Investment Review

It was an extremely difficult quarter for the global stock markets. The S&P 500 index finished the 3^rd quarter with a 14% loss which left the index down 8.68% for 2011.  Other indices had even more severe losses for the quarter. Small cap stocks declined approximately 20%. Even the fast growing emerging market economies saw their stock markets have significant declines in the 3^rd quarter. At the end of the 3^rd quarter, Brazil, China, and India were down 25%, 16%, and 20%. The primary causes for this global weakness were the debt ceiling debate in the United States and the continuing sovereign debt crisis in Europe.

The political games and wrangling that occurred during the US debt ceiling debate created a tremendous amount of uncertainty for both consumers and businesses. The subsequent US sovereign debt downgrade from AAA to AA+ by S&P magnified the problem. Based on economic data released in August and September, it appears that both consumers and businesses cut their spending during these uncertain times. This caused a shock to the global economy at a time when it was already fragile because of the sovereign debt crisis in Europe. The problems in Europe intensified in the 3^rd quarter. It appears a Greek default is a strong likelihood at this point. The concern is that a Greek default will cause contagion to spread to larger European economies such asItaly andSpain which could cripple large European financial institutions. We think that the European Union should implement a TARP style program as theUnited States did in late 2008. The European Union has the financial resources to deal with this problem, but the difficulty is reaching an agreement among all seventeen countries.

During the quarter, the Federal Reserve decided to undertake a new monetary policy called “Operation Twist.” The basic premise of this action is to drive down long-term rates by extending the duration of the Federal Reserve’s portfolio. This can be done by selling short-term securities and buying longer term securities or by reinvesting maturing securities into longer-term securities. The announcement of this action in September caused 10 year and 30 year US Treasury rates to fall.  At the end of the 3^rd quarter, the 10 year was under 2% and the 30 year was under 3%. We do not expect this Fed action to have a significant impact on the economy because interest rates are already at historical lows. The problem with the economy is a lack of demand and changing the demand picture will require some fiscal action.

The strongest sectors for the quarter were Utilities and Consumer Staples. Investors became risk averse and reached for the defensive earnings profile and higher dividend yields of these two sectors. The worst performing sectors were Financials and Materials with losses of -23% and -25%.  The combination of recession fears and the negative impact of Operation Twist on net interest margins hurt financial stocks in the quarter. Material stocks were hit by declining commodity prices and weakening end market demand.

Outlook

Economists have lowered their GDP forecasts for the remainder of this year and 2012. Our most likely scenario is that the USeconomy continues to muddle along with growth in the 1-2% range for the next several quarters. However, we will be closely monitoring the situation in Europeand the 3^rd quarter corporate earnings reports. A significant reduction in earnings guidance from corporations or further deterioration in Europe would significantly increase the probability of a recession. In our opinion, the severe stock price declines of many companies are already pricing in a recession. For example, companies such as Deere (DE), Honeywell (HON), and Fluor (FLR) are already down over 30% from their 2011 highs.

Stock market valuations continue to remain attractive relative to bonds. Risk aversion and Operation Twist have lowered long-term rates to the point where the yield on many companies’ ten year debt is trading below the company’s dividend yield.  Conoco Phillips (COP), Emerson Electric (EMR), Pepsi (PEP), Honeywell (HON), and PPG Industries (PPG) are  companies in our portfolios that fall in this category. Currently, investors are focused on the short-term fear and panic and are missing the long-term value in stocks. Accordingly, any bit of good news on the earnings front or an improvement of the situation in Europe could lead to a sharp rally in the global stock markets.

Financial Literacy and Family Education

We have all seen a variety of startling statistics regarding the increasingly competitive landscape that American children will face as they grow older and compete in the global economy for jobs. Every parent wants to provide the best educational opportunity for their loved ones to prepare them for this new reality. While the traditional education curriculum has expanded to include much more than just reading, writing and arithmetic, very few school systems include financial literacy education. In fact, the majority of all children say they learn all they know (or don’t know) about money from their parents. The unfortunate truth is that parents often say they never talk with their children about money. With those two competing dynamics, it is no wonder American children fair poorly on standardized financial literacy examinations and make poor decisions that can cripple them financially for years.

It is our desire to assist our clients in educating their most valuable assets, their children. We are excited to introduce Family Financial Education and Family Dynamics as a fourth pillar of our service offerings at Novare Capital. We see this as an important complement to service offerings that already include: 1) Investment Management 2) Financial and Cash Flow Planning and 3) Estate Plan Analysis and Document Review. Our goal is to provide parents with the tools to talk to their children about the value and management of money at all stages of their lives.

We have structured these financial building block materials by topic. We attempted to boil down a seemingly unlimited number of daily opportunities to talk with your child into a few that seem to be most relevant. A sample of these topics includes: Budgeting, Types of Investments, The Miracle of Compound Growth, Giving/ Philanthropy and Banking Services and Products.

We acknowledge that while each family’s goals and objectives are likely similar, the current level of financial literacy will vary greatly. In other words, what may already be in practice for a 13 year old in one family may be a brand new topic for an 18 year old in another family. We can help facilitate conversations with your family on an age-appropriate basis. Some representative items include the following: allowance, the purchase of a first car, a first “real” job where taxes and other withholdings are made, and the perils of improper credit card use.

Please call your relationship manager if you are interested in learning more about our financial education program. We are eager to discuss this with you and your children.

Energy Infrastructure MLP Sector

The great untold story… Chairman Bernanke has aggressively lowered interest rates throughout his reign and his latest “Twist” will further lower long term rates. The great beneficiary of this move is the Energy Infrastructure sector. With balance sheets that carry 50% long term debt and 50% equity, they have and will continue to benefit from lower interest rates. We estimate that every 1% drop in the 10 year interest rate should equate to $600MM of additional cash flow for our companies to distribute. This equates to about a 7% increase in cash flow on an annual basis. The interest rate savings and the demand for more infrastructure in the many booming shale areas around the country should keep this sector growing for many years to come. Thank you Ben!

New Companies on Select List

Atmos Energy (ATO) is one of the country’s largest exclusive natural gas utility companies and is headquartered in Dallas, Texas. 75% of its revenue comes from its regulated utility businesses primarily in Colorado, Kansas, Kentucky, Louisiana, Mississippi, Tennessee, and Texas (50% of regulated business). Atmos has a strong balance sheet with a conservative dividend payout ratio relative to its earnings. We were attracted to Atmos because of its natural gas power plants and the favorable rate environments of the geographic areas in which it operates. 

Comcast (CMCSA) is the largest cable company in the US and the 4^th largest telecom company. We believe that Comcast will benefit from the convergence of telephone, internet access and television by subscribers. The “Triple Play” is driving high quality subscribers to Comcast which will allow them to continue to improve margins and cash flow.

Covidien (COV) is a global healthcare company that sells products in three primary segments: Medical Devices, Pharmaceuticals, and Medical Supplies. Products include surgical staples, hernia devices, vascular products, and electrosurgical devices. The company is attractive to us because of its leading technology, geographic diversity and strong free cash flow. Currently, international emerging markets comprise 10% of total sales and the company expects this to grow to 20% in 4-5 years.

Deere (DE) is the world’s largest manufacturer of farm tractors and combines and is a leading manufacturer of construction and forestry equipment.  In 2010, 76% of sales came from agricultural products, 14% from construction and forestry, and 10% from its equipment leasing and financing unit. International sales comprise 40% of total sales and this percentage is expected to grow over the next several years as the company sees tremendous opportunities inBrazil,Russia, andChina. One of the primary growth drivers for Deere should be the increased demand for food as the emerging market economies per capita income continues to increase.

Procter and Gamble (PG) is a manufacturer of consumer packaged goods in the household and personal care sector. Their products are sold worldwide in over 180 countries through multiple distribution channels. As a large multinational company P&G offers stability through its worldwide distribution and solid management. P&G generates great free cash flow and pays a nice dividend.

Companies Sold

Amedisys (AMED) We sold Amedisys due to continuing Medicare cuts to home health care business.

Best Buy (BBY) We sold BBY in the quarter because their prospects continued to deteriorate due to weak consumer demand and the competitive landscape. We had been closely monitoring BBY and decided to reallocate this capital to  better growth stories in this sector such as AutoZone (AZO) and Tupperware (TUP).

Clorox (CLX) We sold Clorox in the quarter after Carl Icahn made a bid for the company. We had been watching Clorox for an opportune time to exit as its operating performance was disappointing. Icahn’s bid gave us the chance and we jumped at it on the price spike. Our clients made a nice profit on this investment.

Hewlett Packard (HPQ) In late August, Hewlett Packard lowered its earnings guidance and announced the possible spin-off of its personal computer division and the discontinuation of its tablet platform. This was the latest in a series of missteps since Mark Hurd, the former CEO was forced to resign in August of last year. The company has reduced its earnings guidance several times and is losing a significant amount of market share to IBM and Oracle. We gave the board and new CEO several quarters to try to turn things around, but the situation only continued to deteriorate.  After this latest miss, we decided to cut our losses and reinvest the proceeds into other technology companies with stronger management teams.

Watch List

EMC Corporation (EMC), Global Payments (GPN), Halliburton (HAL), Lowes (LOW), Mylan Labs (MYL)

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

We have enclosed your 2011 YTD realized gain/loss statements. If you would like for us to forward this information to your tax advisor, 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.

Bill Baynard, Don Olmstead, Anne McPhail, Todd Patton, Whit Wilks, Brian Rudisill, Linda Walden, Gresham Worrell and Susan Thomas

Suite510, 5^th Floor, 521EastMorehead Street,Charlotte,NC28202

Telephone 704.334.3698  1.877.334.3698

www.novarecapital.com