QUARTERLY LETTER

2nd Quarter 2012 — Investment Strategy Review

“I believe that stocks are depressed because there is a pervasive feeling that something awful is going to happen.”
                                          — David Einhorn


The stock market tormented investors during most of the second quarter which should come as no surprise given the grim macro-economic background. Thanks to a sensational early year rally, the S&P 500 index still managed to finish the first half with a gain of 8.3%, but nerves are on edge. The comment above by famed hedge fund manager, David Einhorn, accurately describes the atmosphere and as we head into the summer, many of Wall Street's best and brightest are worried about a replay of the 2008 financial panic. While the situation is not exactly the same, markets today are confronted with a similar toxic mix of a weakening global economy, fragile credit system, gigantic derivative overhang, and ineffective political leadership. Right now, the world is watching the debt negotiations in Europe and the focus will soon shift to the U.S. presidential election.

As value investors, we welcome gloom and the cheap prices it creates; however, as human beings we get zero joy out of the misfortunes of others. That said, we believe a near-term stock market decline would provide a low-risk, long-term buying opportunity. History clearly shows that the ideal time to invest is when fear is abundant and now that Facebook's IPO has bombed, few want any part of the stock market. Even major institutions such as endowments and pension funds have lost faith. They have been cutting their stock allocations and seeking safe harbor in alternative investments like private equity and structured debt products. We would advise them to remember one of our cardinal rules - never invest in anything that involves a fat commission and 200 page prospectus. Another example of the widespread pessimism enveloping stocks is a recent article in the Financial Times headlined “The Death of Equities?” which said the following: “Few people doubt, however, that the old cult of the equity - which steered long-term savers into loading their portfolios with shares - has died.” All this is reminiscent of Business Week's infamous “Death of Equities” cover published in August, 1979. Back then, the stock market would chop around for another three years, but it proved to be a wonderful period to accumulate shares for the long run. We believe history will also be kind to investors taking advantage of the current gloom.

No one can predict with certainty how Europe's crisis and the U.S. election will play out. To us the prediction game is wasted energy. We prefer to focus on investing in great assets, especially when the big picture is cloudy. These days we are able to acquire stakes in the world's most dominant companies at prices likely to be rewarding in the decade ahead. Investors have a tendency to complicate things, but when it comes to stocks it is all about the business. The better the business, the better the long-term returns - it's just that simple. At Mercer Capital this means stable enterprises with durable competitive positions that produce high returns on capital. We've got our shopping list out and will be a buyer if there is a clearance sale during the summer.

Thank you, as always, for your encouragement and support. Please call anytime.

6/30/12           Henry D. Mercer III

Index Return (Year-to-Date)   12/31/11 6/30/12
S&P 500 +8.3% Fed-funds0 - .25%0 - .25%
DJIA +5.4% 10 yr. T-note 1.88% 1.66%
    Oil (W.T.I.) $98.53 $84.96
    Gold $1,565.80 $1,603.50

* 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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