2011 Economic and Financial Market Outlook

January 2011

Michael Dawkins David GuhdeSenior Portfolio Manager Senior DirectorBNY Mellon Wealth Management BNY Mellon Wealth Management

2

3

U.S. Unemployment Rate, Seasonally Adjusted

As of 11/30/10. Source: Bureau of Labor Statistics, Haver Analytics*Includes officially unemployed, those who want a job but stopped looking, and those who need full-time jobs but can only find part-time work, measured as a percentage of the civilian labor force plus all the marginally attached workers.

3

6

9

12

15

18

78 82 86 90 94 98 02 06 10

PE

RC

EN

T

9.8%

17.0%

Civilian Unemployment Rate Broader Unemployment Rate*

Employment Far Behind Normal Recovery EXPECTED TO REMAIN HIGH FOR QUITE SOME TIME

4

High unemployment

Economic and Policy Headwinds to GrowthUNUSUALLY HIGH DEGREE OF UNCERTAINTY

Global deficit

Unwind of stimulative policies

Re-regulation

Investor psychology

Tax policy

Demographic shifts

Entitlement costs

Ongoing credit crunch for smaller companies

5

As of 11/30/10. Sources: National Federation of Independent Businesses and Ned Davis Research

NFIB Index of Small Business Optimism

Business Confidence Remains Low

75

80

85

90

95

100

105

110

74 77 80 83 86 89 92 95 98 01 04 07 10

6

20

40

60

80

100

120

140

160

70 75 80 85 90 95 00 05 10

As of 12/31/10. Sources: The Conference Board and Haver Analytics

Conference Board's Consumer Confidence Index, 1970-2010

Consumer Confidence at Historically Low Levels

7

60

70

80

90

100

110

120

130

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

Households Reducing Debt

As of 9/30/10. Household debt includes home mortgage and consumer credit. Source: Ned Davis

Household Debt as Percentage of Disposable Personal Income

117.6%

8

3

6

9

12

84 89 94 99 04 09

MO

NT

HS

Source: Ned Davis, Haver Analytics, National Association of Realtors

Median Price of Existing Homes – Percent Change from Year Ago

Month’s Supply of Existing Homes 11/30/10, 9.3

11/30/10, 1.2%

-20

-10

0

10

20

84 89 94 99 04 09

PE

RC

EN

THousing Market Still ChallengedDEMAND WAS PULLED FORWARD BY TAX INCENTIVE

9

4.9

7.9

9.2

2.4

15.1

0

5

10

15

PE

RC

EN

TElection Positive Catalyst for Equity Markets

S&P 500 Performance by Partisan Control, 1928-2009

Source: StrategasRP

D CongressR President

R SenateD House

R President

D CongressD President

R CongressR President

R CongressD President

10

8.2 8.7

19.4

11.0

0

5

10

15

20

25

Year 1 Year 2 Year 3 Year 4

PE

RC

EN

TElection Year Cycle Bodes Well for Equity Market

S&P 500 Total Return by Presidential Year, 1928-Present

Source: StrategasRP

11

Historical Market Returns

Returns as of 12/31/10, unless noted otherwise. Standard deviations are calculated based on monthly data for the trailing 10 years. Source: Morningstar. *As of 11/30/10; **Returns are for periods through 6/30/10 and represent Thomson Financial’s Private Equity Performance Index; standard deviation is not available.

Asset Class Index 4Q10 1 Year 3 Year 5 Year 10 Year

Treasury Bills Treasury Bills (90 Day) 0.0 0.1 0.6 2.2 2.2 0.5

Tax-Exempt Bonds Barclays 7-Year Muni (2.4) 4.6 5.6 5.2 5.1 4.4

Taxable Bonds Barclays Aggregate (1.3) 6.5 5.9 5.8 5.8 3.8

High Yield Barclays High Yield 3.2 15.1 10.4 8.9 8.9 11.4

Large Cap Stocks S&P 500 10.8 15.1 (2.9) 2.3 1.4 16.4

Mid Cap Stocks S&P MidCap 400 13.5 26.6 3.5 5.7 7.2 18.7

Small Cap Stocks Russell 2000 16.3 26.9 2.2 4.5 6.3 21.1

International Stocks MSCI EAFE (Net) 6.6 7.8 (7.0) 2.5 3.5 18.6

Emerging Mkts Stks MSCI EMF 7.3 18.9 (0.3) 12.8 15.9 24.8

Hedge Funds* HFRX Equity Hedge 1.7 3.4 (4.6) 0.1 3.2 7.2

Real Estate FTSE EPRA/NAREIT 6.2 20.4 (4.5) 2.9 9.8 20.9

Commodities S&P GSCI 13.4 9.0 (12.8) (5.7) 1.8 25.1

Private Equity** Thomson PEPI 16.0 (0.4) 5.2 2.8

Standard Deviation

Annualized Returns

12

Investors Continue to Flock to Bond Funds

Net Fund Flows By Asset Class, 12-Month Moving Average

As of 11/30/10. Sources: Investment Company Institute and Ned Davis Research

82 84 86 88 90 92 94 96 98 00 02 04 06 08 10-16

-4

0

4

16

36

$ B

ILL

ION

S

Equity Funds Bond Funds

13

Treasury Yields Hovering Near Historic Lows

As of 1/3/11. Source: Ned Davis

10-Year Constant Maturity Treasury Note Yields

PE

RC

EN

T

2

4

6

8

10

12

14

1983 1988 1993 1998 2003 2008

16

3.36%

14

S&P 500 vs. Barclays Capital Long-Term Treasury Bonds Relative 10-Year Total Returns

As of 12/31/10. Source: Ned Davis

Strong Relative Bond Performance Unlikely to RepeatP

ER

CE

NT

AG

E P

OIN

TS

Mean

-74.2%

-120

0

120

240

360

480

40 45 50 55 60 65 70 75 80 85 90 95 00 05

600

10

15

Core Inflation Slowing Dramatically INVESTORS FEAR DEFLATION

As of 11/30/10. Source: Bureau of Labor Statistics

Year-over-Year Percent Change in Consumer Price Index, Less Food and Energy

0.5

1.0

1.5

2.0

2.5

3.0

3.5

95 98 01 04 07 10

PE

RC

EN

T

16

17

Longer-term Concerns

Federal Budget, and as a Percentage of Gross Domestic Product

As of 11/4/10. Source: U.S. Treasury, Office of Management and Budget, Haver Analytics

-1,600

-1,200

-800

-400

0

400

70 74 78 82 86 90 94 98 02 06 10E

$ B

ILL

ION

S

-16

-12

-8

-4

0

4

PE

RC

EN

T

Federal Surplus/Deficit (Left Axis) Percent of GDP (Right Axis)

18

Hedging Against Future InflationINFLATION PROTECTION RELATIVELY INEXPENSIVE

Expected Inflation: Yield Difference between Nominal Treasury and TIPS

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

03 04 05 06 07 08 09 10

YIE

LD

(%

)

As of 12/31/10. Source: U.S. Treasury, Federal Reserve Board, Haver Analytics

19

70

80

90

100

110

IND

EX

Trade-Weighted Dollar

As of 12/31/10. Source: Bloomberg.

Avg = 97.5

Avg = 92.7

Avg = 90.3

Avg = 89.3

Avg = 85.9Avg = 83.0

2003 2004 2005 2006 2007 2008

The Dollar

Avg = 87.3

2009 2010

Avg = 83.8

20

-10

-5

0

5

10

UnitedStates

UnitedKingdom

Japan Euro Area Brazil Russia India China

PE

RC

EN

T

2008 2009 2010E 2011E

Real Gross Domestic Product (GDP)

As of 10/1/10. Sources: International Monetary Fund and BNY Mellon Wealth Management

Continued Strong Growth in Emerging Markets

21

-6.8

-4.9

-0.7

1.6

5.0

3.7

1.72.6 2.5

3.5

-8

-4

0

4

8

4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 2010E Full Year

2011E Full Year

PE

RC

EN

TU.S. GDP ForecastSLOW U.S. RECOVERY, BUT DOUBLE DIP RECESSION UNLIKELY

BNY Mellon Wealth Management GDP Estimates

Sources: 4Q08-3Q10: Bureau of Economic Analysis; 2010-2011: BNY Mellon Wealth Management

22

S&P 500 Operating Earnings Estimates CONSISTENT WITH SLOW GROWTH SCENARIO

82.54

49.51

56.86

90

80

0

25

50

75

100

2007 2008 2009 2010 Estimate 2011 Estimate

As of 11/30/10. Earnings represent trailing four-quarter earnings per share. Source: Standard & Poor’s and BNY Mellon Wealth Management

S&P 500 Earnings and BNY Mellon Wealth Management Estimates

$ D

OL

LA

RS

23

5

10

15

20

25

30

35

40

45

85 90 95 00 05 10

As of 12/31/10. Sources: Bloomberg and Baseline

Stock Market Valuation

S&P 500 P/E Ratio

Inverted 10-Year Treasury Yield

U.S. Equity Valuations SupportiveBUT INVESTORS NOT FOCUSED ON FUNDAMENTALS

24

S&P 500 Sector Current 2005 2000 1995

Information Technology 28.2% 26.5% 18.0% 14.2%

Health Care 15.9% 20.6% 14.8% 10.6%

Financials 14.1% 12.7% 11.2% 14.0%

S&P 500 12.8% 11.5% 8.8% 9.0%

Consumer Discretionary 10.1% 8.0% 4.0% 5.0%

Industrials 9.4% 4.1% 3.9% 3.4%

Materials 6.8% 7.3% 2.1% 4.0%

Consumer Staples 6.5% 6.7% 3.5% 4.0%

Energy 5.6% 9.1% 4.6% 4.2%

Utilities 3.0% 2.3% 2.4% 1.2%

Telecommunications 2.3% 3.4% 1.6% 1.6%

Cash as Percentage of Assets

As of 6/30/10. Source: StrategasRP

25

M&A Activity Improving CATALYST FOR IMPROVED MARKET SENTIMENT

Number and Value of U.S. M&A Deals, Quarterly

As of 12/31/10. Source: StrategasRP

0

50

100

150

200

250

300

350

400

98 99 00 01 02 03 04 05 06 07 08 09 10

0

100

200

300

400

500

600

$ B

ILL

ION

S

Number of Deals (Left Axis) Value of Deals (Right Axis)

26

Another Bull Market Run UnlikelyMORE HEADWINDS THAN TAILWINDS

Source: David Rosenberg. Gluskin Sheff + Associates Inc. and BNY Mellon Wealth Management.

20101982

Federal Funds Rate

Budget Deficit-to-GDP Ratio

Hsehold Dbt as % of Disp. Pers. Inc.

Inflation Rate

Savings Rate

Tax Rates (Highest Marginal)

10-Year Bond Yield

S&P 500 P/E Ratio (Trailing 1-Year)

Baby Boomer Population

Unemployment Rate

S&P 500 Dividend Yield

18% 0%

15% 3.4%

-3% -10%

62% 118%

10% 5%

25y 53y

10.8% 9.8%

69% 35%

6% 1.8%

8.0x 17.5x

10% 0%

27

MoreAttractiveAsset Class

LessAttractive

Asset Class Outlook

U.S. Large Cap Equities

International Developed Equities

Emerging Markets Equities

High Yield Bonds

Treasuries

Commodities

U.S. Small/Mid Cap Equities

Real Estate (REITs)

Municipal Bonds

Private Equity

Hedge Funds (Long/Short)

28

Recommended Balanced Portfolio Structure

*Limited to qualified investors only and where appropriate. As of 12/1/10.

U.S. Large Cap 21.1%

Long/Short Hedge* 7.3%

U.S. Small/Mid Cap 5.1% Managed Futures

3.7%

Fixed Income 30.0%

Commodities 1.2%Absolute Return

Hedge* 3.1%

Real Estate 2.0%

Private Equity* 7.5%

International 9.0%

Emerging Markets 10.0%

29

Strategic ArchitectureNEW INVESTMENT SOLUTIONS INTRODUCED IN THE LAST 2 YEARS

Date Introduced Solution

October 08 Municipal Opportunities

December 08 Diversified International

January 09 Inflation Adjusted Securities

March 09 Commodities

March 09 Small Cap Value Multi-Strategy

April 09 Focused Equity

September 09 Small/Mid Cap Strategy

December 09 Opportunistic Small Cap

January 10 Mezzanine Finance

January 10 Distressed Opportunities

March 10 Managed Futures

September 10 Tax-Sensitive Large Cap Multi-Strategy

September 10 Large Cap Market Opportunities

30

Fixed Income Sector Returns

-3.6

1.5

18.7

11.4

5.9

58.2

34.2

12.9

5.9 4.4

9.06.3 5.4

15.112.8

2.4

-10

0

10

20

30

40

50

60

70

Treasury Agency Corporate TIPS MBS High Yield EmergingMarket

MunicipalBond Index

PE

RC

EN

T

2009 2010

Selected Sector Returns

As of 12/31/10. Source: Barclays Capital

31

Corporate Spreads Down From Recent Highs

As of 12/31/10. Source: Barclays Capital

0

500

1,000

1,500

2,000

00 01 02 03 04 05 06 07 08 09 10

BA

SIS

PO

INT

S

U.S. Corporate High Yield U.S. Corporate Investment Grade

U.S. Corporate Bond Yield Spreads

32

80

120

160

200

240

Jan-07 Dec-07 Nov-08 Oct-09 Sep-10

PE

RC

EN

TMuni Yields as a Percentage of TreasuriesCREDIT AND SAFETY CONCERNS CAUSED SPREADS TO WIDEN DRAMATICALLY

AAA 30-Year Municipal Bond Yields as Percentage of 30-Year Treasury Yields

As of 12/31/10. Source: Bloomberg LP

33

9.1

11.7

15.9

26.1

2.0 2.1 2.23.8

0

5

10

15

20

25

30

AAA AA A BAA

PE

RC

EN

T

2009 2010

Credit Quality Returns

As of 12/31/10. Source: Barclays Capital

Municipal Credit Quality Returns OPPORTUNITIES FOR WELL RESEARCHED ISSUE SELECTION

34

BNY Mellon Wealth Management LARGE CAP EQUITY VS. S&P 500

0

5

10

15

20

25

Cons Dscr Cons Stpls Energy Finance HealthCare

Industrials Tech Materials Telec Utilities

PE

RC

EN

T

BNY Mellon Wealth Management Large Cap S&P 500

Sources: BNY Mellon Wealth Management and FactSet

Sector Weights as of 12/31/10

35

Correlations Likely to Remain Elevated

Daily data 4/20/72 - 12/31/10. Source: Ned Davis Research, Inc.

CO

RR

EL

AT

ION

Median 63-Day Correlation of S&P 500 Stocks to the S&P 500 Index

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

Mean

+1

+2

+3

-1

-2

36

• U.S. represents less than 1/2 of global market cap

• Potential for currency gains

• Valuations are reasonable

Globalization of Investments A Key Trend

As of 12/31/10. Source: Factset

MSCI World ex-

U.S.

U.S.

$12.7 trillion43%

$16.9 trillion57%

Total Capitalization of U.S. vs. Rest of World

37

Emerging Market Capitalizations

All years as of 12/31. Source: Factset

MSCI Emerging Markets vs. MSCI ACWI and ACWI ex-U.S.

0

4

8

12

16

2005 2006 2007 2008 2009 2010

$ T

RIL

LIO

NS

0%

10%

20%

30%

40%

50%

Emerging Markets Market Cap (Left axis)Percent of MSCI ACWI (Right axis)Percent of MSCI ACWI ex-U.S. (Right axis)

38

Private Equity Trends and OpportunitiesHIGHEST PERFORMANCE DURING AND FOLLOWING ECONOMIC DOWNTURNS

U.S. Private Equity Benchmark Statistics as of 3/31/10.Sources: Bureau of Economic Analysis, Federal Reserve Board, Cambridge Associates LLC

Private Equity Returns by Vintage Year vs. U.S. GDP Growth

0

5

10

15

20

25

30

35

86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

-4

-2

0

2

4

6

PO

OLE

D M

EA

N N

ET

IRR

BY

VIN

TA

GE

(%

)

YE

AR

-OV

ER

-YE

AR

U.S

. GD

P G

RO

WT

H (

%)

Recovery Years Other Years U.S. GDP Growth

Should be excellent vintage

years

NM NM NM NM

39

Opportunistic Private Equity Areas

0

150

300

450

600

2001 2002 2003 2004 2005 2006 2007 2008

High Yield and Leveraged Loan Market

Leveraged Loans High Yield

$BIL

LIO

NS

• $1.3 trillion in High Yield and Leveraged Loans set to mature by 2015

• Difficult financing and operational environment creates vast array of distressed opportunities Commercial and residential mortgage-backed securities Corporate debt Commercial loans Consumer debt

Distressed Assets Mezzanine Debt

• Opportunity in small and mid-market due to limited funding from traditional sources (banks, BDC’s & hedge funds)

• Seek equity-like returns with credit-like protection and enhanced position in capital structure

• Current environment provides Better structured security More stable underlying capital structure

Previous Current

Coupon 12% – 14% 14 % – 18%

Warrants Rarely Almost Always

Equity Participation Yes Yes

Equity / Debt 30% 40 – 50%

Debt / EBITDA 4.5x – 5.0x 3.5x – 4.0x

Source: Standard & Poors, Leveraged Loan Report, 2009 Source: BNYM-Alcentra and Internal Analysis

40

Preservation and Income

Inflation Protection

Capital Appreciation

Incremental Diversification

Enhanced Return

Objective-Driven InvestingMANAGING WEALTH TO SERVE BOTH LIFESTYLE AND WEALTH TRANSFER NEEDS

Wealth Preservation

Income Generation

Wealth Accumulation

Generational Transfer

Legacy Funding

Lifestyle Wealth Transfer

Total Portfolio

Lifestyle Portfolio

Wealth Transfer Portfolio

41

SLOW, SPORADIC GROWTH

POLICY HEADWINDS

CHANGED BELIEFS Multi-dimensional Recovery Challenges

A Challenging, Dynamic Landscape

Extreme Investing Environment

2010-2020: WHY THE MOST CRITICAL DECADE

FUNDAMENTAL CHANGES

The Most Critical Decade

42

Investment Innovation and Rigorous Discipline

Dynamic, Seamless Planning

A Different Quality of Client-Advisor Engagement

2010 to 2020: The Most Critical Decade