Claymore: 2008 OUTLOOK(ZT)

While headwinds may limit near-term performance of the markets, I believe that stocks will have a positive bias in 2008. My

favorable outlook is based on expectations of modest economic expansion, sustainable earnings growth, a proactive Federal

Reserve and reasonable valuation levels. In addition, the efforts by the Federal Open Market Committee (FOMC) to inject

liquidity into the economy through rate reductions are expected to have a noticeable impact on the economy in the second half

of the year. I generally feel that recent recessionary concerns are overblown and the odds of the U.S. economy falling into

recession—while rising—still remain moderate.

The U.S. economy is a consumer driven economy—where consumer spending accounts for two-thirds of economic growth.

The fear of rising energy prices and the negative wealth effect due to the turmoil in the housing market has resulted in several

consumer sentiment polls dropping sharply over the past few months. I however, feel the focus should be on what the consumer

does and not what they say.

With that in mind, one only has to look at consumer behavior over the Thanksgiving weekend—known as the official start to the

holiday shopping season. 147 million shoppers hit the stores—with the average consumer spending approximately $348, as

reported by the National Retail Federation. While the spending figure was off slightly from last year, it was still up almost 15%

from 2005 levels. Overall holiday sales, as projected by the National Retail Federation are expected to reach $474.5 Billion—a

4.0% year-over-year increase.

In addition, while rising energy prices and falling home values may weigh on consumers minds, what ultimately matters, in my

opinion, is the outlook for employment. Over the past 20 years the unemployment rate, as reported by the Bureau of Labor

Statistics, has averaged 5.5%. The current rate, as of November, is 4.7%. My expectations are for the unemployment rate to

remain relatively stable over the next 12 months. Wage growth also remains favorable for consumers as year-over-year growth

has averaged 3.8% as of November.

Energy

energy prices have been a nuisance, they have also, in my opinion, been a good way to monitor global economic strength.

Rising prices tend to be an indicator that global growth remains strong while falling prices may signal the opposite. A plunge in

prices, in my opinion, would be more troublesome than oil maintaining itself at current levels.

I believe the

connotation, I believe dollar weakness is actually a net positive. Domestic based multi-national corporations may see their

bottom-lines enhanced through the benefits of currency translation. In addition, exports benefit as a weak dollar makes U.S.

goods cheaper to consumers in foreign economies. While it could be argued that a lower dollar will push inflation higher, the

dollar in actuality has been trending lower since early 2002, and inflation during that period has been relatively benign.

prices are expected to remain elevated throughout 2008, reflecting tight supplies and robust global demand. While highU.S. dollar will likely remain at depressed levels for much of the year. While a “weak dollar” has a negative

2008 is an election year:

Almanac, since 1901—the market, as measured by the Dow Jones Industrial Average, has advanced about 70% of the time

during election years with an average gain of 9.3%. Note:

Historically the market has done well during election years. According to the Stock Trader’sPast performance is no guarantee of future results.

Boring….but good

end of the day I feel the market will post favorable year-over-year performance. Fading recessionary worries, improving

Upside potential

10-year Treasury bond yield of 4.75%, the Standard & Poor’s 500 Index has the potential to rise to approximately 1650 by the

end of 2008.

. Utilizing a regression-based dividend discount model and allowing for earnings growth in 2008 of 5% and a

P O S I T I O N I N G

Sector Investing:

With economic growth expected to slow over the next few quarters, I think investors will shift their preference towards more

“defensive” sectors like

and companies that are less correlated to the underlying economy. For example, consumers typically do not stop taking their

medication, visiting the doctor, brushing their teeth, or using electricity if the economic outlook turns negative.

Additionally, exposure to the

Standard and Poor’s—is positioned to generate earnings growth at a rate double that of the S&P 500. And with corporate

balance sheets flush with cash, an uptick in technology spending could occur, as many corporations haven’t had a major

technology refresh since the panic of Y2K, in my opinion.

From a contrarian point of view the

had been the worst performing of the 10 broad based S&P sectors. The negative performance has resulted from credit-related

issues and exposure to the downturn in the housing sector, in my opinion. Recent events, however, may be signaling that the

worst may be behind for the sector. These include several capital infusions, dividend reductions, and the potential for the U.S.

government to “bail out” certain holders of adjustable rate mortgages (ARMs).

HEALTHCARE, CONSUMER STAPLES and UTILITIES. Defensive investments tend to be sectorsTECHNOLOGY sector may make sense in the current environment. The sector—as forecast byFINANCIALS sector is starting to look interesting. Through the end of November, the sector

Style Investing:

In addition to “defensive” sectors, a shift towards

companies with a capitalization—defined as stock price times shares outstanding—in excess of $10 billion dollars. During times

of uncertainty, investors have historically gravitated towards large-cap investments. This, in my opinion, reflects their leadership

position and their tendency to have stronger financial profiles. In addition, many large-cap companies generate a large portion

of their sales in foreign economies. The weakness in the U.S. dollar has the potential to result in a favorable currency translation

environment, which could ultimately boost earnings and offset weakness due to a slowing in the domestic economy.

When choosing an investment strategy many investors will typically decide between a “growth” or “value” style. Value investors

tend to seek out investments that look underpriced in terms of some valuation metric, typically a price-to-earnings ratio, relative

to a benchmark. Growth investors will try to seek out investments that show above-average earnings growth, regardless of

underlying valuation.

In situations like the current environment,

economic growth shows signs of slowing, investments that are capable of delivering sustainable, above average growth are

usually rewarded by investors.

While both strategies, over time, have produced favorable performance, these styles tend to work in cycles. For example, from

1993 through 1999 investors gravitated toward growth. While from 2000 through 2006 value investments outpaced growth by a

significant margin. Year-to-date (through November) growth stocks have edged value stocks, and if recent history repeats itself,

growth stocks could have the upper hand for the foreseeable future, in my opinion.

LARGE-CAP investments might be considered. Large-caps typically areGROWTH-style investing has tended to be favored vs. value investing. When

Thematic Investing:

Themes are an attempt to identify big picture, multi-year investment opportunities. Examples may include the WATER sector,

DEMOGRAPHICS, the ENVIRONMENT, ALTERNATIVE ENERGY, OBESITY, or AGRICULTURE.

The focus this month will be

Water is a vital component to human life.

average human can only survive approximately three days with out water. Water is the world’s most essential commodity for

which there are no substitutes.

1

and over 80% of all illness and infant mortality in the developing world is because of waterborne

disease

2.

Water Considerations:

As challenges grow, so do the opportunities for the broader commercial water industry to provide

solutions—not only nationally, but globally. Consider the following:

• “The world water market is huge, and – perhaps most critically – many of the key geographic markets, such as China, are at

an earlier and much more rapid stage of growth than is the United States.”

3

• “An estimated $60 billion is invested in water resources in developing countries each year. About 90 percent of investment

comes from domestic sources.”

4

• “As water becomes increasingly scarce relative to the needs of growing populations and economies, and water quality is

increasingly compromised, challenges associated with developing and managing water resources become more acute. In 1995,

29 countries with populations totaling 436 million experienced conditions of water stress or scarcity. By 2025 the number of

water-stressed countries is expected to increase to 48 (primarily developing countries), affecting more than 1.4 billion people.

By 2035, 3 billion people, more than one third of the world’s population, will be living in conditions of severe water stress.”

4

• “In the last 5 years (FY02-FY06), lending for water-related projects averaged $2.2 billion, which represents 11 percent of the

total World Bank’s lending. Lending for water continues strong, and expected to scale up in FY07.”

4

• “Water quality and scarcity problems are the main concern and driver behind the challenges, all of the regulations, all of the

commercial business opportunities and ultimately, the projected growth for the water business over the coming decades.”

3

• “In order for municipalities and industry to comply with all these expanding regulations, and in order for the country to

maintain and expand the necessary drinking water and wastewater treatment infrastructure, huge capital expenditures will be

required into the long-term future.”

3

Drought Conditions

Climate changes, population growth, and pollution –are all having negative consequences on the available supply of water.

For example, Atlanta, Georgia is facing severe drought conditions and according to a recent article in USA Today

main water source, Lake Rainer, could run out of water by early 2008.

In my opinion, epic droughts in the southeast and west are only a part of the problem. Strong population growth and urban

expansion are pushing water resourced to their limit. While in the past engineered solutions such as dams, have been utilized,

environmental concerns are beginning to trump conventional engineering solutions.

Drought conditions in the South Eastern and Western regions of the country:

5 the area’s

The fundamental supply and demand imbalance is expected to result in substantial investments in water infrastructure. This

may create opportunities for the broader global commercial water industry to provide solutions. Water also fits my preference for

“defensive” investments. Despite conservation efforts, water demand is expected to remain steady regardless of economic

uncertainties.

A quick look at any globe underscores the fact that the majority of the earth (approximately two-thirds, in this case) is covered

by water. With such vast amounts of water available one would think that it would be in abundant

supply. The problem, however, is that only a small portion of the world’s supply is fresh, potable

water.

As the world’s population continues to expand, demand for an uninterrupted supply of fresh water

continues to grow. Consider for example that over a billion people worldwide lack clean water

WATER:While it is estimated that humans can go up to three weeks without food, the

conditions in the Financials sector and stable employment are all expected to contribute to the solid performance I envision. In

addition, attractive market valuation should help skew the risk/reward ratio in investors favor, in my opinion.

. The rally I foresee taking shape in 2008 maybe like watching paint dry (i.e. boring and stealthy) but at the