April 26, 2011

Dear Investor,

Since we're doing a mailing anyway, I thought I'd take this opportunity to share a few thoughts.

So far in 2011, things are going pretty well. In last January's letter, I said I would not be surprised if the Dow hit 13,000 before the end of the year. Since starting the year at 11,576, the Dow has advanced to 12,506. It's only April and we're more than half-way there. So we are certainly headed in the right direction.

However, problems have popped up as the year has progressed. First it was the uprisings in Tunisia and Egypt, leading to the ongoing war in Libya and discontent which continues to simmer in much of the Arab world. Then we experienced the tragic earthquake, tsunami and nuclear disaster in Japan. Oil prices have risen substantially this year, as has the price of gasoline. We still have sovereign debt problems in Europe, massive deficits in the US, seemingly intractable conflict in Washington, a weakening dollar and numerous other areas of concern.

That's the bad news and, thankfully, it's primarily on the fringe, so to speak. At the core is the good news, which is that corporate earnings continue to impress, interest rates remain favorably low, stocks are reasonably priced and there are few significant alternatives to investments in world class American companies. Though impacted to some degree by higher energy prices and supply chain disruptions, economies around the world continue to forge ahead. Since World War II the average expansion phase of the business cycle has been 5 years. The current expansion began in June, 2009.

In the months ahead, we will have to cope with the end of the second round of quantitative easing by the Fed, austerity and/or tax increases at national, state and local levels, and the threat of higher inflation. Hopefully, these will affect mainly the fringe and not the core.

Our expectation remains that 2011 will be a year of forward progress, though not at the pace of the first quarter. There could well be a correction or a significant pause along the way, but we still think it's likely that the Dow will reach 13,000 before the end of the year.

In summary, it is clear that the problems noted earlier are having a modestly negative impact on the economy and on the earnings of many corporations. It is our task to anticipate those effects and to concentrate our investments on those companies that can do well in this more challenging environment. That’s basically what we’ve always done, so we’ll just keep at it.

For the team at FIM,

Jeff Friedberg