3rd Quarter 2009 — Investment Strategy Review

“We came very, very close to a global financial meltdown, a situation in which many of the largest financial institutions in the world would have failed, where the financial system would have shut down, and in which the economy would have fallen into a much deeper and much longer and more protracted recession”
                                          — Ben Bernanke (Feb. 25, 2009)

What a difference a year makes, at least for the stock market. The economy, well that’s another matter. September 2008 was the most critical month in U.S. financial history since the Great Depression. The failure of Lehman Brothers ignited a global panic and as noted above by Federal Reserve chairman, Ben Bernanke, the situation was dire. Here we are a year later, and thanks to the radical rescue measures engineered by the Fed and Treasury, some semblance of order has been restored. Equity indices are in the midst of a spectacular rally – no doubt fueled by the massive amount of liquidity being generated by the world’s central banks. The S&P 500 has soared 56.2% since bottoming in March, its best six month performance since 1933. Unfortunately, despite the huge bounce, the index still finished the third quarter far below where it was the day Lehman died.

The current stock market advance is not unusual given the intensity of the panic that preceded it. History’s most devastating bear cycles have been followed by major rallies. We, in fact, would not be surprised to see the uptrend continue. A century ago Wall Street was battered by a similar banking crisis, the Panic of 1907. Back then, the steep losses sustained by the stock market indices were also comparable, with the Dow Jones Industrial Average plummeting 48.6%. The Dow then climbed 61% in nine months and a total of 90% over the next two years, nearly reaching its previous high. Few believe the current rally can power the indices anywhere near their 2007 peaks. This lingering pessimism is bullish from a contrary perspective. Bull markets thrive when the Fed is accommodative and valuations are reasonable and this remains the case at present. Furthermore, recent policy statements from the FOMC have maintained that the Fed-funds rate will remain low for “an extended period” which will keep the liquidity flowing.

The economy is the wildcard. It is tough being optimistic with the system so bogged down with debt and so many Americans out of work. Nevertheless, as discussed in previous letters, the stock market tends to recover prior to a recession’s end. It is a mistake for a long-term investor to obsess over economic data, especially when top-quality bargains are available. We are encouraged by the investment opportunities being presented by the shares of the world’s most dominant business franchises, an asset class overlooked for years. These mega-caps possess what Warren Buffett calls a “durable competitive advantage” and can still be purchased at cheap prices. We are confident that Mercer Capital’s holdings among these companies will produce sizeable returns over the long run.

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

9/30/09           Henry D. Mercer III

* 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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