Brad Sanderson

Enoch Shih

Industrials

Industrials – Sector Makeup

Sector Sub Sectors Companies SIM Weight YTD 2006 2005

Capital Goods Aerospace and Defense Boeing, Northrop LLL 3.53% 7.66% 11.06% 2.21%

  Conglomerates GE, Tyco, 3M GE 1.31% -3.60% 9.34% -1.45%

      ABB 3.58% 0.72% 85.74% 71.89%

Commercial Services Diversified Services Cintas None        

Transportation AirlinesSouthwest, American None        

  RailroadsBurlington Northern UNP 2.92% 11.11% 15.87% 21.85%

Current Situation – In LineMarket Cap ($B) S&P % SIM % Diff 2005 2006 YTD

S&P 500 13,063,902       3.5% 13.6% 2.6%

Consumer Discretionary 1,410,077 10.8% 7.8% -3.0% -6.8% 17.2% 3.9%

Consumer Staples 1,208,466 9.3% 6.7% -2.6% 2.1% 11.8% 2.6%

Utilities 450,806 3.5% 1.2% -2.2% 13.2% 16.9% 3.7%

Energy 1,250,125 9.6% 7.7% -1.8% 28.8% 22.2% -2.0%

Materials 410,219 3.1% 1.5% -1.6% 3.0% 15.7% 8.7%

Financials 2,900,526 22.2% 20.7% -1.5% 4.1% 16.2% 2.4%

Industrials 1,422,908 10.9% 11.3% 0.4% 0.9% 11.0% 3.5%

Information Technology 1,956,684 15.0% 16.4% 1.4% 1.0% 7.7% 2.1%

Telecommunication 463,681 3.5% 7.4% 3.9% -8.5% 32.1% 3.7%

Health Care 1,590,412 12.2% 17.5% 5.4% 5.6% 5.8% 3.5%

Cash     1.6%        

S&P vs. SIM Weights

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Consumer Discretionary

Consumer Staples

Utilities

Energy

Materials

Financials

Industrials

Information Technology

Telecommunication

Health Care

Cash

S&P SIM

Forward Earnings / Sales vs. S&P 500Cyclical Industry with room to grow

StockVal®S&P 500 COMPOSITE ADJUSTED M-Wtd (SP5A) Price 43.5786 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

PRICE / YEAR-FORWARD EARNINGS RELATIVE TO S&P INDUSTRIALS SECTOR COMP ADJ (SP-20) M-Wtd0.84

0.87

0.90

0.93

0.96

0.99

1.02

1.05

1.08

1.11

1.14

1.17

1.20

1.23

1.26

1.29

HI 1.27 LO 0.84 ME 0.99 CU 0.99

02-13-198702-16-2007

StockVal®S&P 500 COMPOSITE ADJUSTED M-Wtd (SP5A) Price 43.5786 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

PRICE / SALES RELATIVE TO S&P INDUSTRIALS SECTOR COMP ADJ (SP-20) M-Wtd0.88

0.92

0.96

1.00

1.04

1.08

1.12

1.16

1.20

1.24

1.28

1.32

1.36

1.40

1.44

1.48

HI 1.46 LO 0.92 ME 1.04 CU 0.99

02-13-198702-16-2007

Are we near the bottom of the cycle?

StockVal®S&P INDUSTRIALS SECTOR COMP ADJ (SP-20) Price 50.5786 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

PRICE / SALES0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

HI 2.02 LO 0.63 ME 1.33 CU 1.53

02-13-198702-16-2007

StockVal®S&P INDUSTRIALS SECTOR COMP ADJ (SP-20) Price 50.5786 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

PRICE / YEAR-FORWARD EARNINGS9.9

11.0

12.1

13.2

14.3

15.4

16.5

17.6

18.7

19.8

20.9

22.0

23.1

24.2

25.3

26.4

27.6

HI 27.2 LO 10.6 ME 16.3 CU 16.2

02-13-198702-16-2007

Industry ComparisonIndustry (10 years) P/Forward Earnings price / sales    

  high low mean current high low mean current value SIM %

Energy (SP-10)1.57 0.28 0.62 0.67 0.91 0.57 0.73 0.62 In-Line -1.80%

Material (SP-15)1.25 0.39 0.81 0.82 0.99 0.43 0.8 0.81 In-Line -1.60%

Industrials (SP-20)1.06 0.43 0.88 0.92 1.16 0.8 1.02 0.92 In-Line 0.40%

Consumer Discretionary (SP-25)

1.22 0.61 0.95 1.2 0.77 0.54 0.65 0.65 In-Line -3.00%

Consumer Staples (SP-30)1.16 0.4 1 1.03 1.13 0.61 0.85 0.71 In-Line -2.60%

Healthcare (SP-35)1.4 0.54 1.08 0.97 2.5 1.11 1.85 1.11 Cheap 5.40%

Financials (SP-40)0.78 0.35 0.65 0.73 18.4 7.9 12.47 18.35 Expensive -1.50%

Information Technology (SP-452.13 0.96 1.4 1.19 4.48 1.67 2.05 1.7 Cheap 1.40%

Telecom (SP-50)1.12 0.43 0.85 0.86 1.17 0.85 1.19 0.96 In-Line / Cheap 7.40%

Utilities (SP-55)0.98 0.27 0.58 0.86 0.98 0.5 0.76 0.84 Expensive -2.20%

Business Cycle

Industry Five Forces

Low

Non-issueLow

Low

High

Economic Drivers

S&P Industrial

Sector

Con. Demand

GDP

Comm.

Prices

FFR

.005 GDP

T stat = 51.89

0.868 FFR

T stat = 10.71

0.144 UMCS

T stat = 7.82

0.005 GDP + 0.868 FFR + 0.144 UMCS = SP-20

R-squared = 0.943

Final Model

Industry Outlook

0.005 GDP + 0.868 FFR + 0.144 UMCS = SP-20

R-squared = 0.943

Final Model

Expected return = 9 percent

FFR = 5%

GDP growth = 5%

UMCS growth = -10%

Recommendations

Sell 32 basis points to bring SIM weighting in-line with S&P 500 Overweight capital goods Underweight transportation Look into commercial services