US FACED TWIN CRISES

In 2008, the US faced twin crises: the systematic collapse of the US banking system and the prospects of a dramatically slowing economy. There is no sugar coating the fact that these crises made for a disastrous year. The S&P 500's total return was -37.0%. Financial stocks recorded a whopping loss of -57%. Consumer staples, generally the safe haven in times of trouble, was the best sector, still down -18%. Bonds performed poorly as investors became concerned about their credit worthiness. Cash was the best performing asset class.

The fickleness of the Treasury department did not help matters. The US government decided to aid AIG, Fannie Mae, Freddie Mac and any number of investment banks while allowing Lehman Brothers to fail. The top 35 commercial banks were all given TARP money with the one exception of National City. At times during the last quarter, political analysis became a much more valuable tool than financial analysis. Attention now correctly turns to the economy and corporate profitability.

With respect to Gold Leaf portfolios, Gilead, a biopharmaceutical company specializing in infectious diseases, was up over +10% for the year. Simpson Manufacturing achieved modest growth (particularly from Europe) and posted a positive return. Watsco and Tractor Supply also added to 2008's investment returns. Some of our other manufacturers, however, were down significantly as the market adopted a "shoot now, ask questions later" attitude about earnings.

We are expecting poor economic news for some time as the global economy works off the excesses of the last decade. Hence, we are allowing cash to build in the portfolios and have not been aggressive buyers. Even though they add to the deficit, TARP and stimulus money are short term positives since they will act to lessen the recession. Longer term, their effect is inflationary and serves to lower the dollar's value. Most of Gold Leaf's companies have broad international exposure which will profit from a weaker dollar. Additionally, we have purchased closed-end income funds with foreign exposure anticipating the dollar's weakness.

Gold Leaf is an independent Registered Investment Advisor that buys stocks in cash positive companies with sustainable competitive advantages. As an independent firm, Gold Leaf provides objective investment management. Our goal is to protect client assets on the downside while participating in most of the market's upside.