New Opportunities: Rediscovering Purpose

Our privileges can be no greater than our obligations. The protection of our rights can endure no longer than the performance of our responsibilities.

- John F. Kennedy

IntroductionExecutive Summary

• We seem to be in a Socialistic Phase of capitalism…similar to that of the 30’s or 70’s. Big Government to the rescue....we believe this phase began at the turn of the century with the Dot Com bust, the subsequent uncovering of corporate malfeasance, and the demand for greater oversight. The Property Bubble and subsequent Bank and Economic fallout provided a platform to further the socialistic agenda.

• The Global Financial System is recovering from a near meltdown scenario, and remains quite fragile. Government aid has largely been repaid and banks are repairing their balance sheets. Future regulation is uncertain, but the Administration’s regulatory focus bridges the gap between Glass Steagall and the fully integrated banks of today.

• The FED acted as Lender of Last resort in the recent crisis and the key issue going forward is the removal of monetary stimulus from the system. We believe this will begin with the gradual reduction of the FED’s balance sheet.

• It appears that Fiscal Stimulus has succeeded in moving some growth into more recent quarters, however, it is difficult to ascertain whether and long term benefit will result from the Government’s actions. Regardless, U.S. and Global economic activity is accelerating and it would appear that the recovery began late in the 2nd quarter.

• Due to the abundance of liquidity and the growing middle class of many emerging countries Global trade is rapidly improving. It appears as though the expansion will continue throughout 2010, but the jobless rate is likely to remain high and growth, particularly in the U.S., may be somewhat muted. This is primarily due to headwinds brought about by weak constructions spending, real estate fall out, and a retruenching U.S. consumer.

• The likely result of the massive amount of Fiscal and Monetary intervention is a weak dollar and rising inflation.

• Ultimately, we believe that Capitalism will prove resurgent in the U.S. as our citizens realize that “Bigger” government is not the ultimate solution and that the free enterprise system provides the best form of capital allocation.

Laying the Groundwork2000-2007

• The Asset Bubble of the Late 90’s

• Consumer Led Recession of 2001

• Market Crash– Leads to Asset Flow to Leverage

Real Estate Assets

• Slow “Jobless” Recovery

Laying the Groundwork2000-2007

• Modest Economic Expansion

• Market Improvement

• Significant Corporate Profit Growth

• Low Volatility across all asset classes– Declining Risk Premiums– Increasing Leverage

Laying the Groundwork2000-2007

• Synchronized Global Expansion

• Leveraged Real Estate Speculation

• Inflationary Pressure

• Commodity Boom

• Rising Interest Rates– FED began raising interest rates in 25BPS increments in

June of ’04 and ended in June of ’06 at 5.25%

The Crisis Begins Early 2007

Weakening RE Market

Defaults on Subprime Mortgages

Investors Begin Exit

Weak Performance

Questions Regarding CDO’s(Collateralized Debt Obligations)

Illiquidity led to further Declines

Performance Plummets

Credit Standards Tighten

Credit Crunch

Early StagesLate 2007

• Rising Interest Rates Lead to Defaults and Initial Liquidity Crisis in August of ’07

• Fed Reacts Strongly

• Market Rallies

• Corporate Profits Rise

• Global Expansion Continues

Early StagesFirst Half 2008

• Defaults Mount and Mark to Market Accounting begins to affect Bank Stocks

• Fed Intervenes in January with unscheduled cut of 75BPS

• Auction Rate Preferred Fiasco

• Bear Stearns “Run on the Bank” Treasury engineers Takeover

• Market Rallies

Tipping Point2nd Half 2008

• Fear Mounts regarding solvency of Global Banking System and Mortgage Backed Securities

• FED and Treasury Intervene

• Fannie Mae & Freddie Mac essentially nationalized

• AIG essentially nationalized

• Lehman Arbitrarily allowed to fail to avoid claims surrounding “Moral Hazard”

Tipping Point2nd Half 2008

• Bank Lending Freezes– Global Liquidity dries up

• Crisis spills dramatically into Global Economy

• Stock Market Collapses

• FED, Treasury, and Congress Intervene

• All Major Investment Banking Firms Merge or Become Bank Holding Companies

The Bottom BeginsLate 2008

• Global Economy in deep recession

• Global Banking community extremely fragile

• Extreme Pessimism

• Stock Market Crash

The Bottoming ProcessLiquidity Dries Up

The Impact of the Financial Sector Credit Crunch

The Bottoming ProcessHoarding

Banks Will not Lend – Confidence Must be Restored

The Financial Sector Update

• Winners:– Goldman Sachs

– Morgan Stanley

– JP Morgan Chase

– Wells Fargo – Bank of America

The Financial Sector Update

• FDIC Insurance 250k through 2010

• FED Three year corporate debt Backing

• New Equity Issuance

• New Debt Issuance

• Steep Yield Curve

• Massive Reserve Build – up

• TARP Paydown

Government Intervention

– FDIC Temporary Liquidity Guarantee Program (guaranteeing newly issued senior unsecured debt of banks, thrifts, and certain holding companies)

– FDIC expansion of deposit guarantee to $250K from $100K

– American Recovery and Reinvestment Act 2009 (tax cuts, spending programs)

– Making Home Affordable Program (refi for 5 million homeowners and $75 billion loan mod program for those facing foreclosure)

– Capital Purchase Program (Treasury invests in preferred equity securities issued by qualified financial institutions)

– Asset Guarantee Program for Citibank and BofA

– Public-Private Investment Program (Treasury/FDIC/Fed program to support legacy assets)

– Automotive Industry Financing Program (loans and equity investments for GM, GMAC, Chrysler, and Chrysler Financial)

– Cash for Clunkers

– First-time homebuyers tax credit

The FED Intervention

FEDBalance

Sheet

2,273.7

Securities Held

Outright\1906.0

Term Auction Credit 75.9

Other Loans84.8

Treasuries776.6

Agencies160.8

Agency MortgageBacked968.6

DiscountWindow

15.9

Primary DealerCredit Facility

ABCPMMF

Liquidity Facility

AIG22.3

Term Asset-Backed

Securities Lending

46.6

Commercial Paper

Funding Facility

14.1

Maiden Lane LLC26.7

Maiden Lane II

LLC15.4

Maiden Lane III

LLC22.4

AIA Aurora ALICO

HoldingsLLC25.1

Central Bank

Liquidity Swaps

5.9

Other Federal Assets98.6

The Recovery

• Between 1854 and 2001– 32 business cycles

• Averages– Recession 17 month duration

– Expansion 38 month duration

– Cycle 55 month duration

» National Bureau of Economic Research

The Recovery

• Monetary Stimulus in full swing

• Quantitative Easing By the FED

• Central Bank Cooperation

• Fiscal Stimulus

The Recovery

The Recovery

The Recovery

• We believe the Recovery began late in the 2nd quarter.

• The ISM Index has been rising for nearly 12 months

• Global Manufacturing is improving

• Global Trade is improving

• Home Prices seem to have bottomed

The Recovery

• Consumer Confidence and Sentiment have improved

• Unemployment is bottoming out; we expect it to base in the first quarter

• Inventory Rebuild is beginning

• Corporate Profits are improving

The Recovery

Indicator THEN

1-08

NOW

1-09

POS/NEG

Industrial Production

-5.1 0.8 Pos

ISM 32.9 55.9 Pos

Real Trade Deficit -52.2 -38 Pos

Real GDP -2.6 2.2 Pos

Consumer Confidence

52.9 38.6 Pos

Real Consumer Spending

0.8* 0.2 Neg

Non-Farm Payrolls

-347 -85 Pos

Unemployment Rate

7.4 10 Neg

The Recovery

Unemployment Rate 1948 – 2009Current rate -10.0%

Highest Post WWII Rate 10.8% in 1982….Great Depression Unemployment approx 25%

The Recovery

Long Run GDP

The Recovery

US Population Growth Still Increasing – Echo Boomers on the way

The Recovery

Unemployment is generally a lagging indicator while Manufacturing is a leading indicator of expansion

The Recovery

The Fed has a dual mandate of price stability and full employment: What do they generally focus on?

The Recovery

• Most Likely Scenario– Economy pulled out of recession in mid 2009 and the new

expansion has begun. Moderate growth with relatively high unemployment should be expected for 2010.

• Negative Scenarios– Central Banks unable to stabilize banking system, stimulus

fails and banks refuse to lend…Economic Decline and Stagnation are likely result – Low Growth Potential Deflation

– Central Bank activity coupled with Government stimulus results in massive inflation, growth is choked out and asset values eventually plummet when the system fails

Strategic Market OutlookSummary

• Markets rallied dramatically off the March 9th Low

• The S&P 500 is up over 70% from its low and over 26% in 2009

• Due to a resumption of the decline in the dollar International Equities outperformed domestic equities.

• Emerging Markets were up approximately 75% in 2009

• Treasury bonds performed poorly as investors moved to riskier assets

• Spreads Tightened - High Yield and Investment Grade Corporate bonds rallied along with equities

Strategic Market OutlookSummary

• Profits Rebounded in 3rd & 4th quarters of ‘09

• Corporate Balance sheets strong and Corporate Funding Gap remains negative

• Extreme Growth Value Divergence

• REIT’s went from extremely undervalued to fairly valued, or perhaps overvalued

• Hedge Fund Improvement

• Diversification proved beneficial

• Summary for 2009 – A rising tide lifts all boats

Strategic Market OutlookProjections

Firm Strategist 2010 Close 2010 EPS

Bank of America David Bianco 1275 73

Bank of Montreal Ben Joyce 71

Barclays Barry Knapp 1120 66

Citigroup Tobias Levkovich 1150 72.5

Credit Suisse Andrew Garthwaite 1125 76

Deutsche Bank Binky Chada 1260 77.8

Goldman Sachs David Kostin 1250 76

JP Morgan Thomas Lee 1300 80

Morgan Stanley Jason Todd 70

Oppenheimer Brian Belski 1300 70

RBC Myles Zyblock 1200 72

UBS Thomas Doerflinger 1250 80

Mean 1223 $73.69

Median 1250 $72.75

High 1300 $80.00

Low 1120 $66.00

Strategic Market OutlookValuation

• Corporate Profits are improving• Earnings Expectations have been

sharply cut and do not seem to be fully reflecting economic potential

• Market Prices are reasonable on a forward looking basis– P/E = 15

– P/B = 2.0 – 2.5

– Yield = 2%

Mistiming the Market Can HaveSerious Consequences

Investment Period Average Annual Total Return

Fully Invested (20 years) 10.9%

Minus 5 Best Days 9.3%

Minus 15 Best Days 6.9%

Minus 25 Best Days 5.0%

Study Conducted: 6/30/1986 to 6/30/2006Source: Ned Davis Research and Oppenheimer Funds 6/30/06

Average Investor Returns are Low

Annualized Returns – 1986 through 2007

8.62%

4.54%4.31%

11.3%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Stocks Bonds Inflation Investors

Source: Dalbar QAIB 2007 Study, IbbotsonStocks=S&P 500, Bonds=Long-Term Government Bond IndexInflation=Treasury Bills, Investor=Average Equity Fund Investor,

3.68%

Gold

Strategic Market OutlookEcon Pro’s

• Economic Fundamentals improving

• ISM Manufacturing Moving Higher for nearly 12 months

• Global Manufacturing Indexes improving

• TARP Payback – Banking Improvement

• 4th Quarter GDP likely to be above 4%

• Recession Likely Ended late in 2nd quarter or early 3rd quarter

Strategic Market OutlookEcon Con’s

• Consumer Retrenching

• “New Normal”

• Banking Fragility

• Weak Global Demand

• Trade War – Tariff Issues

• Monetary Stimulus – Quantitative Easing

• Deflation

Strategic Market OutlookEcon Forecast

• Econ Probability

– Deflationary Meltdown < 20%

– Slow Growth Expansion 40-50%

– Inflationary Bust/Stagflation > 30%

Strategic Market OutlookPortfolio Impact

• Favor Stocks relative to Bonds

• ∆ High Yield Bonds Particularly Attractive

• ∆ Overweight International Exposure

• ∆ Hold Emerging Markets Exposure at target levels

• Retain Small Cap Exposure at Target Weight

• Hedge Funds Retain at Target Weight

• ∆ Retain REIT exposure at Target Levels

• Overweight Large Cap

• Favor Growth to Value across all asset classes

• ∆ Cash yields to remain low – favor short duration, high grade, corporate bond exposure .

• Begin Reviewing TIPS as fixed income alternative and/or cash alternative

• Commodity Trading accounts remain attractive

Disclosures

Financial Advisory Consultants DBA/Cornerstone Management Inc. is aRegistered Investment Advisory Firm. Although the information in this reporthas been obtained from sources that the Firm believes to be reliable, we do notguarantee its accuracy, and any such information may be incomplete orcondensed. All opinions included in this report constitute the Firm’s judgment as of the date of this report and are subject to change without notice. Thisreport is for informational purposes only and is not intended as an offer orsolicitation with respect to the purchase or sale of any security. This presentation may only be dispensed with the disclosure page attached.