Special Report

The Stock Market Stumbles . . .

. . . Time to Panic or Persevere?

August 20th, 2007

Curian Capital, LLC is a registered investment advisor that offers managed

accounts to investors. This involves investing in securities, which entails
certain risks, including the possible loss of principal.
 Special Report: “Time to Panic or Persevere?”

1600

The long-anticipated correction in stock prices 1550

S&P 500 Index level
(Closing price)
has arrived
1500
7/19/07 Closing High: 1553.08
From the peak levels one month ago, the Dow Jones and the S&P 500 1450 8/16/07 Intra-day Low: 1370.60
have declined 10%, based on the intra-day low. This represents a Correction from High to Low: 11.7%
1400
decline generally accepted as the definition of a stock market
“correction”.
1350

1300

01/03/07

01/31/07

02/28/07

03/28/07

04/25/07

05/23/07

06/20/07

07/18/07

08/15/07
Index Price Returns (YTD 08/17/07, Closing price)
8.0
4.9
Declines are broad-based 3.7 YTD Return
4.0 2.0
% return (price)

From their respective closing peaks in July, all major U.S. 0.0
Indices have experienced significant declines. -0.2
-4.0

Smaller company stocks continue to be more volatile than larger -8.0

company stocks -8.3
-9.4 -9.9
-12.0
-12.2
Correction from YTD peak
-16.0
S&P 500 NASDAQ Dow Jones Russell 2000

Source: Bloomberg
 Special Report: “Time to Panic or Persevere?”
NAREIT Index level
The equity market decline includes REITs, the 4800
4600
strongest asset class in recent years
4400
4200
The pain is greatest for Real Estate Investment Trusts (REITs) 4000
following a 34% climb in 2006. 3800
2/7/07 Closing High
3600 8/17/07 Closing Low
Yields on REITs following the decline are now a more attractive 3400 Decline from High to Low: 27.25%
4.3%. The competitive yield vs other fixed income investments could 3200
help to support prices going forward, assuming continued solid Source: Bloomberg, Thru 08/17/07
3000
economic growth to support commercial and industrial tenant

12/29/06

1/26/07

2/23/07

3/23/07

4/20/07

5/18/07

6/15/07

7/13/07

8/10/07
demand.

Index Price Returns (YTD 08/17/07, Closing price)

10.0
International markets correct as well YTD Return 5.0
5.0
% return (price)

In sympathy to the U.S equity markets, Developed international

0.0
markets have decline in double-digit fashion from their July peaks,
with the riskier Emerging Markets dropping even more. -0.9
-5.0

The faster growing economies overseas may help contain the -10.0
decline.
-15.0 -12.7
Correction from YTD peak
-20.0 -17.7
MSCI EAFE MSCI Emerging Mkt

Source: Bloomberg
 Special Report: “Time to Panic or Persevere?”

50
Volatility Index illustrates level of urgency 45
Volatility (VIX) Index level
40
The severity of the recent volatility feels as if panic has gripped the
35
market. A measure of that panic is illustrated in the VIX, or Volatility
Index. The VIX measures expected volatility in the market and tends 30
to spike upward around market bottoms. 25
20
In 2007, there have been 32 days where the market exceeded 1% movement
from the previous day’s close through August 17th. That compares with 29 1% 15
days for all of 2006 and 30 for 2005 (S&P 500). 10
Source: Bloomberg, Thru 08/17/07
5
12/31/89 12/31/93 12/31/97 12/31/01 12/31/05

Post-volatility returns tend to the positive S&P 500 Performance:

VIX persistently > 30 Periods Following VIX level > 30
1 mos 3 mos 6 mos 1yr
The chart above illustrates that while volatility exceeds 30 during
8/6/90 - 1/16/91 17.17% 21.54% 22.67% 36.59%
nervous periods for stocks, they tend to be short in duration.
10/28/97 - 11/18/97 1.97% 10.45% 18.79% 23.87%
8/11/98 - 10/28/98 11.80% 16.79% 27.30% 27.34%
While the market could remain volatile and subject to further declines,
1/14/99 - 2/18/99 6.53% 8.11% 8.42% 10.16%
the positive tendency for stocks after periods of high volatility is
something investors should acknowledge. 4/14/00 - 5/4/00 4.94% 2.35% 1.79% -9.09%
3/21/01 - 4/9/01 10.46% 5.72% -6.48% -0.39%

While past returns are never a guarantee of future returns, history 9/10/01 - 11/5/01 6.29% -0.82% -2.00% -15.70%
suggests some potential for stronger markets ahead. Assuming the 7/10/02 - 3/24/03 5.58% 14.27% 17.79% 28.49%
current volatility is not the precursor to a 2000/2002-type bear market, 8/16/07 - ?
post-volatility performance tendencies are even stronger.
Average all periods 8.09% 9.80% 11.04% 12.66%
Average excluding
2000/2002 Bear Market 8.61% 14.23% 18.99% 25.29%
 Special Report: “Time to Panic or Persevere?”

There remains plenty to be concerned about:

Sub-prime Collapse: More than 50 mortgage companies file for bankruptcy (Dow Jones MarketWatch 08/16/07)
Hedge Funds Close: Use of leveraged exposure to subprime mortgage loans causing mega losses
Housing Recession: New housing starts fall 25% from year ago to lowest level in 10 years*
Credit Crunch: Cost of borrowing jumps, lenders hesitant to lend and mergers & acquisition activity drops markedly
Oil Prices Escalate: Climbed to new highs in July
Earnings Growth Decelerating: Third quarter growth estimates low single-digit expectations, lowest in years

Concerns acknowledged, other fundamentals suggest potential firm footing for stocks:
Second Quarter GDP: Surprisingly strong 2nd Quarter of 3.4% following anemic 1st Quarter growth of 0.6%*
Corporate earnings: Surprisingly strong 10.8% 2nd quarter growth when estimates a few months ago called for about 5%. Third
quarter earnings expectations remain subdued around 3.1% with a fourth quarter rebound estimated at 11.9% (S&P 500)*
Stock price valuations: With price/earnings ratios for the S&P 500 around 15.7* times, stocks are well within long-term averages, and
less than half the levels hit during the market peak in 2000
Oil eases: After hitting $78 per barrel, prices ease toward the low 70’s with the high-demand summer winding down
Long-term interest rates decline: The yield on the 10-year Treasury is below 4.7% after the recent peak of 5.3%*
Short term interest rates subject to decline: 3 month T-bill yield drops below Fed Funds, Fed reduces Discount Rate by ½ percent,
futures market hints of possible Fed Funds cut by year end supported by a moderating pace of inflation
Full employment: Employed consumers continued to spend, unemployment remains at historic lows
Global economic growth: U.S. exports supported by strong economies for trading partners

*Source: Dow Jones MarketWatch, Bloomberg, Standard & Poors,

 Special Report: “Time to Panic or Persevere?”

Hypothetical growth of $10,000 Invested in

the S&P 500 from Jan 1980 – Dec 2006*
$350,000
Perseverance reduces the risk of missing
$286,000 Impact of missing the best days
the rallies $300,000

Value of investment at 12/31/06

$250,000
$212,000
Given the tendency for stocks to snap back after periods of high
volatility (see Post-volatility performance page 4), the risk of $200,000
missing such unpredictable “up” days can significantly hinder the
$150,000 $131,000
long-term objectives for investors.
$100,000 $78,000

Missing just a few isolated days of strong market performance $42,000

$50,000
dating back over 20 years would have had a significant impact on
over all returns. $0
All Days Missing Best 5 Missing Best 10 Missing Best 30 Missing Best 50
days days days days

Perseverance rather than panic may be best course of action

Panic is characterized by extreme volatility, including both down and up moves for stock prices. It is a market characteristic that is repeated throughout
history, occurs infrequently, and can significantly hinder long-term objectives for individual investors if attempts are made to market-time the panic.
While volatile markets are at times painful to tolerate, they also provide opportunities. Assuming continued solid economic fundamentals beyond the weak
subprime and housing markets, combined with very reasonable stock valuations in the form of price/earnings ratios, the recent market declines could unfold
to be an attractive buying opportunity for stocks.

*Source: (Fidelity) The hypothetical example assumes an investment in stocks that tracks the
returns of the S&P 500 Index and includes dividend reinvestment and no taxes on earnings.
 Special Report: “Time to Panic or Persevere?”

Glossary of Index Definitions

Dow Jones Industrial Average Index measures the performance of 30 large U.S. companies. The Dow is a price-weighted index meaning
the highest priced stocks have the greatest influence on the index performance.
S&P 500 Index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. The S&P 500 is
market capitalization weighted with over 80% coverage of U.S. equities as measured by total market capitalization.
Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents
approximately 8% of the total market capitalization of the Russell 3000 Index. Russell 3000® Index measures the performance of the 3,000
largest U.S. companies based on total market capitalization, which represents approximately 98% of the investable U.S. equity market.
NASDAQ Index National Association of Securities Dealers Automated Quotation. A US stock price index that measures the performance of
over 5000 companies listed on the NASDAQ exchange.
The NAREIT Index includes all REITs (real estate investment trusts) currently trading on the New York Stock Exchange, the NASDAQ
National Market System and the American Stock Exchange.
The MSCI EAFE® Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure
developed market equity performance, excluding the US & Canada. As of May 2005 the MSCI EAFE Index consisted of the following 21
developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy,
Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.
The MSCI Emerging Markets IndexSM is a free float-adjusted market capitalization index that is designed to measure equity market
performance in the global emerging markets. As of May 2005 the MSCI Emerging Markets Index consisted of the following 26 emerging
market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea,
Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, Turkey and Venezuela.
The VIX Volatility Index is comprised of S&P 500 options traded on the Chicago Board Options Exchange that reflect a market estimate of
future volatility based on the weighted average of a those options.