QUARTERLY LETTER

2nd Quarter 2009 — Investment Strategy Review

“I get figures on 70 – odd businesses, a lot of them daily. Everything that I see about the economy is that we’ve had no bounce. The financial system was really where the crisis was last September and October, and that’s been surmounted and that’s enormously important. But in terms of the economy coming back, it takes awhile. There were a lot of excesses to be wrung out and that process is still underway and it looks to me like it will be underway for quite awhile.”
                                          — Warren E. Buffett (CNBC — 6/24/09)


After tanking in early 2009, stocks rebounded during the second quarter. At its March 9 low, the S&P 500 index was down 25.1% for the year and 56.8% from its peak, ranking the decline among the worst ever. Abundant gloom produces big rallies and this has been the case of late. The S&P 500 advanced 15.2% during the quarter finishing the first half with a gain of 1.8%, but there is nothing to crow about since the index rests where it was eleven years ago. Yes, that is correct, eleven years ago.

The credit crisis triggering last autumn’s financial panic has been referred to as an “economic Pearl Harbor” and thanks to a decisive counter-attack by the Fed and the world’s central banks, the bears are now in retreat. It would be wonderful if happy days were here again, but the battle is far from over. Consumer’s balance-sheets remain stretched, home prices continue to sag, China is questioning the dollar’s dominance, and the regulatory reform process has just begun. While a growing number of economists believe a recovery is imminent, people operating in the non-theoretical world see few signs of a turn. As noted above by Warren Buffett, Berkshire Hathaway’s businesses are not detecting a bounce. Back in 2007, Berkshire’s diverse enterprises flagged the onset of a recession well-before economists acknowledged one was possible. We will feel better when Buffett sees a business uptick.

The stock market tends to rally prior to a recession’s end, so it is a mistake to obsess over economic statistics. History’s most punishing bear cycles have been followed by huge advances. Therefore, the current rebound may have staying power even if the economy struggles in the near-term. The torrent of liquidity created by the Fed might be enough to support stock prices. What remains important is that the panic of 2008 has produced equity values for select companies that will generate sizeable returns in the years ahead. Patience and discipline, as always, will be critical. Our cash allocation is a bit larger than normal, but these are abnormal times. The enormous cost of the economic war boosts the threat of inflation which would be lethal for long-term bonds. Remember, Mercer Capital’s mantra is “margin of safety” and we will not invest cash unless the risk/reward makes sense. The painful experience of the recent past has only reinforced our commitment to this investment philosophy.

Thanks for your confidence and support. Please call anytime.

6/30/09           Henry D. Mercer III

Index 1st Half Return Key Int. Rates 12/31/08 6/30/09
S&P 500 + 1.8% Fed-funds 0 - .25% 0 - .25%
DJIA - 3.8% 3 mo. T-bill .11% .21%
  10 yr. T-note 2.25% 3.52%

* 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.

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