Global economic conditions have improved over the last few months. However, recent data on employment, housing, industrial production, and retail sales remains very week. Despite improvements in the global financial system, developed economies are still fragile and showing only small signs of improvement. At this point, the LOM Investment Policy Committee expects that economic headwinds will continue through at least late-2009. This has caused us to make the following strategic forecasts: Equity Markets Equity markets were heavily oversold in early March. Since that time, the S&P 500 has rallied over 37% and we now believe that equities are nearing unjustified levels. At this point, economic data indicates just as many "yellow weeds" as "green shoots", meaning there is nothing to suggest either a strong economic recovery or a sustainable rally above current equity levels. Although the possibility for a summertime surprise remains, we believe it is more likely to see a down or flat market by the fall than an up market. While we are leaving our target equity allocation unchanged for now, we anticipate lowering our allocation by 5.0% if the S&P 500 hits 950 and raising our allocation by 5.0% if it hits 860.

Alternative Investment Markets In the alternative investment space, real estate funds and commodities have performed relatively well over the last few months. Commodity gains have been driven by demand in China, where industrial activity has been up over the last 3 months, and have also piggybacked onto the oil rally. Going into this summer, however, we don't see a lot of support for a continued rally in commodities without increased demand from the G-7 countries. In the longer term, we expect commodities to outperform other asset classes as economic growth resumes. In addition to being a good inflation hedge, the case for commodities includes supply constraints due to mine closures and a lack of exploration recently because of the economic downturn. Since our long-term expectations offset our short-term expectations for commodities, we are leaving our target alternative investment allocation unchanged.

Fixed Income Markets Although government bond yields have increased from record lows seen 6 months ago, rates are still at historically low levels. We see very little upside potential from here and believe that it is no longer a question of if rates will rise, but rather a question of when rates will rise. Although unclear when it could take effect, inflation remains a looming concern. In our view, short-term and floating rate bonds are the most attractive fixed income investments since they will relatively outperform longer-term, fixed rate bonds in a rising rate environment. We are cautionary on longer-term, low-yield debt and expect an inflationary environment will drive up yields on longer duration bonds in the future. We are leaving our target bond allocation unchanged at 25.0% with a continued focus on short-term maturities.

Currency Markets Despite all the headlines about currency movements and a weakening of the U.S. dollar, the Japanese Yen, Euro, British Pound, and Swiss Franc have moved mostly sideways and range bound against the dollar over the last month. We believe this trend is likely to continue with the major currencies in the near future, with the British pound being the only wildcard in the bunch. Based on these expectations, we are leaving our target currency allocations unchanged.