 may be most comparable to the current environment. Following the
1998 decline of 19%, the 12 month gain in the S&P 500 was 40%. After the 1990 decline of
20%, stocks rebounded 34% over the next 12 months.
• While the market trough may still be ahead, it is important to try keep in mind a longer term
outlook. Since WWII there have been 16 market declines of around the current magnitude
of 14% or more. On average, 12 months after hitting the trough stocks were up 32%.

Last week’s market commentary compared the drop in consumer sentiment – such as expectations
for personal finance and economic growth – to levels last reached in 1980, while noting that
measures of economic, social, and environmental conditions today are far superior to those in 1980.
The improved measures support our outlook that the economy will avoid a deep recession similar to
that of the early 1980s and the associated 27% peak-to-trough stock market decline. However, this
week’s market commentary focuses on increasing negatives facing the economy and markets that
put our outlook for a classic mid-cycle slowdown scenario at risk.

...the indicators of After the Fed’s aggressive policy actions in late January to improve credit conditions, such as the 125
improvement in the basis points of rate cuts and the easing actions of the Term Auction Facility, the stock and high yield
underlying health of the bond market stabilized, and in the weeks that followed, signs of healing were evident. However, the
economy and markets indicators of improvement in the underlying health of the economy and markets changed last week.
changed last week During the past week:
• credit spreads renewed their widening trend after stabilizing for much of February, and liquidity
dried up, resulting in a seizing up of the credit markets;
• while the stock market held the intraday lows of late January, the S&P 500 broke away from the
1998 pattern with a renewed decline;

Member FINRA/SIPC
Page 1 of 5

The combination of
these factors put our
outlook for a classic
mid-cycle slowdown
scenario for the markets
at risk and increases the
odds of recession.
During the past 20
years, we have only
seen three peak-to-
trough declines of
the current magnitude
or greater
LPL Financial Member FINRA/SIPC
• a second month in a row of job losses was reported – surprising after economists’ consensus
expectations for a gain;
• the dollar suffered a sharp decline to an all time low, and oil prices rose to $105, an all
time high.
The combination of these factors put our outlook for a classic mid-cycle slowdown scenario for the
markets at risk and increases the odds of recession. However, it is worth noting that most economic
data reported in recent weeks are not signaling recession, earnings guidance has been generally
stable in recent weeks outside of financials and some retailers, and real-time trade association data
such as weekly readings on retail sales, rail car shipments, filings for unemployment benefits, and
lending continue to point to growth.
Each of the negative factors that intensified last week warrants further exploration.
Credit Market
The rapid deterioration in the credit markets can be illustrated many ways. The best way may be to
track the spread between the yields of off-the-run and on-the-run Treasuries, which demonstrates
both the improvement of market liquidity following the late January policy actions and the sudden
deterioration seen in the widening spread in recent days.
Liquidity Premium =Yield Spread (in basis points) between
On-The-Run and Off-The-Run for 10-year Treasuries
16
14
12
10
0
Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08
Source: LPL Financial, Haver Analytics
The credit markets remain the center of the economic and market woes. Policy actions to restore
liquidity in recent months have only provided temporary stability to the markets.
Stock Market
During the past 20 years, we have only seen three peak-to-trough declines of the current magnitude
or greater - they took place in 1990, 1998, and 2000-02. The 2000-02 decline was prompted by
very different conditions (record high stock market valuations, over-spending and over-hiring by
corporations, soaring dollar, etc.) and was long and painful as the Information Technology sector
deflated, while leaving most stocks relatively untouched until mid-2002. However, the other two
major declines which took place in 1990 and 1998 may be comparable to the current environment.
Weekly Market Commentary | March 10, 2008 | Page 2 of 5
 As you can see in the chart, the stock market has started to break away from the 1998 pattern that
we have cited as a guide to the current downturn given the very similar credit, profit, and economic
conditions to today.

S&P 500 Peak-to-Trough Declines During 1998 and Current Period

5%

0%

-5%

-10%

-15%

-20% 5/5/98-11/27/98
9/24/07-present
-25%

2-1-08

4-7-08
11-5-07
9-24-07

1-10-08

2-25-08

3-17-08
11-27-07
10-15-07

12-18-07
Source: LPL Financial, Bloomberg

Instead, the market may instead be following the 1990 pattern – when the savings and loan crisis
cost $160 billion, oil prices soared, the dollar continued to slide, and a mild recession combined
to pull stocks down 20%. If the market continues to follow this pattern, we may see some
additional downside.

S&P 500 Peak-to-Trough Declines During 1990 and Current Period

5%

0%

7/6/90-2/8/91
-5%
10/4/07-present

-10%

-15%

-20%

-25%
3-6-08

5-8-08

5-29-08
2-13-08
1-23-08
10-4-07

6-19-08
3-27-08
10-25-07

12-31-07
12-7-07

4-17-08
11-15-07

Following the 1998

decline of 19%, the 12 Source: LPL Financial, Bloomberg
month gain in the S&P
500 was 40%. After the Following the 1998 decline of 19%, the 12 month gain in the S&P 500 was 40%. After the 1990
1990 decline of 20%, decline of 20%, stocks rebounded 34% over the next 12 months.
stocks rebounded 34%
over the next 12 months.

LPL Financial Member FINRA/SIPC Weekly Market Commentary | March 10, 2008 | Page 3 of 5

On balance, the recent
data continue to paint a
picture of an economy
that is teetering on the
edge of recession.
Until effective action
is taken to address the
worsening problems in
the credit markets, we
believe that the stock
and credit markets may
continue to weaken.
Economic Data
The March 7 release of the February employment report came in below expectations, posting a
63,000 loss versus expectations of a 22,000 gain. The back-to-back monthly declines in employment
raise the odds of a recession. The underlying detail of the 63,000 drop in non-farm payrolls in
February was weak, with private sector employment falling 103,000 – the third consecutive monthly
drop. The employment declines were widespread, with losses in construction, manufacturing, retail
trades, financial services, and business services. On balance, the recent data continue to paint a
picture of an economy that is teetering on the edge of recession. While many of the conditions that
need to be in place prior to a recession are not evident – rising wages, inventory overbuild, Fed
raising rates, profit margin squeeze – other indicators, such as today’s employment report and the
recent weak readings on the manufacturing ISM, paint the picture of ongoing deterioration.
Dollar and Oil
Oil prices surged to over $105 from $91 at the end of January, and the dollar fell 3% over the same
time period. The renewed decline in the dollar may discourage foreign investment while rising oil
prices act as a drag on domestic growth.
Oil and the Dollar
110 68

70
100
72
90
74
80 76

70 78

80
60
82
50 Oil (left axis) Dollar (rigth axis - inverted) 84

40 86
Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08
Source: LPL Financial, Bloomberg

While the market trough
may still be ahead, it is
important to try to keep
in mind a longer term
outlook. Since WWII there
have been 16 market
declines of around the
current magnitude of
14% or more. On average,
12 months after hitting
the trough stocks were
up 32%.
Looking Forward
Until effective action is taken to address the worsening problems in the credit markets, we believe
that the stock and credit markets may continue to weaken. However, with stocks down over 6%
in the last seven trading days and 17% from the peak of October 9, the downside momentum may
begin to fade as the S&P 500 nears the 20% level that marked the full extent of the 1990 and 1998
declines, S&P 500 valuations reach 17 year lows, and those sectors most affected like financials
experience peak-to-trough declines of nearly 40%. While the market trough may still be ahead, it
is important to try to keep in mind a longer term outlook. Since WWII there have been 16 market
declines of around the current magnitude of 14% or more. On average, 12 months after hitting the
trough stocks were up 32%.

LPL Financial Member FINRA/SIPC Weekly Market Commentary | March 10, 2008 | Page 4 of 5
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
of sophisticated investors.

REQUIRED DISCLOSURES
Neither LPL Financial nor any of its affiliates engage in investment banking services nor has LPL Financial or its affiliates 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 nor has any company mentioned been a client of LPL Financial or its affiliates within the past
12 months.

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.
Not FDIC/NCUA Insured Not Bank/Credit May Lose Value
Union Guaranteed

Not Guaranteed by any Government Agency Not a Bank/Credit Union Deposit

Member FINRA/SIPC
Weekly Market Commentary | March 10, 2008 | Page 5 of 5
Tracking #430261 (Exp. 12/08)