1. Client Name Market Analysis / First Quarter 2009

2. 1Q 09 2 Losses Continued in the First Quarter of 2009 Concerns about the damage to the financial system, mounting job losses, and sharp declines in corporate earnings sent stocks to new lows by the second week in March Stocks have rallied since, but still finished the first quarter with double-digit losses (though a continued rally has brought them close to breakeven for the year by mid April) High-yield bonds had the best quarter of the asset classes we follow, while REITs had the worst Market Analysis 1Q09

3. 1Q 09 Asset Class Returns Past performance may not be indicative of future returns. 3 Market Analysis 1Q09 Asset Class 1st Qtr. 2009 12 Months 5 Years (Ann.) Russell 1000 Value iShare (Domestic Large-Cap Value)-16.7%-42.3%-5.0% Russell 1000 Growth iShare (Domestic Larger-Cap Growth)-4.2%-34.3%-4.5% Vanguard 500 Index (Domestic Larger-Cap Blend)-11.0%-38.1%-4.9% Russell 2000 Value iShare (Domestic Smaller-Cap Value)-19.6%-38.7%-5.4% Russell 2000 Growth iShare (Domestic Smaller-Cap Growth)-9.7%-36.2%-5.4% Russell 2000 iShare (Domestic Smaller-Cap Blend)-14.9%-37.3%-5.2% Vanguard Total Intl Stock Index (Foreign Stocks)-13.0%-46.6%-1.0% Vanguard REIT Index (Real Estate Investment Trust)-32.1%-58.1%-8.8% Merrill Lynch High Yield Master (High-Yield Bonds)5.3%-19.9%-0.3% Vanguard Total Bond Mrkt Index (Domestic Invest-Grade Bonds) 0.3%3.2%4.1% Citigroup World Govt Bond (Global Invest-Grade Bonds)-4.8%-3.8%4.6% Dow Jones-AIGCI (Commodity Futures)-6.3%-45.0%-3.2% JP Morgan Emg Local Mrkt+ (Short-term Local Currency Emg Markets Bonds) -3.9%-11.8%6.8%

4. 1Q 09 4 A Rising Spiral of Debt and Wealth Is Now Inverted For decades, steady growth in debt has fueled spending and profit growth In recent years the trend was self-reinforcing as purchases with borrowed money drove up asset prices (such as homes) and profits, which supported even more borrowing But now the trend has reversed... Falling asset prices and lower spending/profits is a self- reinforcing feedback loop that is doing serious damage to the economy This kind of debt-deflation spiral can be difficult to break Market Analysis 1Q09

5. 1Q 09 5 The Total Volume of Debt Has Grown Steadily Market Analysis 1Q09 Total debt has grown from aprox. 1.4X GDP to 3.5X GDP

6. 1Q 09 6 We Think the Government Will Do Everything it Can to Prevent a Debt-Deflation Spiral from Taking Hold No one knows for sure how successful their efforts will be Efforts to date have been positives, but serious problems remain Longer term there will be a cost for the actions taken today Likelihood of a weaker dollar Higher interest rates Higher inflation Both the uncertainty and the real economic damage is taking a toll on any investment perceived as having risk Market Analysis 1Q09

7. 1Q 09 7 Our Longer-Term Outlook for Equities We consider four broad scenarios in assessing equities as well as other asset classes Our scenarios look ahead five years, and are the basis for our investment decisions We dont know what scenario will play out, but we believe it will involve components of one or more of the scenarios we analyze We can gauge potential returns based on earnings, dividends, and ending valuations in comparison to where we are today We can also assess possible worst case outcomes and the tradeoffs between risks and potential return Market Analysis 1Q09

8. 1Q 09 8 Our Four Broad Scenarios Scenario 1: Muddle Through Economic recovery in late 2009/early 2010 but subpar recovery for several years. Inflation gradually rises. Scenario 2: Stagflation Economic recovery in late 2009/early 2010 but subpar recovery. Strong inflation (mid single digits) near the end of the five-year period. Scenario 3: Severe Recession/Deflation (Worst Case) Extended/deep recession and potential deflation through 2010, due to severe deleveraging and negative wealth effects. Recession does end but recovery is anemic. Scenario 4: Goldilocks (Best Case) Govt policies are effective and economy starts growing in the latter half of 09. An average recovery with moderate inflation. Market Analysis 1Q09

9. 1Q 09 9 Our Worst-Case Scenario, #3, Includes an Earnings Decline Nearly as Severe as the 1930s Market Analysis 1Q09 We assume a peak-to-trough earnings decline of 65% (close to that seen in the 1930s) We then assume earnings growth recovers more slowly than in past recoveries (usually steeper declines have sharper recoveries) We then assume valuations (P/E multiples) that are low relative to history These assumptions allow for a very poor earnings environment, a slow recovery, and a lingering risk aversion as a result of the difficult deleveraging period we are going through Stocks would be roughly flat over the next five years in this scenario (from current levels) but significant losses from current levels are unlikely.

10. 1Q 09 10 Market Analysis 1Q09 Quarterly S&P Earnings During the Great Depression and Now T for Great Depression = Dec 1929 T for "now" = Jun 2007 Note: Litman/Gregory estimates and adjustments used after September 2008

11. 1Q 09 Investors Typically Become More Risk-Averse After Major Bear Markets Market Analysis 1Q09 11 Lower P/E multiples following bad bear markets reflect periods of risk aversion (remember that because each point reflects the trailing five years there is a lag relative to the dates shown). Rolling Five-Year P/E Ratios

12. 1Q 09 Our Optimistic Scenario, #4, Assumes Earnings Climb Back to Their Long-Term Trend Over the Next Five Years Prior to the financial crisis that took hold last year, this was our baseline scenario But, we now believe this is less likely than other scenarios we consider Returns in this scenario would be strongly positive over the next five years This is the reason we are not more underweighted to equities right now Our other two scenarios fall between the optimistic and pessimistic scenarios 12 Market Analysis 1Q09

13. 1Q 09 Equity Return Ranges Under Each Scenario Market Analysis 1Q09 13 S&P 500 at 843 on 4/23/09

14. 1Q 09 14 Extending Our Time Horizon Leads to Return Assumptions that Are Closer to Our Optimistic Scenario Without the spending tailwind of debt growth, the economy will likely reset at a lower level in the years ahead Even so, there will be a recovery in earnings at some point Over a five- to 10-year horizon, earnings are more likely to revert to their (lowered) long-term trend lines or averages This would result in good equity returns over that span But the path is likely to be bumpy with possibly big dips along the way Market Analysis 1Q09

15. 1Q 09 Active Managers May Have an Advantage in this Highly Disrupted Environment Our overall equity return expectations are not exciting from current levels But some of the active managers we use report finding once- in-a-generation opportunities They dont know exactly when the market will reflect what they believe are the true underlying values of their companies but are highly confident that over the next several years they can earn very good returns We have already seen sharply improved performance from some of our active managers over recent months Longleaf Partners and Oakmark Select are examples Bond managers also have a unique opportunity to add value in this environment 15 Market Analysis 1Q09

16. 1Q 09 Quarterly Performance of High-Yield vs. Equities Since 2007 Market Peak Market Analysis 1Q09 16

17. 1Q 09 We Are Considering the Longer-Term Impact of Governmental Actions We continue to believe deflation is the primary concern in the near term, but we are also taking a hedge position in selective securities given our longer-term concerns about inflation and the dollar TIPS (Treasury Inflation Protected Securities) - which provide insurance against inflation Gold – through an ETF (Electronically Traded Fund) or within the Permanent Portfolio Global bonds – our preferred holding is Templeton Global Bond Commodity Futures – through PIMCO Commodity Real Return or natural resources stocks through the Permanent Portfolio 17 Market Analysis 1Q09

18. 1Q 09 Shorter-Term Risk Remains The sharp rise in stock prices in the second half of March and first part of April have investors feeling good for now But rallies of this and even larger magnitude commonly occur within bear markets Remember that the rally in late November and December had investors feeling better, but it was followed by painful new lows We arent predicting another steep decline, but investors need to consider the possibility and more importantly how they would react We can help you gauge possible portfolio losses in the event of another big downturn in stocks to help you determine what level of risk you can handle Market Analysis 1Q09 18

19. 1Q 09 Short-Term Losses Are Painful but Also Create Longer-Term Opportunities Markets often overshoot what rational analysis suggests is fair value - this happens on both the upside and the downside Buying an undervalued investment is difficult because losses will likely continue in the near term Investing exactly at the bottom is not possible Therefore investors must be willing to accept near term (temporary) losses as a requirement to taking advantage of compelling longer-term opportunities It is easier said than done As valuations change, we expect to adjust our portfolios to reduce risk if an asset becomes overvalued We will also take action if an asset is compellingly cheap Market Analysis 1Q09 19

20. 1Q 09 We Are Taking Nothing for Granted There is a great deal of uncertainty and this is a challenging investment environment We have worked very hard to gain all the information possible to assess the return environment and risks in the years ahead We are challenging our own assumptions and seeking out contrary views to make sure we are considering all possibilities – both at the macro and asset class level The investment approach we employ will, as always, seek to capitalize on mis-valued assets and take a long investment view Though it will be a tough road, we are confident that ultimately the economy will emerge from this difficult period and grow again And we are confident we can add value beyond what the markets give us, especially in this often dysfunctional market environment Market Analysis 1Q09 20