QUARTERLY LETTER

Year End 2016 — Investment Strategy Review

“Here's something to think about: How come you never see a headline like 'Psychic Wins Lottery'? ”
                                          — Jay Leno


The best description for the incredible series of events occurring in 2016 came from Barron's columnist Randall Forsyth who commented that “what was expected didn't happen, and what couldn't happen did.” Donald Trump's stunning victory alone would have given the year a prominent place in history, but throw in Brexit and the Cubs' World Series triumph and now you are talking one for the ages. Pollsters, pundits, strategists, forecasters, and other talking heads must be eating humble pie during the holiday season. The unexpected also occurred in the investment world, which should not come as a shock. On Wall Street, surprises happen often and this certainly was true in 2016. It is axiomatic in the money game that when you hear the word “never,” it is about to happen. Something to keep in mind in the future.

Twelve months ago, the Federal Reserve was projecting multiple rate hikes, but a global stock market correction in January postponed additional tightening. With the Fed sidelined, stocks began to rally before settling into a trading range prior to the presidential election. Well, everyone knows what happened. Few gave Trump much hope of winning and many feared that the stock market would tank if he pulled off an upset. As more and more states fell into the Trump column on election night, S&P futures did indeed begin to collapse, but the Trump slump lasted only a matter of hours. By morning stocks had begun an impressive advance that would carry into year-end. The S&P 500 finished 2016 with a gain of 9.5%, an outcome many felt was impossible in early November. Defensively positioned institutional investors were forced to chase the rebound in an attempt to salvage their annual performance numbers. Even the Fed was forced out of its paralysis as it recently boosted the Fed-funds rate. It will be interesting to see what 2017 serves up for an encore.

Financial media is filled with market forecasts this time of year and the perception that a Trump administration will be more business friendly has generated optimism among investment strategists. A growing consensus believes that the combination of tax cuts and less regulation will bolster corporate earnings and maintain the bull cycle. History shows, however, that the stock market thrives when investor sentiment is pessimistic and we will be watching for signs of rally killing euphoria in the months ahead. With the Dow hovering around the 20,000 level, the good news is that investors are cheerful, not yet greedy. As we often remind you, our job is not forecasting, but rather the disciplined investment of capital. With stock market indices already at record highs and interest rates beginning to rise from record lows, the investment climate could prove more difficult in the year ahead than the seers now anticipate.

Investing works best when kept simple. It is all about owning great assets purchased at attractive prices. Here at Mercer Capital, our ideal asset is an equity stake in a dominant business. The challenge today is not finding an exceptional enterprise, but discovering a bargain value likely to produce a superior rate of return over the long run. A market correction would allow us to invest with a greater probability of success. While the president-elect is attempting to rev-up animal spirits, do not abandon the concept of risk versus reward. We are going to continue to follow the example set by legendary investors such as Warren Buffett and John Templeton. They made their fortunes buying aggressively in falling, not rising, markets which requires cash and courage.

Please remember that we are always long-term bullish and hunting for opportunity. Value is a constant focus, but we recognize that sustainable earnings growth is the real engine powering sizable investment returns. One can be less price sensitive with an extraordinary business, especially if it is operated by highly skilled management that owns a significant stake and treats shareholders as partners. Integrity is key. Good people tend to both allocate capital effectively and nurture a productive corporate culture. We do not mind paying up for these situations and then sitting tight.

Thanks, as always, for your encouragement and support. We hope that you have a happy, healthy, and prosperous New Year.

12/31/16           Henry D. Mercer III

Index Return   12/31/15 12/31/16
S&P 500 +9.5% Fed-funds .25 - .50% .50 - .75%
    10 yr. T-note 2.27% 2.45%
    Oil (W.T.I.) $37.04 $53.72

* 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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