The Rabbit is the fourth sign of the Chinese zodiac, which as you may know consists of 12 animal signs. The Rabbit is a lucky sign and, according to Chinese tradition, the Rabbit brings a year in which you can catch your breath and calm your nerves. This outcome should bring relief to investors given that the last few years have been anything but calm. Our research which, by the way, does not include astrology as a component, suggests that this year very well may be a more calm and profitable year for investors. The global economy is transitioning from recovery mode to a more sustainable growth path. This change has important implications for investors.

As the global economy enters a more sustainable growth trajectory, corporate profits should continue to grow at respectable levels, driving stock prices higher throughout the year. However, 2011 will most likely be a year that

will favor sector and stock selection over index returns. This differentiation is important because this economic cycle is quite different than those in the past. While past economic growth cycles have allowed all sectors of the economy to benefit, this cycle has left some sectors behind and will most likely continue to do so. Our research suggests that even though the global economy will continue to grow, there will continue to be weak areas such as unemployment, the housing market and the banking industry, to name a few. Therefore, it will be important for us to focus on the sectors and industries that are healthy and unrelated to these “black sheep” of the current economic expansion and by doing so deliver healthy stock performance to you.

The Year of the Rabbit and the growth of the global economy should also bring a continuation of rising interest rates. This too has significance. Most importantly, we will be able to buy individual, high quality, bonds with very attractive yields – something that has not been available for a number of years. Additionally, rising interest rates carry great risk for bond fund investors, and investors who hold long dated bonds – neither of which we own for you.

As economies transition from recovery to sustainable growth, the risk of inflation increases and we will be watching this very closely throughout the year. The best ways to beat inflation is through stock exposure, particularly through certain sectors that benefit from the higher prices that result from inflation.

It looks to us that it could be the Year of the Rabbit for the global economy and financial markets. However, we are also acutely aware of the many risks that could potentially derail this outlook. We have just narrowly escaped what could have been a global economic depression and economies are not quite as stable as they once were. Therefore, we will continue to maintain our risk management tools which include your portfolio’s overall asset allocation, sector exposure, and the use of very carefully placed stop loss orders.

Each year we update our Form ADV which we file with the Securities & Exchange Commission. If you would like a copy of this document please let us know. As always, please let us know if you would like to get together to review your portfolio.

All of us here wish you a happy and safe new year.

Sincerely,

James E. Demmert
Managing Partner