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    April 1, 2011

                                                                         The Power of Patience  

    It was yet another solid quarter for the stock market, ending with a gain of just over 5% for the S&P
    500. This marks its best 1st quarter performance since 1998.  Despite a mid-quarter sell-off of
    approximately 7% sparked by mid-east unrest centered on Egypt and Libya, the bulls were able to
    extend the gains of 2010. Fund flows, a measure of sentiment, show that investors continue to move
    from bonds into equities, pushing prices higher. Economic data suggests that while the recovery is far
    from robust, growth is returning to many sectors of the economy. Corporate earnings remain in an
    uptrend, although at a somewhat slower pace than in previous quarters. Tempering the enthusiasm is a
    housing industry that cannot find a bottom, which in turn contributes to a stubbornly high rate of
    unemployment, as well as energy prices that keep creeping higher.

    It was exactly one year ago today that our 2010 spring newsletter titled The Power of Dividends was
    published. In that piece we noted that investment strategies built upon the concept of total return,
    have, over time, proven to be wealth builders for those willing to weather the vagaries of the financial
    markets. We firmly believe that the ability to withstand domestic and world events that shake
    investors’ confidence is vital to long-term success in the stock market. Time and again the term “get
    me out at any price” has proved to be the downfall of many who invest in equities. War, oil price
    shocks, and financial chaos are some of the major factors that affect investor sentiment, and with
    today’s 24/7 media coverage it only exacerbates the challenge to remain disciplined. We thought that it
    might be of interest to look at some major historical events that have affected the markets, and
    measure their impact on prices.

    Unrest in the mid-east is nothing new. In August 1990 Iraq invaded Kuwait, an action that was met with
    international condemnation, and touched off what history refers to as Gulf War I. Economic sanctions
    were imposed on Iraq by the United Nations Security Council, and a coalition of forces were deployed
    to oust the invaders from Kuwait. (Does this sound familiar?) After a series of aerial bombardments
    followed by a ground assault, the Iraqis were expelled in early 1992 and peace was restored. In the
    face of a conflict that could have had far ranging implications, the stock market stood firm, and in the
    year following the end of the conflict the major stock averages had gained more than 10%.

    In 1998 the markets did a dress rehearsal for the 2008 financial collapse when Long-Term Capital
    Management, a Greenwich, Conn. hedge fund imploded. Some of Wall Streets “best and brightest”
    relied on computer models thought to be flawless, and believed that leverage was the road to higher
    profits. (Does this sound familiar?) A bond market correction in the summer of 1998 sent LTC’s
    investments into a tailspin and the fund lost almost $4.5 billion overnight. Fearing a market collapse,
    the Fed intervened, and within a matter of weeks the crisis passed. The event triggered a sharp sell-off
    in stock prices with the S&P 500 falling some 15% that summer. One year later the index had
    recouped all of its losses and stood more than 15% above the pre-crisis level, with a significantly
    larger gain when measured off the market low during the fiasco.

    Oil price shocks are a subject that could fill many pages. Some of us (Bill & Bob, but not Andrew) can
    recall long lines to get gas during the 1973 oil crisis. In response to US involvement in re-supplying
    Israeli military forces, OPEC, along with some other oil-exporting countries, declared an oil embargo
    against the United States. In the early part of 1974 a settlement was reached and the embargo was
    lifted. In the years since then there have been many exaggerated moves in oil prices, the most recent
    being in 2008 when oil was priced at over $140 per barrel. After a subsequent decline to about $40, oil
    now stands at just over $100 per barrel. It is interesting to note that inflation adjusted oil prices today
    are less than at the peak of prices back in 1979. It seems that economies can prosper in the face of
    volatile and often uncertain energy markets.

    There are many other examples of events that can shake the financial markets: the sharp rise in
    interest rates that brought on the “crash of 87”, the high-tech boom and bust of the 90’s, and the flash
    crash of May 2010. And, with today’s 24/7 media coverage, any negative event, big or small,
    challenges the spooked investor to avoid any knee-jerk reactions and to remain disciplined. Through
    all of these, the market has endured and remains a viable venue for wealth building. The “power of
    patience” allow investors to weather the most uncertain of times.

    Lest we appear to be no more than market cheerleaders, there are concerns. Fiscal deficits, surging
    food and energy prices, disasters in Japan, and the impending end of the Feds quantitative easing this
    June, along with the aforementioned residential housing situation to name a few. Job creation remains
    elusive, and the unemployment rate is hovering around 9% a full 21 months after the end of the most
    recent recession. Stock selection is key, and here at Abbot we will use periods of market weakness to
    accumulate equities we feel are ripe for price appreciation in the months ahead.

                                                             1st Quarter Scoreboard 2010
                                                                      Dow Jones: +6.4%
                                                                      S&P 500:    +5.4%
                                                                      NASDAQ:  +4.8%