QUARTERLY LETTER

Year-End 2010 — Investment Strategy Review

“The market cares about cheap money to the exclusion of almost all else.”
                                          — John Authers


The bulls were rewarded in 2010 as the stock market finished the year with an impressive rally. This advance gathered momentum when the Federal Reserve signaled that it was resorting to a second round of quantitative easing. “QE2” was geared to lower borrowing costs and provide support for the housing sector, but in an op-ed piece published in the Washington Post, Fed chairman Bernanke mentioned that the central bank was also targeting equity prices. The S&P 500 index closed out 2010 with a gain of 12.8%. While stocks have thrived, the real action has been in riskier asset classes such as commodities. Things like silver, palladium, cotton, and coffee soared this year. As noted above by Financial Times columnist, John Authers, institutional investors have been emboldened by the “cheap money” created by the Fed. They believe that the stock market will rebound as long as liquidity remains plentiful. This logic may seem simplistic, because the macro environment looks dangerous. Nevertheless, we cannot help but remember the old Wall Street axiom – “Bears sound smart. Bulls make money.”

Here at Mercer Capital, we were bullish twelve months ago because pessimism was rampant. History shows that the best time to buy is when investors are fearful. Today, sentiment is not as gloomy, yet probability favors a continuation of the rally. 2011 is the third year of President Obama’s term. The third year of a presidential term has a fantastic winning percentage. There has not been a negative third year since 1939 and the average gain for the S&P 500 has been 17.5%. Sure, the bears will argue that this time is different, but do not bet on it.

Most importantly, we are optimistic about the future of the U.S and its unique brand of capitalism. A big advantage that this country possesses is the ability to produce great companies operating dominant businesses. This edge has not been eroded by the nation’s current economic challenges. The good news for patient investors is that the shares of the highest quality U.S. companies can still be purchased at bargain prices. Many of these businesses generate the bulk of their revenue overseas, which is an attractive way to gain exposure to the emerging markets. Furthermore, their balance sheets are loaded with cash - granting them leeway to boost dividends, buy back stock, and invest for growth.

We do not mean to ignore the risks - chronic unemployment, deficits, foreclosures, underfunded pensions, crumbling infrastructure, terrorism, the European debt crisis – want to hear more? A major wildcard in 2011 will be China. Jim Chanos, a brilliant investor, predicts that a real estate bust there will cause its dynamic economy to implode. Chanos is not a fool. He was among the first to realize that Enron was a fraud. It is also debatable that the Fed’s manipulation of asset prices here at home will have a favorable long-term impact. By keeping interest rates artificially low, Bernanke is penalizing savers and rewarding speculators. The Forbes 400 list of the wealthiest Americans is now populated with a large number of hedge fund managers. This is bearish from a big picture perspective.

Our job is not forecasting, but rather the rational allocation of your investment capital. As noted in recent letters, we have been expanding our focus and researching strategies appropriate for an environment where global markets exert more and more influence. We will not, however, abandon our value compass.

Thank you for your confidence and encouragement. We hope that you have a happy, healthy, and prosperous New Year.

12/31/10           Henry D. Mercer III

Index 2010 Return (Y-T-D)   12/31/09 9/30/10
S&P 500 +12.8% Fed-funds0 - .25%0 - .25%
    10 yr. T-note 3.83% 3.30%
  Oil $79.36 $91.38
   Gold $1,025.20 $1,421.10

* ase 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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