What a year!  Over the course of this past twelve months, we saw regime changes in Egypt and Libya, the war in Iraq officially ended for the U.S., Europe came dangerously close to breaking up, Greece, Italy, Ireland, Spain and Portugal all teetered on the edge of bankruptcy and for all of the ups and downs in the market, the S&P 500 Index ended up almost exactly where it began the year (1,257.60 close this year versus 1,257.64 close last year).  I guess the market is giving us a “do over”.

Even given the total lack of movement in the stock market, we really saw a lot of volatility.  Between December 2010 and June 2011, the broad market rose 5%.  Between June and September, the market fell just over 14%, then rose enough between October and December to close essentially unchanged for the year.  You may want to strap on your seatbelts as we could well see this same level of volatility this coming year.  Europe still has long-term debt issues as does the U.S.  We are gearing up for a presidential race that may wind up being more divisive than inclusive.  Typically, presidential election years are up years.  In fact, since 1928, there have only been three presidential election years that were down years (1940, 2000 when the tech bubble burst and 2008 when the housing bubble burst).  While this portends well, we still believe that economic factors are far more important to our investment decisions than odd stats like this over the long run.

In spite of the volatility, we had a decent year for clients.  For the most part, client accounts finished slightly up on the year.  This was helped by several securities including Progress Energy (up 35%), Rent-A-Center (RCII) which was up 21%, ConocoPhillips (COP), also up 21% and Innophos Holdings (IPHS) which was up 34.5%.  However, there were a few securities that hurt our overall performance including Overseas Shipholding, International Shipholding – sensing a theme here? – Delhaize Le Lion, the parent company of the Food Lion grocery chain and Nash Finch, another grocer – sensing another theme?   Thankfully, we had far more committed to the securities that increased in value than to the ones that fell.

We have been more active in trading securities recently than in the past.  For example, we waded in to purchase some shares in Bank of America in mid-August.  This was just before Warren Buffett committed $5 billions to the company.  Despite his commitment to the company (he obviously got a much better deal than we did with the common stock), we still see too much risk in the company, but we did see a good trading opportunity here.  By using options, we managed to earn a nice return.  While it didn’t quite pay off as well as we had hoped, we still earned just over 2% (5% on an annualized basis) during our time holding Bank of America.

So what can we expect going forward?  Well, as we stated in the beginning of this letter, we are looking for more volatility.  We are also anticipating that this year should be an overall up year for the markets.  But we’re not sitting back waiting for things to come to us.  We have gotten a little more aggressive in seeking out opportunities.   We are putting new research to work in finding new investment opportunities.  We’re being more proactive about using options to both hedge our risk and augment our returns.  We successfully used options to purchase one stock at a great price.  We used put options – taking on the obligation to purchase shares of Norwegian oil giant Statoil (STO) for $25 per share – to successfully purchase the shares for a net price of $23.91 per share.  At that price, the stock will provide a dividend yield around 3.93% annually.  We’re supplementing that income with additional options that will pay us at least an additional 1.6% income.  At the worst, we’ll be forced to sell our stock in April for a total gain of just over 16%.  We anticipate finding more situations like this going forward.  So long as we can secure a good return, we’ll continue to make investments like this.

As always, we recognize that you have many choices when it comes to your money.  We really do appreciate the trust you have placed in us by letting us manage a portion of your assets.  If you have any questions or concerns, please do feel free to give us a call.

Sincerely,

Alan R. Myers, CFA

President / Senior Portfolio Manager

Aerie Capital Management, LLC

(336) 306-5496

(866) 857-4095

www.aeriecapitalmgmt.com