Waiting for the Turn

Sitting on the fence, waiting for the turn in macro economic indicators will disappoint and leave opportunity on the table. Rising correlations show investors are ignoring relative values among industries and assets, rather reacting to day-to-day signals on the economy. It is more likely that deflation and low growth will be the environment into the second half of the year, underscoring the need to diversify assets from a traditional long equity and bond portfolio.

Opportunities exist in right sized industries and companies and across asset classes. For companies that downsized, the benefits of incremental sales falling to the bottom line EPS have been borne out in Q2:10 earnings results. Indeed, the S&P 500 has rebounded 7.8% since July 2 despite weak economic data as corporate earnings have been stronger than analysts estimated on marginally higher revenues. With 53.4% of the S&P 500 reported, operating margins are 9.7% and could set a record. The record margin was 9.6% set in Q3,’06.

With over two thirds of companies reported Q2, EPS beat forecast by 10.2% while sales grew only 1.4% over estimates. While bears will point to no growth, 73.4% of companies have nonetheless beaten their sales estimate. In analyzing the data, non-Financials increased sales 5.2% over Q1,'10 (looking for momentum in the recovery). The Technology sector lead by companies like Intel and Apple standout as leading in positive revenue and EPS upside. Only companies in Health Care, Consumer Discretionary, and Financials have lowered forecasts. Financials revenues were down 7.3% from Q1,'10 estimates.

The result for rationalized companies can be positive longer-term, as they achieve greater efficiencies and production capacities fall better in line with actual demand. Thus we continue to see resiliency for the right sized companies.

With S&P 500 companies at record cash rich levels with close to $1 trillion, equity selection will be key for quality companies that will grow dividends and repurchase stock. The 5-year T-bill yields 1.75% versus average yield on the S&P 500 of 2.14% is favorable with a call option on growth as witnessed in Q2. Dividend payers have outperformed YTD and expect the hunt for yield to drive further performance in H2:10.

Dividend Performance:	S&P 500 Payers	S&P 500 Non-payers
June - average change	-5.91%	-7.30%
YTD	-2.90%	-4.41%
12 Month	25.58%	26.98%
Issues	368	132

Aside from equities, investment opportunities also lie in credits where the companies have already gone through a restructuring/business rationalization process and therefore seem better prepared for the growth, albeit slow, prospects which lie ahead.

Both investment grade and High Yield corporate debt seem particularly attractive given the wide spreads to T-Bills, the fact that credit markets are opening for new issuance and default rates are predicted to decline to 2% to 4% in 2010/2011.

While we cannot predict economic or market moves month-to-month or even year-to-year, we do seek to identify the key long-term forces that will be driving economies and markets worldwide. We expect that volatility will remain high with growth, inflation remaining low and the FED on hold for sometime.

As a result, equity valuations may not move back to pre-crisis levels and may stay below historic norms. Thus our investors must seek a diversity of investments – our 8-Cylinder Portfolios – that assures to the greatest extent possible exposure to whatever areas of the market “are working” at any time, and handle the volatility via both long and short exposures and are not dependent on market gains for gains in their portfolios.

Looking ahead, we believe that uncertainty may be appropriate, but the fear trade to be overdone. The outlook is rarely clear, exacerbated by governmental programs and redefinition of the economic landscape. But, we remain confident in the CoreStates 8-Cylinder approach to navigate that volatility with opportunities that will meet the long-term financial goals of our clients.

The Big Bounce UP... From What Looked Like the Bottomless Pit!

US stock indexes are some 25% higher than on January 1, and more than 60% above their March lows. Some technology sectors are up nearly 60% year-to-date, having more than doubled from their March lows.

Similarly, industrial metals are advancing strongly, and precious metals are hitting all-time highs. Even good quality corporate bonds have gained some 20% year-to-date while high yield indexes are up more than 50%.

Obviously, these markets are reflecting burgeoning confidence in economic recovery. TARP, the stimulus package, buyer incentives for homes and autos, and the Federal Reserve’s persistence in keeping interest rates low are having an impact!

...the yellow flag is out!

In fact, they’re having a dual impact. First, they appear to be helping pull us out of recession. Home sales have turned around, industrial capacity utilization is improving, and the unemployment rate has ticked down for the first time in several months.

These are the hoped-for results, and are certainly part of what is being reflected in the investment markets. But, it’s the unintended consequences that may be having the greatest impact, pushing not just stocks, but also bonds, precious metals and other assets to what can only be called inflated levels. And, not just in our domestic markets. Investors worldwide are doing exactly what should be expected from such governmental largesse, whether or not it is what those governments intended.

How the game is played.

And, what, exactly, is it that investors are doing? It’s merely the latest version of the “carry trade.”
1. They borrow (dollars in this instance) at the near-zero interest rates set by the Federal Reserve,
2. They use those borrowed dollars to invest in assets that appear undervalued, or at least capable of being bid up in price, and
3. They ultimately sell the assets, hopefully at sizeable gains, and repay the loans with “cheaper” dollars that are almost certain to have resulted from the ballooning Federal deficits.


Where does this leave investors like us here at CoreStates? We choose not to play this game. We never subject our clients to the risks of this form of “borrowing short and investing long,” having seen far too often (most recently in housing) how asset prices can suddenly drop when interest rates begin to rise and the throngs of debt-burdened “carry-traders” all stampede for the exits. But, we do have to deal with the volatile markets these traders help create with their high-risk games.

Our strategies in today’s environment of increasingly inflated prices are intended to participate in a good portion of any continuing run-up in asset prices, but to gradually lighten exposures as prices inflate. This investment approach is almost certain to mean that, unlike the extremely favorable performance we have been able to deliver through the market recovery to date, our clients may not fully participate in the latter stages of such an extreme market advance, but nor will they be fully exposed to the risks of a market collapse.

The way we look at it, the possibility of realizing modestly lagging returns if asset prices continue to inflate is simply the price that must be paid to assure better preservation of values when the bubble eventually bursts. And, this is the best way we know to fulfill our commitment to clients – to protect their lifestyles and preserve their legacies for as long as their investment assets are under our care.
We wish everyone a wonderful Holiday Season, and a safe and secure New Year!


The information provided above reflects the viewpoint of Corestates Capital Advisors, LLC and is subject to change. This article was prepared for general informational purposes only, without respect to the investment objectives, financial profile, or risk tolerance of any specific person or entity who may receive it.

CoreStates 2009 3Q Review & Outlook

At CoreStates, a foundational belief is in the unpredictability of the future. Few would argue with this simple truth. Yet, few in the financial services industry honor this fact in the design of their services to clients. Most, in fact, tout their ability to predict the future as a key reason to entrust your assets to their supervision and management (and fees).

At the current time – three-quarters of the way through 2009 – we would ask these companies and their clients, “So, how is this working out for you?”
Many, we suspect, would lament the fact that they became net sellers of stocks during the first quarter decline to the March lows, then stood by as stocks gained 15% to 30% through the second quarter and repeated that performance in the third quarter.

Now, as the fourth quarter begins and they still struggle to predict the next quarter’s market moves, they look around and see:

1. The increasingly euphoric outlook of stock investors, who have driven domestic and international markets to valuation levels well above their historical averages,
2. The serious fears of the gold bugs as most “safe haven” precious metals are hitting record high prices, and
3. The self-contradictory actions of bond investors as interest rate levels and inflation expectations reflect serious economic concerns, while shrinking interest rate spreads on lower quality bonds indicate increasing confidence in economic recovery.
   

As these conflicting market actions indicate, the current investment outlook is highly uncertain. This is very unusual – not that the future is highly uncertain, but that investors as a group (though still not individually) are recognizing this fact and reflecting it in their investment activities.

And, it is why we do what we do:

• We don’t attempt to predict economic or market moves month-to-month or even year-to-year. But, we do seek to identify the key long-term forces that will be driving economies and markets worldwide via our 20/20 Global Vision.

• And, we provide our investors with a diversity of investments – our 8-Cylinder Portfolios – that assures to the greatest extent possible exposure to whatever areas of the market “are working” at any time, including both long and short exposures so they aren’t dependent on market gains for gains in their portfolios.

Looking ahead, we believe the great uncertainty reflected in current investment markets is appropriate. The outlook has rarely if ever been this clouded by changing international economic forces and domestic governmental redefinition of the economic landscape. But, we remain confident in the CoreStates approach and fully expect to continue providing our clients with services and results that move them toward their long-term financial objectives and life goals.

Stocks For the Long Term? Why Bother?

Stocks got pummeled in 2008 and early 2009. Although most markets have since shown good recovery, the message lingers – stock returns are much more volatile in the short-term and much less dependable over the long-term than most investors were led to believe.

In fact, as 2009 began, the average annual return from stocks over the entire preceding decade was negative (S&P 500 average annual return -1.36%) – a loss! For the same 10-year period, “no risk” US Treasury Bills provided a 3.16% average annual return. And, long-term Treasurys led them both with a 6.59% return (all figures courtesy of Ibbotson).

Now, as 2009 comes to a close and stocks have rebounded some 60% from their March lows, astute investors are wondering if investing in equities is worth the agony. Why don’t we just cash out what’s left of our stock portfolios and settle for the 3% to 6% returns provided by bills and bonds?

Our answer – we would if they (bills and bonds) could. But, regrettably, the confluence of factors that allowed bonds to provide this level of returns over the last decade, actually the last few decades, is highly unlikely to occur in the coming decade. The environment is more likely to be just the opposite.

It’s different this time . . . really.

The return earned on a bond portfolio consists primarily of the interest payments received on the bonds – the portfolio “yield.” The level of yield is determined by the types and quality of bonds owned in the portfolio, and by market interest rate levels prevailing when the bonds are bought – initially and ongoing as interest payments and proceeds of maturities are reinvested. A much smaller but still important component of a bond portfolio’s return is any change in price of the bonds owned – the “appreciation or depreciation.”

To understand why bonds aren’t likely to provide the level of returns of the last few decades, consider the current state of each of the factors noted above.

1. Beginning market yields – The level of interest rates at the time a bond portfolio is initially assembled is the primary factor in determining a portfolio’s ultimate return, at least through the first several years. And, as this table shows, we’re starting from much lower levels than 10, 20 or 30 years ago.

Interest Rate Levels – United States Federal Reserve

2. Direction of change in market yields – The above table also shows that market rates have been steadily declining. This means yields on existing managed portfolios would have steadily declined as interest payments and proceeds of bond maturities were reinvested at ever-lower rates over this period. Over the last several years, this made bond portfolio returns decline relative to their beginning yield levels. And, with interest rates now virtually at half-century lows, most bond portfolios’ yields should continue to decline until market interest rates begin to rise.

3. Current or ending market yields – Market values of bonds vary to reflect changes in the general level of interest rates. If market rates are generally lower than when a bond portfolio was initially purchased, the bonds’ prices will have gone up, and vice versa. (This might sound backwards, but think of it this way – declines in available yields make bonds bought earlier at higher yields more valuable, and vice versa.) So, looking back over the last few decades, bond investors have benefitted greatly from price appreciation as interest rates steadily declined. Going forward, with rates already near zero, such declines are simply not possible (unless our bankers decide to pay borrowers to take their money, which, we suppose, may not be all that unreasonable to expect now that the government is running the banks!).

4. Types of bonds in the portfolio – The final factor influencing bond portfolio returns is the composition of the bonds in the portfolios. Managers can increase yields by investing in lower quality, longer maturity, and more price volatile bonds. In recent months, however, the additional returns to be gained by such increases in risk have shrunk dramatically. And, should such spreads widen again, the bonds could suffer significant price depreciation, more than offsetting the riskier bonds’ initial modestly higher yields.

So, what of stocks?

Even if bonds can’t be expected to do as well as in the past, can stocks be expected to do better? We think so, based on a similar evaluation of their yield and appreciation prospects. The S&P 500 currently provides a dividend yield (which for most investors is taxed more favorably than interest income) in excess of 2%. Many individual stocks of sound companies provide twice this level of yield or more.

As for appreciation prospects, stocks represent ownership in their underlying economy, and history has shown that as that economy grows, the economic value of stocks generally grows at a similar or greater rate. The 3.5% US GDP growth reported for the third quarter of 2009 may falter in the coming quarters, but should average at least 3% over the next few years. The resulting 5+% theoretical return is twice the current yield of the highest quality bonds.

In regard to valuations, the S&P 500 at 1100 is trading at approximately 15 times current annual earnings of the underlying companies. Said differently, stockholders currently earn back about 1/15th of the cost of the index annually. So, the “earnings yield” of the index is currently 1/15 or 6.7%. And, that’s before any growth in earnings in the years ahead.

To us at CoreStates, these measures qualify stocks as a worthy investment – with this core return expectation in excess of 5%, current earnings return of 6.7%, and good prospects for additional return from increasing earnings and expansion of valuations as the world economy stabilizes and growth resumes its historical patterns. Bonds also have a role in many portfolios, but a reduced role relative to that of the last few decades given their much-reduced future return prospects.

But, the key to investment success for 21st century investors will be to diversify well beyond these two traditional asset classes, carefully select managers capable of taking both long and short positions, and actively manage allocations among the several asset classes based on relative evaluations of the type summarized here for stocks and bonds. Our 8-Cylinder portfolio engine, SCORE manager evaluation process, and 20/20 Global Vision asset allocation perspectives are designed to provide our clients with exactly these capabilities.

They are the foundation of our overarching commitment to clients – to protect their lifestyles and preserve their legacies throughout their investing lifetimes.

Our favorite allocation as of November 17th, 2009:

Stocks 45% Bonds 25% Cash 5% Real Estate 5% Currency 8% Energy 2% Gold & PM 2% Managed Futures 8%

CoreStates Economic Survey

Last quarter, we sent out an email inviting all CoreStates clients to participate in an Economic Survey. We asked you to go to our website and give us your opinion on several important segments of our economy. We asked if you thought these key economic indicators would increase, decrease or remain unchanged over the next six months. Here are the results from a terrific cross-section of our client base. Thank you everyone who participated.



66% of the respondents felt that the stock market would improve over the next six months, while 80% thought oil prices would increase. 64% of respondents think the unemployment rate will increase with 42% seeing lower home values. 58% are predicting higher inflation most likely led by the cost of medical insurance (78%), increased government spending (86%) and the declining value of the dollar. 56% of those surveyed think the income taxes will increase over the next six months. 51% think that the consumer confidence will improve and 39% believe the automobile sales will increase.

We hope that you will compare your responses to those individuals who participated in the survey. Keep in mind this is not a scientific survey. We just wanted to provide a forum for people to tell us what they thought. Please look for more investor surveys in future newsletters. We greatly appreciate your involvement in making CoreStates a special place.

CoreStates 2009 Q2 Review & Outlook

The April through June period saw stocks continue their bounce from early-March lows. By quarter’s end, the advance had begun to falter, but not before adding another 12% of gains for the Dow Industrials, cutting their year-to-date decline to about -2%. International developed economies saw their markets advance some 15% (MSCI EAFE) and reach a year-to-date positive return of about 3%.

Encouraging as these numbers are, even they don’t fully represent the resurgence of investor enthusiasm as the quarter’s economic measures began to indicate a moderation in the rate of national and worldwide economic decline. This growing perception led to sharp rebounds in the more speculative areas of the markets, with small capitalization US stocks (Russell 2000) advancing nearly 21% and reaching positive territory for the year. The NASDAQ gained 20%, bringing its year-to-date gain to over 16%. Emerging nations’ stock markets were even stronger, averaging gains of 25% for the quarter and year-to-date. The dollar also reflected the moderation of concerns for the US economy, adding another 10% to the returns of the average US investor in foreign markets.

Improving economic prospects were also noted by bond investors, as were the heightened prospects for inflation resulting from the burgeoning Federal deficits. This served to elevate yields on the 10-year Treasury from 3% at the beginning of the quarter to about 3.5%. Other areas of the bond market generally benefitted from diminishing credit quality concerns, offsetting the modest rise in interest rates on Treasury securities and holding yields generally steady.

Commodities prices also reflected growing investor confidence in recovery and fears of inflation, as broad commodities indexes advanced in the area of 15% for the quarter. Crude oil led the way, gaining more than 40% in a May-June surge from $52 to $72 per barrel. Precious metals also moved higher with gold, for instance, gaining nearly 7%.

So, is the perfect economic storm finally weakening and clear sailing ahead? We at CoreStates believe the worst of the financial crisis is over, but we see three areas of likely investor misperceptions. We believe investors are early with their enthusiasm for economic recovery, are probably equally early regarding their fears of imminent, rapidly increasing inflation, but are also too sanguine regarding the longer term implications of the sea change taking place in the core of our economic system.

In our view, a slower-than-expected recovery is likely to produce at least a few months of disappointing economic measures near term, which should also defer the inevitable inflationary effects of current fiscal and monetary policies. These countervailing factors should keep most markets quite volatile, but largely within their recent trading ranges. The greater concern for prudent investors is the eventual impact of the massive increase in the role of the Federal government in our economy, and the reduced incentives to the private sector from ever-higher taxes on our most productive enterprises and individuals and ever-broader social programs for the less productive. And, this is before the impact of a national health plan, vast changes in social security, or the remaking of our public educational system.

Our governmental structure was designed with several checks and balances, a key one of which is the requirement for a 60% majority in the Senate to be assured of passing key legislation. The expectation of our founding fathers was that, to reach this level, legislation would have to be tempered by a wide cross-section of political viewpoints. Today’s Democrat super-majority, led by a President many consider the most anti-business in our history, creates a level of uncertainty for investors that is unprecedented. Although we maintain our long-held belief that it is unwise to bet against the resilience of the US economy, we also believe it is imperative in the current environment to spread those bets widely, maintain a sizeable cushion of liquidity, and be prepared to react decisively as our new economic reality takes shape.

Financial Pain Relief

The following may surprise you. But it's true.

A recent national survey found that the two primary concerns for individuals over the age of 45 are their health and their wealth. But, that's not the surprise.

The same survey discovered that although we do give a lot of thought and attention to our health, the same cannot be said of our other primary area of concern. Most people spend more time planning a vacation than planning for their lifetime financial security.

And, that's not the only difference. If we have a persistent health problem, we often seek a second medical opinion. But, even when facing serious financial security challenges, few of us bother to get a second opinion regarding our financial goals and how we hope to reach those goals.

So, ask yourself, "If I am willing to get a second opinion for a serious health issue, doesn't it make sense to get a second opinion for my serious wealth challenges?"

Of course it does. A second opinion will either validate your existing strategies or provide other possible remedies to consider. Either way you can't lose. It's a win-win situation.

I would welcome the opportunity to tell you how easy and painless our "second opinion process" can be. And best of all, it will cost you nothing . . . other than a little time spent thinking about one of the most important aspects of your life.

I look forward to helping you understand how easy and painless our "second opinion process" can be. Best of all, it won't cost you anything but a little time.

-Bill Spiropoulos
President & CEO
CoreStates Capital Advisors

Take Off Your Blindfolds! It's NOT Pin the tail on the Donkey!

Never before in the post-war era have U. S. investors had to deal with a crippled financial system, such monumental depth and breadth of change, and a pervasive uncertainty about the future. And, never in any modern era have we had to do so while also experiencing the waning of our nation’s global economic power, international prestige, and internal potential for future growth.

Even more importantly, never before have U. S. investors had to deal with the kind of investment markets produced by this new economic environment – investment markets that lack the underpinnings of a consistently growing and increasingly productive economic base. In this previously unknown environment, most investors will be essentially investing blind.


The reasons behind the gradual dissipation of the foundational substance of our nation and economy are many, varied, and controversial. So, I will leave the explanations and evaluations of the causes (e. g., the opinions) to the political pundits and economic editorialists.

The more important issue is this: What can investors do to protect their lifestyles and preserve their economic legacies in this extremely hostile financial environment?

At CoreStates Capital Advisors, we have been pondering this question since well before the severe market erosion began. Our approaches will continue to develop and evolve, of course, but the following are some of the key concepts, strategies and tactics we have been implementing for our clients in our pursuit of investment success in this new environment.

21st Century Diversification
The four-cylinder portfolios (stocks, bonds real estate and cash) of the 1980s gave way to the eight cylinders (adding energy, precious metals, commodities and currencies) of the 1990s, but success in the 21st century will require all of this, plus the ability to be long or short in each category, and with manager discretion within each of the categories to move among style boxes, or even to abandon the style box concept for a more opportunistic approach.

Emphasis on Liquidity
An investment’s returns become “real” only when the investment is sold. Until then, they are only on paper. But, when sold, the return is locked in. So, it is critically important never to be forced to sell an investment, especially a highly priced volatile investment, at an inopportune time. The only way to achieve this is by maintaining enough liquidity in price-stable form or in truly uncorrelated assets to meet any scheduled or unscheduled cash needs.

Dynamic Allocations
The days of fixed allocations . . . never really existed. Going forward, dynamic allocations will become even more important as most markets see their historically upward bias diminish or even reverse, making all markets into trading markets and generously rewarding those investors able to capitalize on their inherently higher volatility.

End of Indexing
The days of buy-and-hold investing are also over. Active security selection will be more important than ever as increasing global competition as well as the mounting geopolitical challenges make the generation of corporate earnings increasingly difficult. In a flat-to-declining overall economy, “par” corporate performance will be insufficient to provide attractive returns to shareholders or even to maintain long-term credit quality. We must invest accordingly.

Focus on quality and valuation
The easy investment approach for the coming years will be to focus on quality . . . and settle for near-zero nominal returns in a potentially high-inflation environment. True growth of purchasing power will be achieved only by correctly evaluating investment quality and being willing to trade among quality levels based on their current relative valuations.

Polar Portfolio Positioning
Implement all of the above points and you are likely to find yourself with a “polar” portfolio – one consisting primarily of some very high quality, liquid assets and some very cheap, but rather speculative, exposures. Middling opportunities are likely to provide piddling returns as most investors seek to improve on low risk, low return investments by edging up the risk spectrum, thereby bidding up prices and diminishing their returns.

Importance of Judgment
Investing driven by historically based, “black box” models becomes less and less effective as the future becomes less and less like the past. The sea change in our worldwide investment landscape is rendering not only past models ineffective, but weakens the very concept of historically based investment models. The next generation of quantitative market analysis will require a higher level of investor behavior-based sophistication, as well as a very influential overlay of superior investment judgment.

Commitment to Patience
A more volatile, changeable market demands a more resolute, patient investor. Returns are certain to be erratic. Extreme market moves will be more common. Directionless markets will become the norm. Periods of steady, positive returns will be extremely rare.

We at CoreStates have no legacy investment styles that we must maintain. Our product is building client portfolios in whatever way we believe will be most effective in the years ahead. This gives us the freedom to truly serve our clients’ needs as those needs, and the market’s nature, change over time.

To us, this is the only way to do business.

2009 Outlook

2009 Outlook The Bottom LineAt CoreStates remain positive about the ability of the U. S. and international investment markets to provide patient investors with favorable, inflation-beating, long-term returns. But, we also believe the changing priorities of our government and of other administrations worldwide can make our future economic prospects decidedly less favorable than they have been. The following points highlight what we see for 2009 in the major areas pertinent to investors.

Economy – The global downturn will continue, and is likely to worsen through 2009 and possibly much longer as governments and financial institutions worldwide attempt to limit its severity at the expense of extending its duration. U. S. unemployment will rise well above 7% and production will decline markedly as businesses attempt to align their output with shrinking demand.

Inflation – The widespread actions of governments and financial institutions to support over-extended borrowers with additional borrowings will eventually foster inflation. But, through 2009 at least, it will be moderated by the deflationary effects of the downturn.

Bond markets – Fixed income investors will be increasingly tempted by these government and corporate actions to focus not on the financial health and economic prospects of issuers, but on their perceived economic importance and political strength. It will encourage increased risk-taking by sophisticated, unregulated investors, while driving other investors further into the lowest risk, lowest potential return investments.

Global stock markets – Equities will remain extremely volatile as investors’ hopes for economic recovery are periodically inflated then dashed by economic reports, geopolitical events, and governmental actions. We expect disappointments and new areas of concern to exceed positive surprises, leading to further stock market declines before year-end.

Real Estate – Weakness will moderate in both commercial and residential markets as governmental efforts to increase demand and dampen the growing supply of properties for sale.

Energy and Materials – Efforts by producing nations to curtail output will put a floor under prices, but will be insufficient to push prices sharply higher in the face of continued recession-related declines in global demand this year.

Agricultural commodities – Demand growth in developing economies will continue to support prices in all areas other than current biofuel crops where the accelerating development of alternative biofuel sources is likely to depress prices.

Precious Metals – Weakness in industrial demand will be more than offset by investors’ increasing desire for safe, universally honored, “hard” assets.

Currencies – Efforts by investors and commercial users of the currency markets to discern the relative prospects for the G8 and developing economies will keep these markets volatile week-to-week and month-to-month, but largely trendless from the beginning to the end of 2009. We believe the U.S. Dollar will remain stable during the global crisis and economic downturn. The Dollar remains the reserve currency of choice for now.

External Market Influences – Difficult economic conditions around the globe coupled with a new administration in Washington and a plethora of geopolitical confrontations are certain to produce worrisome incidents throughout the year. Investment markets will react accordingly, with risk premiums remaining high and the lowest risk investments moving to even higher valuations.

Our Recommendations:
Diversification, which provided only limited protection in 2008, will be more important in 2009. We expect the greatest success with “bar bell” allocations – those consisting primarily of some very safe, highly liquid investments together with a modest but growing exposure to carefully selected higher risk assets. This mix, if well managed, should provide returns significantly in excess of a portfolio of all asset classes equally weighted.

Trading will become more important in the volatile but range-bound markets we expect. Buy-and-hold returns in most asset classes will be largely disappointing.

Patience will be required throughout the year, although limited market rallies will provide occasional encouragement.

Volatile but generally trendless markets (as described) appear most likely, but the precarious nature of global economies and geopolitics creates the possibility of sudden large moves in either direction reaching extreme levels that could persist for an extended period. So, although we never expect to fully capture any such surprise moves, we will remain vigilant and ready to reallocate our portfolios as we deem prudent in response to the expected rapidly changing environment.

CoreStates Strategies:
The best long-term investment purchases are made when others are selling, when fear is greatest, when the outlook is most bleak. The current environment certainly fits this description. But, we expect this gloom to gradually (though erratically) dissipate over the next several quarters. We intend to capitalize on this by carefully managing but generally retaining our current allocations, but also doing some strategic buying – scaling our higher-than-usual cash positions into attractively valued U. S. and foreign equities and alternative assets. Selling will continue in the shortest-term Treasury securities, which have been inflated in price by the global flight to quality. Generic fixed income investment holdings will continue to be minimal, preferring the bar bell portfolio described above to capitalize on the expected gradually improving market environment.