THE ECONOMIC & FINANCIAL MARKET OUTLOOK THROUGH 2005:

What Next For The Post-Election Economy?

A Presentation To The Iowa Chapter Of Financial Executives International

Des Moines, IowaJanuary 20, 2005

THE ECONOMIC & FINANCIAL MARKET OUTLOOK THROUGH 2005:

What Next For The Post-Election Economy?

A Presentation To The Iowa Chapter Of Financial Executives International

Des Moines, IowaJanuary 20, 2005

THE ECONOMIC-POLICY THE ECONOMIC-POLICY DEBATE OF 2005DEBATE OF 2005

* Sharpening A Classic Division Between Republicans * Sharpening A Classic Division Between Republicans And Democrats And Democrats

--What Kind Of “Ownership Society?”--What Kind Of “Ownership Society?”

* Finding A Balance Between Growth & Inequality * Finding A Balance Between Growth & Inequality Vs. A More Equal, Less Efficient EconomyVs. A More Equal, Less Efficient Economy

* Ideology Frames The Policy Issues In 2005* Ideology Frames The Policy Issues In 2005

--Social Security Reform--Social Security Reform

--Permanent Tax Cuts--Permanent Tax Cuts

--Tax Reform--Tax Reform

RESPECTABLE, BUT STILL SUB-PAR GROWTH RESPECTABLE, BUT STILL SUB-PAR GROWTH THROUGH 2005THROUGH 2005

Year-Ago Percent Change In Real GDPYear-Ago Percent Change In Real GDP

-2%-2%

-1%-1%

0%0%

1%1%

2%2%

3%3%

4%4%

5%5%

6%6%

7%7%

-1-1 11 22 33 44 55 66 77 88 99 1010 1111 1212 1313 1414 1515 1616

Quarters Before And After The Start Of A RecoveryQuarters Before And After The Start Of A Recovery

Source: U.S. Department Of CommerceSource: U.S. Department Of Commerce

Avg. Annual % Chg., Avg. Annual % Chg., 1991-2003=3.4% P.A.1991-2003=3.4% P.A.

Avg., Previous 5 Long Cycles*Avg., Previous 5 Long Cycles*

Current CycleCurrent Cycle

* Cycles beginning in 1960, 1969, 1974, 1981, 1990.* Cycles beginning in 1960, 1969, 1974, 1981, 1990.

ForecastForecast

IOWA'S ECONOMIC RECOVERY LAGS THE IOWA'S ECONOMIC RECOVERY LAGS THE NATIONAL AVERAGENATIONAL AVERAGE

Percent Change, Gross Sate/ Domestic ProductPercent Change, Gross Sate/ Domestic Product

-1.0%-1.0%

-0.5%-0.5%

0.0%0.0%

0.5%0.5%

1.0%1.0%

1.5%1.5%

2.0%2.0%

2.5%2.5%

3.0%3.0%

3.5%3.5%

4.0%4.0%

4.5%4.5%

1998-1998-20002000

20012001 20022002 20032003 20042004 20052005 2006-2006-0808

Sources: Economy.com, Blue Chip Economic ForecastSources: Economy.com, Blue Chip Economic Forecast

ForecastForecast

IowaIowa U.S.U.S.

GAUGING "DISINFLATION'S" IMPACT ON GAUGING "DISINFLATION'S" IMPACT ON CORPORATE "PRICING POWER," COSTS AND CORPORATE "PRICING POWER," COSTS AND

PROFIT PROFIT Year -Ago Percent Change; Non-Financial CorporationsYear -Ago Percent Change; Non-Financial Corporations

-4%-4%

-3%-3%

-2%-2%

-1%-1%

0%0%

1%1%

2%2%

3%3%

4%4%

5%5%

Mar-89Mar-89 Mar-91Mar-91 Mar-93Mar-93 Mar-95Mar-95 Mar-97Mar-97 Mar-99Mar-99 Mar-01Mar-01 Mar-03Mar-03 Mar-05Mar-05

Selling PricesSelling Prices

Unit Labor CostsUnit Labor Costs

Source: U.S. Commerce Dep't.Source: U.S. Commerce Dep't.

'04Q3'04Q3

Note: Bars DenoteNote: Bars DenoteRecession PeriodsRecession Periods Margin Margin

PressurePressure

Margin Margin ExpansionExpansion

A "YELLOW FLAG" ON INFLATIONA "YELLOW FLAG" ON INFLATIONYear-Ago Percent Change, Non-Energy CPI Goods Vs. Year-Ago Percent Change, Non-Energy CPI Goods Vs.

Services PricesServices Prices

-3.0-3.0

-2.5-2.5

-2.0-2.0

-1.5-1.5

-1.0-1.0

-0.5-0.5

0.00.0

0.50.5

1.01.0

1.51.5

2.02.0

Jan-1996Jan-1996 Jan-1998Jan-1998 Jan-2000Jan-2000 Jan-2002Jan-2002 Jan-2004Jan-20042.42.4

2.72.7

3.03.0

3.33.3

3.63.6

3.93.9

4.24.2Commodities, Ex. Food & Commodities, Ex. Food &

EnergyEnergy(Left Scale)(Left Scale)

Services, Ex. EnergyServices, Ex. Energy(Right Scale)(Right Scale)

11/0411/04

Source: U.S. Dep't Of LaborSource: U.S. Dep't Of Labor

INVENTORIES STILL "LEAN" OUTSIDE THE INVENTORIES STILL "LEAN" OUTSIDE THE AUTO INDUSTRYAUTO INDUSTRY

Ratio Of Inventories To SalesRatio Of Inventories To Sales

1.2501.250

1.3601.360

1.4701.470

1.5801.580

1.6901.690

1.8001.800

Jan-92Jan-92 Jan-94Jan-94 Jan-96Jan-96 Jan-98Jan-98 Jan-00Jan-00 Jan-02Jan-02 Jan-04Jan-041.1501.150

1.2001.200

1.2501.250

1.3001.300

1.3501.350

1.4001.400

1.4501.450

1.5001.500

1.5501.550

11/0411/04

Source: U.S. Department Of CommerceSource: U.S. Department Of Commerce

Excluding AutosExcluding Autos(Right Scale)(Right Scale)

AutosAutos(Left Scale)(Left Scale)

U.S. EXPORTS RESPOND TO A U.S. EXPORTS RESPOND TO A WEAKER DOLLARWEAKER DOLLAR

4444

4646

4848

5050

5252

5454

5656

5858

6060

6262

6464

Dec-98Dec-98 Dec-99Dec-99 Dec-00Dec-00 Dec-01Dec-01 Dec-02Dec-02 Dec-03Dec-03 Dec-04Dec-048686

8888

9090

9292

9494

9696

9898

100100

102102

104104

106106

108108

110110

112112

* Based on the dollar's inflation-adjusted, trade-weighted exchange * Based on the dollar's inflation-adjusted, trade-weighted exchange rate against 44 other currencies.rate against 44 other currencies.

Sources: Nat'l Ass'n Of Purchasing Mgrs.; J.P. Morgan & Co.Sources: Nat'l Ass'n Of Purchasing Mgrs.; J.P. Morgan & Co.

12/0412/04

"Real Trade-Weighted" "Real Trade-Weighted" $*$*

(Right Scale)(Right Scale)

Export Orders, Mfd. GoodsExport Orders, Mfd. Goods(Left Scale)(Left Scale)

% Rept'g An Increase% Rept'g An Increase Index: 2000=100Index: 2000=100

1/14/051/14/05

RAPID-FIRE RATE HIKES FOLLOW RAPID-FIRE RATE HIKES FOLLOW AGGRESSIVE POLICY STIMULUSAGGRESSIVE POLICY STIMULUS

The Federal Funds Rate Less The PCE "Deflator;" The Federal Funds Rate Less The PCE "Deflator;" PercentPercent

-2.0-2.0

-1.0-1.0

0.00.0

1.01.0

2.02.0

3.03.0

4.04.0

5.05.0

Jan-90Jan-90 Jan-92Jan-92 Jan-94Jan-94 Jan-96Jan-96 Jan-98Jan-98 Jan-00Jan-00 Jan-02Jan-02 Jan-04Jan-04

12/0412/04

Avg., 1969-2003=2.6%Avg., 1969-2003=2.6%

Sources: Bloomberg Financial News, Inc., U.S. Commerce Dep'tSources: Bloomberg Financial News, Inc., U.S. Commerce Dep't

Fed "Easing" During The Sluggish Fed "Easing" During The Sluggish 1991-92 Recovery1991-92 Recovery

Note: Bars Denote Note: Bars Denote Recession PeriodsRecession Periods

A REPLAY OF THE 1999-2000 A REPLAY OF THE 1999-2000 INTEREST-RATE “UP CYCLE?” INTEREST-RATE “UP CYCLE?”

The Treasury Yield Curve, Selected Periods; Yields The Treasury Yield Curve, Selected Periods; Yields In PercentIn Percent

4.34.3

5.35.3

6.36.3

7.37.3

00 55 1010 1515 2020 2525 3030 3535Years To MaturityYears To Maturity

Fed Funds Target Rate, Fed Funds Target Rate, 11/17/98=4.75%11/17/98=4.75%

5/18/005/18/00

Source: Bloomberg Financial News, Inc.Source: Bloomberg Financial News, Inc.

6/29/996/29/99

11/18/9811/18/98

Federal Funds Target Rate, Federal Funds Target Rate, 5/16/00=6.50%5/16/00=6.50%

““RISKS” IN THE OUTLOOKRISKS” IN THE OUTLOOK

* “LOW-QUALITY” SECTORS UNDER FIRE* “LOW-QUALITY” SECTORS UNDER FIRE

* THE HOUSING “BUBBLE” BURSTS* THE HOUSING “BUBBLE” BURSTS

* A DOLLAR TAILSPIN* A DOLLAR TAILSPIN

*OIL-PRICE VOLATILITY*OIL-PRICE VOLATILITY

* A CHINESE GROWTH RECESSION* A CHINESE GROWTH RECESSION

* TERRORISM & OTHER GEO-POLITICAL STRAINS* TERRORISM & OTHER GEO-POLITICAL STRAINS

* “BUSH II” ECONOMIC POLICIES* “BUSH II” ECONOMIC POLICIES

FISCAL DEFICITS: IN THE EYE OF THE FISCAL DEFICITS: IN THE EYE OF THE STORM?STORM?

Budget Surpluses & Deficits As A % Of GDP; Fiscal Budget Surpluses & Deficits As A % Of GDP; Fiscal YearsYears

-7%-7%

-6%-6%

-5%-5%

-4%-4%

-3%-3%

-2%-2%

-1%-1%

0%0%

1%1%

2%2%

3%3%

19701970 19751975 19801980 19851985 19901990 19951995 20002000 20052005 20102010

Source: Congressional Budget Office & WCM EstimatesSource: Congressional Budget Office & WCM Estimates

Avg. 1982-92=4.3% Avg. 1982-92=4.3% Of GDPOf GDP

No Tax No Tax Chgs.=2.3% Of Chgs.=2.3% Of

GDPGDP

Forecast, Forecast, 2006-102006-10

Wi. Tax & Soc. Wi. Tax & Soc. Sec. Sec.

Chgs.=3.7% Of Chgs.=3.7% Of GDPGDP

HOPEFUL SIGNS OF AN APPROACHING HOPEFUL SIGNS OF AN APPROACHING TURN IN THE U.S. BALANCE-OF-TURN IN THE U.S. BALANCE-OF-

PAYMENTS DEFICITPAYMENTS DEFICIT

-1%-1%

0%0%

1%1%

2%2%

3%3%

4%4%

5%5%

6%6%

Dec-84Dec-84 Dec-87Dec-87 Dec-90Dec-90 Dec-93Dec-93 Dec-96Dec-96 Dec-99Dec-99 Dec-02Dec-028080

8585

9090

9595

100100

105105

110110

115115

'04Q3'04Q3

Source: U.S. Commerce Dep'tSource: U.S. Commerce Dep't

1/14/05=87.91/14/05=87.9

* Four-quarter moving averages; trade-wtd. $ adjusted for relative inflation rates.* Four-quarter moving averages; trade-wtd. $ adjusted for relative inflation rates.

Percent Of GDP*Percent Of GDP* Index: 2000=100*Index: 2000=100*

U.S. Payments DeficitU.S. Payments Deficit(Left Scale)(Left Scale)

Trade-Wtd. U.S. $Trade-Wtd. U.S. $(Right Scale)(Right Scale)

IS FOREIGN CONFIDENCE IN THE U.S. STILL IS FOREIGN CONFIDENCE IN THE U.S. STILL INTACT?INTACT?

Net Foreign Direct Investment In The U.S. PlusNet Foreign Direct Investment In The U.S. Plus Foreign Private Portfolio Investment; $ Billions Foreign Private Portfolio Investment; $ Billions

-20-20

00

2020

4040

6060

8080

100100

120120

Mar-85Mar-85 Mar-88Mar-88 Mar-91Mar-91 Mar-94Mar-94 Mar-97Mar-97 Mar-00Mar-00 Mar-03Mar-03Source: U.S. Commerce DepartmentSource: U.S. Commerce Department

'04Q3'04Q3

Rolling 4-Quarter Rolling 4-Quarter AverageAverage

Rolling 5-Year Moving Rolling 5-Year Moving AverageAverage

THE OUTLOOK FOR S&P 500 EARNINGS GROWTH THE OUTLOOK FOR S&P 500 EARNINGS GROWTH STILL FAIRLY UPBEATSTILL FAIRLY UPBEAT

Yr.-Ago % Change In S&P 500 Operating Profits*Yr.-Ago % Change In S&P 500 Operating Profits*

-23%-23%

-18%-18%

-13%-13%

-8%-8%

-3%-3%

2%2%

7%7%

12%12%

17%17%

22%22%

27%27%

Mar-97Mar-97 Sep-98Sep-98 Mar-00Mar-00 Sep-01Sep-01 Mar-03Mar-03 Sep-04Sep-04 Mar-06Mar-06* First Call "bottom-up" consensus estimate, including goodwill adjustments.* First Call "bottom-up" consensus estimate, including goodwill adjustments.

Source: First Call, Inc.Source: First Call, Inc.

Forecast*Forecast*'04Q3-'05Q4'04Q3-'05Q4Avg. Annual % Chg., Avg. Annual % Chg.,

1983-2003=7.2%1983-2003=7.2%

S&P 500 PRICE-EARNINGS (P/E) MULTIPLE NOT S&P 500 PRICE-EARNINGS (P/E) MULTIPLE NOT UNUSUALLY HIGH... UNUSUALLY HIGH...

S&P 500 P/E Multiple, Based On Consensus, "Bottom-Up" S&P 500 P/E Multiple, Based On Consensus, "Bottom-Up" Operating. Earnings ForecastsOperating. Earnings Forecasts

33

77

1111

1515

1919

2323

2727

Jan-79Jan-79 Jan-83Jan-83 Jan-87Jan-87 Jan-91Jan-91 Jan-95Jan-95 Jan-99Jan-99 Jan-03Jan-03Sources: Standard & Poors, Inc., IBES, Federal Reserve BoardSources: Standard & Poors, Inc., IBES, Federal Reserve Board

S&P 500 P/E MultipleS&P 500 P/E Multiple(Left Scale)(Left Scale)

1/14/05 1/14/05 P/E=16.1xP/E=16.1xAvg. P/E, 1983-2003=14.9 Times Avg. P/E, 1983-2003=14.9 Times

Forward Operating EarningsForward Operating Earnings

……AND STILL "CHEAP" AGAINST BONDS, AT AND STILL "CHEAP" AGAINST BONDS, AT CURRENT INTEREST RATESCURRENT INTEREST RATES

Ratio, 10-Yr. Treasury Yield Vs. Earnings-Price Yield (E/P) On Ratio, 10-Yr. Treasury Yield Vs. Earnings-Price Yield (E/P) On S&P 500 StocksS&P 500 Stocks

0.40.4

0.60.6

0.80.8

1.01.0

1.21.2

1.41.4

1.61.6

1.81.8

Jan-79Jan-79 Jan-83Jan-83 Jan-87Jan-87 Jan-91Jan-91 Jan-95Jan-95 Jan-99Jan-99 Jan-03Jan-03Sources: Standard & Poors, Inc., IBES, Federal Reserve BoardSources: Standard & Poors, Inc., IBES, Federal Reserve Board

Avg., 1983-2003=1.016Avg., 1983-2003=1.016

1/14/051/14/05

BOND MANAGERS POSITIONED FOR HIGHER BOND MANAGERS POSITIONED FOR HIGHER INTEREST RATES RATES INTEREST RATES RATES

Portfolio "Duration" Vs. Target, In Percent; 4-Wk. Portfolio "Duration" Vs. Target, In Percent; 4-Wk. Moving Avgs.Moving Avgs.

9494

9595

9696

9797

9898

9999

100100

101101

102102

103103

104104

25-Dec-0125-Dec-01 25-Jun-0225-Jun-02 24-Dec-0224-Dec-02 24-Jun-0324-Jun-03 23-Dec-0323-Dec-03 22-Jun-0422-Jun-04 21-Dec-0421-Dec-04Source: Stone McCarthy Research Associates, Inc.Source: Stone McCarthy Research Associates, Inc.

12/14/04 12/14/04 WeekWeek

"Neutral" (100% Of "Neutral" (100% Of Benchmark Duration)Benchmark Duration)

LOW TREASURY YIELDS VS. DURATION LOW TREASURY YIELDS VS. DURATION INCREASE INCREASE

THE RISK OF NEGATIVE RETURNSTHE RISK OF NEGATIVE RETURNS

22

33

44

55

66

77

88

Dec-92Dec-92 Dec-94Dec-94 Dec-96Dec-96 Dec-98Dec-98 Dec-00Dec-00 Dec-02Dec-02 Dec-04Dec-04

Duration (In Years)Duration (In Years) Yield (In Percentage Points)Yield (In Percentage Points)

11/0411/04

5-Yr. Treasury Yield5-Yr. Treasury Yield

5-Yr. Treasury Duration5-Yr. Treasury Duration

Source: Merrill Lynch, Inc.Source: Merrill Lynch, Inc.

COMPETING IN A DYNAMIC COMPETING IN A DYNAMIC GLOBAL ENVIRONMENTGLOBAL ENVIRONMENT

* GLOBAL COMPETITION’S SILVER LINING* GLOBAL COMPETITION’S SILVER LINING

--Ongoing Pressure To Boost Productivity Growth Via Tech --Ongoing Pressure To Boost Productivity Growth Via Tech

Investment, Management & Other InnovationsInvestment, Management & Other Innovations

* “MUTED” BUSINESS CYCLE* “MUTED” BUSINESS CYCLE

* MORE FAVORABLE DEMOGRAPHICS* MORE FAVORABLE DEMOGRAPHICS

* THE BENEFITS OF A MORE “MARKET-ORIENTED” FORM * THE BENEFITS OF A MORE “MARKET-ORIENTED” FORM

OF CAPITALISM OF CAPITALISM

--Entrepreneurship & Innovation, More Open, Dynamic Labor & --Entrepreneurship & Innovation, More Open, Dynamic Labor &

Financial Markets, More Pro-Active Economic PoliciesFinancial Markets, More Pro-Active Economic Policies