For most of the third and fourth quarter of 2011, global equity markets exhibited extreme volatility; at one point, the Morgan Stanley World Stock Index declined approximately 25%. This market turmoil was a result of significantly slower global economic growth, the reduction of US credit quality from AAA to AA, the European debt crisis and global geopolitical unrest. At the time, there was no telling how much worse things could get or how much longer and further stock markets would decline.

As you know, in early August we took a defensive posture, significantly reducing stock exposure in areas

sensitive to the economy and at one point instituted a relatively small "short" position. This strategy served us very well during the volatile and declining market. During the month of September, when US and global markets declined anywhere from 15-20%, the composite of all of our client portfolios declined by less than 3%. Had markets fallen further, this strategy would have continued to mitigate your risk and helped avoid a catastrophic decline in your portfolio value. Though markets continued to be volatile in the fourth quarter and tested the September lows a few times, stock prices — fortunately — did not fall further.

In late December we began to switch from defense to offense in regard to your portfolios structure. Had we been clairvoyant, we would have reinvested all of your funds at once in late December. However, there was not enough evidence to support such a risky move. Instead we invested in phases which we believe — over time — will have little effect on the success of your long term performance. Many investors are asking — "why are global stock markets exhibiting such strength and how long can it last?"

The primary reason that global equity prices have stabilized and begun an upward ascent is due to a reversal of trend in all of the problems that got us into the mess to begin with; (1) improving economic data, particularly in the US, most notably the better than expected unemployment data (2) the European governments providing significant capital to the banks in the region, and the crisis beginning to improve (3) less volatile geopolitics. Is the world in great shape? No. Is it better? Yes. Will it continue to get better? We think so.

Stock investors — namely institutions and similar to the market bottom of 2009 — have more cash on hand than normal. When economic outlooks improve, the force of such large cash balances drives stock prices higher and often longer than most investors believe possible. We believe, given our research, that we may be at the beginning of a cycle of upward biased stock markets that may last more than a year and possibly much longer.

Though we are more optimistic than just two quarters ago, we understand that risk continues to exist and that our more optimistic view could be de-railed by a decline in economic fundamentals, a worsening of the European debt crisis or unknown geo-political disruption. Therefore, we continue to manage risk through your portfolio’s asset allocation, sector management and the use of carefully placed stop loss orders.

If we are correct, we are at the early stages of a longer term — and very welcome — improvement in global economic fundamentals and stock prices. We believe our global, blue chip approach to investing will shine in this environment and look forward to providing you with strong returns over the longer term.

We hope this update finds you and your family well. If you would like get together to discuss your portfolio, or if you have experienced any significant changes in your financial situation that we may be unaware of, please let us know at your earliest convenience.

Sincerely,

James E. Demmert
Managing Partner