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Review & Outlook

Spring 2008

Investor's Update
The first quarter of the year was a difficult period for investors, characterized by slowing economic growth brought on by a slew of credit market losses and a rapid decline of liquidity. It also marked a substantial shift in monetary Update policy by the Federal Reserve to a focus on growth over inflation. As the deleveraging process accelerated through the quarter, consumers, businesses and investors were faced with a very challenging environment that featured a continued decline in home prices, higher commodity prices and generally falling asset valuations. It truly was a quarter wrought with volatility and few safe havens other than energy, precious metals and U.S. Treasury debt. Risk aversion was the dominant theme!

On a total return basis, the Dow Jones Industrial Average recorded a -7.0% return for the first three months of the year, while the S&P 500 declined 9.4% and the Nasdaq decreased in value -13.9%. According to mutual fund tracker Lipper Inc. diversified U.S. stock funds lost 10.1% on average. As poor as returns were domestically, global benchmarks generally fared worse. The 5-year and 10-year U.S. Treasury Bond increased in value 6.0%, respectively, highlighting the flight to quality. The Lehman Brothers Intermediate Government/Corporate Bond Index advanced 3.0%, while the slightly longer duration Lehman Brothers Aggregate Bond Index registered a positive 2.2%.

Economic Outlook
While financial institutions are in the process of reducing leverage and restoring badly impaired balance sheets, economic data continues to point to anemic economic growth at best. Recent data confirms slower consumer spending, a downturn in manufacturing and non-manufacturing activity, as well as softening in the labor markets. Clearly, the troubles that had been confined to the housing sector are now leaking into the broader economy with no quick fix in sight. Recent indicators also suggest that the economy started the first quarter on a soft tone and has weakened to a point that resulted in negative first quarter GDP growth. Our interpretation is that we are presently in a mild recession that will likely result in similar second quarter weakness.

The good news is the Fed has acted aggressively. The bad news is that monetary policy acts with a lag and while proposed fiscal measures will help, neither will fully resolve the credit driven asset bubble. The exercise of repricing riskand removing market excesses could run for a few more quarters resulting in a lackluster recovery period. Given the existing weakness and perceived downstream vulnerability, we believe authorities (both the Fed and the executive and legislative branches) will continue to pursue aggressive stimulative policies as we move forward. Remember, it is an election year!

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Capital Market Analysis
We believe it is critical to recognize the heightened level of risk in all asset classes. Thus we remain cautiously participatory with a focus towards further potential impairment to overall economic growth, corporate earnings and margins as well as general asset valuations. It is our belief that any sustained recovery in the economy or equity valuations must be preceeded by stabilization and a recovery in the credit markets. From a positive perspective, Treasury yields are attempting to begin a bottoming process that we feel is an absolute necessity if funds are to be reallocated to riskier assets. It does not seem reasonable to assume that stocks or other riskier assets can sustain an advance, on an intermediate-term basis, if U.S. Treasuries are pricing in more economic risk and credit dislocation. We caution, however, that this process could be weeks or months in the making.

While current conditions seem to favor some short-term upside potential for stocks (S&P 1370-1450 range), we do not see sufficient fundamental evidence to indicate that the intermediate-term downtrend has been totally exhausted, at this point. Unfortunately, we can envision significant economic hurdles that will continue to test consumer and investor confidence. From a technical analysis standpoint, the series of declining peaks and troughs in the major averages have also not been abrogated, which lends credence to treating each upturn with due caution. Experience tells us that the bottoming process can be very trying and rarely happens in a “V” shaped pattern. One characteristic of bear markets is strong counter-trend rallies that are followed by equally volatile downside action. We perceive a more prolonged “W” shaped or trading range pattern.

Summary
While the overall risk/reward scenario of many asset classes has improved, relative to 6 to 9 months ago, the underlying economy still faces an uncertain road ahead, even in light of further monetary and fiscal initiatives. No one can be certain how long the credit markets will be impaired or what the final tally of damage done to the economy will be. The bottom line is that it’s going to take time for credit conditions to return to normal. It seems prudent to us to reflect on how that scenario will or could impact the quality of corporate balance sheets and income statements relative to asset valuations. We believe the challenging earnings environment is likely to continue until later in the year.

We are beginning to see signs of a potential turnaround, but caution is still warranted while awaiting a durable bottom in the economy and the capital markets.

We appreciate the opportunity to serve you. Please do not hesitate to contact us if you have any questions or if we can be of any assistance

120 South Warner Road • P.O. Box 837 • Valley Forge, Pennsylvania 19482 • 610-687-6800 • FAX: 610-687-1848
One Righter Parkway • Suite 150 • Wilmington, DE 19803 • 302-478-2036 • FAX 302-478-3084