DO GIFT HORSES HAVE CAVITIES?

After the first Quarter's shaky start, the market rallied in the remaining three Qs to gain +26.5% for the year. It doesn't totally erase the pain of 2008's -37.0% loss, but it's a start. Many of the exact securities that were so severely punished in 2008 were the great winners in 2009. Our closed end funds investing in a variety of REITs, preferreds, convertible bonds, etc. saw remarkable recovery with most gaining +50% to +100%. Tech was the best sector for the year, up +60%, and basic materials followed with a +45% gain. No sector was negative although teleco only rallied +3% for the year.

A nascent recovery may be underway (though it hardly feels that way in the Midwest). Dollar weakness may be helping here while the government's various stimulus programs are certainly giving a boost. We live in interesting times; 2010 will prove to be no different. When the Fed finally stops purchasing mortgage-backed bonds, interest rates could rise anywhere from 0.50% to 0.75%. Commercial real estate losses are coming. Many homeowners continue to be upside down on their mortgages. Those with ARMs resetting in 2010 and 2011 may choose to walk away. Contrast that with the hope for improving corporate profitability - expenses have been slashed so dramatically that any revenue growth should flow nicely to the bottom line.

During the 4Q, we sold our position in Simpson Manufacturing (SSD) since it had reached fair value. We also sold 1/2 of our position in Eaton (ETN) which had shown rapid appreciation. We still like the company and its prospects; the outlook, however, has been clouded by the prospects of a liability settlement. During the Q it was announced that Cedar Fair (FUN) was being acquired by a private equity group for $11.50. We will hold on to the stock for now reasoning that this is just the opening bid.

During the Q we bought two small positions; one was in a biopharmaceutical company that engages in the commercializing of glutathione-based compounds for the treatment of cancer and hepatitis. We also bought shares in a med tech company which provides image-based biomarker solutions. Its image-based measurement and visualization tools enable automated, accurate, and reproducible measurement of changes that occur in anatomic structures.

As in any portfolio, some of our investments did not work out as planned. This was particularly true in the banking sector where, we too, underappreciated the power of a liquidity driven market. Therefore, throughout the year we took tax losses on some of these broken stories which will offset gains and ordinary income.

Gold Leaf is an independent Registered Investment Advisor that buys stock 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.

Gold Leaf does not provide legal, accounting, or tax advice.