The first three months of 2010 saw positive returns in both stocks and bonds. The S&P 500 returned 4.8% for the period and the index of US intermediate investment grade corporate bonds returned approximately 2.2%. Indeed many asset classes saw positive returns with only a few showing particularly disappointing results including intermediate US Treasury Bonds which lost value during the quarter and Money Market/ Cash investments which continued to offer no real yield.

The quarter however, did not offer a smooth upward trend for investors. We saw markets spooked towards the second half of January through the middle of February on concerns over European credit markets, specifically Greece, and to a lesser degree over fears surrounding economic policy in China as that government looks to curb overly rapid growth and contain inflation particularly in real estate prices.

During the quarter we also saw a considerable amount of positive US economic data including strong retail and auto sales, an apparent stabilization in residential real estate activity, optimistic readings on manufacturing and industrial production and of course a powerful GDP reading.

In my January 11, 2010 letter I described, on behalf of Coral Gables Trust’s Investment Committee, our views on the markets for 2010. Below is a brief recap of those thoughts:

• The US economy would continue to show signs of Recovery and Expansion
• The S&P 500 would continue to move higher and that we expected a closing 2010 level of 1300.
• We would be overweighting equities, particularly US Large Cap High Dividend paying stocks for both cashflow and growth opportunities.
• We anticipated interest rates to move higher in 2010 and therefore would be laddering investments with maturities out to about five years in fixed income portfolios thereby reducing the risk that those portfolios experience mark-to-market losses as interest rates move higher.
• Investors who did not have specific cash requirements should not hold levels of cash higher than their strategic allocation levels.
• The US dollar would not continue to trend lower.
• We remain cautious on real estate given high unemployment levels and the historical correlation between real estate prices and unemployment.
• Emerging markets represent compelling growth opportunities and attractive valuations.
• The general trend toward Recovery should create demand for commodities, particularly Oil.
• Gold would likely see less demand as a safe haven and hedge against inflation and would therefore likely not trend higher.

As we end the first and move into the second quarter of 2010 the Investment Committee of Coral Gables Trust sees no reason to change its posture regarding the above or to the institutional managers and index products we are currently working with in our model portfolios. We have however added recently a 5% allocation to the Index of Master Limited Partnerships ((MLPs) in an effort to increase portfolio cashlfow and add non correlated investments for enhanced portfolio diversification. Our overall position remains that we consider the recession to have ended, the economy growing, the “double dip” scenario a low probability occurrence, and that portfolios today should be positioned very closely toward their strategic, longer term allocations. Balanced portfolios could benefit from a tilt toward equity and particularly to higher dividend paying stocks. Fixed income portfolios should continue to be positioned defensively in anticipation of rising interest rates.

Our current positioning and thinking is summarized below:

1. The S&P 500 will likely grind higher as second quarter earnings continue to beat estimates. We continue to believe that by year end the S&P 500 will reach 1300, an approximate 8% increase from the current level. We fully anticipate that this movement will not be a straight line up but absent any meaningful systemic shock, any pullback should be used to bring underinvested portfolios in line with strategic target allocations. We remain tilted toward Large Cap, high dividend paying stocks in our equity allocations for both growth and income.

3. The 10 year US Treasury yield will fluctuate between 3.80%-4.20% before moving higher in the later part of 2010. Investment Grade Corporate Bonds should outperform US Treasuries as credit spreads compress further. Remain short duration and keep maturities within five years.

4. Money Market/Cash yields to remain at current levels.

5. Inflation will remain subdued in the short term.

6. The US dollar will probably appreciate further as global capital is deployed toward the US as interest rates rise and the US economy begins to show convincing signs of expansion.

7. Emerging markets to continue to offer compelling growth potential and diversification.

We are proud of the stewardship of our client’s portfolios and the investment results obtained in the first quarter of 2010 and look forward to speaking with all of our clients regarding our views and the performance of their respective investment portfolios.

On behalf of the Investment Committee of Coral Gables Trust, we thank you for your confidence in our team and our firm.

Sincerely,

Joseph Nader
Chief Investment Officer