Peattie Capital Management :: Invested in the Individual

November 6, 2011

Range of Returns*	OCTOBER	YTD
All Custom Accounts**	(4.4%) - 9.3%	(14.4%) - (2.4%)
All Split Accounts**	(.6%) - 3.5%	(11.6%) - (9.3%)
S&P 500	10.8%	(.3%)

*Returns are net of fees and commissions and the S&P 500's return excludes dividend reinvestment.
**Includes all accounts over $50,000 under discretionary management. All numbers are unaudited.
The risk of loss always exists, and past results are not necessarily indicative of future results.

Comments on Performance

The markets gave us another wild ride in October, starting with a 3% drop on the first day of trading, and then a 3.8% bounce in the last hour of the day on the second day of trading. I have said repeatedly that my primary goal for most accounts is the preservation of wealth, and in October I stayed very defensive overall, with significant cash holdings. The weakest split account, for example, was 80% cash. The weakest custom account is one of my personal accounts, in which the loss was $2,000.

For the year, the weakest custom account is the IRA account of a client which is smaller and more speculative than his regular account, with only five positions. In November, it is already up nearly 3%. Taken together with his other account, the client's performance is much better, and historically has performed very well, losing only 12% in 2008, when the market was down over 40%, for example.

My two most recent "Featured Stocks" have been terrific: Carters ("CRI") returned 27% from the time I recommended it in the August 6 newsletter through the end of October, and Family Dollar ("FDO") returned 17% from the October 3 recommendation through month end. These two positions have outperformed the S&P 500 by 23% and 3% respectively since their recommendations. I have bought FDO as high as $58, but would wait for a pullback to the $36 range before adding any more CRI. Please contact me if you'd like a list of all PCM's recommendations from the past 12 months. Note that there was no "Featured Stock" in the September newsletter.

KVH Industries ("KVHI") has been disastrous, and I have sold a portion of it to harvest what is now a long-term loss. The game-changing marine satellite communications systems are performing very well, but everything else has been disappointing. Longer term I am very optimistic about KVHI and expect to increase positions again sometime in the next couple months. KVHI is down nearly 60% from its springtime highs and has damaged performance significantly.

Year-End Optimism

I am wary, but putting money to work as earnings reports have generally been good, and many companies I like are trading at reasonable multiples and are well below their year's highs. In addition, that enormous turn on October 4th suggests to me that professional equity market participants would like higher prices for year end. There are other reasons to favor equities in the near term: fear gauges have been running very high and retail investors have pulled significant amounts from mutual funds, for example. By some measurements, equities are cheap and, especially for those with a long-term horizon, provide much better appreciation potential than other investments.

I believe that volatility will continue and that brief selloffs will be bought as incentive-motivated money managers will push equity prices higher through year end. The aggregate performance of the first three days of the month continues to be a reliable indicator for the market's overall direction for the month, and in the first three days of November the S&P added eight points. It's also worth mentioning that we have entered the "best six months" of the year, and that the third year of a Presidential term hasn't been negative since 1939. One wild card in November is the announcement by the "Super-Committee", due on the 21st, recommending ways the US can address its budget deficits. In the long run, it's very healthy that this issue is on the table, but the short-term impact is unclear.

Europe's Problems Will Persist

Overlooked somewhat in light of the Greece headlines are the softening fundamentals at several European countries, and the OECD just cut its growth outlook for the Eurozone from 2% to .3% for 2012. An even bigger concern is Italy, which is running a government debt to GDP ratio of roughly 120% and has $425 billion of its $2.7 trillion debt maturing next year. Rates on Italy's 10-year debt have risen to 6.40%, the highest level since the Euro was formed in 1999.

One of the lessons of the past decade is that correlations are higher than generally believed, as "predictably uncorrelated" assets are anything but, and "decoupling" didn't hold in the 2007-2009 bear market. On top of that, no one really knows to what degree US and major European banks are exposed to one another, so the risk of contagion could be higher than many believe. Despite my short-term optimism about US markets, I am still cautious about a variety of macro issues, and how they may impact the US.

As for the US economy, the data suggest that we are muddling along. The most noteworthy report for me is the personal income report, which has been down three consecutive months. As consumer spending represents such a material portion of our GDP, roughly 65%, anything that negatively affects the consumer's ability to spend bears watching. Coincident with the recent drop in income is a drop in savings, suggesting that rather than austerity, we in the US are dipping into savings to maintain our lifestyle. Eventually, that is unsustainable.

Second on my list of US concerns are the growth reductions Chairman Berrnanke outlined after the recent FOMC meeting. The Fed lowered GDP growth and inflation projections for 2011, 2012, and 2013, while raising unemployment projections for each of these years. Who would've thought that after three years of a nearly 0% Fed Funds rate the FOMC is projecting sub 2% economic growth? The overall message is that this is a weak recovery, and the US economy remains fragile. The bond markets must be concerned too, as yields have dropped across the board. The five-year note is well below 1%, a level that has never been seen except in the 1930s and in Japan. The yield on the 10-year note dropped 28 basis points Friday and is back down to just above 2%.

Positioning Portfolios

In addition to specific names such as the ones mentioned above, I continue to emphasize income, and generally favor more conservative industries such as utilities, health care, and consumer staples. For a number of reasons I also like energy, which is my single largest weighting. For income acounts, I have been adding Master Limited Partnerships. In addition, it looks to me like high quality corporate bond spreads are too wide, and I am watching a couple fixed income ETFs such as "LQD" as a possible way to participate in a narrowing of those spreads.

As I mentioned, I think volatility will continue, and am exploring ways to take advantage of that. Gold has been consolidating, but I have no intention of selling any gold positions.

I have had a number of conversations with clients and prospects about reducing Treasury exposure at these levels and legging into higher-yielding instruments. A basket of large, well-chosen global companies with long-term records of performance, good dividend yields and strong balance sheets will perform better over a 10-year period than the US Treasury will as far as I'm concerned.

Featured Stock

I started buying Macquarie Infrastructure Trust, LLC ("MIC") several months go around $27. Subsequently it fell to $20, and I have been adding more as it has regained its previous high. There are 47mm interests outstanding and the company is paying 80 cents per share in dividends annually, for a yield of 3%.

MIC owns and operates several infrastructure and energy related businesses with high barriers to entry. Most their businesses require either high up-front costs and/or governmental approvals, and tend to have limited competition. The company has stated that its energy-related businesses were largely immune to the recent economic downturn due to the contractual or "utility-like" nature of their revenues, combined with their ability to pass through most cost increases to customers. MIC is optimistic it will consistently generate cash flows through the business cycle (source: company documents).

In the third quarter of 2011, free cash flow increased 12.9% on a comparable year-over-year basis, and the company is ahead of it's original guidance of $3 per share in free cash flow for 2011. Since 2008, MIC has paid down debt at the holding company level, and cut expenses by 19%, while revenues have increased.

One catalyst for MIC is that it is expecting to conclude litigation with one of its operating partners in January or February, and is optimistic that the results will be in their favor. Once completed, the company plans to examine ways to return more cash to shareholders and expects to increase the dividend, possibly to $1.50 within the next couple years.

Even if this favorable outcome doesn't happen, I like MIC's long-lived, low-volatility assets and increasing cash flow generation. It can grow by acquisition or organically, and might be a takeover candidate as well. In the meantime, the company is profitable, continues to improve operations, and pays a competitive dividend. Shares are already up 25% this year, and, while I would prefer to not buy shares that have performed so strongly recently, in this case I recommend buying MIC at Friday's closing level of $27.71.

Please note that a list of all of Peattie Capital's stock recommendations is available on request.

Please feel free to contact me with any questions or comments.

CLOSE THIS ISSUE

October 3, 2011

Range of Returns*	September	YTD
All Custom Accounts**	(7.2%) - 1.7%	(16.7%) - 3.0%
All Split Accounts**	(3.6%) - (4%)	(14.6%) - (8.7%)
S&P 500	(7.0%)	(10.1%)

Performance Comment
Peattie Capital's September performance, overall, was much better than the market's, with only one account underperforming the S&P 500. Two accounts were up on the month. On the other hand, one position, KVH Industries ("KVHI") was down 12% in September, and is now down over 50% from its springtime high. It is a core holding in nearly every account, and, as most accounts only have 20-25 positions, it has had a material effect on performance. I continue to believe that it will be a very rewarding position, and I expect to hold it. At the 1131 close, the S&P 500 is now down 17% from the late April high, and has been down five consecutive months.

Vicious Volatility.....Again
This month's newsletter could be virtually identical to last month's as far as market commentary goes. The most noteworthy observation for me is that the extraordinary intra-day volatility has continued, with an overall downward bias. Through September 26, 44 of the preceding 45 days had experienced triple digit intra-day swings (Source: David Rosenberg, "Breakfast with Dave" 9/27/11), and the last four days of the month did too so that is now 48 of the last 49 days.

Here are some of the comments I made last month, all of which I repeat for October:

The risk of a recession is higher than generally believed and U.S. equity markets are not yet priced for it.
Gold will continue to be an attractive investment, but is due for a correction.
In the near term, energy prices are vulnerable not just because of an economic slowdown, but also because of the increase in drilling activity. Longer term I am still bullish.
The first three days of the month are a reliable indicator of how the markets will perform for the rest of the month.
For individuals, a defensive approach is especially imperative.
The yield curve will flatten.
The powerful short-term rallies are common in bear markets and, for now, shouldn't be bought.
Correlations remain very high, debunking the widely held misconception that a well-diversified equity portfolio will protect investors from market risk. In the short term, nothing could be further from the truth.

For the year, the S&P 500 is down 10.1%, after falling 14.3% in the third quarter. The "BRICs" were all down at least 20% in the quarter and are all down over 25% for the year. Still think a broadly diversified equity allocation program will protect you from a bear market?

Overall, I remain very cautious. September ended even more disastrously than it started, with the NASDAQ dropping 5.1% in the last three days alone. On Friday, September 30, the head of the ECRI (Economic Cycle Research Institute) said that the U.S. had begun "tipping into a new recession" and that "there's nothing the policymakers can do to head it off." The growth rate for the ECRI's weekly economic index fell for the 8th straight week, and is now where it was in October, 1990, March, 2001, and January, 2008.

Nonetheless, as we enter October there are other issues to consider. For example, earnings season begins soon, and that will give individual stocks an opportunity to trade based on their own fundamentals, rather than macro headlines. In addition, the third year of the Presidential Cycle hasn't been down since 1939 (Source: Stock Trader's Almanac). Not to overdue the seasonal impact, but November marks the beginning of the "strong" six-month period and October the end of the "weak" six-month period. And, I wouldn't be surprised to see the Fed intervene, possibly with some version of QE3, especially if the market meltdown continues. Whether that would have a positive impact on markets is anyone's guess.

Portfolio Positioning
This section is also a virtual repeat of last month. I continue to hold large amounts of cash, ranging from 25%-85% of portfolios, depending on client-specific factors. I like defensive names such as consumer staples and utilities. I also like dividend payers, such as select energy-related Master Limited Partnerships and I believe that over a long period, say 10 years, that a basket of very large, dividend-paying global companies with long track records of success will outperform the U.S. 10-yr. Treasury Note, currently yielding below 1.8%. At some point U.S. Treasury yields will begin rising, possibly significantly, at which point they will represent "return-free risk," but I don't know when that will start happening. My best guess is that it is not imminent, as there is still simply too much slack in the U.S. economy, and U.S. Treasuries will continue to be seen as a "safe haven", microscopic yields notwithstanding.

One of the opportunities that arises when stocks are highly correlated is that some very good companies with strong earnings profiles become more attractively priced. One such example is Apple ("AAPL") which dropped nearly 10% ($420 to $381) at the end of September. I have heard earnings estimates as high as $45 per share for AAPL, although most street estimates are in the $30-$35 range. I have begun nibbling at Apple, on the belief that it is very attractively priced, especially if the nearly $80 billion of cash on the balance sheet is excluded. In addition, it has numerous growth avenues still in front of it. If it drops to the $350 range I expect to buy more.

Featured Stock
Family Dollar Stores ("FDO") is one of several discount/value retailers which has benefitted from the difficult economy. Typically, it sells items for $10 or less, and has been growing same store sales nicely the past few fiscal years: 4.0% in 2009, 4.8% in 2010 and 5.5% in fiscal 2011, which the company reported Wednesday, 9/28. FDO shares fit nicely with Peattie Capital's investment style, which is to marry a "top down" macro view of the world and US economy with "bottoms up" industry and company specific analysis. One of FDO's direct competitors, Dollar General ("DG"), was taken private by Kohlberg, Kravis, Roberts in 2007 and then came public again in 2009. Prior to the that transaction, FDO and DG were fairly comparable on a variety of operating metrics, such as same store sales growth, sales per square foot, and EBIT margin. However, DG has improved dramatically since it's return to the public markets, and now has higher sales per square foot, higher margins and faster profit growth. So FDO is working hard to "close the gap" with DG and has made progress. There is still room for improvement.

In addition, the company plans to add 350-400 (net) new stores annually for the forseeable future. Stores are generally inexpensive to build, and have good returns very quickly. FDO has also been spending on renovations, and same store sales growth at the renovated stores are growing at a double digit rate.

Several well known private equity companies are significant shareholders of FDO. One is Bill Ackman's Pershing Square Capital, which recently published an analysis of its investment thesis ("All in the Family" May 25, 2011). In it, Pershing states that if FDO can match the improvements that DG has made, then earnings in fiscal 2012 would be $6.04, against current estimates of $3.68. Even if only half that improvement happens, earnings would be $4.79, giving the company a p/e multiple of 11x at current prices. One of the other private equity holders, Trian Funds, made an unsolicited offer to buy FDO in February, 2011 for between $55-$60 per share. Concurrent with last week's earnings report, FDO announced that one of Trian's executives would join the Board immediately, in exchange for an agreement that Trian will cap its investment in FDO at 9.9%. The shares dropped about 10%, to about $51 the day of this announcement, despite the good earnings report. For now, I don't expect FDO to be sold, but its poison pill defense expires in March, 2012. It's worth noting that another discount chain, BJ's Wholesale, was just taken private by Leonard Green and CVC Capital Partners at $51.25 per share, which equates to 24x trailing earnings. A comparable multiple for FDO produces a price of $75, roughly a 50% gain from the $50.86 quarter-end close.

My conclusion is that FDO shareholders have several ways to benefit. First, I think FDO will continue to benefit from a weak economy. Second, the company has a roadmap for improvement, and has been executing on it so far. Third, any one of several strategic investors could try to take the company private, and fourth, another value chain could buy FDO. In the meantime, FDO is returning money to shareholders via the dividend (1.3%) and through a stock buy back plan. I also note that the CEO, Howard Levine, owns 8% of the shares.

Please note that a list of all of Peattie Capital's stock recommendations is available on request.

Please feel free to contact me with any questions or comments.

CLOSE THIS ISSUE

September 7, 2011

Range of Returns*	August	YTD
All Custom Accounts**	(6.8%) - (2.0%)	(11.1%) - 1.8%
All Split Accounts**	(5.1%) - (4.7%)	(8.4%) -(11.3%)
S&P 500	(5.7%)	(3.1%)

Volatility Reigns

I have two basic takeaways from August's markets. First, this kind of volatility is normally associated with a bear market. For example, there were 15 rallies of 5% or more during the October, 2007-March, 2009 bear market and four rallies of 10% or more (Source: David Rosenberg, Morning Comments 8/25/11). Second, once again, stocks were highly correlated throughout the month. I repeat what I have said several times which is that a broadly diversified equity asset allocation program is no defense against a bear market. Stock prices are increasingly correlated, especially in fast-correcting markets.

As I said in last month's newsletter, I have concerns about the strength of the economy, and don't feel that equities properly reflect the risk that we are headed towards another recession.

Early in August I became much more defensive, and sold many positions. The late month rally (+9% from 8/23-8/31) looks to me like one of those bear market rallies cited above, and I didn't reinvest cash to participate in it. 90% of Peattie Capital Management's (PCM's) clients are wealthy individuals, and the overwhelming priority is to protect their principal. So I am taking a "wait and see" approach. Some accounts are more risk averse than others and for them the cash portion of their account is as high as 85%. For accounts with a more risk tolerant profile, cash is running around 25%. PCM manages separate accounts only, and so I can tailor portfolios to address specific client profiles and preferences.

Economic Concerns Still Growing

September is off to a terrible start with the S&P 500 down nearly 4%. However PCM accounts are genrally flat, as a result of the significant cash holdings and the bounce in gold. For several reasons, I am troubled by the market's poor performance: First, the economic reports of the past few days have been weak, and second because the first three days of the month have recently been a reliable indicator of how the markets will perform for the rest of that month.

Tuesday's monthly Consumer Confidence reading was 44.5, well below estimates and far below July's reading of 59.2.

Thursdays' ISM report was a touch better than expected, but it has been down five of the past six months. The market's initial response to the report was positive, but then the Dow and S&P 500 both swung down more than 2%, and closed the day with significant losses.

Friday's unemployment report was disastrous. In addition to no new jobs (the 45,000 striking Verizon workers are more than cancelled out by the 18,000 returning workers in Minnesota and the 58,000 downward revisions for June and July), hours worked were down .3%, and average weekly earnings were down for the second consecutive month. The U-6 jobless rate was 16.2%, up .1%, and is now at its high for the year.

As far as I'm concerned, we are living through a major credit bust, and the only real cure will be time, and the proper write-off of broken assets. The world simply hasn't dealt with its enormous, and growing, debt problem. The market may have periodic rallies, but I believe we are years away from things getting back to "normal." Multiple contraction will continue, despite historically low interest rates and good earnings from many corporations.

Furthermore, I am at a loss as to what, exactly, any arm of our government can do to help. Regardless of the economy's direction, we currently have a 9.1% unemployment rate, a Fed that has used up all its proven tools, and a highly partisan and polarized political environment in Washington. Whoever thought that we could have a stalling economy with interest rates at 0% for nearly three years? The bond market usually sorts through the economic issues more quickly and accurately than the equity markets, and it looks like it is pricing in a recession as Treasury yields have been steadily falling since their February peak and credit spreads have started widening.

Portfolio Construction

So what's a portfolio manager to do? It varies depending on the account, but broadly speaking I have sold most of my cyclicals, in some cases replacing them with defensive names. Among the industries I favor are consumer staples, and health care, for example. I also like dividends, and have held most of my Master Limited Partnerships and also added a couple other large cap dividend payers that have strong balance sheets, significant international operations, and a long history of success. For a few accounts, I have also added a yield curve flattening position, on the belief that there is too much slack in the economy for inflation to become a near-term issue, that the US Treasury markets will remain a safe haven, and because if there is some form of QE3, it will involve the Fed buying back longer-dated Treasury issues.

In addition, I still have a significant exposure to gold, but boxed about half of it after the big gains in early August. As far as I'm concerned, the issues driving gold are still very much in place, and I expect to continue owning gold. Alas, the timing of my box has been poor. The precious metals miners have lagged the price of gold and silver, and usually when that happens they play catch up, so there may be an opportunity there.

Generally speaking I like commodities, and still have energy exposure in most portfolios. However, according to a recent WSJ article (August 27, 2011 "By the Numbers"), the number of oil rigs drilling in the U.S. has jumped 60% over the past year to a recent 1,069 rigs, the highest level since at least 1987. Additional supplies of oil in a slowing economy is a recipe for lower oil prices, and so I have begun hedging against a drop in energy prices.

Excluding hedges, I haven't added any shorts, but may do so. From an industry/asset class perspective, the place to look is cyclicals, and small/mid caps with no dividends. Financials, particularly the major money center banks, might also be good shorts. No one has any idea what the true value of their assets are and they are facing a host of legal/regulatory issues.

When To Buy Again?

I am keeping a close eye on a number of issues, including valuations, technical support, sentiment indicators, and other traditional metrics. So far, my best judgement is to stay very cautious. From a short-term, trading perspective, I'd like to see the AAII survey have more bears than bulls, and I'd also like to see the VIX climb back to the 45-50 range. If these two happen together, that might present a temporary bottom, but if we are headed into a recession, I expect a further drop in prices. I don't expect much from the President's speech this week or from the upcoming FOMC meeting, but how the markets respond to these events is anyone's guess. The next earnings season won't start until October, and so the market may continue to be driven by more macro events.

Housekeeping

The CT State Dept. of Banking recently audited PCM, and I have been advised that I may be in violation of regulations regarding discolsure of the performance of stock recommendations. Last month I included a sentence at the end of the "Featured Stock" section offering to anyone a performance summary of the prior 12 months' recommendations. In so doing, I thought I was in compliance. However, the State hasn't advised me yet whether that is sufficient, and so for the time being, at least this newsletter anyway, I have refrained from mentioning any stocks by name. Please feel free to contact me if you'd like any more specific detail about what I'm doing, or if you'd like a summary of the previous 12 months' recommendations.

Please feel free to contact me with any questions or comments.

CLOSE THIS ISSUE

August 6, 2011

Range of Returns*	July	YTD
All Custom Accounts:	(4.0) - (.7)	(21.3) - 3.8
All Split Accounts	(1.6) - (1.7)	(6.6) - (3.9)
S&P 500:	(2.1)%	2.8%

*Returns are net of fees and commissions and the
S&P 500's return excludes dividend reinvestment. All numbers are unaudited.
The risk of loss always exists and past results are not necessarily indicative of future results.

Again, it's the sub-accounts

Once again, one tiny account was by far the weakest performer. For both July and the year the worst performance is one sub-account, which is down ~$9,000 for the year. At the risk of repeating myself, it is one of three accounts held by a single client, has only a couple positions, represents a microscopic portion of the client's wealth, and is not representative of overall performance. I am looking forward to the month when this sub-account turns around.

Debt and the Downgrade

Given all the news, I have some developing concerns:

First, the macro view is increasingly troubling. The debt ceiling was raised, but the process was fractious and Standard &Poor's cited the difficulties of bridging polarized political views as one reason for cutting the US debt rating from AAA to AA+ yesterday. The country's debt load ($14.58 trillion) now exceeds GDP, and that number excludes a number of unfunded liabilities, which, if included, bring the total to $50-$60 trillion. Ironically, deficit-reduction steps may help induce a recession.

Second, the European sovereign debt crisis, and, by extension the European bank crisis, have stumbled from one "PIIGS" (Portugal, Greece, Ireland, Italy, Spain) moment to the next. As I said last month, I don't think this situation will be going away anytime soon.

Third, recent economic data has been surprisingly weak. The Q2 GDP report and monthly Institute for Supply Management data were both well below expectations. Consumer spending has also slowed (Personal Consumption Expenditures were +.1 in Q2) and the Michigan Consumer Sentiment Index dropped to 63.7 in July from 71.5 in June, the lowest print since March, 2009. Friday's employment report was mixed, with a better increase in new non-farm jobs than expected. However, digging deeper reveals some weakness, such as the labor participation rate, which dropped to 63.9%, the lowest it has been since 1983. Likewise the employment/population ratio fell to 58.1%, also a 28-year low.

My conclusion is that we aren't in a recession, but are more or less just muddling along, and I suspect this may continue for a while. I believe that the US will have no choice but to print dollars as far as the eye can see in order to meet its overwhelming debt load. Eventually, there will be a substantial devaluation of the dollar.

Valuations aren't bad......but

As of the end of July, the market's trailing p/e multiple was 13.8x, the lowest it's been since July, 2010 (Source: "Birinyi Advises Holding Stocks After S&P Drop" Bloomberg, August 3, 2011), and slightly below the long-term average of 15-16x. Thus far, companies that have reported quarterly results show earnings growth of 18% and revenue growth of 14% (ibid).

On forward estimates, the S&P 500's multiple is 12x, and the S&P shows "strong support" in the 1200-1225 range, according to Don Hays ("Ski Mittens for Sale.....But No one is Buying" August 3, 2011). Hays characterizes the S&P as "cheap as its been since 1985", citing, among other items, the earnings yield of 8.3% compared to a 10-year Treasury Note yielding 2.8% (now 2.5%).

The bearish rejoinder to Hays is that there have been lengthy periods when the trailing multiple on the S&P 500 has stayed below 15x. April, 1973-January, 1986 and October, 1946-April, 1958 are two examples, and during these periods the multiple bottomed at 6.7x and 5.9x respectively (Source: David Rosenberg, "Breakfast with Dave" July 16).

Portfolio Construction will be critical

Regardless of the macro situation, I think stock-picking is essential to investment success, and I reiterate my belief that a broad, well-diversified portfolio will not protect principal in the event of another major market correction. One of the lessons from the past decade is that in down markets, assets that had been considered "predictably uncorrelated" are actually highly correlated. That is, when things go down, particularly if they go down suddenly, they all go down, at least as far as equities are concerned.

PCM portfolios hold income-producing assets, precious metals, companies that have exposure to faster growing areas of the world, and special situations. Energy has been a favorite industry and PCM still owns several energy names, but a slowing economy would put near-term pressure on oil prices and energy shares. Longer term, energy will be a good place to invest as there are fewer new oil discoveries and a steadily increasing demand for oil, particularly from emerging economies.

For now I have reduced a number of cyclically-sensitive positions and also added a hedge on oil prices. I am looking at some defensive positions in industries such as utilities, consumer staples, and health care. I would rather not have significant cash levels, which presents a dilemma as I am always concerned about capital preservation. However if the dollars I hold are worth less and less over time, as I expect, then holding them doesn't really help.

I haven't boxed or sold short any names for quite a while, but won't hesitate to do so if I see the right opportunity.

KVH Industries.....it happened again

KVH Industries ("KVHI") reported its second quarter and held a conference call on July 29. For the second consecutive quarter the numbers were disappointing, and the shares dropped 15%. The shares were down 10% in July and are down 40% from the nearby high in late April. KVHI is a core holding in every PCM account, which has hurt PCM's performance.

There are exciting developments at the company, specifically the accelerating shipments of the satellite communications systems. This part of the business has a one-time hardware sale, and a subsequent recurring monthly fee. However other parts of the business are either weak or lumpy, and the strong parts of the business aren't big enough to carry the company yet.

At July's $9.60 close, the company's market cap (excluding cash) is $115mm which will approximate 2011's revenues, based on company guidance. The resulting 1x price/sales ratio is reasonable, but the company will probably only make a few cents in earnings per share this year.

I have sold shares in accounts that are very sensitive to monthly performance, but for PCM clients with a longer-term perspective I am holding most shares, and may even buy more. Needless to say, I remain excited about the company's long-term prospects.

Featured Stock: Carters ("CRI")

CRI is a leading baby and children's wear manufacturer which sells its two main brands, Carters and OshKosh, through its own and independent retailers. Despite growing revenues 12% and operating profit by 21% annually over the past decade, I believe CRI still has a number of ways to both grow revenues and cut expenses going forward.

CRI has been expanding the number of branded outlets at 7-10% annually, but still has only 500 stores. Its main competitors, Gymboree and Chidren's Place, have 1,000 and 600 stores respectively, so there is plenty of room for expansion. The company is also just beginning to sell on the internet, which I think will be significant for them, given the number of working mothers and the demands on their time. Third, CRI has just bought a small Canadian children's apparel retailer, Bonnie Togs, as it begins to expand outside the US.

CRI's biggest expense is cotton, which is in 85% of their products, and represents 15-20% of their costs. Historically, cotton prices have traded in a fairly tight range around 65 cents per pound, with a couple brief exceptions. Then about a year ago cotton prices started running and peaked early this year around $2.20, but have been dropping steadily since.

When it comes to commodities, I believe that "price cures price." That is, a price spike of a given commodity will induce more production of it, in an effort by producers to maximize profits. Subsequently, there will be a surplus, driving prices back to their long term norm, or even below. Even if cotton prices don't continue to correct, I think CRI would be able to pass along some costs, as they operate in an oligopoly, where that is somewhat easier to do.

CRI was taken private by Berkshire Partners, LLC, a Boston-based private equity group, in 2001, and then came public again. Berkshire is actively buying again, and now owns nearly 8mm shares (13%) according to this week's filings.

Regardless of Berkshire's intention, I like the opportunity in CRI. The stock closed just below $30 Friday, a drop of nearly 12% for the week, presenting a reasonable entry point.

Please note that I will furnish a performance summary of all PCM recommendations from the past 12 months upon request.

Please feel free to contact me with any questions or comments.

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July 2, 2011

Range of Returns*	June	YTD
Custom Accounts:	(9.8%) - (2.2%)	(19.4%) - 5.0%
Split Accounts:	(1.1%) - (4.1%)	(5.3%) - (1.2%)
S&P 500:	(1.9%)	5.0%

Performance Summary

Similar to May, the weakest portfolio in June (-9.8%) was one of my own personal accounts which lost $750. The weakest portfolio for the year (-19.4%) is one of three accounts for a particular client, and its loss for the year is $8,300. These are both outliers and most accounts have performed far better than these ones have. That said, June was a difficult month and most accounts were down.

I have mentioned a core holding, KVH Industries ("KVHI") numerous times and it was down 5% in June, and down 30% in the second quarter. PCM also has significant exposure to commodities, which were down 8% in the quarter (Source: Don Hays Quarter-End World Wrap, July 1, 2011). For the year, the best performing sector so far is health care, which is +12.7% (ibid). Being overweight energy and underweight health care, and having a core holding drop 30% in the quarter is largely why most PCM portfolios are behind the S&P 500 so far. Nonetheless I remain optimistic about our holdings and excited about the prospects for PCM's positions.

A tale of two tapes

Between the 1st and 16th of the month the daily put/call ratio's lowest close was 1.03. As a rule of thumb, the P/C ratio usually closes between .8 - .9. When it closes above 1.10 (110 puts traded for every 100 calls), that represents well above average fear, and if it trades at that level for several days there is a reasonable chance a bounce (or more) is coming. Likewise a ratio below .6 indicates too much complacency and can be the precursor to a selloff. Another indication of the increase in fear was the drop in the AAII bulls vs. bear ratio. In late April there were 42% more bulls than bears, a level that signals overwhelming optimism. However by June 15, that number had dropped to 11%, within the historical norm of 10-15%. (Source: Jerry Hegarty, Morning Comments, June 21)

I have said several times this year that I thought there was too much optimism in the markets, and in the first half of June fear came back. As far as I'm concerned, this fear is a necessary ingredient for strong markets, which we had in the back half of the month. My hope is that we don't revert back again to too much complacency, but given the unilateral "risk on, risk off" nature of these markets that is a distinct possibility.

Some other indicators are telling a good story too. For example, the transportation index has been holding up very well, at least so far. On June 23rd, the day of the announcement of the release of oil from the Strategic Petroleum Reserve, the Dow was down 200 points mid day, but only closed down 65 points. The transportation index closed higher that day. Also, many consider Federal Express ("FDX") a barometer of economic health, and FDX's shares have gained 6% since the company reported terrific earnings and gave strong guidance on June 22.

Bulls attribute the slower than expected growth this year to one-time factors such as the harsh winter, and the sudden shut down of Japan, the world's third largest economy. They also cite several technical factors, such as the the S&P's successful test of the 1259 level in mid June, which is both the 200 day moving average, and also the uptrend line since the market turned in March, 2009.

Since the rally began last August, the first three days of the month have been a reliable indicator for what the rest of the month will bring. That is, in each month from September to April the markets were up the first three days of the month and the markets ended the month higher. In May and June markets were down the first three days and then finished the month lower. At some point this pattern won't hold, but for now it's an interesting observation which bodes well for July.

These kinds of indicators can be helpful in assembling an overall view of the environment. Taken together with liquidity, which is very good, and valuations, also very good, I think there is reason for optimism. At the risk of overdoing the anecdotes, in three separate conversations over the past week with other investment professionals, I have heard some version of "we've got a lot of cash sitting around here." That suggests that if the markets improve from here, there will be plenty of buying power to sustain a rally.

All that said, we are approaching another earnings season and earnings matter more than any other single factor, as far as I'm concerned. In addition, no one knows how markets will behave after QE2 ends nor does anyone know if the factors cited by the bulls are indeed "transitory." I would think that the US dollar would show some strength after QE2 ends, which could impact gold prices in the short run. However, my longer-term view is that the US dollar will remain under pressure. Right now there is relief that Greece isn't going to default, but the fundamentals for Greece and other peripheral Eurozone countries are still very weak, and we may see another round of "Eurofear" somewhere down the road.

Most strategists I follow characterize the US's economic recovery as softer and slower than prior recoveries. The stubbornly high unemployment rate, and poor housing market are the most frequently cited areas for concern, but there are others.

Overall I am cautiously putting some cash back to work in names that I want to own, regardless of the near-term direction of the market. I still favor income-producing names, and generally speaking, expect larger caps to outperform smaller caps.

Energy and Master Limited Partnerships

The release of oil from the Strategic Reserve surprised everyone, and oil prices fell about 10%. A break in oil prices would be a welcome relief, as the shock of $4 per gallon at the pump seems to represent a tipping point for consumers and the economy overall. However, the long-term issue of relatively fewer new oil supplies compared to a steady growth in global demand leaves me with the same bullish view of energy as I've held for several years. I particularly like the service companies, and also have a healthy position in Seadrill ("SDRL") a deep-sea driller yielding 8.7%.

Master Limited Partnerships continued to be plagued by the perception that their tax status may be changed and that they are vulnerable to lower oil prices and a weakening economy. I reiterate my statements from last month that I think the likelihood of a change to the tax treatment is very small, that the MLPs I own are not dependent on higher oil and natural gas prices to grow, and that several MLPs are paid by their customers whether their facilities are used or not. MLPs rallied with the market late in the month, and I have been adding selectively to my MLP positions.

Featured Stock

Like last month's selection, Telular Corp. ("WRLS") is a micro cap and may be too small for many. WRLS has been, and will probably continue to be, volatile, with a trading range this year from $5.80 to $8.50. With a current stock price of $6.20, its market cap is barely $100mm. However, it fits several investment themes I like right now. For example, it yields 6.4%, and it benefits from the explosion of wireless technology. Furthermore, it is profitable, has significant recurring revenues, is debt free and is growing quickly.

Roughly 80% of WRLS's revenues come from its Telguard division, which facilitates wireless home security. The company sells its products to alarm dealers, who resell it to homeowners. More importantly, WRLS provides back-end services, for which it receives an ongoing monthly fee which is currently $4.08. Approximately 60% of its revenues are service-based and recurring, and this number is growing. At the end of the March quarter, the Telguard division had 568,600 customers. Prospects for growth are good as according to the company, 23,000 landlines are eliminated every day, and wireless home alarm monitoring is only installed in approximately 10% of homes.

The balance of the revenues come from the company's Tanklink division, which facilitates the wireless measuring and monitoring of large tanks of liquids and gases, primarily used for commercial purposes. This divison has higher pricing than Telguard, with monthly fees of $12.48. The company reported 19,900 billable tanks at the end of the March quarter.

In November, 2010, the company paid a one-time $1.00 per share dividend, and announced an annual $0.40 dividend, payable quarterly. The company estimates it will earn between $8.5mm and $9.5mm in fiscal 2011, ending this September, more than covering the $6mm annual dividends and approximately $1mm of capital expenditures. For the six months ended March 31, 2011, the company's cash from operations grew from $6.1mm to $7.9mm

In addition, WRLS recently introduced an iphone app which, for $2 per month, allows users to set and monitor their home alarm system remotely. Another new product addresses the fire alarm market, which previously had remained exclusively a wireline area as Federal guidelines mandated use of a wireline for fire alarm purposes.

WRLS is not without risks as its largest customer, ADT (38% of revenues), also sells its own competing product, and ADT recently added a surcharge for installation of WRLS's products. However, WRLS already has a large base of users throwing off bundles of cash, and has several ways to grow even if there is no incremental growth via ADT.

There is also the risk of churn, currently running at 6-7%, while the industry churn rate is about twice that. The company believes that with the only universally adaptable product that its churn rate will remain below the industry and, even if it does rise, that will likely be the result of increased penetration, which is a good thing.

WRLS is under-followed, cheap, generating loads of recurring cash flow, and easily covers its generous dividend. If it were to trade at a 4% yield, that would equate to a $10 stock, or a gain of 66% from today's level.

Please feel free to contact me with any questions or comments.

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June 6, 2011

Range of Returns*	May	YTD
Custom Accounts:	(13.2%) - 2.2%	(11.4%) - 10.2%
Split Accounts:	(7.0%) - (4.8%)	(9%) - 1%
S&P 500:	(1.4%)	7.0%

Performance Summary

May was a difficult month, to say the least. Once again, the weakest performer for the month was a small sub account, this time one of three accounts belonging to one client. The loss in the account was ~$4,000. The same sub account is also the weakest for the year, with a loss of ~$5,200. While I would prefer not to have that setback, it's not material to the client's overall wealth, nor representative of PCM's overall performance.

That said, most accounts were weak in May. Many clients have exposure to energy-related Master Limited Partnerships ("MLPs"), especially if they have a "split" account, which combines income ideas with other investments. In early May, stories circulated that the preferential tax treatment of the dividends of MLPs would be be part of a tax overhaul, with the net effect that they would become fully taxable. In addition, since late April, the oil and energy complex corrected by 10%-15%. These two factors took their toll on MLPs, which dropped roughly 10%from their late April peaks, although they stabilized late in the month.

From time to time MLPs have corrected 5% or so, and each time this has happened the past few years they have bounced back strongly. My belief is that the odds are very low that the tax treatment will change, and I plan to stay with the MLPs in PCM accounts as they are solid and growing businesses. Most of them are conservative, in that their revenues are fee-based, and in some cases contracts are based on capacity, in which the MLP earns revenue whether its facilities are used or not.

However in the short-term the MLPs are correlated with oil prices, despite many of them having little or no price exposure. My conclusion is that most our positions are good buys around these levels, and I will likely add to our MLP positions, both in split accounts and customized accounts.

As to oil prices and the energy complex, broadly speaking I am still bullish, particularly longer-term. I have discussed the reasons I like the energy complex several times, and the gist of my belief is that supplies are becoming increasingly difficult to find while simultaneously there is an increase in global demand. No doubt there will be corrections along the way, and some part of the rise in oil prices is attributable to speculation. Even so, I expect that energy will be a good place to invest for the forseeable future.

Most of oil's decline took place the first week of the month, with Thursday May 5 seeing a particularly sharp drop of roughly 9%. For my more aggressive accounts I have subsequently added some small hedges (2%-4%), but these were not in place during the selloff.

Economic slow down

There is clear and irrefutable evidence that the economy has slowed, but whether this is the proverbial "soft patch" or something more lasting is anyone's guess. Bulls are citing the similarities to last year's slow down, and the eventual pick up in activity. But last summer the Fed announced QE2 and whether some version of that happens again is debatable.

Of greater concern is that interest rates have been at rock-bottom levels for a long time, and yet overall growth (GDP), while positive, is softer than what many expect. In addition, there is sporadic job growth and very weak housing fundamentals. If you're in the investing class, you're probably feeling better about things, recent choppiness notwithstanding. However for many Americans the reality is that their job prospects are bleak, their homes are well below peak value and possibly "underwater" and they are paying more and more every day for basic necessities like food and gas. The growing bifurcation between the "haves" and "have nots" is itself a concern as well.

Friday's unemployment report was particularly weak, and reinforces my view that the Fed will remain very "friendly" regardless of what is decided about a possible QE3. That is, I don't expect the Fed to move from its current 0-25 basis point Fed Funds target anytime soon. Beyond temporary countertrend rallies, I expect the US dollar to remain weak, even with all the turmoil in Europe. Large multinationals will continue to benefit from this, and we have a few names in portfolios (Heinz, for example) which have significant and growing operations internationally. Precious metals will also benefit, and I continue to own gold in virtually every account, in some cases with large weightings. I have tiptoed back into silver as well, but only in one particularly aggressive account.

Regardless, the market has rotated into larger and more defensive names, such as utilities, health care and consumer staples. Each of these performed reasonably well in May, with the result that the major indices, while soft, weren't materially damaged.

Futures have been rangebound...

From May 12 through June 2, S&P futures were range bound between a low of1310 and a high 1348. After Friday's employment report they broke below the low end of the range, trading down to 1295. At the risk of being too microscopic, that suggests to me that we may be in for more correcting, although there's no way of knowing when or to what degree that will happen. A 5% or 10% correction is a reasonable guess.

My overall view is that liquidity is excellent and valuations vary but broadly speaking are very good. Fear is finally starting to creep in as well, and as I've said practically every month this year I thought there was too much optimism in the markets. For example, the daily put/call ratio was 1.23 on Friday, and usually a couple days at that level marks a turning point, so I take this increase in fear as a positive sign. Collectively, this combination of factors suggests a good near-term environment for equities.

Featured Stock

PCM accounts own a variety of small and mid cap positions, based on their fundamentals and growth opportunities, and these tend to be volatile. I've said regularly that I believe in paying the right price for the right situations, and I expect many of our small positions will become "tall trees". In the meantime I monitor them as closely as I can, and will add to them selectively if I think the price is right. In some cases they are too small to hedge, and so I live with their volatility, as uncomfortable as it can be sometimes.

I've mentioned Westell Technologies ("WSTL") in the past as a way to play the exploding market for all things mobile. The overwhelming growth in iPads, iPhones, and Blackberries, and the increasing amount of data being transferred wirelessly between them provide a good background for the equipment providers in the industry.

WSTL was mentioned favorably by Barron's on May 8, and then reported its fiscal Q4 on May 18. The report was terrific with 31% revenue growth and 25% EPS growth to $0.05 in WSTL's Q4, ended March 31. For the year, revenues grew 5% and earnings grew 43% to $0.23.

The company also announced the divestiture of a non-core division, for which it received $30mm in cash, after expenses. This brings the company's cash position to nearly $120mm, roughly 50% of its $245mm market cap.

The company also announced that it would be buying back shares, and has begun doing so by buying 1,000,000 shares recently at $3.43. There is still $6mm available under the current buyback authorization.

Given all these great developments, it would be reasonable to expect strong stock performance. However the shares were down 6% in May, although they are +7% for the year. Part of the reason I 've selected WSTL as the featured stock this month is to demonstrate the volatility of several of the small names we own, as WSTL has traded as low as $2.80 this year, and as high as $3.90. WSTL may be too small for many, but the story is a good one, and I am looking forward to outstanding performance of the shares.

Please feel free to contact me with any questions or comments.

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May 4, 2011

Range of Returns*	April	YTD
Custom Accounts:	(13.2%) - 8.2%	(4.0%) - 23.5%
Split Accounts:	1.0% - 1.0%	5.2% - 6.5%
S&P 500:	2.8%	8.4%

Comment on Performance

Once again, the worst performing accounts for both the month and the year are two miniscule subaccounts of my personal portfolio. Arguably they shouldn't appear in the table but technically they are discretionary portfolios that I manage and so I include them. Each has only one name in it, which is not representative of client accounts. If anyone ever wants to discuss performance please feel free to contact me and I will provide as much detail as I can.

April: a Tale of Two Tapes

After a weak start, April finished strongly, with eight consecutive up days. May has begun poorly, with significant rotation away from recent winners like energy, commodities and resources. It looks like the eight-month run of a positive market over the first three days of the month is over.

I still believe that, generally speaking, there is not enough fear in the market, which I have mentioned several times. A few days of a put/call ratio in the 1.10 range would cure that, I would think. In addition, many investors believe in the "sell in May and go away" adage, which has some supportive evidence. However, if you overlay the presidential cycle on that, as Hays Advisory did in a research note last week, the outcome over their tested time frame is a mean return of nearly 2.5% for May-October in pre-election years ("Should You Sell in May" April 28, 2011). The author goes on to break the data into quarters, and concludes that "there is a slight downward bias to returns in the August-October period in pre-election years." So maybe we should sell in August and go away.

Regardless, there are good reasons to like US equities: For example, on a "bottom-up" basis, the S&P 500 is expected to earn $95.70 in 2011 and $108.68 in 2012, meaning that the broad market is trading at 14.2x 2011 estimates and 12.5x 2012 estimates (Source: Hays Advisory March 30, 2011).

In addition, the economy is expanding, albeit slowly, and other investment vehicles provide paltry returns. Monetary/liquidity conditions are also healthy, with $2.4 trillion of cash on corporate balance sheets (ibid). Furthermore, I expect the Federal Reserve to remain friendly even after QE2 expires, given the fragile conditions of housing and employment. It seems to me that deflation is still more of a risk than inflation, why else would yields in the Treasury market have dropped so significantly recently?

I expect continued pressure on the dollar, which will benefit companies with significant operations overseas, and is also one of the cornerstones of the gold bull story. Some of these names also pay healthy dividends, above 3%, which exceeds the S&P 500's 1.8% yield and also most US Treasury yields, where the 10-yr. yield has dropped to 3.3%.

Recognizing the environment is an important step, and then paying the right price to be in the right securities is what PCM strives for, above and beyond all else.

Silver Volatility

In last month's newsletter I said silver was probably still a buy, despite its big performance in 2011. Silver rose 28% in April, and over the past few days I have sold my silver positions. Bull markets typically end with a big "blow off" phase, and after the parabolic performance of silver we may have seen that. The 50-day moving average for SLV is around $39 and the 200-day moving average is $28, and my guess would be there will be a test of the 50-day moving average, and possibly the 200-day moving average also. For the time being I will stand aside, but eventually if gold prices continue higher, silver may follow it.

Gold has held steadily above $1500 per oz, and I continue to hold all my gold positions. I have discussed the reasons for owning gold in many newsletters, and recently I came across some data points describing price moves in other big bull markets, which help put gold's performance in perspective. The data are from David Rosenberg's "Breakfast with Dave" morning research from Monday, April 25. Rosenberg is the Chief Economist and Strategist at Gluskin, Sheff in Toronto.

1. Gold has risen 12 consecutive years from its low of $253 in July, 1999, at an average annual rate of 16%.

2. During their bull runs,

The Nasdaq rose 27% annually from 1990-2000, 45% during the last five years.
Oil prices rose 62% annually from 1970-1980.
The Nikkei grew nearly 20% annually from 1980-1990, ditto the Hang Seng from 1990-2000.

3. Matching the 1980 peaks in real (inflation-adjusted) terms, gold would be $2,400 per oz. and silver $140 per oz. Relative to the overall economy, gold would "be testing" $4,000 per oz.

4. In Barron's Spring 2011 "Big Money Poll", fund managers were 39% bullish, 36% neutral and 25% bearish on gold prices.

So gold is not over-owned and still has many doubters, a bullish sign in my opinion. It's also worthwhile to mention that in it's last bull market, gold rose 24x, from $35 to $850. In this bull market it has only risen sixfold, from roughly $250 to $1550. Arguably there is greater demand now too, as Chinese buying has been added to the mix.

That said, I don't expect gold to go up in a straight line, and may box some of our gold positions from time to time.

KVH Drops a Bomb

Our month was a good one until Friday, April 29th, when KVH Industries ("KVHI") announced surprising and very disappointing earnings and guidance. I have referred to KVHI many times over the past couple years, as I am very enthusiastic about its game-changing technology in the satellite communications industry, particularly with regards to commercial maritime communications.

This side of the business (53% of revenues in 2010) is performing beautifully, and the company reiterated it's somewhat aggressive growth expectations for it for the next couple years.

However, other pieces of the business had disappointing news. The leisure marine market was particularly slow, which was surprising as pleasure boat manufacturers have been reporting good sales. Secondly, Continental Airlines has asked KVHI to not deliver $4mm of satellite TV equipment, despite a signed contract and purchase order.

So KVHI has cut their revenue growth guidance in half, and their operating profits guidance to a negative number, year over year. The shares were down 18% Friday after the news, and finished the month down 13%. Despite this drop, shares are up over 8% in 2011, in line with the market. Note that this is the position I was referring to in my introductory paragraph discussing monthly performance.

For my more aggressive accounts, who look at the month to month performance, I have sold some shares. However, I still believe in the long-term opportunity and ability of the company and am holding shares in most accounts. Nonetheless, the shares could be "dead money" for another quarter or two.

Feature Stock

Normally I wouldn't consider mutual funds for investment, given their high cost structures and tax inefficiencies. In fact, I have never bought any mutual fund, except Central Fund of Canada, which owns physical gold and silver. However I have begun buying the Permanent Portfolio Fund ("PRPFX") whose goal is to protect an investor's purchasing power over time. After all, what's the point in preserving the absolute number of dollars you have if those dollars keep dropping in value, as the US dollar has been doing?

PRPFX is a low-cost, no-load fund, with $12.5bn in assets. Roughly speaking, it aspires to own equal parts growth stocks, bonds, precious metals, and cash across US dollar and other currencies, predominantly the Swiss franc. As of March 31, the breakdown was 15% cash, 30% stocks, 30% bonds, and 25% "other". In the 2008 meltdown, the shares of PRPFX dropped from $38 to $30, roughly 20%, and currently they are $49, suggesting they are correlated to the S&P, but less volatile in both directions.

I'm not sure you can buy and "put away" any equity security, but for those concerned about long-term purchasing power, PRPFX might be worth a look.

Please feel free to contact me with any questions or comments.

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April 8, 2011

Range of Returns*	March	YTD
Custom Accounts:	(10.1%) - 2.7%	(6.4%) - 23.6%
Split Accounts:	(1.9%) - 0%	4.2% - 6.1%
S&P 500:	.2%	5.4%

Comment on Performance

In March, my smallest custom account, with assets of $8,000, lost roughly $800 on it's one position. It is also the worst performing account for the year. One client IRA account dipped 5% in March, but is still +24% for the year.

So I will repeat that there is a wide spectrum of accounts with differing goals and circumstances, and the results above should be scrubbed before drawing any conclusions.

March Madness

Volatility returned in March, and the two-day stretch of March 15-16 saw the highest two-day total of puts in the CBOE's history (source: Jerry Hegarty, Morning Newsletter, March 25). That fear marked the low point for the markets, which bounced right back in the second half of the month.

As far as I'm concerned, the combination of liquidity, earnings growth, valuations, lack of attractive alternatives, and support from the Fed continue to provide a decent environment for equity markets. Going forward, selecting the right names and being involved at the right prices will become increasingly important as the "risk on/risk off" trade seems to be abating. In addition, earnings are facing tougher comparisons than they did in 2010, and the end of QE2 is approaching.

Given the employment situation, however, I think the Fed is unlikely to tighten anytime soon, even if there is no QE3.

From a near-term perspective, the VXO has dropped 12 consecutive days from 23.5 to 15.2, and is close to the 14.5 level which has coincided with short-term peaks. The combination of a 14.5 VXO and a put/call ratio hovering around .7 suggests overly bullish sentiment and has been a precursor to selloffs over the past few months. We are not there now but I am watching those levels.

The recent winners have been the "buy and hold" crowd. If you are trading in and out, you are probably underperforming this year. So far in April for example, (through Wed., the 6th) the overnight S&P futures have gained 15.3 points. However, the net closing gain overall has only been 7.9 points. In other words, during the day session, from the 9:15 am close until the 4:15 close, the S&P futures have declined 7.4 points (source: Jerry Hegarty, Morning Newsletter, April 7).

Wall of Worry

How many macros issues can you count? Here are a few: Most of Europe is broke and probably behind the US in terms of recovery, civil unrest continues to spread in the Middle East and fears of oil supply disruption are contributing to increasing oil prices, inflation in food and energy prices continues to rise, housing prices in the US look like they might "double dip", the US needs to create 10 million new jobs to get back to its pre-recession level of employment(source: David Rosenberg, 4/5/11), the US dollar is falling again, any number of US states and municipalities are broke, as is the Federal Government which may or may not shut down soon, Bill Gross, head of one of the world's biggest bond managers, (PIMCO) announced he had sold all his US Treasury holdings, there was an earthquake/tsunami and nuclear accident of still indeterminable proportions in Japan, there are roughly $50 trillion (by some estimates) unfunded US liabilites, and other central banks are raising rates, such as China and Europe.

I mention these because I believe that good stock picking more often than not trumps the macro environment; because I believe markets can "climb the wall of worry", and because I have recently had several conversations with prospective clients who cite a few of the above and conclude that equities are an unsafe investment choice.

Biggest Positions

Our biggest positions continue to be in precious metals, energy, a variety of small and midcap growth names, and a couple special situations. Most of these have been performing well this year and I continue to remain optimistic about them. The earnings power at KVHI Industries ("KVHI") is becoming increasingly evident, and the shares have returned 23% year-to-date. Even so, they now trade at $15, where they began 2010, and yet the story is improving rapidly. The company's mini-VSAT broadband product is now on over 1,000 ships, and averages nearly $2,000 per month per ship in fees. Furthermore, the rate at which new ships are being added is accelerating. With most fixed costs behind it, a couple of large contracts under its belt, and award-winning products in place, the company's shares are poised to grow, possibly significantly.

Gold is flat this year, but given the ongoing debasement of the US dollar and other "fiat" currencies, as well as a variety of other reasons, I would expect gold to perform well.

Silver is +24% this year, and the gold/silver ratio is now down to 37, from a high of 85 in late 2008 (source: Richard Russell, 9/8/09). That is, an ounce of gold bought 85 ounces of silver then, and now it buys 37 ounces. Historically, an ounce of gold buys roughly 15 ounces of silver (source: Richard Russell, 1/6/10) so this ratio could drop much more. Silver bulls cite the ongoing shortage of silver, which has caused the US Mint to stop producing silver coins. This is likely attributable to China's becoming a net importer of silver, and also the additional demand on silver for its industrial uses.

I expect to hold our silver positions and would like to add more. However, there is an old saying "bull markets don't let you in and bear markets don't let you out." Buying into such a strong market is difficult to do, but is probably the right step at this point.

Investment Industry Changes

Each month, the Financial Times publishes a "Fund Management" section. In April's edition, published on the 4th, there are several articles discussing changes in the wealth management industry. For example, sophisticated investors are beginning to question how well financial models perform, as it is now very clear that in a down market all the correlations go to one. Conclusion: diversification will not protect investors from market risk. In addition, the role of the middleman is changing, and a recent independent survey calls them "overpaid."

Here are links to three articles:

"Industry 'overpaid' by $1,300 billion" by Steve Johnson http://www.ft.com/cms/s/0/3adcb3e6-5c9c-11e0-ab7c-00144feab49a.html#axzz1IYysBnIy

"Funds rally to stem the march of the middlemen" by Steve Johnson http://www.ft.com/cms/s/0/a74c42d0-5c9c-11e0-ab7c-00144feab49a.html#axzz1IYysBnIy

"Financial models useful but limited" by Rodney Sullivan http://www.ft.com/cms/s/0/b78d47d4-5c9c-11e0-ab7c-00144feab49a.html#axzz1IYysBnIy

Peattie Capital already operates on many of the principles discussed here, with the overall goal of providing the best possible service and returns in the most transparent and "user-friendly" way. Brokers and brokerage firms are not required by law to act in the best interests of their clients, whereas at Peattie Capital that is a core principle.

Featured Stock

Six Flags ("SIX") came out of bankruptcy last summer and is only covered by three sell-side analysts. Current management has extensive turnaround experience and a track record of creating significant wealth for shareholders. I had been reluctant to buy shares, on the concern that rising oil prices would translate into less disposable income for consumers to spend at places like amusement parks. However when the CFO recently spent $1.7mm to buy shares, I took a closer look.

There are many things to like at SIX. For example, it operates in an industry with high barriers to entry, and little new investment has come on since the recession. There are a myriad of ways for the company to cut operating costs, and it has already made progress doing so. The company has 24 million visitors per year at its 19 regional theme parks, and has a plan to achieve $350mm in EBITDA. Using that number, and applying a comparable multiple to Royal Caribbean Cruises ("RCL") and Carnival Corporation ("CCL") of nearly 10x, produces a stock price of $90, up 25% from current levels.

Furthermore, if my original concern about oil prices does become true, that may be a net positive for SIX, as vacationers would be less likely to travel extensively and instead find something to do nearer home.

SIX isn't a selection for every account, but for some it fits nicely.

Say it ain't so, Warren

The actions of David Sokol, Warren Buffett's presumed successor at Berkshire Hathaway are indefensible. They are also being described as "not unlawful" by Buffett and a "glitch" by Charlie Munger.

Technically, Buffett may be right, but ethically Sokol's actions are disgraceful. As far as whether it's a glitch, who knows? I have no information about Sokol's (or other Berkshire employees) trading before other Berkshire announcements. I wonder if any journalist is going to take a look.

Please feel free to contact me with any questions or comments.

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March 5, 2011

Range of Returns*	February	YTD
Custom Accounts:	1.7% - 24.9%	3.4% - 29.8%
Split Accounts:	4.6% - 5.2%	5.6% - 6.2%
S&P 500:	3.2%	5.5%

More volatility

I believe the recent volatility is healthy for the markets as there has simply been too much bullishness. These consolidations serve an important purpose, and set the stage for further gains. I see an improving economy, ample liquidity, strong earnings, lack of alternatives, under-exposure to equities as an asset class, and, most importantly, the continued support of the Federal Reserve. At some point, perhaps when QE2 ends, this backdrop will be different, and I may (or may not) have a different view of the market's prospects. But for now I am staying the course.

Once again the sentiment and fear levels I have been watching turned out to be precursors to corrections. The VXO dropped to about 14.5 in mid February, similar to it's November and January levels. The daily put/call ratio didn't drop below .7, but did get below .8, and several days later there was severe selling. If either the VXO drops below 15 or the daily put/call ratio drops below .7, I would expect volatility again.

Importantly, companies in Peattie Capital Management's portfolios have been reporting strong earnings and speaking favorably about their prospects, and I remain very excited about our core holdings.

Energy

PCM owns several energy names, as I believe that broadly speaking, there are relatively fewer new oil discoveries while global demand is steadily increasing. In early February, the International Energy Agency released data showing global consumption increased 2.8 million barrels per day (b/d) in 2010, an increase of 3.3% from 2009. In addition, the IEA is predicting a further demand increase of 1.5 million b/d in 2011, with a corresponding increase in production from non-Opec producers of only 700,000 b/d. So OPEC has to increase supply by 800,000 just to maintain the status quo.

The recent middle east uprisings have mildly disrupted supplies and are probably responsible for adding some speculative fervor to current oil prices. Libyan production is relatively small, and can be replaced by Saudi Arabia. However, no one knows how much the unrest will spread, and it may even threaten Saudi Arabia itself at some point.

While there is no current oil shortage, the longer-term issue of meeting ever increasing demand will continue. This is important because rising oil prices have coincided with poor equity markets frequently in the past. Examples include 1974, 1980, 1990, 2000, and 2008, after monthly averages were up more than 75% than a year earlier. Today oil prices are roughly 50% higher than a year ago and 80% higher than the average price in 2009. (Source: FT, Feb. 25, 2011)

In the meantime, energy shares have performed well. One core holding, Seadrill ("SDRL"), a deep-sea driller, reported an excellent quarter, and increased it's annual dividend by 2.5 cents to 67.5 cents. It also announced a special "one-time" bonus dividend of 20 cents. The shares have gained ~60% since I bought them last summer, and still yield nearly 6%.

Interest rates

Another potential "yellow light" would be a significant rise in interest rates. Thus far, my view is that rising long-term rates represent an improving economy, with little fear of inflation. Note that the TIPS market is not yet showing any inflationary fear, with a 10-year TIPS rate of barely 1%. I don't know at what level the rise reflects material inflation, but my guess would be something around 5% for the 10-year Note. 5% would not only be a reasonably attractive risk-free return for some investors, but would also impact borrowing costs for many companies. Additionally, I would also be interested in the speed of any backup in rates, as a sudden move would suggest an element of surprise, which is usually unfavorable for equity markets.

A recent FT article by John Authers ("The lessons of history support bond yield fears" Feb 12, 2011) cites studies from Societe Generale suggesting 5.2% is the level where central banks are concerned about inflation. This level would also break the downwards trend in rates that has been in place since the early 1980's. According to Jeremy Grantham, rate rises have preceded market bubbles bursting in 1929, 1972, 1987, and 2007.

Higher oil and interest rates are only two of a number of issues that bear watching. However, as I mentioned, my belief is that the positives still outweigh the potential negatives for the time being.

Great performance

There's an old market saying, possibly from George Soros, on the order of "It's not whether you're right or wrong that's important. It's how much money you make when you're right and how much you lose when you're wrong that matters."

Last month I mentioned that I was taking a very concentrated approach with certain IRA accounts, and in February several names in these portfolios were outstanding performers. For example, Sky Mobile, ("MOBI") which I discussed last month, gained 50% and KVH Industries ("KVHI"), which I have mentioned repeatedly over the past year, was +20%.

Soros notwithstanding, this highly focused approach is only appropriate in select situations and as part of a client's overall strategy. Several potential clients have asked about hiring Peattie Capital to employ this approach with a portion of their investable assets, and I welcome those opportunities.

KVHI is PCM's single largest holding and is a full position in every account. I believe KVHI is still in the early innings of a powerful earnings cycle, and expect to hold all our KVHI shares. Usually, a full position means that I have bought a stock up to10% of a portfolio, and will let it appreciate to 15-17% of the portfolio. From time to time, and given the goals and circumstances of an individual client, these levels may vary.

MOBI has appreciated roughly 75% from when we bought it in mid January, and for tax exempt accounts I have sold it. For taxable accounts I am still holding it, but it is near my low teens price target and so I am studying whether to sell the shares. While I would prefer not to incur such a large tax bill, my approach is to not let the "tax tail" wag the "investment dog". Furthermore, I am finding several other situations that look appealing to me.

At the risk of speaking out of both sides of my mouth, I have started hedging in some accounts by buying the VIX ETN ("VXX") or long-term options on it. VXX has declined in price from nearly $475 two years ago to a recent low of ~$28. Despite my short-term optimism, insurance looks cheap, and now is a reasonable time to buy a little.

Please feel free to contact me with any questions or comments.

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February 5, 2011

Range of Returns*	January	YTD
Custom Accounts:	(1.8%) - 3.9%	(1.8%) - 3.9%
Split Accounts:	.91% - .96%	.91% - .96%
S&P 500:	2.3%	2.3%

2011...Same big picture, with rotating asset classes beneath the surface

The best performing asset class thus far is large caps, which have lagged the past few years. Many of Peattie Capital's core positions are small and mid cap names, which are underperforming this year. I prefer small and mid cap names because they are underfollowed, are easier to understand, and have better growth opportunities. It looks like large caps are coming back into favor however, and I will broaden my research to include large cap names.

So far only two core positions have reported earnings, both of which were lukewarm and triggered 10-15% corrections. For the time being I am holding these names, but will re-examine the investment thesis for them. In February several key names are reporting, and I expect better results from them.

In addition, most precious metals were weak in January, down 6-8%. After a 10-year run of outperforming, it's not surprising to see selling in gold and silver. I expect to hold precious metals positions, given the macro concerns, although I have boxed some gold.

Overall, continuing favorable monetary conditions, low yields in competing investment vehicles, good earnings reports, and reasonable valuations provide a positive background for equities to continue to rally for the time being. Longer term there are a host of troubling issues but so far I am finding plenty of opportunities and only have a small cash position, depending on the account.

Investment themes remain the same

In addition to precious metals, broadly speaking I also like energy, agriculture and some basic materials sectors. Nothwithstanding short-term momentum and valuation issues, these sectors will benefit from demand in emerging markets, and also provide an inflationary hedge. The risks here are an emerging markets/global slowdown, and also an increase in supply, which would drive down stock prices, possibly significantly. For the time being though, I think these sectors are a good way to be involved in some long-term trends and also provide exposure to emerging markets.

Three macro observations

First, when and how the U.S. deals with its overwhelming debt load is a major concern. Consider that the U.S.'s reported national debt is $14.1 trillion, close to 100% of GDP. This number excludes unfunded entitlements, such as Social Security, Medicare and Medicaid. Estimates for the total debt including those entitlements run as high as $100 trillion (Source: Richard Russell 2/1/11). It's possible that the Government's strategy for dealing with these obligations is to devalue the dollar, in which case hard assets would benefit.

Secondly, income disparity in the U.S. is growing. Owners of financial assets are probably feeling much better than they were a couple years ago. However, 75% of U.S. households earn less than $67,000. For them, there has been no financial rebound and "commodity prices don't represent an 'asset class' but a cost of living" (Randall Forsyth, Barron's 1/13/11). Friday's employment report didn't show any significant progress in putting people back to work, although bad weather throughout much of the country probably contributed to that. Ultra loose monetary policy has not stimulated job creation, as far as I can tell.

The most interesting aspects of the civil unrest in Egypt to me are 1) that the internet allows for widespread dissemination of information, which means that keeping civilians in the dark will become increasingly difficult for dictators, and 2) if uprisings spread to other states, what will be the affects on global stock markets?

Tactical positioning

From a tactical perspective, sentiment has been a very reliable indicator. Rallies have been derailed when the put/call ratio drops below .7, and then resume a few days later after the put/call ratio goes back above 1.0. This cycle has happened several times in the past few months. The VXO has also been a reliable indicator: when it drops to around 14.5 it's time for the bulls to take notice. So far the corrections have been brief and shallow, and my view is that this pattern will continue for the time being.

I also continue to believe that the Fed is actively supporting equity prices. I have said repeatedly that I would much prefer to see steady buying with late day highs rather than a sharp up open, generated, theoretically, via the Fed's purchasing of equity futures in the overnight session. On these days the markets open strongly, never turn negative, and the day's high usually occurs by 1 pm. This has happened regularly, most recently on both Jan. 31 and Feb. 1.

My guess would be that the Fed remains supportive for the time being. In addition to the remaining months of QE2, it looks like the Fed is preparing to sell a portion of its AIG stake. Helping create a positive environment will facilitate that sale, and I would expect that on the day the shares sell, there will be yet another big open, similar to the day of the recent General Motors sale.

Some New Names

For certain accounts, I am shorting Herman Miller ("MLHR"), a manufacturer of office furniture, whose shares are up 50% in the past six months to $25. I don't view MLHR as a terminal short. However, I am concerned that office furniture may go the way of home furniture as foreign manufacturers find the right formula to meet domestic needs. Home furniture manufacturers have had a very difficult period; for example, shares of Furniture Brands ("FBN") and Stanley Furniture ("STLY") are both down to the $3-$4 range from $25-30 several years ago. Additionally, MLHR faces rising input costs, and continued joblessness, and telecommuting trends will present a headwind as well. At 31X fiscal year 2010 (ended November) and 22x 2011 estimates, shares trade at a premium to the market, and insiders have been selling.

I have been looking for ways to participate in the explosion of the smart phone market, and noticed a broken IPO, Sky-Mobi Limited ("MOBI"), the leading Chinese mobile application store, which came public in December at $8. Subsequently the shares traded below $6, and I began buying. MOBI works with handset manufacturers to pre-install it's software on a variety of phones, and is compatible with different hardware and operating system configurations. The shares have rebounded above the offering price and in the meantime the underwriters have initiated coverage of the company with low teens price targets.

Housekeeping

The income accounts performed very well in 2010, and under the logic of "they probably won't deliver 25% two consecutive years" the clients and I have decided to change the mix from 100% income positions to 50% income and 50% best ideas. So I have introduced a new account type called "split accounts" for this strategy. For a split account, PCM charges an annual fee of 0.95% on the first $1mm, and thereafter on a sliding scale.

At the moment there are no active "income" nor "short" accounts, and so I have removed those categories from the performance table at the top of the letter. I will include the performance of either one if they become active.

Two clients recently moved their IRAs to Peattie Capital where they already have a custom account. In these situations, where PCM manages both a custom account and IRA, the IRA tends to have a highly concentrated profile of three to 10 positions, depending on a variety of factors. My best account in 2010 was such an account, which returned 39.9%.

One of the questions arising when clients have mutiple accounts is how to report performance, separately or combined? So far I have been calculating results for all the different sub accounts and then selecting the best and worst for the performance table at the top of the newsletter. However, I am considering combining all of a client's sub accounts together as one, calculating results, and then selecting the best and worst from that universe instead.

Please feel free to contact me with any questions or comments.

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January 7, 2011

Range of Returns*	December	YTD
Custom Accounts:	(8.8%) - 9.2%	(20.0%) - 28.6%
Income Accounts:	2.0% - 2.4%	22.6% - 25.0%
Short Accounts:	inactive	inactive
S&P 500:	6.5%	12.8%

Explanation for poorest "custom" account

The worst account among my custom accounts in both December and for the year is one of my personal accounts, representing 4% of my investable assets. There is only one position in it, KVH Industries ("KVHI"). KVHI is a significant position for every client, in some cases 10% of the holdings. Despite the drag KVHI created this year, most portfolios performed well; only two of the 23 portfolios I manage had disappointing performance.

My best performing portfolio was up 39.9%, but I exclude it from the table because the account holder passed away during the year. The account then went into probate and I no longer had discretionary authority over it. This account is the IRA of a client who also had a custom account, and it held only six names, which demonstrates the power of a concentrated portfolio.

A Big December

The combination of the extension of the tax cuts, and an improving economy are being cited as the reasons for the market's strong performance in December. For example, leading economic indicators are accelerating, and initial unemployment claims have been dropping. For the week ended January 1, the four week average of such claims has dropped to 410,000, after peaking near 650,000 a year ago. More recently the Chicago Purchasing Manager's Index came in at its highest level since the summer of 1988.

In my opinion the recovery, while slower and arguably more unsteady than many in the post-war era, is progressing, and that beats no growth every time.

Furthermore, recent FOMC minutes, released in early January, cite two downside risks to the economy and have very little to say about upside risks. The first such risk has to do with a weakening housing sector as a result of excessive supply either on or coming to the market. Another risk the FOMC mentioned had to do with the spreading of european banking and sovereign debt problems.

My takeaway from the FOMC language is that the Fed is still more concerned about the downside than the upside, and as such I expect that the 0-.25% targeted Fed Funds rate will continue indefinitely. In the short term this is a plus, but longer term who knows. I am concerned about how the market reacts when the Fed begins tightening.

Other Bullish Factors

In addition, valuations remain reasonable. Consensus earnings estimates for the S&P 500 for 2011 are roughly $96, and the most optimistic projection I've seen is from Don Hays who is looking for $100. In such a low interest rate environment, a mid teens multiple for the market seems acceptable, and putting 15x on the consensus earnings means an S&P 500 of 1440, or +15% for the year. Between the continued liquidity and decent valuations, it's not hard to envision such returns.

In addition, there is money coming out of the bond markets, and no doubt some of that will find it's way into equities. According to this morning's Lipper data, $8bn has recently been allocated to equity funds. Most of that appears to be going into more speculative names, as the Nasdaq is +2.7% so far this year and the S&P 500 +1.3%, through Thursday's close. I might mention that January is an extremely tricky month, as profit taking and re-balancing can cause all kinds of short-term gyrations.

Rates have been backing up, with the 10-year US Treasury Note going from 2.60% in early November to 3.30% at year end. My view is that this is a good thing and reflects an improving economy. I base this on the low inflation data, and the fact that shares of the major financial firms are performing very well. Despite the rise, rates are still very low by historical measures, and at this point don't threaten the recovery or present an attractive investment alternative. Even with the 70 basis point rise in the final two months of the year, the yield on the 10-year Note dropped 50 basis points during 2010.

All that said, the market has come a long way in a short period, and December's 6.5% gain represented half of 2010's return. Sentiment has turned decidedly bullish, and for the first three days of the year the put/call ratio has been .65, .66, and .71. We had a couple days like this in early November, and recall that November's market ended flat, after starting out with a nearly 4% gain the first week. So I am keeping an eye on this bullish sentiment as it can become a headwind very quickly.

Furthermore, it is somewhat troubling that pretty much every strategist/prognosticator I've encountered has more or less the same prediction for 2011: that the market will go up. Uniform bullishness is not the environment I prefer.

Known Unknowns and Unknown Unknowns

At the risk of being Rumsfeldian, it's not the known unknowns that pose a risk, but rather the unknown ones. That is, the market already knows about european sovereign and bank problems, and potential state and municipal shortfalls and budget gaps. Rather, it's usually something unknown that causes major damage. By definition, I have no idea what that may be, but to my way of thinking one of the biggest risks right now is that China has begun tightening, in contrast to the U.S.'s continued accomodative monetary policy. The Chinese are trying to prevent inflation, and we're trying to generate it. China's market returned -14% in 2010.

Also, China is pushing to have the renminbi accepted as a medium of exchange, which has implications for the U.S. dollar. According to Richard Russell, (Morning comments, 1/6/11) 3% of China's M2 offshore would be a meaningful threshold.

Another potential problem I see is that the rising price of oil may choke off economic growth. This idea is beginning to get some press, see the five-column, above-the-fold, front-page FT article (Jan. 5) titled "Oil price enters danger zone." It is well documented that paying more at the pump acts as a surrogate tax on consumers, leaving them with less discretionary income. It may be that forewarned is forearmed, but usually higher gas prices pose a risk to the economy.

Sometime this spring Congress has to act to raise the debt ceiling, which will be one of the early tests of the newly elected Tea Partiers. If they are serious about fiscal responsibility, what better time to demonstrate it than during this debate? Further, what happens if this is going on against the backdrop of the end of QE2? Again, who knows, but it does give me pause.

As always, Peattie Capital's approach will be to find the best situations and be involved at the best possible prices. In contrast to the broad asset allocation programs widely touted by the major asset managers and investment firms, Peattie Capital believes in "the land of tall trees." That is, find these opportunities, be involved at the right prices, and then let them develop. Layered on top of that is the ability to hedge overall exposure if and when I feel it is necessary.

Peattie Capital believes in being flexible and opportunistic and has no size or geographic limits. That said, I tend to like small and midcap names and also restructurings, spinoffs, and names with little following. One of the benefits of managing separate accounts is being able to get involved in these kinds of situations. That is, establishing a meaningful position in a small name for a $2mm or $3mm account is much easier than doing so for most funds. In addition, a dovish Fed while the economy is improving is a good environment for these kinds of situations.

Some New Positions

I mentioned Westell ("WSTL") last month, which gained 12% in December. I still like this name very much and would like to add more. See last month's newsletter, posted on my website www.peattiecapital.com, for a couple sentences on why I like it.

Another new name is Accuride ("ACW") which has been a strong performer as well.ACW manufactures parts and components used in trucks and has recently come out of bankruptcy. It is relatively unknown, and has simplified its balance sheet. Estimates for sales growth are 32% in 2010 and 35% in 2011 which seems realistic to me considering that A) class 8 truck production has been running below replacement demand for several years, and B) the average age of Class 8 trucks is now 6.7 years, the highest in the past 30 years. (Source: Grant's Interest Rate Observer, 12/10/10). The supply/demand data caught my eye, and I like the cyclical tailwind as well. Note that one of the S&P's top performers in 2010 was Cummins Engines ("CMI") which returned 140%.

I mentioned KVHI's poor performance in 2010, particularly in December, when the shares were down 9%. For the year shares were down 20%. The CFO told me that he thought the reason for the poor performance in December had to do with a lack of information from the US Government with regards to the next CROWS Program (Common Remotely Operated Weapons Systems). I also think it may have been a source of funds for some owners, who may have been looking for a way to offset gains for tax purposes. At this point, my view of the company is unchanged, but I will be following this name very closely.

Please feel free to contact me with any questions or comments.

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