In the spirit of the World Cup, let's break out the vuvuzelas and cheer on the home team! Over the past ten years, the cumulative gain for all of our clients is + 43%. Each Dollar invested with our Firm in the year 2000 is worth $ 1.43 today. In contrast, the cumulative loss for the S&P 500 over the same decade is - 15%. Each Dollar invested in that Index is worth just 85 cents today.

We have worked very hard for a very long time to preserve all of our clients' assets, and have managed the portfolios against downside risks in highly volatile equity markets. We have consistently delivered positive returns, and have out-performed the major benchmark in both relative and absolute terms. Goal!

It would appear that the stock market has commenced the second downturn which we have been anticipating. If history is any guide, the second downward adjustment could be more severe than the first. We experienced the first at the end of 2008 and early 2009. Then, there was a subsequent and highly speculative rebound which, try as it might, still did not erase the earlier losses sustained by many investors. This next leg down could be more harrowing, and like the first, it will be exacerbated by a shortage of liquidity. The maw between bid and ask will gape wider, and many stocks could fall to prices equivalent to their book value per share. Considering that the overall indexes are trading at three times book value, the downside could be quite precipitous.

We and our clients are prudently on the other side of the liquidity issue - we are safely in United States Treasuries which can be converted immediately into cash. It is now a matter of prudence as we prepare to re-invest that cash into deeply discounted equities.

What would the equity portfolio contain? Over the past several years, many businesses have taken dramatic steps to rein in costs and foster long-term profitability in their operations. Non-performing assets and burdensome debt have been winnowed away from corporate balance sheets, and there has been a concerted effort to improve safe and efficient production. We believe that as overall economic conditions strengthen, those companies which have well-managed businesses should reap major rewards from an increase in sales revenues. Therefore, we seek to invest in those companies which consistently maximize their operating margins, and are able to produce solid earnings results. Since the consumer is the catalyst for economic expansion, we favour those industries which should benefit from an anticipated increase in consumer spending: retailers, restaurants, and technology.

What about interest rates? Concerns about the sovereign debt crisis in Europe and about the ballooning debt of the United States have impacted currencies and interest rates. We anticipate that domestic short-term rates will remain low in the near term in order to facilitate the economic transition of many businesses which are facing immediate challenges. However, as overall economic conditions strengthen and as industries resume a solid level of profitability, we should expect a commensurate rise in interest rates. Financial institutions, insurance companies, and construction and mining concerns ought to benefit from any modest uptick in short-term rates.

Is it time to buy stocks again? It could be soon.

How quickly could we be re-invested? Depending upon market conditions, we could be substantially invested in equities within a very short period. In the meantime, it is imperative that we maintain our strict disciplines, and identify opportunities in the midst of panic selling in order to snatch up bargain priced stocks of well-managed companies.

George A. Leylegian
President and Chief Executive Officer