Quarterly Newsletter: October 2009

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Capital Markets
The Bulls confounded the Bears in the third quarter as markets continued to rebound. The Dow Jones Industrial Average posted its biggest quarterly gain since the fourth quarter of 1998 and its best third quarter performance since 1939. The S&P 500 was up 15.6% for the quarter and 19.3% year to date. The MSCI EAFE Index of developed international markets outperformed the S&P 500 Index, gaining 19.5% in US Dollar terms. Emerging Market equities led all asset classes with a 20.9% return for the quarter and 64.5% year to date.

Federal Reserve Chairman Ben Bernanke declared the recession "very likely over" in September and there is a good probability of economic recovery beginning in the fourth quarter. The investment environment, however, remains complex due to the sharp and uninterrupted gains in stock prices and the looming possibility of a correction to the downside.

In the short-term conditions remain positive for stocks: continued government stimulus, low interest rates, benign inflation and improving corporate profitability. In the long run, however, the removal of government stimulus, rising interest rates, higher taxes and tighter regulation are likely to produce the low growth scenario we outlined in our last newsletter.

Economic Update
The US Dollar has made headlines of late as America's key creditor nations have called for the creation of a super reserve currency to replace the dollar. The dollar has been trading on the weak side, although the overall foreign-exchange market has remained incredibly steady given the uncertainty surrounding our economy. Generally speaking, a weaker dollar is positive for multi-national US companies as a cheaper currency boosts profits from overseas sales and serves to fight deflation domestically. Similarly, returns on investments in foreign denominated securities (international and emerging market stocks and bonds) are also enhanced by a falling US dollar.

Since the start of the recession in December 2007, the number of unemployed persons has increased by 7.6 million and the unemployment rate has doubled to 9.8%. The unemployment rate is now at its highest level in 26 years and is predicted to reach 10% sometime next year. The majority of economists are predicting Gross Domestic Product growth over the next few quarters backed by government spending and improved manufacturing activity to replenish depleted inventories. Self-sustained growth, however, may not be possible until employment stabilizes allowing consumer spending (typically responsible for 2/3 of economic activity) to rebound

In July, the S&P/Case-Shiller 20-city composite index of median home prices was up 1.6% from a month earlier and 3.6% from the low it hit in April. Industry observers expect further price volatility as foreclosed home inventories rise to a forecasted peak of nearly 1 million over the next 9 months.

As the chart below illustrates, since the 1980s, not only have interest rates followed a pattern of descending tops and bottoms, but the "choking point" of rising rates for the overall economy has become lower and lower. The US economy will be less susceptible to higher interest rates if outstanding debt loads in the public and private sectors are reduced. A rising rate environment, however, is unlikely to be an imminent concern because the Federal Reserve remains committed to keeping its key policy rate near zero for the foreseeable future. Low short term rates should serve as an anchor for the longer end of the yield curve.

Implications for Investors
The last two years have provided investors ample opportunity to reassess their appetite for risk. After breathing a collective sigh of relief, the recent market rebound should prompt us to review our asset allocation yet again to ensure it is aligned with our financial objectives and risk profile. Over the long haul and through market cycles, rational rather than emotional decisions underpin a sound and successful investment strategy. Disciplined rebalancing and tax-wise, cost-conscious investing will best enable success in reaching our financial goals.

Important Proxy Vote
Barclays Global Fund Advisors, the adviser to the iShares Funds, is being acquired by BlackRock, Inc. Many of you have received a proxy package in the mail or via e-mail regarding the transaction. There are three proposals on which iShares Funds shareholders are asked to vote. The Board of the iShares Funds has unanimously approved each proposal and recommends that shareholders vote in favor of each proposal. It is expected that the nature and scope of the iShares business will continue undiminished.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Arbor Investment Advisors, LLC. Please remember to contact Arbor Investment Advisors, LLC if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. Please also advise us if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. A copy of our current written disclosure statement discussing our advisory services and fees remains available for your review upon request.