Dear Clients and Friends,

We are pleased to present Caves & Associates’ Market Perspective Full Year 2009 and Outlook. The review indicates 2009 will go down in the history books as a year in which securities markets sank to unimaginable levels and some investors briefly questioned the viability of capitalism. As it turned out, capitalism did not cease to exist and equities, as well as fixed income securities, managed to regroup and record one of the most impressive rebounds in the history of the capital markets. Global governments’ unprecedented efforts and some success by overseas economies to “de-couple” from the faltering U.S. economy were instrumental in restoring investor confidence. Additionally, the review provides information on five-year returns for perspective; for most U.S. stocks, the 2008 bear market was so severe that cumulative five-year returns were only about breakeven. We encourage you to read the Market Perspective for a fuller review of major economic and market events in 2009. The Market Perspective also presents 1) our 2010 Outlook and 2) a scorecard rating the 2009 Outlook and the 2009 performance of Caves & Associates portfolio strategies and recommended mutual funds.

The rally in global equities and credit bonds from March 9 onward was as broad as it was strong. Investor optimism lifted all boats, but it is noteworthy that 2009’s biggest winners were 2008’s biggest losers. As a corollary, investors exhibited an increasing appetite for lower quality stocks and bonds during much of the year. Another key observation is that diversification worked and provided investors very good returns and a smoother ride in the year’s down months in January, February, and October. As usual, we encourage you to avoid focusing on any short time period, because stock prices are historically quite volatile in the short-run.

Each year from 2001-2005 included multiple external shocks which hurt financial markets, the most severe being 2001 when we endured the terrorist attacks of September 11th. During these five years we also faced major corporate, mutual fund, and accounting scandals; escalating mid-East tension; additional terrorist attacks; and terrible natural disasters. The lack of major negatives was a big contributor to surprisingly good investment returns in 2006; continuing geopolitical challenges were seemingly treated as “old news” by investors who focused on the key factor of corporate profit growth. In 2007, investors became aware of the weakening U.S. housing market, dealt with our continuing struggles in Iraq, and then faced the rapid deterioration of the value of subprime mortgages and the related, equally sudden credit crunch. In 2008, the housing and credit crises spread to reveal a shockingly overleveraged, undercapitalized global financial system and an equally overextended U.S. consumer; additionally, the spike in energy prices and drastic reduction in overall consumer spending combined to cause the collapse in the U.S. economy. In 2009, geopolitical tension continued or increased in Iraq, Iran, Afghanistan, North Korea, Yemen, and Somalia; we had the Fort Hood killings and the attempted Christmas day airliner bombing. We can only wonder what potential disruptions and unexpected economic twists lurk for 2010. As we have often indicated, investing in the capital markets involves not only understanding risks that may be apparent, but also planning for risks that are not.

We have also enclosed or attached a Market Review for the fourth quarter of 2009. The review indicates it was quite a positive quarter for U.S. and foreign stocks, especially the former due to mixed but generally improving economic news. In fact, the fourth quarter was an extension of strong market conditions exhibited in the second and third quarters. U.S. government bonds and those issued by developed foreign countries foreign both had weak quarters, but high quality as well as “junk” corporate bonds continued to be strong performers. A tabular attachment to the review provides global returns for the quarter and full year 2009.

As noted above, the 2010 Outlook is included in the accompanying Market Perspective. It is somewhat cautious but not pessimistic. We continue to have powerful positive and negative forces impacting the economy and stock market. We also face the threat of inflation in the next 9-18 months as well as continuing uncertainties about 1) the impact of the inevitable eventual withdrawal of government stimulus programs around the world, especially in the U.S., and 2) sustainability of the strength of emerging economies like China, India, Russia, and Brazil. While the U.S. economy seems to be gradually improving on a variety of fronts, there are still many questions that remain unanswered. Most notably, how sustainable is an environment of nearly 0% short-term interest rates, and how will investors react if and when the Federal Reserve raises rates? As to timing, the Federal Reserve is performing its usual balancing act: it is well aware of the inflationary implications of its easy money policy, but it is also aware of the risks associated with changing course while the economy is still in the healing process. We also have to deal with the increasing overhang of government and consumer debt both here and abroad, and the threats involving global warming and fundamentalist Muslims. These opposing forces and uncertainties make it again difficult to provide definitive forecasts for the next year, and at this point we have declined to make a point-by-point forecast for 2010. Nonetheless, the Outlook section in the Market Perspective does elaborate on various key issues in 2010 and beyond.

We have previously quoted the cautionary comments of Mr. Gary Shugrue, Chief Investment Officer of a fund of hedge funds, on outlooks. To reiterate and summarize, he criticizes the number of people saying the same thing. He also notes there is always a certain serial correlation in their thinking, meaning what they project is never significantly different from what has just happened. Further, since the consensus is already reflected in the prices of today’s securities, it is the unexpected and very hard to predict events that will determine the future direction of stock prices. Accordingly, the consensus will in all likelihood be wrong.

As noted above, a scorecard at the end of the Market Perspective and Outlook rates last year’s predictions. It also provides an evaluation of the success of Caves & Associates’ investment strategies, mutual funds, and portfolio supervision in 2009. Generally speaking, the accuracy of economic and market predictions was poor, and client results were held down somewhat by the defensive elements of 2009 portfolio tactics. We did not predict the dramatic rebound of global stocks. Therefore, to hedge a continuation of 2008’s sharp downturn, we substituted alternative strategy positions for a limited but not immaterial portion of clients’ equity positions; the underperformance of the former versus skyrocketing stocks “left some money on the table,” accordingly. We did make a number of moves that were quite helpful. We maintained some underweighting of U.S. versus foreign stocks. We also employed a small overweighting of growth styles and corporate bonds during the year, and these tactics aided portfolio returns considerably. In summary, quite a few tactics were about on target, and the alternative strategies substitution, which in retrospect was a wrong move, was intentionally implemented to only a limited degree to avoid excessive “adoption” of a market timing approach. As a result, our client portfolio returns were quite good on both a relative and absolute basis, especially when adjusted for the lower risk assumed.

We note that our outlooks have been off the mark for two years in a row. In that our outlook projected about what had just happened, they suffered from one of the typical forecast failings noted by Gary Shugrue (see above about one page). Two years ago, we had forecast positive 2008 results for stocks (especially for foreign stocks) “about in line with historical averages.” The prior year, namely 2007, had been positive for stocks, and we felt (or rationalized) erroneously that newly initiated Bush administration government economic incentives would bolster the weakening economy and forestall a down stock market. In a like manner, our very negative 2009 forecast again was likely affected by the extremely poor results that had just happened in 2008 and by the prevailing fear of a Great Depression II. The reader is referred to the Scorecard section of the Market Perspective for additional description and critique.

Additional Perspective and Cautions

As we review the two years 2008 and 2009, we observe that many things that sounded impossible at the start of each year now have to be accepted as facts. The extreme volatility, first on the downside and then on the upside, was both unprecedented and unpredictable. As a result, emotions were running high. The lessons are that at least some level of volatility is a constant, markets inevitably run in cycles, and we must remain disciplined long-term investors, not market timers. Accordingly, even as broad asset allocators, we must be psychologically ready for periodic poor absolute returns, which are the inevitable result of an extreme bear market. Finally, some underperformance on a relative basis is also very likely when stock markets rally strongly.

With the usual uncertainty about future outcomes, investors should develop and maintain a plan that has the potential to work over most future scenarios. It is impossible to consider every possible cause and effect with regard to markets. Thus, we believe the more useful approach is to maintain a broadly diversified investment plan customized to your specific time horizon which can meet your investment objectives over a variety of potential scenarios. Further, we continue to believe that a disciplined investment approach emphasizing diligent fundamental research, diversification, and rebalancing will provide sound long-term investment returns.

Caves & Associates discourages focusing much attention on short-term results because a broadly diversified portfolio is structured for the long-term. As we often state, there is no way to completely eliminate short-term risk from an investment portfolio.

Mutual Fund News

Our mutual fund managers continue to receive well-deserved plaudits. The latest example is Bill Gross, manager of PIMCO Total Return and PIMCO Limited Duration, who was recently named Morningstar’s Domestic Bond Manager of the Decade. We first included those two funds in most client portfolios many years ago, probably for the whole decade covered by the award, and we are proud our clients have been so well served.

What’s Topical or Timely

We remain committed to continuing education as well as keeping you abreast of anything crucially affecting your wealth management. Rather than a separate enclosure or attachment, the following presents an abbreviated discussion of Timely Topics.

1. Uncertainty Surrounding Estate and Gift Taxes

As you may have heard, year 2009 ended without any legislation regarding estate, generation-skipping transfer ("GST"), and gift taxes (collectively, "transfer taxes"). Thus, by reason of the 2001 Tax Act, estate and GST taxes have been repealed for calendar year 2010. In 2011, both estate and GST taxes will be reinstated at 2001 rates and exemptions. In particular, the reinstated $1.0 million dollar estate tax exemption will be much less than the $3.5 million dollar exemption in effect for 2009, and a similar loss of tax shelter would also apply relative to the GST tax exemption.

At this time, we do not know whether Congress will pass new legislation regarding transfer taxes in 2010, or whether any such new legislation will be made retroactively effective to January 1, 2010 (if a retroactive effective date is constitutionally permissible). Estate planning professionals caution that your estate planning documents were likely based on the transfer tax laws existing at the time your plan was completed, with the expectation (shared by virtually all estate planning professionals) that transfer taxes would continue uninterrupted after 2009.

If you die this year before any subsequent legislation is enacted by Congress that is not or cannot be made retroactive to January 1, 2010, then your current estate plan may not be appropriate for reasons of both tax planning and disposition of your taxes. Nonetheless, any modification you make now may require a subsequent change back to your original plan.

We understand that most (but not all) plans need not be modified at this time. Please call your estate attorney if you would like to discuss your existing plan with them in light of the foregoing.

The annual gift-tax exclusion remains at $13,000. This means you can give as much as $13,000 this year to anyone you wish, and to as many people as you want, without having to worry about taxes or even having to file any forms with the Internal Revenue Service. It’s a simple way to help others and reduce the size of your taxable estate. You can give even more than that by paying directly for someone else’s tuition or medical expenses. Just be sure to pay the institution directly. The lifetime gift-tax exclusion amount is unaffected by the 2001 Tax Act and remains unchanged at $1 million this year, unless Congress makes a change (a possibility) in connection with resolving the issues regarding estate and GST taxes noted above.

2. Required Minimum Distributions Return in 2010.

Most of you affected "know the drill" from 2008 and earlier. If you’re turning 70 ½ during 2010, please call Susan Mazzoni at your earliest convenience. Action will most likely be needed by yearend if you have IRA or qualified plan retirement accounts.

3. 2009 IRA Contribution Deadline is 4/15/10

Here’s our annual reminder that IRA contributions should be of interest to all taxpayers who have earned income at least equal to the limits. Please note income from investments, Social Security, and pensions does not constitute earned income. The allowable contribution to an IRA attributable to 2009 is $5,000 for anyone under 50 years of age and $6,000 for those over 50 as of the last day of the calendar year. Accordingly, for a married couple the 2009 contribution limits total $10,000 - $12,000, depending on age. These single and married limits are high enough to make a considerable difference over time in the rate of after-tax wealth accumulation for all but the wealthiest U.S. taxpayers (i.e., not a big enough impact for the really wealthy).

There are complicated rules limiting Roth IRA contributions and the deductibility (but not the allowability) of traditional IRA contributions. Nonetheless, even non-deductible contributions of $10,000-$12,000 to traditional IRA’s repeated year after year can be valuable for enhanced wealth accumulation, especially for younger people, because of the long-term tax deferral respecting earnings attributable to the contributions. It is also important to note that a non-working spouse may qualify for a deductible IRA contribution depending on the other spouse’s company-sponsored retirement plan participation status and the level of family income. Your tax preparer is usually the best source for guidance regarding IRA contributions as each individual case differs.

In summary, the annual IRA contribution is almost always a good strategy. However, the contribution is a perishable commodity: once the deadline passes, you are out of luck for 2009.

4. Conversion to a Roth

In our quarterly communication dated October 22, 2009, we provided an introduction to whether converting could be a good idea. With the start of 2010, all taxpayers, even wealthy ones, have the option of converting. This is a controversial and complicated topic. As the year progresses, we’ll be identifying those of you who could benefit from an evaluation of a Roth conversion.

Blog Department

We present two quotes from both sides of the aisle which make about the same point. How about we start a third major political party called the Moderation Party?!

Kevin Madden:

[Referring to newspaper headlines on Barack Obama’s inauguration day]

"While the headlines trumpeted talk of change and optimism about "remaking America," one year later the nation’s capital is still frozen in the depths of an icy political winter, still captive to partisan extremes and still scorned by an American electorate exasperated with its chronic dysfunction."

Mr. Madden is a Republican strategist and was a senior adviser to Mitt Romney’s 2008 presidential campaign.

Eli Pariser:

"One year into the Obama administration, it’s clear that changing presidents isn’t enough. Pundits who argue over how progressive Mr. Obama really is or how well he played his cards miss the larger point. Our problem isn’t just leadership, it’s also the system we ask our leaders to maneuver. Corporate interests and their lobbyists have hamstrung our politics, making it difficult or impossible to make the change our country needs. Unless we confront this oversized influence directly, it will stymie our best chance in a generation for progress and reform."

Mr. Pariser is president of MoveOn.org and blogs at elipariser.com.

Our Usual Guidance Regarding Attainment of Long-Term Life Goals

Although the outlook for 2010 and beyond is quite uncertain amid numerous continuing challenges to the U.S. and international community, our reasonable expectations for results over the next five to ten years do not need to be overly pessimistic. Nonetheless, to be prudent, we need to hope for the best, but also align our expectations lower just in case, to be ready for the possibility of reduced results. Prudent behavior includes: 1) reasonable reductions in spending and increases in our savings rates whenever possible, and 2) maintenance of reserves for all foreseeable large portfolio withdrawals, whether recurring or not.

Need a Planning Update?

If something important has changed in your personal situation (career, family, health, cash needs, etc.), don’t hesitate to let us know. A significant change in your life may indicate you need a review of your insurance, financial, or investment planning. Examples are family matters (births, deaths, divorces, and marriages), business matters (promotions, lay-offs, sale, and impending retirement), and significant changes of your health or that of family members.

Quotes of Our Times and All Time

Pericles:

“What you leave behind is not what is engraved in stone monuments, but what is woven into the lives of others.”

Thomas Jefferson:

“It does me no injury for my neighbor to say there are twenty gods or no God.”

George Bernard Shaw:

“If there was nothing wrong in the world, there wouldn't be anything for us to do.”

Charles M. Schulz:

“Sometimes I lie awake at night, and ask, 'Where have I gone wrong?' Then a voice says to me, 'This is going to take more than one night.”

Anonymous:

“A watchdog is a dog kept to guard your home, usually by sleeping where a burglar would awaken the household by falling over him.”

Form ADV Available for Your Review

The ADV is our registration as an investment advisor with the SEC. It shows fees and services and other information that may be of interest. It is available free upon request. Please call if interested.

In Conclusion

We are providing these materials for your information and as a means to educate and stay in touch. We hope you find this information helpful, and we would be pleased to hear your comments and questions.

We are always grateful for our many clients, and we are especially thankful for continued confidence after such difficult and humbling years as 2008 and 2009. Just as speakers are nothing without listeners, and performers are nothing without audiences, financial advisors are nothing without clients.

You are welcome to share our views with your family and friends if you think they will benefit. This letter and the enclosures, as well as an overview of our staff, advisory philosophy, and methods, are available on our website, http://www.cavesassociates.com. We appreciate your referrals and suggest you steer those who might be interested to our website as a convenient and private way to initially make our acquaintance.

The information in this letter and accompanying materials is of a general nature and should not be acted upon without further details and/or assistance.