David R. Kotok Chairman & Chief Investment Officer

614 Landis Avenue, Vineland, NJ 08360800-257-7013www.cumber.com

David R. Kotok Chairman & Chief Investment Officer

Outlook for the Economy and Financial MarketsOctober 2009


©Copyright 2009 Cumberland Advisors, Inc. Further distribution prohibited without prior permission.

Chart 2

Measuring Bank & Government Risk Now (10/15/09)

Chart: Nine of sixteen banks in LIBOR receive US Federal support. Source: Bloomberg and Cumberland Advisors.

Inte

rest

Rate

Bank Risk

Government Risk0

2

4

6

8

10

o/n 1m 3m 6m 9m 1y 2y 3y 4y 5y 6y 7y 8y 9y 10y 15y 20y 25y 30y

US Fannie Mae Benchmark Yield Curve

USD US Bank (A) Bloomberg Fair Value Yield Curve

US Dollar LIBOR Yield Curve

US FDIC Temporary Liquidity Guarantee Yield Curve

US Treasury Actives Curve



Chart 3

Chart: Nine of sixteen banks in LIBOR receive US Federal support. Source: Bloomberg and Cumberland Advisors.

Measuring Bank & Government RiskDecember 29, 2008

Inte

rest

Rate

Bank Risk

Government Risk

0

2

4

6

8

10








Chart 4

Chart: Nine of sixteen banks in LIBOR receive US Federal support. Data as of 8/13/09. Source: Bloomberg and Cumberland Advisors.

Measuring Bank & Government RiskJanuary 1, 2007

0

2

4

6

8

10






Inte

rest

Rate

Bank Risk

Government Risk



Chart 5

Series B

reak

"TD

WP

- 8/17/07"

TS

LF

-3/11/08P

DC

F-3/16/08

TA

F-12/12/07

Series B

reak

450

950

1,450

1,950

2,450

8-A

ug

-07

22

-Au

g-0

71

4-N

ov-0

72

8-N

ov-0

71

2-D

ec-0

72

6-D

ec-0

79

-Jan

-08

23

-Jan

-08

6-F

eb

-08

20

-Fe

b-0

85

-Ma

r-08

19

-Ma

r-08

2-A

pr-0

82

7-A

ug

-08

10

-Se

p-0

82

4-S

ep

-08

8-O

ct-08

22

-Oct-0

85

-No

v-08

19

-No

v-08

3-D

ec-0

81

7-D

ec-0

83

1-D

ec-0

81

4-Ja

n-0

92

8-Ja

n-0

91

1-F

eb

-09

25

-Fe

b-0

91

1-M

ar-0

92

5-M

ar-0

98

-Ap

r-09

22

-Ap

r-09

6-M

ay-0

92

0-M

ay-0

93

-Jun

-09

17

-Jun

-09

1-Ju

l-09

15

-Jul-0

92

9-Ju

l-09

12

-Au

g-0

92

6-A

ug

-09

9-S

ep

-09

23

-Se

p-0

97

-Oct-0

9

$ B

illio

ns

Other Credit Extensions

M ortgage Backed Securities

Other Federal Reserve assets (14)

Central bank liquidity swaps (13)

TALF

Net P ortfolio Holdings of M aiden Lane II LLC

Net P ortfolio Holdings of M aiden Lane III LLC

Net P ortfolio Holdings of Commercial paperFunding Facility LLC

Securities Lent to Dealers - Overnight Facility

Securities Lent to Dealers - Term Facility-TSLF

Asset-Backed Commercial P aper M oney M arketM utual Fund Liquidity Facility

Net P ortfolio Holdings of M aiden Lane LLC

Credit Extended to A IG

P rimary Dealer Credit Facility-P CDF

Term Auction Credit-TAF

Regular Discount Window Credit(P rimary,Secondary and Seasonal Credit)

Repurchase Agreements

M isc(F loat,Gold Stock, Special Drawing R ights &Treas. Currency

Securities Less M ortgage Backed Securities

Factors Adding to Reserves PlusOff-Balance TSLF from 8/8/07 to 10/14/09

Note: Data are weekly averages for all but the Foreign Central Bank TAF which are as of the last day of the week.Source: Federal Reserve Board of Governors Statistical Release H.4.1.

Lehman failure



Chart 6

Source: Bank of England.

Bank of England Assets 01/03/07 to 10/07/09

0

50000

100000

150000

200000

250000

300000

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09

Ste

rlin

g (

mil

lio

ns)

Weekly amounts outstanding ofCentral Bank other assets total (insterling millions) not seasonallyadjusted RPWB74A

Central Bank bonds and othersecurities acquired via markettransactions (in sterling millions) notseasonally adjusted

Weekly amounts outstanding ofCentral Bank sterling w ays andmeans advances to HM government(in sterling millions) not seasonallyadjusted

Central Bank sterling longer-termreverse repos w ith Bank ofEngland counterparties (in sterlingmillions) not seasonally adjusted

Central Bank sterling short-termmarket operations w ith Bank ofEngland counterparties (in sterlingmillions) not seasonally adjusted

Weekly amounts outstanding ofCentral Bank sterling standingfacility assets (in sterling millions)not seasonally adjusted



Chart 7

Source: Oesterreichische Nationalbank.

Consolidated Balance Sheet of European System of Central Banks from 01/05/07 to 10/09/09

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09

Eu

ros

(mil

lio

ns)

Securities of euro area residentsdenominated in euro

Claims on euro area residentsdenominated in foregn currency

Lending to euro area credit institutionsrelated to monetary policy operationsdenominated in euro

Other assets

General government debtdenominated in euro

Other claims on euro area creditinstitutions denominated in euro

Claims on non-euro area reseidentsdenominated in euro

Claims on non-euro arearesidentsdenominated in foreignCurrency

Gold and gold receivables



Chart 8

Canada3.4%

Italy1.5%

Spain2.8%

Switzerland2.4%

India3%

China11.2%

EM15.9%

ROW3.4%

Euronext6.3%

Japan8.6%

UK6.1%

US32.9%

Germany2.9%

Germany3.4%

US33.2%

UK6.7%Japan

7.3%

Euronext7.0%

ROW4.1%

EM14.6%

China10.7%

India3%

Switzerland2.1%

Spain2.9%

Italy1.8%

Canada3.6%

Germany4.2%

Canada2.1%

Italy2.2%

Spain1.6%

Switzerland2.7%

China1.3%

EM5.0%ROW

5.5%

Euronext7.4%

Japan9.5%

UK9.2%

US49.2%

Share of World Stock Market Value

Note: “EM” slices include Argentina, Brazil, Chile, Colombia, Egypt, Hungary, Indonesia, Iran, Israel, Korea, Malaysia, Mauritius, Mexico, Peru, Philippines, Poland, Singapore, Slovenia, South Africa, Sri Lanka, Taiwan, Thailand, and Turkey. “ROW” includes Australia, Austria, Cyprus, Greece, Ireland, Luxembourg, Malta, OMX exchanges, New Zealand, and Norway. In 1998 China is the Hong Kong exchange; in 2008 China includes the Hong Kong, Shanghai, and Shenzhen exchanges.

Sources: World Federation of Stock Exchanges and Cumberland Advisors. No market data in 1998 for India, Mauritius, Egypt, Hungary, Colombia.

Oct 2007(Total $63.05 trillion)

1998(Total $25.683 trillion)

Aug 2009(Total $41.66 trillion)

Feb 2009(Total $28.67 trillion)

Canada3.2%

Italy1.4%

Spain2.7%

Switzerland2.4%India

2%

China11.3%

EM13.3%

ROW3.0%

Euronext5.8%

Japan9.2%

UK5.6%

US37.2%

Germany2.9%



Chart 9

World Measured by Gross Domestic Product (GDP)

Sources: World Federation of Stock Exchanges, World Bank Data, and Cumberland Advisors. Euronext (Europe) includes Belgium, France, France, and Portugal. Data is current US dollars.



China3.4%

Japan12.9%

U.K.4.8%

Germany7.3%

Euronext7.5%India1.4%

Italy4.1%

Spain2.0%

Canada2.1%

U.S.29.0%

ROW25.6%

China6.4%

Japan8.2%

U.K.4.4%

Germany6.1%

Euronext7.4%

India2.0%

Italy3.8%

Spain2.7%

Canada2.3%

U.S.23.6%

ROW33.1%



Chart 10

Source: Bank for International Settlements and Cumberland Advisors.

Domestic and International Debt All Issuers

ROW9.6%

GBP3.7%

JPY13.4%CHF

0.7%

CAD1.6%

AUD1.0%

EUR29.1%

USD41.0%

DOMESTIC AND INTERNATIONAL BONDS AND NOTES BY CURRENCY IN BILLIONS OF US DOLLARS, AMOUNTS OUTSTANDING

Mar. 200981,862

GBP3.3%

CHF1.0%

CAD1.9%

ROW7.2%

AUD0.6%

JPY16.5%

EUR23.3%

USD46.2%

Dec 199832,207 ROW

10.50%

GBP3.85%

JPY11.92%

CHF0.71%

CAD1.67%

AUD1.21%

EUR30.77%

USD39.38%

Jun 200884,798



Chart 11

Stocks, Debt and World GDP

Source: Bank for International Settlements, World Federation of Exchanges and Cumberland Advisors. Data through Dec 2008.

92.8% 95.3% 95.6%107.8% 112.6% 111.7% 117.7%

129.6%136.8% 138.6% 132.0%

140.5% 144.9% 140.8%

58.1%64.6%

71.7%

85.7%

112.8%

97.2% 83.9%69.2%

84.6%89.1%

90.8%

104.1%112.0%

54.2%

50%

100%

150%

200%

250%

300%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

$-

$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

$60,000,000

$70,000,000(U

SD

millio

ns)

Stocks / GDP (percent, left axis)

Debt / GDP (percent, left axis)

GDP Current (USD millions, right axis)



Chart 12

Growth of Securitization Markets

Source: AB Alert, CM Alert, SIFMA, S&P, MCM, IFR, LPC, Bloomberg and Wachovia Securities

Yearly Securitized Issuance

0

500

1000

1500

2000

2500

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 YTD2009

Issu

ance

($

Bill

ions

)

CMBS

CDO

Non-Agency

Student Loan

Home Equity

Credit Card

Auto



Chart 13

-10

-5

0

5

10

15

1919 1927 1935 1943 1951 1959 1967 1975 1983 1991 1999 2007

Per

cent

Source: St. Louis Fed and Cumberland Advisors. Data through September 2009.

Why Bond Managers ExistBond Market Regime Change: Moody’s AAA Monthly Returns 1919-2009

Apr. 198010.14

Jan. 1980-9.18

Apr. 20038.27

Nov. 200816.79

Jun. 2003-7.14

Sep. 2008-7.94



Chart 14

Source: Bloomberg. Daily data.

Munis are Cheap



Chart 15

Source: Ned Davis B470.

Muni Move UnprecedentedWeekly Data 1/08/1965 - 10/09/2009 (Log Scale)

(B470)

20-Year Treasury Yield 10/09/2009 = 4.04%

( )

20-Year Municipal Bond Yield 10/09/2009 = 4.06%

( )

3.0

3.4

3.9

4.4

4.9

5.6

6.3

7.2

8.1

9.2

10.4

11.8

13.3

15.1

3.0

3.4

3.9

4.4

4.9

5.6

6.3

7.2

8.1

9.2

10.4

11.8

13.3

15.1

Munis Overvalued

Munis Undervalued Muni Yields as a % of Treasury Yields

Mean = 86.1%

10/09/2009 = 100.5%

708090

100 110 120 130 140 150 160 170

708090

100 110 120 130 140 150 160 170

Implied Tax Rate = 1 - Muni Yield Treasury Yield

If in the 35% tax rate, favor Munis on a yield basisIf in the 15% tax rate, favor Munis on a yield basis

Current Implied Rate = -0.5%

Munis Undervalued

-78.0 -70.2 -62.4 -54.6 -46.8 -39.0 -31.2 -23.4 -15.6

-7.80.0 7.8

15.623.431.2

-78.0 -70.2 -62.4 -54.6 -46.8 -39.0 -31.2 -23.4 -15.6

-7.80.0 7.8

15.623.431.2

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Munis, Treasurys and the Implied Tax Rate

Copyright 2009 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at



Chart 16

Anatomy of a Bond Trading Decision

• Real interest rates count• Nominal rates alone don’t help• Holding return (market price plus interest)

is critical



Chart 17

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Holding Return on 1 Year Treasury Note (1955 – 2009)

Chart: The holding return is the monthly yield-to-maturity of the 1 Year US Treasury note. Data through July 2009.Source: Bloomberg, Cumberland Advisors, Federal Reserve Bank of St. Louis (http://www.stls.frb.org/fred).

Standard Deviation 2.96Mean 5.37



Chart 18

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Chart: The real holding return on the 1 Year Note is the monthly nominal yield-to-maturity on the 1 Year US Treasury Note less the annual change in the Consumer Price Index for all urban consumers. This chart shows a riskless short-term interest rate with inflationary distortions removed. Data through July 2009.

Source: Bloomberg, Cumberland Advisors, the Federal Reserve Bank of St. Louis (http://www.stls.frb.org/fred).

REAL Holding Return on 1 Year Treasury Note (1955 – 2009)




Chart 19

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Chart: The holding return on the 10 year US Treasury Note is a synthetic construction designed to measure the total return (coupon plus price change) of the 10 Year Treasury Note. It is calculated by creating a par bond and repricing it in one year at the new market interest rate. It assumes that the coupon on the bond is the yield-to-maturity. Data as through July 2009.

Source: Bloomberg, Cumberland Advisors, Federal Reserve Bank of St. Louis (http://www.stls.frb.org/fred).

Holding Return on 10 Year Treasury Note (1955 – 2009)

Standard Deviation8.04Mean4.59



Chart 20

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Chart: The real holding return on the 10 Year U.S. Treasury Note is the holding return less the annual change in the Core Consumer Price Index (CPI less food and energy). The holding return on the 10 year U.S. Treasury Note is a synthetic construction designed to measure the total return (coupon plus price change) of the 10 Year Treasury Note. It is calculated by creating a par bond and repricing it in one year at the new market interest rate. It assumes that the coupon on the bond is the yield-to-maturity. Data as through July 2009.

Source: Cumberland Advisors, the Federal Reserve Bank of St. Louis (www.stls.frb.org/fred).

REAL Holding Return on 10 Year Treasury Note (1955 – 2009)

Standard Deviation

8.94Mean

1.76



Chart 21

-30%

-20%

-10%

0%

10%

20%

30%

40%

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

10 yr. Tsy 12 Month Real Holding Period Return

1. yr. T-bill Real Holding period Return

Chart: This chart shows the nominal holding returns of the 1 Yr. and 10 Yr. U.S. Treasury Notes, less the annual change in the CPI for all urban consumers. This compares a riskless short-term instrument with a riskless intermediate-term instrument. It depicts the cyclical movement of bonds without inflationary distortions. Data through July 2009.

Source: Bloomberg, Cumberland Advisors, and St. Louis Federal Reserve Board.

REAL Holding Returns on Treasury Notes (1955 – 2009)





Chart 22

-30%

-20%

-10%

0%

10%

20%

30%

40%

1955 1960 1965 1970 1975 1988 1993 1998 2003 2008



Chart: This chart shows the nominal holding returns of the 1 Year and 10 Year U.S. Treasury Notes, less the annual change in the Core Consumer Price Index (CPI less food and energy). This compares a riskless short-term instrument with a riskless intermediate-term instrument. It depicts the cyclical movement of bonds without inflationary distortions. Data through July 2009.


REAL Returns (without the Volcker Era - 1955-1978; 1987-2009)





Chart 23

-30%

-20%

-10%

0%

10%

20%

30%

40%

1955 1960 1965 1970 1975 1988 1993 1998 2003 2008





When To Lengthen Bond Durations





Chart 24

-30%

-20%

-10%

0%

10%

20%

30%

40%

1955 1960 1965 1970 1975 1988 1993 1998 2003 2008





When To Shorten Bond Durations





Chart 25

-30%

-20%

-10%

0%

10%

20%

30%

40%

1955 1960 1965 1970 1975 1988 1993 1998 2003 2008





Duration Change Model – T Bills

DurationChange

Zone





Chart 26

-30%

-20%

-10%

0%

10%

20%

30%

40%

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

10 yr. Barclays REAL Total Return 12 Month

1 yr. Barclays REAL Total Return 12 Month

Chart: The real holding return is the 1- and 10-year Barclays Total Return 12 month. Data through July 2009.Source: Barclays Capital, Cumberland Advisors, and Federal Reserve Bank of St. Louis (http://www.stls.frb.org/fred).



DurationChange

Zone

Duration Change Model – Tax Free Bonds



Chart 27

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007

Source: Barry B. Bannister, CFA, Managing Director, Stifel Nicolaus; data from the Federal Reserve Flow of Funds, Z.1 Release, Series D.3 Debt Outstanding by Sector (billions of U.S. Dollars, quarterly figures, seasonally adjusted), U.S. Bureau of Economic Analysis, and Cumberland Advisors.

* Each point plotted is a four-quarter moving average. Data through 1Q09.

Dollar change y/y in nominal GDP

divided by

Dollar change y/y in Total U.S. Debt

equals the

Dollar increase in GDP

per $1.00 increase in total U.S. debt

Diminishing Returns from Each $1 of Additional Debt

1Q55 - 1Q09



Chart 28

About Cumberland Advisors

Cumberland Advisors supervises over one billion dollars in separate account assets for individuals, institutions, retirement plans, government entities, and cash management portfolios. Cumberland manages portfolios for clients in 43 states, the District of Columbia, and in countries outside the U.S. Cumberland Advisors is an SEC-registered investment adviser.

Munis, Taxables, ETFs Cumberland’s portfolio management efforts emphasize long-lasting relationships and continuous dialogue among clients, their consultants, tax advisors, accountants, estate planners, and their assigned portfolio management contact at Cumberland. Cumberland offers several different investment portfolio management styles. Our investment strategy is described in detail on our website.

Fixed IncomeAll of our fixed-income offerings are total return strategies, but can take the client’s current income needs into consideration. Our fixed income styles areTax-Free Municipal Bonds, Taxable Bonds, and Short-Term Investment Program

StocksCumberland uses Exchange-Traded Funds to manage global equities. Exchange-Traded Funds (ETFs) are securities that mimic the price performance and dividend yield of an index, or a basket, of securities. Cumberland uses ETFs as building blocks in crafting a portfolio, investing in attractive equity sectors, industries, market capitalization strata, styles, and regions. Our equity portfolios are U.S. Exchange-Traded Funds (ETF) Equity, International Exchange-Traded Funds (ETF) Equity, Emerging Markets Exchange-Traded Funds, and Global Multi-Asset Class Exchange-Traded Funds.

Balanced AccountsCumberland can blend the strategies presented above to create a balanced mix of stocks and bonds.

For further information about Cumberland Advisors, please visit our website at www.cumber.com.



Chart 29

AppendixExplanation of Factors Adding to Reserves ChartThe Federal Reserve Board has posted on its website information on how its balance sheet was allocated across the different asset classes, as well as the composition of its liabilities. For many years prior to the most recent turmoil that has occurred in financial markets, the bulk of the Federal Reserve’s assets were in the form of its holdings of US Treasury securities. Nearly 90% on average of its assets were of this type. Other major asset categories included Treasury currency and the gold stock. Normal daily open-market operations which add to and subtract from the Federal Reserve’s balance sheet take place mainly through repurchase and reverse repurchase agreements. The composition of the Federal Reserve’s portfolio has, however, changed dramatically during the recent period of financial turmoil, as the Board of Governors has modified the terms under which access to the discount window is available to banks, and now to investment banks, and the FOMC has modified its securities lending program from the System Open Market Account (SOMA). Specifically, several new programs have been created and several have been modified since they were originally established (while not all have as yet shown up on the Federal Reserve’s balance sheet they will be added to the Factors Chart 1 as loans are made):

Term Discount Window Program (TDWP) – announced August 17, 2007Under the TDWP banks were permitted to borrow on the full range of eligible discount window collateral for a term of up to 90 days.

Term Auction Facility (TAF) – announced December 12, 2007Under the TAF banks were permitted to bid for term federal funds with maturities up to 28 days, backed by the full range of eligible discount window collateral.

Foreign Central Bank Term Auction Facility – announced in December 2007Swap lines were established with the European Central Bank and Swiss National Bank specifically to facilitate the establishment of a dollar term auction facility against foreign denominated collateral to provide dollar liquidity in foreign markets. The swap lines were expanded several times and the program expanded to include seven additional central banks (Bank of England, Bank of Japan, Norges Bank, Sveriges Riksbank, Reserve Bank of Australia, Danmarks Nationalbank and Bank of Canada)

Term Securities Lending Facility (TSLF) – announced March 11, 2008Under the TSLF primary dealers (both banks and investment banks) were permitted to borrow US Treasuries from the SOMA portfolio overnight for a term of up to 28 days, using Treasuries, agency securities, agency mortgage-backed securities, AAA/Aaa-rated private-label real estate MBS, collateralized MVS, agency-collateralized mortgage obligations, and other asset-backed securities (these latter securities were added to the list on May 2, 2008). The Treasury securities so borrowed could then be repo-ed overnight and used as a way of liquefying what might otherwise be illiquid assets in this period of market turmoil. The TSLF-related securities lent show up on the System’s balance sheet as off balance-sheet items.

Primary Dealer Credit Facility (PDCF) – announced March 16, 2008, and renewed on July 20, 2008 until January 30, 2009Under the PDCF primary dealers that didn’t have access to the discount window were permitted to borrow from the window under this program using Treasuries, agencies, and investment-grade munis, corporates, MBS and ABS for which a market price is available as collateral. The collateral requirement was subsequently relaxed to include all securities that can be readily pledged in the tri-party repo system.

Asset-backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) - announced September 19, 2008The Federal Reserve created a special facility providing non-recourse loans to banking organizations to finance their purchases of high-quality asset-backed commercial paper (ABCP) from money market mutual funds.

Commercial Paper Funding Facility (CPFF) – announced October 7, 2008 to provide temporary direct purchase of newly issued commercial paper directly from corporate issuers.



Chart 30

While the Federal Reserve has attempted to sterilize the impact of its lending programs so as to avoid undue expansion of the money supply, we do not believe that this adequately represents the total expansionary impact of the Federal Reserve's efforts to deal with the problems in certain segments of financial markets. The System has also initiated, in addition to its regular securities lending program, the Term Securities Lending Facility. This Facility permits prime dealers to borrow securities from the Federal Reserve's portfolio for a term of up to 28 days. In a series of rolling overnight loans of securities, prime dealers are permitted to pledge a wide range of eligible collateral (Treasuries, agencies, agency MBS, AAA/Aaa-rated private-label RMBS, CMBS, agency CO and other ABS) in return for US Treasuries which they can then RP out overnight. The effect is to enable them to liquefy otherwise illiquid securities on their balance sheets and replace them with dollar assets which can then be deployed in other ways. While these assets represent a reallocation of reserves within the US banking system, they also represent a way for prime dealers to tap into dollar reserve assets from the rest of the world. To the extent that prime dealer assets are freed up, these institutions can engage in lending that would otherwise not occur. Securities lent under the TSLF are off the Federal Reserve's balance sheet since the transaction is unwound each morning. During the day, the funds that had been RePoed by the prime dealers is likely replaced by daylight overdrafts from the Federal Reserve. Thus, there is effectively an off balance sheet creation of additional reserves to the banking system. To reflect the potential expansionary impact of the TSLF, we have created Chart 1, which attempts to reflect the potential impact that the TSLF may be having on the banking and financial system by adding the TSLF memorandum item to the Federal Reserve's balance sheet.

Definitions of additional Items Shown in Cumberland Table on Factors Adding to ReservesThe following are the definitions of the items shown on the chart:

Maiden Lane II LLC. On December 12, 2008, the Federal Reserve Bank of New York (FRBNY) began extending credit to Maiden Lane II LLC under the authority of section 13(3) of the Federal Reserve Act. This limited liability company was formed to purchase residential mortgage-backed securities from the U.S. securities lending reinvestment portfolio of subsidiaries of American International Group, Inc. (AIG subsidiaries).

Maiden Lane III LLC. On November 25, 2008, the Federal Reserve Bank of New York (FRBNY) began extending credit to Maiden Lane III LLC under the authority of section 13(3) of the Federal Reserve Act. This limited liability company was formed to purchase multi-sector collateralized debt obligations (CDOs) on which the Financial Products group of American International Group, Inc. (AIG) has written credit default swap (CDS) contracts.

Net Portfolio Holdings of Commercial paper Funding Facility LLC – Beginning Oct.27the the Federal Reserve began buying newly issued commercial paper directly from high quality issuers. These purchases are being made through a limited liability company that was formed to purchase three-month U.S. dollar-denominated commercial paper from eligible issuers and thereby foster liquidity in short-term funding markets and increase the availability of credit for businesses and households.

Securities Lent Off Balance Sheet to Dealers Overnight – Treasury securities lent under the Desk’s normal securities lending program

Securities Lent Off Balance Sheet to Dealers Term Facility – Treasury securities lent under the TSLF

Mutual Fund Facility – (AMLF)- Asset-backed commercial paper money market mutual fund liquidity facility added to extend non-recourse loans to U.S. depository institutions and bank holding companies to finance their purchase of high-quality asset backed commercial from money market mutual funds. Maiden Lane LLC. On June 26, 2008, the Federal Reserve Bank of New York (FRBNY) extended credit to Maiden Lane LLC under the authority of section 13(3) of the Federal Reserve Act. This limited liability company was formed to acquire certain assets of Bear Stearns and to manage those assets through time to maximize repayment of the credit extended and to minimize disruption to financial markets.Other Assets Less Euro TAF – Other Federal Reserve assets minus the Foreign Central Bank TAF facilities conducted by the 9 participating foreign central banks as a result of dollar swap arrangements with the Federal Reserve.

Other credit extensions – emergency credit extended by a Federal Reserve Bank under exigent circumstances to an individual, partnership, or corporation that has been approved by the Board of Governors. This would include AIG

Primary Dealer Credit Facility – Funds lent to primary dealers under the PDCF

Foreign Central Bank TAF – Funds lent by now 9 central banks as a result of swap arrangements. These include: European Central Bank, Swiss National Bank, Bank of England, Danmarks Nationalbank, Svireges Risksbank, Bank of Japan, Bank of Canada, Reserve Bank of Australia and Norges Bank.

Term auction credit –Loans of term federal funds to banks under the TAF

Repurchase agreements – Securities sold under agreements to repurchase them at a latter time



Chart 31

Miscellaneous which include:Float – Temporary funds that reflect the difference between checks that been credited against the sending bank’s reserve account but have not been cleared against the receivingbank’s accountGold – Gold bullion held by the System primarily in the Federal Reserve Bank of NY’s vaultsSpecial drawing rights certificate accounts – an asset reflecting an allocation of funds to the US from the IMF and any accumulation of such assets by the Federal Reserve that had been allocated to other countriesTreasury currency – US Treasury currency (mainly silver certificates that are being held by the Federal Reserve system but not in circulation)

Regular Discount Window Credit which include:Primary credit – Discount window credit available to generally sound depository institutions on a very short-term basis as a backup rather than a regular source of funding. Depository institutions are not required to seek alternative sources of funds before requesting advances of primary credit.Secondary credit – Discount window credit that is extended on a very short-term basis to depository institutions not eligible for primary credit. It is available to meet backup liquidity needs when its use is consistent with a timely return to market sources of funding or the orderly resolution of a troubled institution.Seasonal credit – Discount window credit that is available to relatively small depository institutions to meet regular seasonal funding needs. Historically, the credits were related to agriculture.Securities held outright - Include US Treasury bills, notes and bonds, inflation-indexed compensation, and federal agency securities (these securities are not presently in the portfolio).Appendix for Bank of England and European Central Bank ChartsExplanationThe Bank of England and European System of Central Banks have significantly expanded their balance sheets in response to the financial crisis. To provide a more complete picture of how these institutions have responded by comparison with the Federal Reserve, we have added two charts. One is for the ECB and the other is for the Bank of England.Neither bank publishes data exactly like the Federal Reserve’s “Factors Affecting Reserves” data. Nevertheless, by examining changes in the asset composition of each institution, it is possible to draw meaningful comparisons.

The legends of each chart show the asset categories as they are labeled by each of the central banks in their weekly data releases.

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David R. Kotok Chairman & Chief Investment Officer