The Storm Before the Calm Market Outlook 2012 New Castle Investment Advisors, LLC Mark Connolly, Principal Presented January 24, 2012

2011 Market Review Flat Stock Year US—S&P 500 Up 2.11% Great Fixed Income US—Barclays Aggregate (Long) Up 29.93%; Municipals Up 10.7% International Down—MSCI World Ex-US (11.78%); Emerging Markets Down (18.7%) US Stocks—Growth Beat Value REITS Stand Out—Up 8.5% Stand-Out Stocks: McDonalds, IBM, Pfizer, Home Depot Laggards: Bank of America, Alcoa, Hewlett-Packard, Cisco

2011 In Perspective Lackluster Performance—what happened? -Global Equities Up 10% by late April. -Japan tsunami. -Political Foibles and Blunders—whether to commit capital not by economic fundamentals or by parliamentary maneuvers. -Investors alternate between the domestic politics of small European countries to US and back again.

2011 In Perspective By Spring on, economists and investors quickly changed their views on likely economic growth— consensus US GDP forecast drops from high 0f 3% in February to 1.5% September. Economic Indicators drop in May—Double Dip Recession Talk. China/India Uncertainties; Mid East Turmoil; Rising Crude; Europe Drags. Late summer, high stock market volatility—25% up-and-down swing; S&P 500 moved up or down by 1% or more on 96 out of 252 trading days.

Looking Forward: Key Macro Themes for 2012 Global Economic Growth will continue to be positive but uninspiring; US Household Deleveraging will continue; Employment will improve—on the margin; Interest rates will remain low as Fed continues its focus on high unemployment and housing; Political uncertainty will persist in Europe and U.S. with little prospect for near-term solutions— whether market is better or worse depends on Europe;

Looking Forward: Key Macro Themes for 2012 Policy mistakes are possible and could be a wild-card; The Euro zone is in recession now; US Economy continues to expand. ISM Index tells compelling story; Investors focused on Europe and U.S. debt problems--not actual world economy; China, policymakers focus on keeping economy growing.

Setting the Stage: Investor Sentiment--Wary “Lost Decade” for U. S. Investors—S&P 500 negative annual or flat returns 5 out of 12 last years, 42%, vs. historic norm of 1 out of 4 years, or 25%.; Three-decade outperformance of bonds to stocks (11.5% vs. 10.8%)—first time since Civil War; Investors today more wary than last year at this time and only 42.7% of investment advisors will increase their clients’ allocation to U.S. stocks. Expected U.S. stock returns in 2012—40% say flat to down; 77% say 8% or less—room to run?

What the Facts are Telling Us Corporate America—strong balance sheets. Two trillion in cash. U.S companies the most profitable in 40 years; margins of non-financial companies in U.S. now at 15%--highest since Was at 8.7%, June, Consumer Strength—ratio of house-hold debt service payments to personal disposable income falling—lower than most of last decade (now 11%--was 14% in 2007). Employment improving—in 2011, the economy added more jobs since 2006—1.64 million. December, 2011, nonfarm payrolls added 200,000 jobs and 46,000 were manufacturing and construction.

What Are the Facts Telling Us Business inventories are low—could add more than.5% to 1% to GDP in 2012; core capital goods orders now at all-time high. Recovered twice as fast as last economic recovery; Housing—multifamily construction improved 32% in November. Housing starts up 9.3% in November; Consumer confidence at 64.5% in December. Was 40.9% in October; Third straight year of increasing retail sales.

Question: The U.S. Stock Market— cheap or expensive? Answer—cheap. Interest rates in major countries near historic lows. The S&P dividend (E/P) is now much higher than the yield on the 10-year U.S. Treasury (7.72% vs. 1.89%). Highest in modern times. Similar trend in most major countries S&P 500 P/E is Historic average is 15%. U.S.corporate revenues strong and earnings strong despite slower overall economic conditions.

2012 Market Outlook Global economy to expand at rate of 3.5%. U.S. GDP will be 2.5%; Euro zone will contract— (.5% +/-). China, 9%. LOOK AT GDP GLOBALLY. Total Return--Stocks lower risk than fixed income. Bond yields continue to be low but bias is up. Since 2006, $900 billion has gone into fixed income and over $400 billion has come out of stocks--$1.3 trillion spread unprecedented. Asset correlations to start decoupling—Risk- on/Risk-off.

2012 Market Outlook Beware extrapolation bias—rear-view driving. Reversion to the Mean—will this start in 2012? Sector outperformance—yes. Overweight health, industrials, information technology. High-yielding macro stocks still relatively undervalued. Under-weight consumer staples, utilities. Watch changing conditions— election, economy, international developments. Favor U.S. Stocks. S&P 500 up 12-15%--maybe more. Domestic economy not that dependent on Europe.

2012 Market Outlook Global Investing—Neutral on Europe. Already priced in but uncertain. Emerging Markets—slightly positive. U.S. better. Fixed Income—High Yield debt and medium grade corporate debt relative outperformers. Treasury yields could go lower but bias shifting upward. Currencies—U.S. save haven as is Japanese Yen but appreciation potential limited. Volatile. Euro zone problematic. Emerging markets commodity markets could have surprises. Volatility trend likely. Don’t time market.