Experiential Wealth, Inc.
Experiential Wealth, Inc.
Experiential Wealth, Inc.

Quarterly Market Commentary – Q4 2008

Feb 3, 2009 | Individuals, Institutions, Plan Sponsors, Quarterly Commentary

On January 28, 2009, the Federal Open Market Committee (FOMC) released the following statement regarding theirposition:

The Federal Open Market Committee decided today to keep its target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.

Information received since the Committee met in December suggests that the economy has weakened further. Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending. Furthermore, global demand appears to be slowing significantly. Conditions in some financial markets have improved, in part reflecting government efforts to provide liquidity and strengthen financial institutions; nevertheless, credit conditions for households and firms remain extremely tight. The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.

In light of the declines in the prices of energy and other commodities in recent months and the prospects for considerable economic slack, the Committee expects that inflation pressures will remain subdued in coming quarters. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee’s policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve’s balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve’s balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability.

2008 was a year where the unimaginable became real and the unthinkable became history. The speed of the collapse of Wall Street and the magnitude of the subprime-deleveraging-credit crisis are truly unprecedented. We hope the worst is behind us but I submit that for the general economy, we have a lot more pain to endure. Our concern is about 2009 and possibly 2010. Since the current US recession started at the end of 2007, the protracted and expanded slowdown has added significant downward pressure to the already collapsing real estate market and troubled bankingand financial sectors. The old saying goes that high tide covers everyone and when the tide recedes we see who are naked on the beach. Even though signs were there in 2007 and early 2008 that the world is over leveraged and real estate prices in many parts of the world were at unsustainable levels,everyone wanted the party to continue. Insiders were hoping for a gradual slowdown in the US economy with little impact to other economies. The idea was that globalization has matured to a point where economies were decoupled from the US;China and India would continue to be the factory to the world and normal trade will continue with other developed and emerging markets.

Allowing Lehman Brothers to fail on September 15, 2008, was the cataclysmic event that stopped the financial world from turning. This single episode accelerated the deleveraging process and brought into question every borrower’s ability to repay their debt. Investors went from seeking returns at any risk to an abandonment of risk en masse. In times of extreme uncertainty and fear, investors sold good and bad assets indiscriminatelyand sought the safest investments available – US Treasuries. Hoarding cash is the logical approach when all else fails. The post mortem effects of Lehman continue to be felt globally with significant collateral damage worldwide. The credit market froze and liquidity disappeared. The entire worldwide financial system was on the verge of collapse. The borrowing costs shot up dramatically even among banks (LIBOR). If credit is the blood to the system, trust is the glue that binds the system together. We have witnessed the cessation of credit and the lost of trust. The magnitude of the collapse on top of theongoing subprime and real estate debacle and a slowing global economy ignited a domino effect that ultimately brought down investment and commercial banks. The negative feedback loop is in full force, and we continue to experience its fallout. Every part of the financial sector is being negatively affected. Although the focus has been on the commercial and investment banking sectors, the pain is being spread to life and property insurers and all financial intermediaries.

According to the Federal Reserve Board Beige Book Report released January 14th, the US economic activity continues to weaken across all districts and the retail sales during the holiday season were generally negative. Manufacturing and services sectors also continue to fall. The broad-based slowdown again confirms the breadth of the current recession. In fact, the US economy experienced its worst slowdown in 26 years in the final quarter of 2008. The gross domestic product (GDP) fell at an annual rate of 3.8%, adjusted for inflation after a 0.5% decline in the prior quarter. We believe that the economic contraction will continue for the rest of this year. Consumer spending fell at a 3.5% annual rate which was the seventh biggest drop on record. Spending on big-ticket durable goods plunged at a 22% pace, the largest decline since 1987. Since consumer spending accounts for more than two-thirds of overall economic activity in the US, this is a sign of a further slowdown. For a while in 2008, economic activities showed some signs of resilience due to strong exports. With the synchronized global recession, this last bit of support has vanished. Fixed investment in equipment and software, an indication of business spending, plunged at an annual 28% rate. That’s the biggest drop in 50 years. We now have a case of excess capacity and inventory.

The Department of Labor announced that since it began keeping records in 1976, this is the first time that all 50 states and the District of Columbia recorded unemployment rate increases compared with the previous month and the year prior period. Since the beginning of this year, US companies have announced job cuts of 227,229 as of the end of January. The national unemployment rate rose to 7.2% in December, up from 6.8% the previous month and from 4.9% a year earlier. Nearly 2.6 million jobs were lost during 2008, the highest yearly total since 1945. The estimates for unemployment continue to be revised upward and some economists are predicting a 10% or more unemployment rate before this is all over. 2009 may see another 2 million job lost according to the Conference Board.

In a cascading manner, even healthy sectors of the economy are beginning to show signs of strain with credit worthiness eroding. The negative feedback loop of bad economic conditions generating more bad economic effects is contributing to deflation forces. Although most do not predict a spiraling deflation for the US, the odds have certainly increased. A little deflation may be good for the consumer where there is a general lowering of prices for goods and services, but a spiraling deflation is the worst of all worlds where economic activities cease since consumers hoard cash and wait for even cheaper prices before buying.

During the bubble years in a low interest rate environment and a world awashed in liquidity, property appreciation created the “wealth effect” for homeowners. Much of the GDP growth was attributable to the easy access to home equity. Government policies and financial institutions promoted and enabled an era of real estate frenzy which led to overconfidence, abuses and fraud. This epitomizes the “bigger fool theory” where a home buyer purchased real estate at any price believing that it can subsequently be sold at an even higher price to someone else. Lenders, brokers, appraisers were all in on the act, convinced that no one would lose in an ever increasing real estate market, even for those buyers who could not even afford the first payment. The current mess was ignited by the subprime debacle and led to a downward spiral in the residential real estate market. The S&P Case-Shiller Home Price Index, a sampling of 20 cities from across the nation, peaked in mid-2006 and is now lower than when the index first kept scores in February 2004. The index has fallen for 28 consecutive months. The U.S. Census Bureau reported that new home sales fell to an annual, seasonally adjusted rate of 331,000 in December. That’s down 14.7% from a revised 388,000 annual rate in November. This is the lowest level on record since1963. Without a stabilization of the residential real estate market, the American psyche, thus the economy, cannot have a sustainable recovery.

Subprime loan ($1.9 trillion from 2004 through 2007) has been the poster child for the US led toxic asset influenza globally. Option ARM mortgages are a serious contender. $750 billion of option adjustment-rate mortgages were generated from 2004 to 2007. These loans were made to borrowers with higher credit scores than sub-prime and applied with minimum documentation on borrower’s income and assets. Since borrowers decided on the amount of monthly payment they made, many only paid the absolute minimum amount which is sometimes less than the monthly interest. This creates a negative amortization environment where the borrower owes more with each passing day. To compound this unsustainable situation is the continuing depreciation of home prices. The combination of these two factors coupled with more job losses to the economy will encourage more defaults.

Residential real estate loan is not the only problem in the credit market contributing to the banking crisis. According to Goldman Sachs’ estimate, total “troubled” assets could be as high as $5 trillion where “troubled” means assets could show a loss rate of more than 10%. Although much attention has been paid to personal loans and credit, loan delinquencies are now hitting the commercial real estate sector. Initially confined to smaller and remote markets, now delinquencies are showing up in primary and secondary markets with retail and hotel properties struggling. In the wake of cutbacks by business and leisure travelers alike, US hotels this month are expected to post their 15th consecutive month of declining occupancy, longer even than their 12-month losing streak after the Sept. 11, 2001, terrorist attacks. The slowdown in the domestic lodging industry is escalating to crisis level. The cutback by business and leisure travelers and the slowdown in visitors to the US due to a strengthening dollar, have all contributed to 15 consecutive months of declining occupancy in hotels. This is the largest decline in per room revenue since 9/11. With over $250 billion in cumulative mortgages outstanding, this economically sensitive sector will continue to see escalating loan defaults and add pressure to the current liquidity and credit crisis.

The commercial real estate market has been somewhat immune to the credit crisis since there was less speculation in this sector of the market. However with the precipitous drop in the US economy, the downward pressure on prices is hitting office rent with effective rents falling in 65 out of the 79 major markets according to Reis, Inc., a New York real-estate research firm. Prices of securities tied to commercial mortgages have fallen quickly during the 4th quarter of 2008. They now reflect a downturn greater than the early 1990s when default rates exceeded 30%. The $3.4 trillion of commercial mortgages is small when compared with the $11.2 trillion of residential-mortgage debt outstanding, but it is still significant with its full impact not yet felt by lenders. Bank and thrift hold almost 50% of all commercial real estate mortgages outstanding. This sector could well be the next big problem for mortgage holders and lenders.

From 1975 to 2007 the economic output in this country has increased eight folds while the volume of debt has jumped 20 times. The total debt-to-GDP went from 155% to 355% with private debts increasing three times faster than the economy as a whole and fast enough to take the ratio of private debt to GDP from 117% to 303%. In more recent years, the “shadow” banking system became dominant where non-banks such as private equity funds, investment banks, hedge funds, structured investment vehicles (SIVs), and financial engineered products and schemes (derivatives) became the alternative or even the preferred lenders. This group of banking alternatives used leverage to an excess and fueled the credit and financial bubble. The bubble is sustainable only during extremely favorable economic conditions. The increasing leverage heightened vulnerability of the global financial system. To bring the system back to equilibrium requires time and the restoration of trust and liquidity. As long as asset prices continue to fall (real estate and financial institutions), the restoration process cannot begin. Assets that securitize credit card debts, auto loans, home mortgages, lines of credit, municipal bonds and commercial real estate debts must stabilize before the recovery process can take hold. We would be less skeptical of the government’s extraordinary efforts if we were confident that the injection of capital is to directly stabilize asset prices.

The easy credits and the sustained low interest rate environment of the last few years have made leverage the default answer to all questions. Now with credit evaporating and deleveraging in full force, the government is the only entity that has a deep enough pocket (i.e. print enough money) to save us all. The Federal Reserve is holding a zero percent interest rate position and is considering buying US treasuries on the open market to drop long term rates lower. The problem with these actions is that if banks are holding on to their cash reserve to rebuild their balance sheets and the private sector is going through the worst recession since the Great Depression, no one is borrowing even at these attractive rates. President Bush on February 13, 2008, signed the Economic Stimulus Act of 2008, calling it a “booster shot” for the American economy in an effort to prevent the economy to go from a slowdown to a recession. The $152 billion package (about1% of GDP) paid $600 to most individual taxpayers and $1,200 to married taxpayers filing joint returns, so long as they are below income caps of $75,000 for individuals and $150,000 for couples. There is also a $300 per child tax credit. There were two palpable effects that came from the package: it propped up the GDP slightly for one quarter and gave Walmart a good quarterly profit. Otherwise, it was too little and too late. Since then, we have seen massive amount of commitments, guarantees and investments made to our financial system. This is a process of deleveraging private sector by leveraging up the public sector. Exhibit A shows a list of allocated and spent dollars from the US government since December 2007 as compiled by CNN. We have spent $3 trillion, and we still have a long way to go.

At the end of January, the House passed a new $819 billion stimulus package that is supported by the Obama Administration.The package, voted on along strict party lines, includes three segments: a $365.6 billion spending measure for infrastructure projects such as roads and bridges; a $180 billion to boost unemployment benefits and Medicaid; and a $275 billion tax-relief package, which includes a plan to give a $500 payroll tax holiday to all workers. The Senate has its own version of the bill. When and if the two houses agree to a final bill and the president signs it into law, the Congressional Budget Office expects government borrowing to enact the plan that would add another $347 billion, pushing the estimated cost of the stimulus plan to more than $1 trillion, including interest. If the bill is to turn the economy around or intends to get the unemployment figures to turn the corner, I am afraid that it would do neither. The package is laden with special interests and the infrastructure projects are long term projects that will have little impact on the current recession and unemployment. As far as tax cuts and rebates are concerned, Americans are not looking to spend the savings. This is a repeat of the Bush stimulus package last year. The reality is that the government has proven its willingness to throw as much money at the current challenges and hope that the some of the measures will bring positive results. We are not optimistic in the short run.

After spending the first $350 billion of the TARP fund, the Administration is ready to deploy the remaining $350 billion. The total $700 billion seems to be insufficient by all estimates to “save” the banks. The idea of an “aggregator” bank or “bad” bank is under serious consideration. Many banks carry on their books “toxic” assets which are either depreciating or with unascertainable value. The banks have been reluctantly holding on to these assets since there are little to no buyers. As a result, the banks are required to write down the value of these assets on their books which undermines their capital structure and lowers earnings. By establishing a “bad bank,” the government would essentially buy up those assets to get them off the balance sheets of the nation’s largest institutions, along with the guarantee against future losses on other assets. This would theoretically strengthen bank balance sheets and promote stability and much needed lending. The problem with this approach is that the trouble with the shadow banking sector remains unattended. We expect more bank and other institutional failures and bankruptcies to come in 2009. The term “nationalization” is also being introduced to the national dialog. Depending on how the myriad of new government programs are working, it is likely that one or more of our largest financial institutions will be nationalized. This was certainly unthinkable a year ago, but it may be the only way to stop the bleeding. This will truly be the new chapter in our financial history and speaks volumes about the sorry state of our financial affairs today. Banks will be run more like a utility company than a financial enterprise. The “socialization” of our private institutions may be the only way to get us out of this mess but we are also concerned that once the government is in our business, there will be many unintended consequences. Just be careful what we wish for.

The International Monetary Fund again revised its projection for world growth downwardand painted a sobering picture:

The world economy is facing a deep downturn.

Global growth in 2009 is expected to fall to ½ percent when measured in terms of purchasing power parity and to turn negative when measured in terms of market exchange rates. This represents a downward revision of about 1¾ percentage point from the November 2008 WEO Update. Helped by continued efforts to ease credit strains as well as expansionary fiscal and monetary policies, the global economy is projected to experience a gradual recovery in 2010, with growth picking up to 3 percent. However, the outlook is highly uncertain, and the timing and pace of the recovery depend critically on strong policy actions.

Financial markets remain under stress.

Financial market conditions have remained extremely difficult for a longer period than envisaged in the November 2008 WEO Update, despite wide-ranging policy measures to provide additional capital and reduce credit risks. Since end-October, in advanced economies, spreads in funding markets have only gradually narrowed despite government guarantees, and those in many credit markets remain close to their peaks. In emerging economies, despite some recent moderation, sovereign and corporate spreads are still elevated. As economic prospects have deteriorated, equity markets in both advanced and emerging economies have made little or no gains. Currency markets have been volatile.

Financial markets are expected to remain strained during 2009. In the advanced economies, market conditions will likely continue to be difficult until forceful policy actions are implemented to restructure the financial sector, resolve the uncertainty about losses, and break the adverse feedback loop with the slowing real economy. In emerging economies, financing conditions will likely remain acute for some time—especially for corporate sectors that have very high rollover requirements.

Less than a year ago, the world was concerned about inflation with commodities going nowhere but up, but with a 75% reversal in oil prices from their July peak and significant economic slowdowns globally, as a result of the credit and liquidity crisis, the US consumer price index (CPI) dropped 0.7% in December on a seasonally adjusted basis compared to the previous month. This is the fifth drop in a row. CPI rose just 0.1% when compared to December 2007, and for the year, the CPI rose 1.8% compared to 4.1% in 2007. The global economic contraction has eliminated the short term threat of inflation. As the inflation threat subsides, the deflation threat is increasing. The question is whether the current disinflation environment under a global recession will linger long enough to become a broad based and sustained deflationary environment. The general consensus is that sustained deflation or a depression remains unlikely.

After falling off a cliff in the last quarter of 2008, the global economy will feel the full force of a recession in 2009 and will not likely begin to recover until 2010. Factories are closing, unemployment is rising, and economic activities are contracting. Developing and emerging economies that have rode the wave of commodity prices such as Russia and Brazil are further more affected. Governments and central banks all across the world have and will continue to take accommodative measures. Long and short term interest rates will continue to trend downward along with significant injections of capital into every economy with a sizable portion going into infrastructure projects. Capital infusion into each economy takes time to translate into economic revival as the global credit and liquidity crisis is still being played out. The combination of toxic asset write down and continuing deleveraging among the largest global institutions is also affecting their willingness to be lenders and investors in emerging markets. Furthermore, investors are repatriating their investments to their home countries further stresses emerging markets. Many economies are fragile and many economic sectors are on the tipping point. It remains worrisome that the downside risks are outweighing the upside. In many ways we are unwinding the globalization of the last 10 years and the danger is the rise of financial and trade protectionism. Retreating from globalization through “buy America” by erecting trade walls around us may make us feel good for a while, but if other countries are also doing the same, it will choke off world trade and significantly dampen global economic activities. As we look inward to solve our own economic challenges by throwing trillions of tax payer dollars into the economy we should also take the long view of what is in the best interest of this country in the future.

I have been reading “The Black Swan: The Impact of the Highly Improbable” book by Professor Nassim Nicholas Taleb. Taleb suggests that randomness has always been around us and most of the time we explain it away or eliminate it from being considered. Such is the case for a black swan,for example, since everyone defines a swan as white and never considered the possibility of a black swan. It is through randomness comes uncertainty and extreme risk because we are less prepared. As the financial debacle unfolds, people are constantly shocked and surprised by the collapse and the collateral damage that is seeping through every corner of our economy and the world. We all operate in varying degrees of blindness and prejudice and select data and information that fit our own world view of the past and future, even though history repeats itself but seldom repeats exactly. Now looking back at 2008, everything seems to make sense and orderly, but why could we not have anticipated this a year ago? Are we all that much smarter or more informed today? We don’t like randomness and unpredictability and tend to discount them for primal reasons. But the world is full of randomness and unpredictability is, in reality, the norm.

The world economies may have 12 to 18 more months more of recession pain and we do not see it turning around in 2009. However, the stock market is considered a leading indicator and has historically begun to recover 6 to 9 months before the real economy turns the corner. There will be months that we will retest the stock market lows of last year with serious volatility. Investors will exaggerate the market ups and downs from euphoria and hope to capitulation and fear. With each major financial injection approved by lawmakers comes hope and joy in the market and as reality sinks in that the current financial problems are much greater than any single stimulus, investors retreat. In 2008 over $1 trillion has been wiped out of the 401(k) market alone and countless trillions lost globally. There has never been a better time for investors to assess their tolerance for risk with honesty and objectivity. It is easier to retreat and stay in cash and consider lessons learned than to subsequently regretting the decision. On the other hand simply using the buy, hold and hope equity strategy will not produce the desired result.

Countless headlines and articles have been written about the failure of diversification in 2008 with a cataclysmic event asset correlation becoming 1 on the downside (i.e. the benefit of diversification is lost and all assets lost value at once).The use of commodities and other alternative asset classes to broaden the benefit of diversification did fail. However, diversification is hardly dead. Exhibit B lists the performance of a number of indexes for 2008. By simply allocating one’s portfolio among US stocks, bonds and cash, the benefit of diversification would be realized. Until someone invents a failsafe crystal ball, diversification is our only hope to guard against future investment failures.

EXHIBIT A– Economy Rescue: Adding Up the Dollars



The government is engaged in an unprecedented – and expensive – effort to rescue the economy. Here are all the elements of the bailouts.

Date Bailout Allocated Spent
December-07 Term Auction Facility $2 trillion $2 trillion
February-08 Economic Stimulus Act of 2008 $168 billion $168 billion
March-08 Bear Stearns Bailout $29 billion $29 billion
March-08 Discount Window n/a $99.8 billion
May-08 Student Loan Guarantees $9 billion unknown
September-08 Fannie Mae and Freddie Mac Bailout $200 billion $13.8 billion
September-08 Foreign Exchange Dollar Swaps Unlimited n/a
October-08 FHA Housing Rescue $320 billion unknown
October-08 Auto Industry Energy Efficiency Loans $25 billion $0
October-08 Troubled Asset Relief Program $700 billion $276.3 billion
October-08 Money Market Guarantees $659 billion unknown
October-08 Commercial Paper Funding Facility $1.4 trillion $334.7 billion
November-08 Unemployment Benefit Extensions $8 billion $8 billion
November-08 AIG $152.5 billion $125.9 billion
November-08 Citigroup Loan-Loss Backstop $301 billion $0
November-08 Term Asset-Backed Securities Loan Facility $200 billion $0
November-08 GSE Mortgage-Backed Securities Purchases $500 billion $5.6 billion
November-08 GSE Debt Purchases $100 billion $24.2 billion
November-08 FDIC Temporary Liquidity Guarantee Program Unlimited $220 billion
June-05 FDIC Bank Takeovers $16.7 billion $16.7 billion
January-09 Bank of America Loan-Loss Backstop $118 billion $0
January-09 Credit Union Deposit Insurance Guarantees $80 billion $0
January-09 US Central Federal Credit Union Capital Injection $1 billion $0
January-09 FDIC Bank Takeovers $469.1 million $469.1 million
Total: $7.8 trillion $3.3 trillion

EXHIBIT B – 2008 Index Returns

Fixed Income Indexes
BarCap (LB) US Aggregate 4.58% 5.34%
BarCap (LB) Global Aggregate (US$) 5.25% 4.79%
BarCap US Corporate high Yield -17.88% -26.16%
Equity Indexes – US
Wilshire 5000 -22.93% -37.34%
S&P 500 Total Return (Inc Div) -21.94% -37.00%
S&P 500/Citigroup Pure Growth (TR) -24.56% -38.99%
S&P 500/Citigroup Pure Value (TR) -30.84% -47.87%
S&P 400 -25.99% -37.28%
S&P 600 -25.49% -31.99%
Equity Indexes – Foreign
MSCI EAFE -20.33% -45.09%
MSCI World ex US -22.74% -47.07%
MSCI Emerging Markets -27.94% -54.48%
Commodity Indexes
S&P Precious Metals 3.29% 0.03%
S&P Livestock -18.88% -27.07%
S&P Agriculture -27.95% -28.80%
S&P Goldman Sachs Commodity Index -53.59% -46.48%
S&P Industrial Metals -50.80% -49.72%
S&P Energy -60.80% -52.32%
S&P Crude Oil -63.89% -55.46%
MSCI Index – 24 Countries 3Mo. YTD
JAPAN -9.090% -30.520%
SWITZERLAND -13.330% -31.570%
USA -22.820% -38.580%
SPAIN -18.090% -42.970%
FRANCE -20.960% -44.920%
CANADA -33.590% -46.590%
GERMANY -20.880% -47.240%
DENMARK -28.150% -48.150%
SINGAPORE -27.160% -49.550%
NETHERLANDS -23.180% -50.090%
UNITED KINGDOM -27.110% -50.560%
SWEDEN -25.080% -51.440%
ITALY -23.450% -52.100%
AUSTRALIA -27.400% -52.300%
HONG KONG -19.580% -52.880%
PORTUGAL -21.280% -53.650%
NORDIC COUNTRIES -26.860% -54.770%
NEW ZEALAND -24.690% -56.220%
FINLAND -20.140% -56.430%
NORWAY -40.720% -65.220%
GREECE -41.410% -67.070%
BELGIUM -37.120% -67.480%
AUSTRIA -43.260% -68.960%
IRELAND -40.360% -72.740%
S&P 500 Sector Performance QTD YTD
Consumer Staples -13.54% -17.66%
Health Care -12.72% -24.48%
Utilities -11.94% -31.55%
Telecommunications Services -2.86% -33.62%
Consumer Discretionary -23.43% -34.73%
Energy -21.05% -35.93%
Industrials -24.66% -41.52%
Information Technology -25.99% -43.68%
Materials -31.43% -47.05%
Financials -37.64% -56.95%

EXHIBIT C – Mutual-Fund Yardsticks:

Fund category performance as of Dec. 31. Total return includes capital appreciation and reinvested distributions. Returns shown for periods of one year or less are cumulative. Three-year, five-year and 10-year returns are annualized.

Large-Cap Core Funds 1.59 -21.99 -37.23 -8.99 -2.88 -1.72
Large-Cap Growth Funds 1.76 -23.25 -40.70 -10.48 -3.72 -2.92
Large-Cap Value Funds 2.15 -21.72 -37.36 -8.83 -1.91 0.51
Mid-Cap Core Funds 4.53 -25.09 -38.53 -9.61 -1.32 3.79
Mid-Cap Growth Funds 2.65 -26.97 -44.49 -11.15 -2.63 0.14
Mid-Cap Value Funds 4.81 -24.96 -38.26 -10.37 -1.04 5.04
Small-Cap Core Funds 5.40 -25.95 -36.21 -10.06 -1.52 4.36
Small-Cap Growth Funds 4.83 -26.59 -42.11 -11.49 -3.81 1.02
Small-Cap Value Funds 5.26 -25.94 -33.45 -9.59 -0.90 5.41
Multi-Cap Core Funds 2.77 -22.94 -38.79 -9.66 -2.61 0.82
Multi-Cap Growth Funds 2.60 -24.02 -41.90 -10.33 -2.65 -1.30
Multi-Cap Value Funds 3.12 -22.53 -38.16 -10.14 -2.11 1.83
Equity Income Funds 2.10 -19.53 -33.77 -6.69 -0.73 1.08
S&P 500 Funds 1.03 -22.03 -37.29 -8.82 -2.68 -1.85
Specialty Diversified Equity 2.94 -11.85 -16.37 -0.67 2.57 2.28
Balanced Funds 3.11 -14.37 -26.85 -5.01 -0.62 1.04
Stock/Bond Blend Funds 3.54 -15.55 -28.22 -5.17 -0.39 1.51
All USDE Funds 3.13 -23.83 -38.73 -9.85 -2.40 0.58
Science & Technology Funds 3.28 -24.54 -44.71 -12.12 -5.16 -4.12
Telecommunication Funds 2.72 -22.50 -48.33 -12.57 -4.07 -6.57
Health/Biotechnology Funds 6.69 -15.30 -22.99 -4.53 1.06 3.85
Utility Funds 0.71 -13.45 -33.53 -0.20 6.89 2.96
Natural Resources Funds -5.31 -35.45 -47.83 -7.06 8.39 9.28
Sector Funds 8.84 -30.79 -38.81 -13.89 -2.95 4.02
Real Estate Funds 15.64 -38.71 -39.92 -12.83 -0.67 6.82
Financial Services Funds 0.45 -28.20 -43.84 -18.46 -9.62 -1.08
Global Stock Funds 4.76 -21.72 -41.26 -8.25 -0.48 0.88
International Stock Funds 7.03 -21.27 -44.24 -7.73 1.27 1.73
European Region Funds 6.03 -23.23 -46.97 -7.47 1.67 2.42
Emerging Markets Funds 6.71 -29.91 -55.47 -6.77 6.04 9.16
Latin American Funds 4.18 -39.47 -57.33 -1.71 15.13 12.98
Pacific Region Funds 10.26 -17.15 -45.94 -3.72 3.24 6.13
Gold Oriented Funds 24.08 -5.44 -28.17 3.77 5.71 13.86
Short-Term Bond Funds 1.23 -2.20 -5.03 0.73 1.18 3.34
Long-Term Bond Funds 4.18 -1.41 -7.26 0.10 1.40 3.70
Intermediate Bond Funds 3.53 -0.28 -4.47 1.04 1.72 4.05
Intermediate U.S. Funds 4.50 -0.77 -0.14 3.33 3.80 5.04
Short-Term U.S. Funds 1.35 2.06 4.13 4.58 3.19 4.13
Long-Term U.S. Funds 4.56 7.54 9.30 5.65 4.54 4.89
General U.S. Taxable Funds 4.20 -0.94 -5.64 1.85 3.53 5.08
High Yield Taxable Funds 4.47 -18.36 -26.19 -6.48 -1.79 1.20
Mortgage Funds 1.39 0.87 1.25 3.49 3.20 4.44
World Bond Funds 6.43 -2.78 -6.47 2.18 3.28 6.24
All Taxable Bond Funds 3.09 -4.30 -7.73 0.15 1.45 3.50
Short-Term Muni Funds 0.05 -0.35 -0.03 1.92 1.80 2.92
Intermediate Muni Funds 0.85 0.48 -1.31 1.70 1.83 3.28
General Muni Funds -0.47 -4.12 -9.09 -1.44 0.53 2.44
Single-State Municipal Funds -0.21 -2.98 -7.04 -0.16 1.12 2.84
High Yield Municipal Funds -7.37 -18.31 -25.11 -8.02 -2.48 0.57
Insured Muni Funds 1.13 -0.56 -6.16 -0.18 1.10 2.89
Dow Jones IndDlyReinv -0.39 -18.39 -31.93 -4.09 -1.12 1.66
S & P 500 Daily Reinv 1.06 -21.94 -37.00 -8.36 -2.19 -1.38
S & P Midcap 400 IX Tr 4.85 -25.55 -36.23 -8.76 -0.08 4.46
Russell 2000 IX Tr 5.80 -26.12 -33.79 -8.29 -0.93 3.02
Dow Jones US Tot Mkt Tr 1.76 -22.60 -37.16 -8.35 -1.72 -0.87
Russell 3000 IX Tr 1.91 -22.78 -37.31 -8.63 -1.95 -0.80
Dow Jones US GrwthTr Ix 1.22 -25.21 -40.09 -9.83 -3.68 -5.43
Dow Jones US Value Tr Ix 1.44 -19.96 -34.43 -7.11 -0.30 1.70
Barclay Muni Bond TRIX 1.46 0.74 -2.47 1.86 2.71 4.26
Barclay US Agg TRIX 3.73 4.58 5.24 5.51 4.65 5.63
MSCI EAFE IX ID 5.92 -20.33 -45.09 -9.69 -0.81 -1.26
Dow Jones World Ex US Tr 6.06 -21.61 -44.40 -7.18 2.67 2.47
S&P Sm Cap 600 TR IX 6.10 -25.17 -31.07 -7.51 0.88 5.18
T-Bill 3 Month Index Tr unch. 0.08 1.40 3.48 2.97 3.16
Dow Jones Corp BdTr Ix 8.29 7.78 1.80 3.60 3.66 5.59