2008 Market Forecast - Welcome to Woodward Wealth Management by decree


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Contact: Kirsten Beyer                                For Release
Phone: (303) 355-0556                                 12 NOON, December 31, 2007

                                 *Advance Copy*

                                 2008 Market Forecast
                                       Calm Seas Ahead…For Now

          Note: Our principal, Al Woodward, is available for interview up until January 2, 2008

There is an old sailor rhyme you may have heard:

                     Red sky at night, sailor’s delight. Red sky at morning, sailors take warning.

That quaint lyric saved many lives over the centuries. The key to survival is being able to read the signs of the
times. A crimson sky in the evening forecast a calm day ahead. Auburn skies in the morning however foretold
dangerous storms.

In the same way it is important to read the financial signs. There likely will be a painful market correction in the
next 5 years. That is the law of economic cycles. The U.S. stock market experiences a abhorrent crash, on the
average, every 10 years. This treatise limits itself to predicting what 2008 holds. If the economic cycle were a day,
2008 is the “cooler part of the day.” In other words it is about 4 p.m. The sun hasn‟t set. In fact, dusk isn‟t even
here yet.

2008 MARKET FORECAST, DECEMBER 31, 2007                                                                       MORE
2008 MARKET FORECAST, DECEMBER 31, 2007                                                                           PAGE 2

We cite many of our concerns here. Remember the U.S. economy, like any prize fighter, can and will take a
punch from time to time. Many premier economists predict a slowdown in 2008, but no recession. We agree with
them. Here‟s why.

Solid Earnings vs. Blind Euphoria? A Look at 2007

As 2007 comes to a close, we collectively breathe an uneasy sigh of relief. The Dow Jones hit an all time high on
October 11 at 14,198.10. In the fourth quarter, the Dow has held steady in the 13,000 range.
True, the market has officially recovered, but will it last? In our professional opinion the answer is yes. The major
difference between the dot-com bubble of the late 1990s and the current recovery is summarized in one word –

Over excitement, bogus accounting and unsubstantiated optimism fueled the inevitable bust of 2000. Earnings
could not sustain stock prices at that time. This market is different. After a thorough lashing, investors from all walks
of life have again remembered to look before they leap. The bad boys have been put in jail. Corporations are
again on the straight and narrow. Revenue reporting is accurate. Stock prices are well in line with earnings.

The Weak Dollar – “Hey buddy, can you spare a Yuan?”

The greatest hazard to our economic health is our slow, steady and subtle rise in debt. The trend is truly alarming.
Americans, both and individuals and as a nation, have become borrowers, not lenders.

Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
-William Shakespeare, Hamlet

Formerly a nation of creditors, we have been steadily morphed into a nation of debtors. This cannot continue.
Uncle Sam has been borrowing heavily from China. In fact, China will soon eclipse Japan as our largest creditor.

Even on an inflation adjusted basis oil is at an all time high. Gold, flirting with $1000 an ounce, is also at an all time
high. The stock market remains near an all time high. Many factors are at work, but the common thread is a
weak dollar. The Greenback is virtually on par with the Canadian dollar. Our normally polite neighbors to the
north are snickering.

It is no secret the dollar has been weakening. Interest rates have been hovering at historic lows since 2003. All this
was done to cushion the blow of the dot-com bust. The tactic worked, but we paid a price. The dollar has fallen
against major currencies like the Euro and the Yen.

In the Lisbon Conference of 2000 the European Union stated their goal to make the Euro-dollar the world‟s
currency by 2010. No one took them seriously. Skeptics even laughed. No one is laughing now. The EU central
bank has deliberately kept their interest rates higher than ours. The results are self evident. The Euro has doubled
in value against the Greenback since inception. If the globe exchanges their Dollars for Euros, we could
eventually see hyperinflation. That however is a worst case scenario. More than likely the Fed will react positively.
The Federal Reserve Board must address this in years to come or face the consequences. On the bright side U.S.
goods are now more competitive overseas. Dr. Sohn, a former senior economist on the President's Council of
Economic Advisors in the White House states:

The yen-dollar relationship is a good barometer of stress in the U.S. credit markets. Normally, speculators borrow
money at very low interest rates, like 0.5 percent, in Japan and invest the money in the U.S. at higher interest rates
like 5 percent. In the process the yen is sold and the dollar is bought. Now in the face of uncertain financial market
2008 MARKET FORECAST, DECEMBER 31, 2007                                                                      PAGE 3

environment, the opposite is happening. The so called yen-carry trade is unwound by selling U.S. assets to pay off
the debt in Japan. In the process, the dollar is sold and the yen is bought. This is one of the main reasons for the
weak dollar against the Japanese yen. A stronger yen often implies problems in the U.S. financial markets.i

Fortunately the powers that be are aware of the situation. We need a strong fiscal policy from the next president.
In the long run look for rate increases meant to restore the dollar to its glory days.

The Petrol Pachyderm –The Elephant in the Room No One Wants to Talk About?

Oil is flirting with $100 a barrel. Energy prices strain the economy, it is true. Yet necessity remains the mother of
invention. Like any commodity, oil too has its limits. We may groan at the pump, but we are far from being
brought to our collective knees.

Much has been made of alternative fuels recently. For example Honda is introducing a car that runs on
hydrogen, the FCX Clarity. (see: http://automobiles.honda.com/fcx-clarity/) Not long ago Bills Gates invested
heavily in Pacific Ethanol. Pessimists say oil will run out in ten years. Optimists claim it will last a thousand.
Regardless of what you may believe the future holds, one thing is clear. Global demand is up. Pricing pressure
will force changes. The most likely “alternative fuel” in the immediate future is heavy oil.

Heavy oil, in contrast to light, sweet crude, is more difficult to process. However it is also more abundant. Until
recently it was not cost effective to even consider processing these reserves. The high sulfur content and
increased density made it impractical. However that may change soon.

The chief business of the American people is business. – Calvin Coolidge

Americans are nothing if not resilient. We dealt with the energy crisis of the „70s by diversifying our supply chain.
We dealt with tea taxes by diversifying into coffee. Look for diversification in fuels in the next 10 to 20 years.

A Fool and His Money…. Subprime Lending Goes Bust

The same fiscal negligence that created the dot-com bubble has given birth to a subprime meltdown. Lenders
deviated from time tested principles and paid dearly for it. Merrill Lynch for example wrote off $7.9 billion in
subprime loans in the third quarter of 2007. $9 billion more may be announced in the fourth quarter. ii

Another big continuing concern in the U.S. economy is the tightening credit conditions. Financial conditions had
improved somewhat after the summer turmoil in subprime-related losses but a significant portion of the credit
market, including mortgages, is malfunctioning. As a result of the credit problems, investors have become more
cautious and fearful about lending and demanding greater compensation for taking risks. In many parts of the
credit    markets,    money     has    become        more       expensive    and      difficult  to   obtain.   i

In recent weeks, large scale credit downgrades of subprime securities and heavy write-downs and massive losses
by large Wall Street banks have reinforced those fears. During the summer when the subprime problems surfaced,
no one knew the magnitude of the problems, but now the losses are being recorded on the books. i

In short, credit markets have received a well earned bloody nose. Merrill Lynch stock, for example, dropped from
$98 (01/18/07) to $51 (11/21/07) per share. Overreaction? Probably. Resiliency will prevail as we live to fight
another day.

Luck Be a Lady Tonight - 2008 a Year of Slow Growth

With the dot-com crash fresh in our minds, Woodward Wealth Management approaches 2008 with tempered
confidence. There is understandable concern, but we know the score. In many ways the signs aren‟t pretty. Yet
2008 MARKET FORECAST, DECEMBER 31, 2007                                                                    PAGE 4

the important point to remember is all this indicates an economic slowdown, not a recession. Don‟t head for the
hills just yet. Managed accounts in particular have the ability to perform well in a sideways market. Overall
consumer spending remains strong. Corporate revenues are healthy. None of the concerns mentioned here will
create enough job loss to trigger a recession. As Dr. Sohn puts it:

A latest statement by an official from the Federal Reserve said, “The current stance of monetary policy should
help the economy get through the rough patch during the next year, with economic growth likely returning to its
long-term sustainable growth path.”

The bottom line is that consumer spending, which accounts for over 70 percent of the economic growth and has
held up pretty well so far. i

The buzz word for 2008 is “slowdown”. That means we can expect growth, just not spectacular growth. 2008 is
also an election year. History has found that the economy doesn‟t care who is in office. It only cares when there
is a change. If the Democrats do take the Oval Office this November, look for turbulence. Government
spending typically changes. Defense spending is cut. Social programs, not corporate earnings, can be
expected to receive favorable tax treatment. Such shuffling invariably affects individual stocks and sectors. For
example Lockheed Martin (LMT) began climbing in 2000, long before the rest of the market recovered.
Lockheed has steadily outgrown the market as a whole since the Republicans took office. For instance Lockheed
opened on January 3rd of 2000 at $22 a share. As of December 26, 2007, shares now sit comfortably at over $100
a share. Witness the 400% increase. By contrast the Dow Jones, in the same period, opened at 11,502 and today
hovers near 13,549, a mere 18% increase. Financial stocks are enduring their own correction as the credit crunch
takes its toll. Technology does well when the overall economy is healthy enough to support innovation. Note
Apple‟s (AAPL) success with the iPOD and the iPhone. However ladies and gentleman, we ask you to keep your
seatbelts fastened as we navigate through what looks to be a benign year overall.

I know the way you’ve treated other guys you’ve been with. Luck, be a lady with me.
Frank Sinatra

     Dr. Sohn The Weakening U.S. Economy Means Lower Interest Rate, November 16, 2007
     Analyst says Merrill 4Q write-downs could top $8 billion Marketwatch - December 20, 2007 1:54 PM ET

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