QUARTERLY LETTER

2nd Quarter 2016 — Investment Strategy Review

“The major consideration for the investor is not when you buy and sell, but at what prices.”
                                          — Ben Graham


Now that the British decision to abandon the European Union has jolted financial markets, investors are wondering if the fallout will produce additional turmoil in the months ahead. Given the degree of surprise, it may take a while for things to become clearer. There are few historical parallels to provide much context. The presidential election circus here in the U.S. had us expecting a volatile summer, but the Brexit news was totally unexpected. Years ago John Kenneth Galbraith made the classic comment: “We have two classes of forecasters - those who don't know and those who don't know they don't know.” This pretty much sums up the current situation.

The recent chaos briefly knocked the S&P 500 index into negative territory before a late quarter rebound. As highlighted in the table below, the S&P 500 squeezed out a gain of 2.7% during the first half. Until last week, the short-term trend had been upward in the wake of a nasty early year correction. Stocks in the U.S. have been buoyed by the growing perception that economic sluggishness and global financial stress would postpone rate hikes by the Federal Reserve. Heading into 2016, projections by the members of the FOMC signaled multiple increases were likely - more forecasts gone askew…

The violent international market response to Brexit is a clear example of how linked everything has become. Trillions are deployed at the push of a button. Currencies, for example, have experienced incredible volatility. Swings that used to take years to play out, now take seconds. Wish we had more confidence that politicians and central bankers understood the impact of their actions. Get ready. It could be quite a summer.

As mentioned above, history books provide little guidance to investors these days. The best illustration of how abnormal the current environment has become is the bond market. $11 trillion of government debt worldwide trades at negative yields. Talk about misallocation of capital. No one in their right mind would purchase a long-term security yielding less than nothing. The only way to generate a profit is if yields become even more negative. We can find better odds at Monmouth Park. The radical monetary policies forcing yields below zero in hopes of generating economic growth are having unintended consequences. Wealthy people in Japan are buying safes to store cash rather than invest it. History does say that the hoarding of cash is a byproduct of deflation. Who really knows what it means this time?

Warren Buffett's sidekick, Charlie Munger, has often said that their investment success comes from being “consistently not stupid, instead of trying to be very intelligent.” This common sense wisdom is something we always keep in mind. Investing does not reward extra points for degree of difficulty. Here at Mercer Capital, we keep it simple. It is all about value. Our core philosophy echoes Ben Graham's belief that price, not market forecasting, should determine the attractiveness of an asset. Without question, the current macro picture appears gloomy, but fear tends to generate value, or to use Graham's words, a better “margin of safety.” In a crazy world that is producing negative bond yields, owning equity stakes in dominant businesses seems sensible. We'll be a buyer if summer brings a correction.

Lastly, remember that the U.S. stock market has recovered from a number of shocks over the years such as wars, financial accidents, assassinations, acts of terrorism, political scandals, and natural disasters - sometimes quickly. It pays to be bullish long-term.

Thank you for your encouragement and support. Please call anytime.

6/30/16           Henry D. Mercer III

Index Return (Year-to-Date)   12/31/15 6/30/16
S&P 500 +2.7% Fed-funds .25 - .50% .25 - .50%
    10 yr. T-note 2.27% 1.49%
    Oil (W.T.I.) $37.04 $48.33

* 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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