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February 2007 Market Commentary Despite suffering the largest single-day point drop in the Dow Jones Industrial Average (Dow) in more than five years, the markets still managed to finish the month with mixed results. Domestic equities were up modestly through most of February. But investor concerns over weaker-than-expected durable goods orders, turmoil in China and the softening residential housing market, among other factors, led to a single-day decline in most indexes not seen in several years. As a result, the Standard and Poor’s 500 Index (S&P 500) finished down 1.95% for the month, while the broader Russell 3000 slid 1.64% for the same period. Fixed-income instruments, however, provided positive returns as investors sought an alternative to equities. Yields on 5- and 10-year Treasury bonds ended the month at 4.52% and 4.56%, respectively, both down from January’s close. The Lehman Brothers Aggregate Bond Index posted a 1.54% gain in February, with longer-term maturities leading the way. In the emerging markets, the Shanghai Composite Index’s 8%-plus drop on February 27 spooked markets around the globe. But other emerging markets held their ground for the month, including Korea and Taiwan. Consequently, emerging markets were down only fractionally in February. The MSCI Emerging Markets Index declined 0.60%. Similarly, developed markets retreated slightly in local currency terms in February, with Japan as the most notable positive exception. Because of the weakness in the U.S. dollar, however, U.S. investors recorded a small advance of 0.82% for the month (MSCI EAFE Index). Elsewhere, after jumping an impressive 7.88% in January, REITs pulled back in February as the NAREIT Index declined 2.89%. Overall, domestic equities, REITs and emerging markets lost ground for the month, while developed and fixed-income markets advanced. Opinions about the overall health of the U.S. economy abound, and investors seem to have come to one of two conclusions: either the pullback in equities in February is nothing more than a breather from months of solid market performance, or it is a precursor to an unwelcome bear market. Our view is that if the economic scenarios detailed below are resolved favorably, we can avoid a bear market this year. Obviously, not all recent economic news has been positive. The Commerce Department reported that growth in gross domestic product, or GDP, was revised downward for the fourth quarter of last year. Business spending and industrial output also fell more than expected. One scenario is that forthcoming economic reports cloud the economic horizon (i.e., continued slump in housing, lower factory orders, slowdown in consumer spending, etc.). In this case, the Fed may be prompted to lower interest rates before the end of the year. Another scenario is that oil prices stabilize (or, preferably, decline). Because energy costs are embedded in production expenses for most companies, stable prices are beneficial. Lower energy costs likely will ease inflationary pressures over time, allowing the Fed greater flexibility to reduce interest rates this year. Yet another favorable scenario is that corporate earnings come in as expected (or better than expected). Standard & Poor’s estimates that 2007 fiscal year earnings growth as reflected by the S&P 500 Index will be 8%, which is lower than the recent double-digit pace of growth, but still very solid. Valuations (based on the average price-to-earnings multiple year to date) for the S&P 500 Index stand at 17.80, in line with historical averages and considered reasonable. Market data courtesy of Bloomberg. Indices are unmanaged and cannot be invested into directly. Past performance is no guaranteed of future results. The Market Commentary provided represents the opinion of National Planning Holdings and should not be considered a recommendation to buy or sell securities. All information presented is believed to be reliable, however, we can make no representation that the information contained herein is accurate or complete in as much as information we relied on comes from third-party data providers who make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide. You agree not to rely on the information contained herein and to hold us harmless for inaccuracies of any kind relating to such data. The trademarks and service marks contained herein are the property of their respective owners. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of National Planning Holdings. Securities and Advisory Services offered through SII Investments Inc. Member NASD, SIPC and a Registered Investment Advisor. Private Wealth Management Group, LLC and SII Investments, Inc. are separate and unrelated companies. Formatted Deleted: ¶ ¶