Raging Bull

An eye on equity market trends

February 6, 2008

Mixed Consumer Discretionary Outlook Hinges on

Consumer Spending
Jeffrey Buchbinder, CFA
Assistant Vice President
Equity Strategy
LPL Financial
John Canally, CFA
Vice President
LPL Financial
Jeffrey Kleintop, CFA
Chief Market Strategist
LPL Financial
Dave Reilly, CFA
Assistant Vice President
Equity Strategy
LPL Financial
• We have a Market Weight Recommendation on this sector.
• Among the industry groups, we prefer Media and Consumer Services and are more
cautious on the Consumer Durable & Apparel and Automobile & Components
groups.
• Consumer spending has been impacted by the soft housing market and higher food
and energy prices, however these headwinds may be peaking.
• Consumer spending tracks income growth, which remains healthy with mid single
digit growth rates.
• Interest rate cuts by the Federal Reserve and the potential for a government stimulus
package should support the consumer in 2008.
• At the sector level valuations have come down, however the sector is still more
expensive then the broader S&P 500 and we believe that some risks remain.

Consumer Discretionary Sector Has Lagged in the Market

Indexed Price
2-Feb-2007 to 5-Feb-2008 (Daily)
02-Feb-2007=100; Local
S&P 500 / Consumer Discretionary - SEC (SP285) 80.7
S&P 500 (SP50) 93.7

105

100

95

IMPORTANT 90
DISCLOSURE
INFORMATION: 85
Please refer to the
last two pages for 80
important disclosures.
75

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan

Source: Prices/Exshare 02/06/2008

Member FINRA/SIPC

Page 1 of 6
 Below is a snapshot of our recommendations
on the industry groups that make up the
Consumer Discretionary sector, which
Wage and Salary Disbursements
% Change Year to Year SAAR, Bil.$
S&P 500: Consumer Discretionary
% Change Year to Year Dec-30-94 = 100
12 60

represents 8.5% of the S&P 500 Index. 10

40
A detailed rationale for our industry
8
recommendations below are relative to 20

...despite the diversity the sector. 6

0
within this sector, 4

there remains a close A close look at sector components and 2

-20

relationship between the drivers

0 -40
health of the consumer The Consumer Discretionary sector is 85 90 95 00 05

and the performance of comprised of a broad range of industries, Source:BEA, S&P / Haver 02/05/2008

the broad sector. which include media, cable operators,

As consumer spending
slowed from the nominal
6-7% range to the
4-5% growth range, the
Consumer Discretionary
sector was the worst
performing sector in the
S&P 500.
retailers, restaurants, hotels and home
building related companies. However,
despite the diversity within this sector, there
remains a close relationship between the
health of the consumer and the performance
of the broad sector. While not a perfect
relationship, you can see in the nearby chart
that consumer wages and salaries closely
track the performance of the Consumer
Discretionary sector. To be sure, there have
been and continue to be other factors that
have been at play here, such as a change in
the industry dynamics for media, newspaper
and cable companies, margin and sales
pressures from competition in the discount
retail space and consolidation within hotel
industry. Nonetheless, a solid, albeit slower
pace of consumer spending - supported by
aggressive fiscal and monetary stimulus as
well as moderating energy prices – supports
our view that the sector will keep pace with
the broader market, as measured by the
S&P 500.
Industry recap over last few years
As shown in the next chart, income growth
and personal consumption expenditures
peaked out in the fall of 2005 along with
the housing market and have slowed since
then. As consumer spending slowed from
the nominal 6-7% range to the 4-5% growth
range, the Consumer Discretionary sector
was the worst performing sector in the S&P
500. From October 1, 2005 to January 31,
2008 the total return of the S&P Consumer
Discretionary sector returned 2.85% while
the S&P 500 Index rose 17.2%. During
this period, much of the weakness occurred
within the consumer durables and apparel
industry, which is dominated by housing
related stocks like homebuilders. In
addition, specialty retailers, which include
home improvement stocks also exhibited
relative weakness. Separately, the domestic
automakers remained challenged, saddled
by a high cost structure compared to
their foreign competitors. Finally, media
companies were faced with their own
challenges, as ad spending continued its

Industry group Weighting in Weighting in Health Recommendation

S&P 500 (%) Care sector (%)
Automobiles & Components 0.5 6.3 Neutral to Negative
Consumer Durables & Apparel 1.0 11.9 Negative
Consumer Services 1.6 16.5 Neutral to Positive
Media 2.8 32.2 Positive
Retailing 2.6 33.0 Neutral
Source: FactSet and LPL Financial Research

LPL Financial Member FINRA/SIPC Raging Bull | February 6, 2008 | Page 2 of 6


We believe there
are several factors
supporting the resilience
of the U.S. consumer,
however we are not
ready to call the all clear
just yet.
12
10
Source: Bureau of Economic Analytics / Haver 02/05/2008
...valuations for this
sector are still a
premium relative to
the S&P 500 Index and
above historic averages.
LPL Financial Member FINRA/SIPC
move away from print media to the Internet.
Also, cable operators faced pricing and
margin pressure from satellite providers and
telcos’ entrance into the cable TV market.
With a shrinking discretionary budget,
consumers have been forced to allocate their
dollars to pay for higher food and fuel prices.
This trend coincided with the mortgage
meltdown, which meant consumers were
less able to tap their home equity to make
discretionary purchases.
Personal Consumption Expenditures
% Change Year to Year SAAR, Bil.$
Wage and Salary Disbursements
% Change Year to Year SAAR, Bil.$
8
6 the current risk to consumer spending.
4 2
2 0
85 90 95 00
Sector Outlook, Hinging on Consumer
We believe there are several factors
supporting the resilience of the U.S.
consumer, however we are not ready to
call the all clear just yet. Our view is
that the U.S. economy is not going into
a recession, but rather is experiencing a
mid-cycle slow down. In addition, income
growth, a stimulative monetary policy and
the potential for a stimulative fiscal policy,
favor strength in consumer spending growth
consistent with a mid cycle economic slow
down rather than a recession. Importantly,
the employment situation remains stable.
On the other hand, some risks do remain.
If employment weakens consumer incomes
will erode. Other risks to the sector include
another down-leg in the housing market and
a resurgence in energy prices. However,
we believe that worst of those headwinds
are now behind the consumer. Certainly,
there can be regional pockets of continued
housing price declines, but in aggregate
housing affordability of housing has never
been so good given solid income growth,
falling home prices, and very low interest
rates.
Valuations are not compelling
Reported earnings and estimate revisions
for the group have been resilient despite
challenges. However, valuations for this
sector are still a premium relative to the
S&P 500 Index and above historic averages.
12
While we believe that the consumer will
10 remain resilient, valuations for this sector
8 would need to be lower for us to believe
6
that investors are properly compensated for
4
Consumer Discretionary
Sector Relative Valuations
05
12 Month Forward Relative PE Ratio
Consumer Discretionary
1.8
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Source: IEBS / LPL Financial Research 02/06/2008
Industry Group Views
Our view on the broad sector is a Market
Weight recommendation. However, a
detailed look at the industry groups below
served to support this recommendation.
Retailing – We are Neutral on the retailers.
Despite our expectation of a resilient
consumer and reasonable valuations, this
group may continue to face margin pressures.
Retailers are also exposed to many different
risks, such as a fickle consumer, inventory
Raging Bull | February 6, 2008 | Page 3 of 6
 challenges with fashion and weather related
changes. Furthermore, there are housing
related retailers that are included in this
group and these companies may continue to
face weak sales trends.
Media – We are Positive on this industry for
several reasons. First, the companies in this
industry tend to have diversified revenue
mix driven by both business and consumer
spending. As such this group tends to be
less sensitive to consumer spending and
therefore, slightly defensive. We also
believe that the group should benefit from
ad spending related to the elections and to
the Olympics. Lastly, current valuations for
this group are attractive compared to both
historical measures and the broader S&P
500 Index.
Consumer Services – We are Neutral to
Positive on this industry group, which is
largely made up of fast food restaurants and
hotels. With a broad geographical footprint
and a favorable revenue mix driven by
both businesses and consumers, we believe
this group is well positioned to potentially
outpace the sector and the broad market.
The performance of these stocks has been
one of the bright spots in the sector over
the last couple of years. As such, valuations
are above average causing our somewhat
guarded Neutral to Positive view on the
group.
LPL Financial Member FINRA/SIPC
Consumer Durables & Apparel – We are
Negative on this industry group due to the
fact that it is very sensitive to consumer
spending, particularly on housing. Should a
recovery in the housing market, which we
expect later in the year, be delayed this group
would likely remain under pressure. Despite
the fact that this group could move higher in
advance of a turnaround in housing, risks to
the consumer cause us to be more cautious
on this group. In light of the recent rally in
homebuilding stocks, current valuations are
less attractive.
Automobiles & Components – We
are Neutral to Negative on this group.
This group is comprised of the U.S. auto
manufacturers, which continue to face
stiff competition from foreign automakers.
They are also saddled with higher cost
structures than their competition, which is
not represented in this sector. Furthermore,
risks to consumer spending, especially
for big-ticket items, don’t favor vehicle
manufactures. The one bright spot in this
industry are the component companies,
which have both business and geographical
diversification, as they sell to all automakers
and other industrial companies, domestic
and foreign
Raging Bull | February 6, 2008 | Page 4 of 6
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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
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Past performance is not indicative of future results. The information set forth above has been obtained from third party sources believed to
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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.

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The Nasdaq Composite Index measures all Nasdaq domestic and non-U.S. based common stocks listed on The Nasdaq Stock Market. The
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