UMBF UMB Financial Corporation

UMB Financial Corporation (NASDAQ: UMBF) Chief Investment Officer Bill Greiner releases the following mid-year economic and market outlook. Bill Greiner is chief investment officer of UMB Financial Corporation's Asset Management Division in Kansas City, Mo. He has spent his entire career in the investment field, with more than 25 years' investment management experience. Greiner most recently was named Business Week's "Fearless Forecaster: 2005 Stock Market Strategist of the Year" in December 2005. He received this distinction by being the investment strategist who most accurately forecasted where the U.S. markets would end up at the close of 2005. Summary Economically, things are slowing. GDP growth, after registering strong well above-trend data for the first quarter, is slowing as the housing market and commodity price increases are registering a negative toll on the economy. We expect GDP growth to slow to the 3% range during the 2nd quarter of 2006, followed by growth in the 2.5% to 3.0% range for the remainder of the year. Corporate profits (as measured by the S&P 500) grew by 14% during Q1 2006. Along with overall economic momentum, we expect Q2 EPS growth to come in at 8-9%. This slowing is providing a negative headwind to the financial markets. Along with the slowing economic/profit momentum, the Fed continues to raise interest rates. As a result to these two "unexpected" pressures, the S&P corrected in price by 7.7% from early May to June 13. Over the same period, the Russell 2000 Index declined by 13.9%. Along with slowing economic growth (and corporate profit growth), our best guess is the Fed will continue to raise interest rates another .25% at the June meeting, followed by a "pause" in the upward move in rates. If this call is wrong, we fear the Fed will continue to raise rates without a pause, due to increasing inflationary pressures. If this were to occur, further downside momentum in the financial markets may unfold. Details All of this year, we have been consistent in the message that the economy was slowing, and corporate profit growth rates were going to contract. This appears to be happening (at least on the economic front). Earnings season will be upon us within the next two weeks, and we will see if the overall slowing in growth in the economy will lead to a slowing in reported earnings growth. Q1 GDP growth came in well above 5% (above expectations), and consequently, Q1 EPS grew by 14%, well above expectations, which drove the financial markets higher. As it has become apparent that the economy is starting to slow (housing market slowing, gasoline prices having an impact on consumer discretionary spending), expectations for Q2 EPS growth have started to contract. Combined with a Fed that appears to be focused on inflationary targeting, the markets retreated. Early last month, we called for this to occur. Now, the question evolves around how much economic and profit growth slowing is in the cards compared to current expectation? We believe further downside adjustments to growth expectations are needed. Corporate Profit Growth Expectations At the beginning of the year, the consensus forecast for S&P 500 profit growth was in the 8% range. Following first quarter EPS releases, many analysts ratcheted up their growth projections for this year, topping at 10%. Now, expectations have declined to the 9% growth level. Our expectation is that 2nd quarter EPS growth will come in at a 9% level (down from 14% growth during Q1). This will further drive 2006 EPS growth expectations downward towards the 6-8% range. This may indeed provide the catalyst for further downside adjustments in equity valuations as the summer continues to unfold. Inflationary Expectations Building The latest data on inflation readings are suggesting that inflation is building at the "core" level. The 12-month core CPI measure rose to 2.4% recently, close to the upper end of the Fed comfort zone of 1.5% to 2.5%. Furthermore, annualized core CPI inflation rates measured over every horizon shorter than 12 months are even higher, in many cases substantially so; the 3-month core inflation rate, for example, is at an 11-year high of 3.8%. Strong demand, increases in rents and perhaps some pass-through from recent increases in energy prices have contributed to the firming of core CPI inflation. This action may weigh heavily on the Fed, as our expectation is for another .25% rate increase as the Fed continues their onward quest to dampen inflationary build. What Does All This Mean? We believe the two main drivers of equity prices (corporate profits and inflation/interest rates) are headwinds with which the markets will struggle against. We expect a choppy equity environment, which started about a month ago, to continue over much of the summer months, as corporate profit growth expectations cool and the Fed gets a grip on inflationary trends. Themes for Equity Investing In the face of this less-than-positive short-term view, we sense certain themes which should be used for equity selection and portfolio construction. These themes are: -- Large over small. Due to valuation issues and dollar sensitivity, we believe large cap stocks should outperform small caps for some time going forward. -- Negative dollar play. Focus on companies who generate a significant amount of their top line sales from foreign operations, due to our outlook that the dollar will be under pressure over the remainder of this year compared to other foreign currencies. -- Energy play. We believe the upward move in oil prices is secular in nature, not cyclical. We don't think the positive outperformance of energy stocks is yet complete. -- Capital spending. In the face of slowing economic growth, it appears capital spending is holding up well. Look for companies that produce items which other companies buy to maintain profitability/competitive position. -- Health Care. Many companies in the Health Care space are multiple plays on these themes (large, multi-national). Bill Greiner Chief Investment Officer, UMB Asset Management UMB Financial Corporation UMB Financial Corporation (NASDAQ: UMBF) is a multi-bank holding company headquartered in Kansas City, Mo., offering complete banking and related financial services to both individual and business customers nationwide. Its banking subsidiaries own and operate 141 banking centers throughout Missouri, Illinois, Colorado, Kansas, Oklahoma, Nebraska and Arizona. Subsidiaries of the holding company and the lead bank, UMB Bank, n.a., include an investment services group based in Milwaukee, a trust management company in South Dakota, and single-purpose companies that deal with brokerage services, consulting services and insurance. UMB was named one of Business Week's "Web Smart 50" companies in 2005. UMB Investment Advisors is a division within UMB Bank, n.a., that manages active portfolios for employee benefit plans, endowments and foundations, fiduciary accounts, and individuals. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation. Securities and investment products are: Not FDIC Insured -- May Lose Value -- No Bank Guarantee (BOXED) The opinions and forecasts are based on information and sources of information deemed to be reliable, but UMB Investment Advisors does not warrant the accuracy of the information that this opinion and forecast is based upon. Further, the information and opinions contained within this report is subject to change at any time without notice and should not be construed as investment advice or recommendation of any specific security. The opinions and forecasts indicated within the report might not come to pass.