QUARTERLY LETTER

1st Quarter 2010 — Investment Strategy Review

“With every successive cyclical pile-up in the past 20 years, the Fed’s interest rate has gone lower and its printing press has whirred faster. You start to wonder where it’s going to end. ”
                                          — James Grant / Grant’s Interest Rate Observer


The U.S stock market continued to rally in early 2010 as the S&P 500 finished the first quarter with a gain of 4.9%. What a difference a year makes. Since bottoming last March, the index has surged 72.8%. If not for the horrifying crash that preceded the advance, investors would be ecstatic. Unfortunately, the S&P is still 6.6% below where it traded the day before Lehman failed and 25.3% below the October 2007 record high. Investors, on balance, remain unconvinced that the rebound is genuine and this is bullish in terms of sentiment. Valuation is another matter. The incredible bargains created by the panic are tough to find. While corporate earnings are recovering, it is the liquidity generated by the Fed that is powering the rally. Cash equivalents such as money market funds are yielding peanuts, so the higher stocks go the more pressure investors feel to leave the sidelines. The Fed has stated that it will not boost rates significantly until the employment situation improves which should keep the liquidity flowing.

This loose monetary policy is necessary, but we worry about the ultimate impact. The comment above by James Grant aptly sums up our concern. Throughout the past 20 plus years Wall Street has blown itself up with alarming regularity, only to be rescued time and time again by the Fed’s slashing of its funds rate. The subprime mess was so precarious that the rate is now zero. This is great for speculators, but rotten for savers. Where, indeed, is it going to end?

Last quarter’s letter mentioned the possibility that the bull cycle in U.S. Treasuries was over; as a result, we have been researching asset allocation strategies appropriate for an environment in which bonds have little appeal. The more investigating we do, the more we keep coming back to the teachings of Warren Buffett who once said, “Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now.” Therefore, we will avoid exotic stuff and maintain our focus on the value equity approach that has served us well. Many are worried that the U.S. will experience a bout of inflation. Again, we rely on the Oracle of Omaha who advised that, “The best protection against inflation is your own earnings power. The second best is owning a wonderful business – not buying metals or raw materials.” He must truly believe it, because Berkshire Hathaway just acquired a railroad, the Burlington Northern.

Thanks, as always, for your encouragement and support. Please call if you have any questions.

3/31/10           Henry D. Mercer III

Index Q1 Return   12/31/09 3/31/10
S&P 500 + 4.9% Fed-funds0 - .25%0 - .25%
DJIA + 4.1% 10 yr. T-note 3.83% 3.84%
  Oil $79.36 $83.76
   Gold $1,095.20 $1,113.30

* Please contact Mercer Capital Advisers, Inc. if there are any changes in your financial situation or your investment objectives or if you wish to add to or modify any restriction to the management of your account. Our current disclosure statement as set forth on Part II of our form ADV is available for your review upon request.

* Mercer Capital’s management fee is billed quarterly, in advance, based upon the market value of the assets on the last day of the previous quarter.

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