LP L FINANCIAL R E S E AR C H
Weekly Market Commentary
v4
Jeffrey Kleintop, CFA
Chief Market Strategist
LPL Financial
Highlights
April 22 is Earth day, which marks the
anniversary of the birth of the modern
environmental movement. While environmental
regulations are nothing new, the next major
round of environmental regulations has the
potential for far more sweeping effects on
businesses than those already in place.
The broad market impacts of climate change
initiatives include: potentially higher inflation;
advantages for large-cap stocks over small-
cap stocks; rising commodity prices; favorable
influences for the Industrial, Information
Technology, and Financial sectors; and negative
influences for Consumer Staples and Utilities
sectors along with the Automobile industry.
Climate change is a market force that will
be shaping decisions for years to come, and
markets are beginning to react now. However,
climate change exposure should not be the sole
reason for making any investment, especially
since these initiatives remain in their early stage
and are likely to have only a minor influence on
the performance of the underlying companies,
industries, sectors, or asset classes. We will
continue to actively monitor climate change
initiatives for the potential impact on investors.
April 21, 2008
What Does Climate Change
Mean For Investors?
Last week’s 4% gain in the stock market has helped the S&P 500 recover
much of the year-to-date losses with a 10% rebound from the lows of mid-
March. The Dow Jones Industrial Average hit a three month high on Friday.
The gains were driven by the solid earnings results and guidance from a
number of key companies, and increasing signs that the worst of the credit
crisis is over. Market participants are beginning to shift their attention to
future improvement in business trends and away from lagging indicators like
last week’s weak economic reports on housing and employment. The stock
market continues to follow the pattern of past financial crises where steep
declines were followed by sharp rebounds, such as those experienced in
1990 and 1998. [chart 1]
As investors begin to look forward to the second half of the year, we are
inspired to look even further to the horizon to see what changes may affect
the markets in the coming years. Climate change stands out as a market
force that will be shaping decisions for years to come.
April 22 is Earth day, which marks the anniversary of the birth of the
modern environmental movement. This movement can cite some important
successes. Environmental efforts established many years ago are paying
off with:
ƒ Cleaner air measured by fewer smog days in cities, and lower levels of
ozone, sulfur dioxide, and carbon monoxide – Toxic chemicals like dioxin
and PCBs are down more than 90% since 1980.
ƒ Cleaner water, with municipal water supplies showing ongoing
improvement – Lead, mercury, and arsenic levels have declined sharply.
ƒ The return of some species from endangered status due to the
restoration of natural habitats.
The regulatory changes of the environmental movement had positive
consequences for citizens. They also had material impacts on businesses.
Costs rose as businesses were forced to clean up wastewater, scrub
emissions, and adopt more sustainable operating procedures. Many
companies embraced the changes and invested in community projects
intended to restore natural environments, which helped to improve corporate
image. The movement also led to the development of new energy efficient
products and technologies and gave birth to alternative energy companies.
The next major round of environmental regulations has the potential for far
more sweeping effects on businesses. With each of the three major U.S.
presidential candidates proposing climate change initiatives and states
already leading the way, climate change is a market force that will be shaping
decisions for years to come, and markets are beginning to react now. Policy
Member FINRA/SIPC
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 W E E KLY MARKE T CO MME N TAR Y

makers and business leaders are increasingly embracing climate change

initiatives, and we believe the political support of climate change mitigation
and adaptation policies is gaining momentum. Because our research is
focused on the financial markets and not on environmental science, we
1 Stocks Tracking 1990 Pattern do not debate the rights and wrongs of the science. We focus on what
S&P 500 Pattern of Performance During 1990-91 matters to investors: the response of markets, sectors, legislative policies
Decline and Current and companies to the opportunities and risks that will be posed by climate-
7/6/90 - 2/8/91 10/4/07 - present change initiatives in the coming years.
5%

0%
Many elements factor into evaluating the long term net impact of climate
change for the markets overall, including the effectiveness and cost of
-5%
the initiatives, the impact of climate change on economic growth, and the
-10% lengthy time period over which success must be measured. However, in the
-15%
shorter-term, we can assess the positive and negative impact across asset
classes, sectors, and industries.
-20%
The broad market impacts of climate change initiatives include:
-25%
10-4-07
10-25-07
11-15-07
12-7-07
12-31-07
1-23-08
2-13-08
3-6-08
3-28-08
4-18-08
5-9-08
5-30-08
6-20-08

ƒ Higher potential inflation – Inflation may result as indirect costs formerly

borne by the environment become incorporated into the direct costs of
goods and services. The magnitude of rising prices and the offsetting
Source: Bloomberg, LPL Financial
forces are difficult to gauge. Rising inflation pressures are a negative
for all financial assets, but more negative for bonds, growth stocks, and
smaller caps.
ƒ Advantages for large-cap stocks over small-cap stocks – The marginal
cost of adopting climate change initiatives for larger companies is lower
than for small to medium-sized firms. The benefits of scale and global
sourcing when implementing environmentally-friendly packaging, fuels,
In the shorter-term, we can assess raw materials, and processes are significant. Larger firms are better able
to sustain start-up costs and leverage first-mover brand advantages.
the positive and negative impact
across asset classes, sectors, ƒ Rising commodity prices – While the impact of technology and
innovation to spur increased production and high quality yields of crops,
and industries.
produce, and livestock should not be underestimated, commodity prices
may rise further, given the added costs of environmentally friendly
cultivation, the impact of changing weather patterns, and water
supply issues.
ƒ Favorable influences for the Industrial, Information Technology, and
Financial sectors – More stringent environmental standards work as a
positive for companies that will be involved in producing more efficient
and cleaner industrial equipment and technologies along with alternative
energy solutions. Also, investment banks should benefit from new
trading markets such as carbon emissions and weather futures.
ƒ Negative influences for Consumer Staples and Utilities sectors along
with the Automobile industry - Higher agricultural input costs for
ingredients such as cocoa, sugar, and corn due to more erratic weather
patterns may negatively affect costs for producers of consumer
products. In addition, companies may have to increase spending for
environmentally friendly equipment and vehicles. The emerging markets
are a key source of growth for beverage companies, but challenges
to access to clean water supplies may continue to crop up. With the
highest proportion of costs attributed to energy of any industry, utilities

LPL Financial Member FINRA/SIPC Page 2 of 3


Climate change exposure should
not be the sole reason for making
any investment
W E E KLY MARKE T CO MME N TAR Y
are the most exposed to changing regulations on greenhouse gases.
Automakers’ efforts to achieve the new standards for fuel efficiency
come at a higher cost. In addition, the dominance of U.S. automakers
in the larger, less fuel-efficient categories may act as a negative as they
cede more market share to the generally smaller, more fuel-efficient
vehicles of foreign auto makers.
Climate change exposure should not be the sole reason for making any
investment, especially since these initiatives remain in their early stage and
are likely to have only a minor influence on the performance of the underlying
companies. Also, investments opportunities focused purely on climate
change tend to be small, single product companies that come with high risks.
We have prepared a special report on climate change with additional insights
for investors, available upon request. In the report we look at:
ƒ The impact of tighter environmental standards and the influential
framework in which those standards are imposed.
ƒ The impact of likely climate-change initiatives on the broad financial
markets and specific industries.
ƒ Investments that may provide exposure to climate change initiatives.
We will continue to actively monitor climate change initiatives for the
potential impact on investors.
Important Disclosures
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.
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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