Fourth Quarter 2010

Quarterly Review & Outlook

We are disappointed with the performance we generated during this past quarter. Our defensive approach held back much of the potential gains that were generated by our value holdings. The implementation of QE 2 that we discussed last quarter had the (unintended) effect of increasing interest rates and (intended) fueling a significant market rally. We have little thus far to show for the hundreds of billions of dollars spent on QE2. The Republican victories in the house and the last minute tax legislation did help to increase confidence in the likelihood of a more pro-business government which clearly helped the equity markets. Additionally, some recent economic statistics have helped to support the notion that the risk of a double dip recession has abated for now and that the economy is beginning to gain some traction.

We continue to view the equity markets as overvalued, the economic environment as getting better but still very fragile and the excessive level of debt (particularly Federal) as an issue that increases the risk of unwelcomed events. Please note that the best performing indexes were the risker, more volatile indices such as the NASDQ and the Russell 2000 (small caps). This is indicative of a high level of speculation, not dissimilar to what we saw in the late 1990’s just before the Tech bubble. As a point of reference, the Russell 2000 Index (consisting of small cap stocks) was up more than twice as much as the Russell 200 (Blue Chip stocks). We have seen this play before (in the late 90’s) and had the same frustration with underperformance relative to the indices. Our conservative approach worked out well in protecting client’s wealth back then and only time will tell if our conservative approach will help to conserve capital in the year(s) to come.

We thought it would be helpful to share an historical overview of market “bubbles”. Jeremy Grantham of GMO LLC recently published a speech on the topic. Mr. Grantham is a very experienced (and successful) institutional money manager, a wonderful financial historian and a terrific writer. A copy of his speech can be found here: Grantham’s Pavlov’s Bulls. We hope you find it as enlightening and entertaining as we did.

As always, should you have any questions concerning our outlook or your portfolio, please do not hesitate to give us a call.

Sincerely,

James A. Martin, III