1Since 1895. Member SIPC and NYSE.

Outlook & Opportunities

Terry SandvenChristian Heitzman

April 2007

2 2

First Quarter Review & Outlook

Overview

• Performance• Housing• Economic growth/inflation• Oil• Interest rates• Earnings, valuation & consumer confidence• Employment

3 3

Performance Market and Sector Performance

Total ReturnClose Q1

Index 3/30/07 2007 2006 2005S&P 500 1,420.86 0.6% 15.8% 4.9%Dow Jones Industrials 12,354.35 -0.3% 19.0% 1.7%NASDAQ Composite * 2,421.64 0.3% 9.5% 1.4%Russell 2000 800.71 1.9% 18.4% 4.6%MSCI EAFE 2,147.51 4.1% 26.9% 14.0%MSCI Emerging Markets 929.03 2.3% 32.6% 34.5%Lehman U.S. Aggregate 1,211.13 1.5% 4.3% 2.4%Lehman U.S. Govt. & Credit - Intermediate 1,315.72 1.6% 4.1% 1.6%Lehman U.S. Govt. & Credit - Long 1,784.40 1.0% 2.7% 5.3%Lehman U.S. Short Treasury - Bills 85.34 1.2% 4.8% 3.1%Lehman Municipal Bond 636.33 0.8% 4.8% 3.5%

Percent ofS&P 500 Sector S&P 500Consumer Discretionary 10.5% -0.7% 18.6% -6.4%Consumer Staples 10.3% 2.2% 14.4% 3.6%Energy 9.9% 2.1% 24.2% 31.4%Financials 21.5% -2.8% 19.2% 6.4%Health Care 11.8% 1.0% 7.5% 6.5%Industrials 10.6% 1.1% 13.3% 2.3%Information Technology 15.1% -0.9% 8.4% 1.0%Materials 3.1% 9.0% 18.6% 4.4%Telecommunication Services 3.6% 7.3% 36.8% -5.6%Utilities 3.6% 9.3% 21.0% 16.8%* NASDAQ Composite performance calculated by percent change; excludes dividends.Source: Piper Jaffray & Co.

4 4

Housing

Delinquencies

• Housing—sub-prime deterioration—remains a predominant concern.

5 5

Housing

New Home Sales & Housing Starts

• Both new home sales and housing starts continue to decline.

6 6

HousingPending Home Sales of Existing Homes

• Pending sales of existing homes unexpectedly rose 0.7% in February after dropping 4.2% in January.– Considered a leading indicator because it tracks

contract signings.

7 7

Economic Growth/Inflation

Gross Domestic Product (GDP)

• Economic expansion continues.• Final fourth quarter GDP annualized rate was

2.5%; for all of 2006, the economy grew 3.3% versus 3.2% in 2005.

8 8

Economic Growth/Inflation

CPI & PCE

• CPI & PCE are two inflation indicators favored by the Fed.

• Both suggest economic expansion remains intact.

9 9

Economic Growth/Inflation

CRB Commodity Index

• Commodity prices tend to move in opposite direction of bonds.

• Trend line is largely inconclusive.

10 10

Economic Growth/Inflation

Institute for Supply Management (ISM)

• Both manufacturing and non-manufacturing appear at risk.

11 11

Economic Growth/Inflation

Index of Leading Indicators

• Biased toward weakness.

12 12

OilCrude Oil

• Oil is wildcard.• Any sustained increase puts the economy at

risk.

13 13

Interest Rates

U.S. Treasury Yield Curve

• Appears to be moving toward a more normalized rate.

• Upward sloping typically implies inflationary pressures.

14 14

Interest Rates

China’s Holdings of U.S. Treasuries

• If the trade deficit narrows and/or if protectionism policies become more widespread, it becomes logical to expect China’s appetite for U.S. Treasuries to decline.

15 15

Earnings, Valuation & Confidence

S&P 500 Earnings Projections

• S&P 500 earnings are projected to grow but at a lower rate.

• Valuations are reasonable.

16 16

Earnings, Valuation & Confidence

S&P 500 Valuation Levels

97 98 99 00 01 02 03 04 05 06

14x

16x

18x

20x

22x

24x

26x

28x

800

900

1000

1100

1200

1300

1400

1500

Price (Right)FY1 Price/Earnings Range (Left)Average (Left)

S&P 500 Index (Operating Basis) (SPX)

Data Source: First Call Estimates

Source: FactSet Research Systems Inc.

17 17

Earnings, Valuation & Confidence

S&P 500 Valuation LevelsHistorical Price-to-Earnings Ratio of S&P 500

and Yield on 10-Year Treasury Bond

0x

5x

10x

15x

20x

25x

30x

35x

40x

45x

50x

'50 '55 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05

P/E

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

10-YearTreasury

Yield

P/E (As Reported Earnings) P/E (Operating Earnings) Yield on 10-Year Treasury Bond

Data Sources: Standard and Poor's, FactSet Research Systems Inc. and Piper Jaffray

18 18

Earnings, Valuation & Confidence

Consumer Confidence Versus Performance

• Consumer confidence remains favorable.• If consumer confidence weakens, it seems

reasonable to expect equity prices to soon follow.

19 19

EmploymentU.S. Employment

• Employment is paramount, arguably the most telling indicator of future economic conditions.

• Stable employment and wage growth imply that consumers have the financial wherewithal to support generally high debt levels and continued spending.

20 20

Employment

Jobless Claims

• Jobless claims are a leading indicator.• Should jobless claims accelerate, the

prospects of a recession would seemingly increase.

21 21

Conclusion

Summary

• Pro-growth thesis remains intact.– Inflation will remain contained.– Economic expansion will continue, albeit at a slower

rate.– Fed is not likely to move until second half of 2007;

should sub-prime deterioration continue, next move is likely to cut; Fed is not under any immediate pressure to change its stance.

– Bonds and stocks will likely trend within a relatively narrow trading range, with an upward bias.

• While overall risks have increased, unless deterioration in employment becomes more evident, we remain biased toward a pro-growth economy.

22 22

Fixed Income Investing

Current Environment

• Talk of a Fed ease appears to be over done • Curve should remain near where it is• Opportunities may exist in some option

structures• Credit fears seem to remain• Look for widening where it doesn’t belong• Cash flow characteristics are important• Municipal Market could be in for change

23 23

Fed Funds Futures• Fed Funds Futures are currently implying a

25% chance of a cut at the June meeting. This is down from a high probability of over 70% in early March. In our view this may be too high. We look for the Fed to be on hold though most of 2007.

CURRENT FED FUND FUTURES (4/03/07)

5.00

5.25

5.50

-50%

-25%

0%

25%

50%

Prob 25 bpdecrease

-2% -4% -8% -22% -44%

Fed funds 5.245 5.240 5.230 5.195 5.140

Apr May Jun Jul Aug 7

Source: Piper Jaffray & Co., Bl;oomberg

24 24

Agency Market

Current State• Multi call and single call options seem to be

separating out a bit• Trading volumes in all classes have been

good, particularly in shorter maturities• Spreads have been actively moving

Outlook and Opportunities• Adding optionality may be worth the risk

depending on portfolio structure• Bullets out to 5 year sector appear to offer

some total return potential• Be aggressive in managing your portfolio

25 25

Agency Market

Value of Calls and Bullets

•Bermuda Calls are beginning to offer some value versus European calls. We think that this is a development that is worth the attention of investors.

CURRENT TREASURY & AGENCY YIELD CURVES

4.00

4.50

5.00

5.50

6.00

0 2 4 6 8 10

Treasury Bullet Agcy

European (1x) Callable Bermudan Callable

Yrs to Mat

Source: Piper Jaffray & Co., Bl;oomberg

26 26

Agency Market

The Volatility Wild Card

• Volatility has been steadily decreasing since 2003

• An increase in volatility would hurt any bond with embedded options – including callable agencies and MBS product

MERRILL LYNCH OPTION VOLATILITY ESTIMATE INDEX

50

70

90

110

130

150

170

190

2002 2003 2004 2005 2006 2007

MOVE Index

Source: Piper Jaffray & Co., Bl;oomberg

27 27

Corporate Market

Current State

• Corporate balance sheets in good condition• Limited evidence for a turn in the credit

cycle• Relative credit spreads are still tight

Outlook and Opportunities

• We feel staying short is warranted• Watch out for “headline” risk • Look for bonds that are fundamentally

sound, but have widened in sympathy on sub-prime woes

28 28

Corporate Market

Corporate Credit Spreads

• Corporate spreads still remain tight relative to where they have been in the recent past. Relative value among ratings classes may still be too tight to compensate for the increase in risk. We are wary about spread performance going forward.

10 YEAR COMPOSITE INDEX SPREADS TO TREASURIES

25

50

75

100

125

150

175

Mar-03

Sep-03

Mar-04

Sep-04

Mar-05

Sep-05

Mar-06

Sep-06

Mar-07

Banks UtilitiesIndustrial Composite

Source: Piper Jaffray & Co., Bl;oomberg

10 YEAR AAA, AA, A, & BBB-RATED COMPOSITE SPREADS TO TREASURIES

0

50

100

150

200

250

Mar-03

Sep-03

Mar-04

Sep-04

Mar-05

Sep-05

Mar-06

Sep-06

Mar-07

AAA AAA BBB

Source: Piper Jaffray & co., Bloomberg

29 29

Mortgage-Backed Market

Current State

• Prime collateral continues to perform well• Sub-prime debacle not over yet, but remains

contained• Issuance could slow down – tighter spreads

possible

Outlook and Opportunities

• Look for good collateral – continue to avoid sub-prime

• Mitigate extension risk with structure• Principal portion of cash flows may be valuable

in this rate environment

30 30

Mortgage-Backed Market

Mortgages versus Alternatives

• Mortgages appear to remain attractive versus some of their closer substitutes. The incremental pick up in yield and re-pricing principal flows may be attractive to many investors.

YIELD CURVES – TREASURY, AGENCY, SWAP, & PAC

4.004.20

4.404.60

4.805.00

5.205.40

5.605.80

2yr 3yr 5yr 7yr 10yr

Tsy Agy Swap 5.5% PAC

Source: Piper Jaffray & Co., Bloomberg

31 31

Municipal Market

Current State• Supply is the primary driver in the market at the

moment• We feel tax equivalent yields remain good• Relative credit spreads appear tight

Outlook• New credit derivatives have the potential to

change the market• Look for increased volatility• Secondary market may offer some value

32 32

Municipal MarketMunicipal Supply – Q1 2007

• Supply in the first quarter was up almost 50% versus the first quarter of 2006. This has focused underwriters and dealers on the primary market and offered some selective opportunities in the secondary market.

BOND BUYER 30 DAY VISIBLE SUPPLY (4/03/07)

0

2000

4000

6000

8000

10000

12000

14000

16000

18000Bond Buyer 30 Day Visible Supply

30d moving avg

Source: Piper Jaffray & Co., Bloomberg.

33 33

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