Investment Review
The first quarter of 2011 presented the financial markets with two major obstacles: the tragic events in Japan and the Middle East turmoil. In spite of these events, the S&P 500 finished the first quarter with a gain of 5.9%. The Energy and Industrial sectors were the top performing sectors with respective gains of over 16% and 8%. Even the poorest performing sectors- Consumer Staples and Utilities had gains of 2% this quarter. The Merrill Lynch Intermediate Bond Index was up 1.2%.

The earthquake and tsunami in Japan were catastrophic to the Japanese people and economy; however, we do not think it will stop the global economic recovery. Over the last decade, Japan’s economy has become significantly less important to the global economy. Countries such as Brazil, India, and China have been the drivers of global growth and will continue to be for the foreseeable future. Also, the Japanese people are extremely resilient and they will work quickly to rebuild the areas of their country that were devastated. Several companies in our portfolios should benefit from the reconstruction including Fluor (FLR) and Plum Creek (PCL).

The Middle East turmoil has spread from Egypt to Libya and now to Syria driving oil prices to over $113 a barrel which is the highest level since September of 2008. Gasoline prices in the United States exceed $4.00 per gallon in several states which could be the breaking point for the US consumer. The economy may be able to withstand higher oil prices without falling into a recession due to a couple of factors including “Demand Destruction” and “Oil Intensity”. “Demand Destruction” involves consumers changing their behaviors to drive less in order to conserve gas. In addition, the “Oil Intensity” of our economy (the amount of oil needed to generate GDP) has fallen 30% in the last twenty years.

The turmoil has not spread to Saudi Arabia yet; however, if this should happen, the impact on oil prices could be significantly worse since Saudi Arabia provides approximately 11% of the global oil production. We do not believe this will happen because their ruler, King Abdullah, is deemed to be more of a “Reformist” than other rulers in the Middle East. We are keeping a close eye on this as it unfolds.

Outlook
Improving economic data, strong corporate earnings, and a healthier banking system are three of the primary reasons we continue to remain optimistic about the economy and equity markets. In the recent March jobs report, 216,000 jobs were added in the US. Private employers added 200,000 jobs per month for two consecutive months for the first time since 2006. Remember, only two years ago the US economy was losing over 700,000 jobs a month. Also, unemployment fell to 8.8% in March. The unemployment rate has fallen a full percentage point over the last four months, which is the sharpest drop since 1983.

The encouraging economic data is being validated by corporate earnings which were extremely strong in the first quarter. Corporations continue to produce strong profit margins and have even started to show some revenue growth. Balance sheets remain strong which should lead to increased merger and acquisition activity, higher dividends, and share buybacks.

The banking system which was very fragile two years ago continues to heal. In March, the Federal Reserve approved significant dividend increases and share repurchases for many of the large banks. Some banks are beginning to report a reduction in problem loans and actual loan growth.

As we enter the third year of a bull market, we remain cautiously optimistic about the economy; however, the one factor that could undermine the recovery is the price of oil.

What is a “Chokepoint”?
Oil transportation “chokepoints” are those maritime locations that are critically important to world oil trade because a significant amount of oil passes through them. “Chokepoints” are narrow sea passages of strategic military and economic importance. Oil tankers encounter several geographic “chokepoints” or narrow channels including:

Out of the worldwide production, 50% of the oil moves through the maritime routes such as the Strait of Hormuz and The Panama Canal.

Our attention is focused on one of the most important “chokepoints,” Strait of Hormuz. Located between the tip of Oman and the southern coast of Iran, the Strait connects the Persian Gulf with the Arabian Sea making it vulnerable in the event of an Iranian conflict. The daily flow of oil through this region is 15.5 million barrels per day (bpd.) 90% of Middle East oil traded worldwide is transported through the Strait on a daily basis. Because of its strategic importance, the US Navy’s Fifth Fleet keeps a very close eye on this region.

Is the US dependent on Middle East oil? The answer may be surprising. 12 million bpd are imported from various regions to the US. These imports total 51% of our usage. The largest sources for US oil and petroleum imports in 2009 were:

Middle Eastern oil production is vitally important to world economic growth and US economic growth. For example, China is the second largest consumer of oil. 58% of its imports come from the Middle East region and that number is expected to grow to 70% by 2015. As goes the flow of Middle East oil, so goes the price of oil around the world. Consequently it is very important that the flow of oil remains unrestricted as the world prices affect the US.

Energy Infrastructure MLP Sector
Our Energy Infrastructure Composite had positive returns for the first quarter; however, it trailed the strong performance of the S&P 500 by a few points. March proved to be a difficult month for this strategy as it corrected during the month. The distribution yield of this sector remains around 6% which makes it an attractive alternative in this low yielding environment. There is consolidation in this sector as Enterprise Products Partners (EPD) announced their merger with Duncan Energy Partners (DEP) during the quarter. EPD has been aggressive in acquiring assets making it the largest MLP in the country.

New Companies on the Select List
Fifth Third Bank (FITB) is a large regional bank headquartered in Cincinnati, Ohio. It operates in 12 states and has $111 billion in assets. As of December 31, 2010, its loan portfolio was approximately 56% commercial and 44% consumer. Fifth Third has a strong capital position relative to its peers and government regulations. Recently, it announced a significant dividend increase which the company expects to continue growing over the next two years.

Tupperware Brands Corp. (TUP) We added this consumer products company to our list at the end of the quarter. TUP is an international company with 88% of its revenues coming from outside the US. Tupperware Brands is comprised of 8 major brands in the areas Kitchen-Home products and Beauty/ Personal Care products. We find their direct sales approach a differentiator which allows for higher margins because there is no need for “bricks and mortar” sales locations. With over 2.6 million sales people in the field, TUP should continue its sales growth trajectory. Their products create opportunities for people (particularly women) in the emerging markets to contribute to family income through a sales career. As the middle class emerges around the world, TUP should benefit. Let’s have a party!

Companies Sold
AFLAC (AFL) was sold because we were concerned about their large exposure to Japan after the recent events.  In 2010, Japan accounted for 75% of its sales. 

Lubrizol Corp. (LZ) Warren Buffett and Berkshire Hathaway are taking us out of our investment in Lubrizol. Berkshire’s purchase of Lubrizol at $135/share is set to close in the third quarter of 2011. We are slowly working our way out of this position as other opportunities arise. This was a very successful investment for us and we hate to miss out on the future appreciation of this stock. Ironically, Novare Capital had a higher valuation on the company. Warren bought this company at what we consider to be a very attractive price.

Watch List
Best Buy (BBY), Johnson & Johnson (JNJ), Staples (SPLS), Target (TGT)
These are companies that have underperformed according to our expectations. Your investment committee has actively discussed and reevaluated each of them during the past quarter to determine the best course of action.

Other News
Our ADV (the SEC document that describes how we conduct our firm) is always available for your review. If you would like to see a copy of the ADV, please let us know.

Please remember that primary tax documents are 1099’s from the custodian and the K-1’s from the partnerships. The reports sent to you by Novare Capital are for informational purposes only and should not be construed as tax documents.

We appreciate your continued confidence in Novare Capital.