February 15, 2010 Shareholder Letter

February 15, 2010

Dear Shareholder:

As you have probably noticed, Allen Grimes and I are taking turns writing this shareholder letter. That has served to allow Allen, a lawyer (I know, but we can’t do without them!) to cover necessary business, while allowing me, when my turn comes, to ruminate on just about any subject that seems cogent, amusing or otherwise relevant. I’ll be eighty this year and rank has its privileges.

In my memory I have never seen such a parade of Senators and Congressmen following each other out of the door saying they are “tired” of the Washington scene or otherwise admitting they are in big trouble with the voters back home. Lyndon Johnson didn’t stand for election after getting mired down in Vietnam, but I can’t remember any others, though there may be a few. What is unique, I think, is that there are several who have already announced their departure and there is the possibility of more announcing in the near future. This is ominous stuff. Possibly the folks who are leaving are beginning to see the dangerous fiscal turn Washington has taken and don’t want to be around to have to take responsibility when the deficit chickens come home to roost.

In my opinion Washington’s current problems lie at the feet of both parties. The Republicans ran the war in Iraq without any reference to how to pay for it, running up the national debt in the process. Then at the end of the Republican administration and the beginning of the Democratic administration we attempted to bailout the financial system and stimulate the economy, both parties letting “how to pay for it” be a later decision. Nobody in either party took a position against spending this money, or pushed for taxes that would pay the bills. It would probably have been political suicide to do so, but that is not to say it shouldn’t have been done by somebody with enough courage. The result has been that for the first time in my 55 years in the business, Moody’s Investor’s Service is mentioning the possibility of downgrading U.S. Government securities from AAA to something less, maybe AA. My father, who lived through the Great Depression, never saw U.S. Treasury bonds threatened with a downgrading and would not have believed it possible.

Suppose it happens, or is about to happen? What do we do then?

I think there are two things we must consider. One is political and one has to do with our investment strategy.

Politically, we need to vote for candidates, regardless of party, who will radically reduce spending and who will increase taxes over a broad base in order to reduce our debt over time in some significant way. I am not sure such a candidate running on that promise could find enough votes to be elected. It may be that we have become so enchanted with spending other folk’s money and taxing somebody else that we may just have to die by that sword. But I don’t believe we will. Like the lady in South Pacific, I’m just a cockeyed optimist. I think Americans are already beginning to see this problem and can be persuaded to do something about it.

As for your investment strategy, what to do?

Well, one thing is for sure. A decline in the rating of our Treasury bonds will lead to some degree of loss in confidence. I think people will be concerned enough to seek refuge in bonds and commodities, rather than stocks. I do not believe there will be panic, nor do I believe inflation will be rampant, though there may be some inflation in commodities such as gold, oil and other major items of international trade. But inflation is unlikely to be broad or strong because recession, already being experienced, will hold inflation in check.

China will not sell our bonds, in any major way, because that would depress the price of U.S. Treasuries and hence, the value of China’s main international asset. It would be suicidal for them to do otherwise.

State and local municipal bonds will not default at the elevated level that some panicky news articles suggest.

I doubt that any of the doomsday predictions you hear will come to pass in any significant way.

I have made an awful lot of predictions here that may, indeed be mistaken. I have claimed age and imputed wisdom at the beginning of this letter. I’ll close with a couple of sobering aphorisms attributed to Will Rogers:

The quickest way to double your money is to fold it and put it back in your pocket.

Good judgment comes from experience, and a lot of that comes from bad judgment.

There are two theories to arguing with a woman…neither works.

If you find yourself in a hole, stop digging.

Never miss a good chance to shut up.

Sincerely

Thomas P. Dupree, President

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