2009 Outlook The Bottom Line 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.