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River View: Big River Report April 2013

The portfolio was up 4.3% during March bringing year to date net performance to +10.9%.

Economic weakness in the European Union continued during March, as the US economy kept forward progress. The Federal Reserve released it latest policy statement which could be construed as a subtle shift towards removing 'highly accommodative' monetary policy. However, the overriding theme of the statement was a continuation of the $85 billion per month asset purchase program with reinvestment s of maturing securities.

My interpretation of the statement is that the first step in removing 'highly accommodative' policy could be in the form of an elimination of the reinvestments of maturing securities.

Next, if the US economy continues to strengthen, the Federal Reserve policy committee could begin a gradual reduction in the amount of assets purchased.

Once the Federal Reserve is no longer purchasing securities, the committee would be positioned to raise interest rates. The committee consensus is still 2015 for raising interest rates.

At the time of writing, the US 10 Year Treasury note is yielding 1.8%. The bond market does not appear to see an end to the present low interest rate environment anytime soon. However, when interest rates rise, the move will catch a majority of investors off guard.

The two key factors determining the timing of monetary policy adjustments are the unemployment rate and the inflation rate. The Federal Reserve is specifically targeting a 6.5% unemployment rate and a 2% inflation rate, allowing up to 2.5% inflation in the near term, next two years.

If the unemployment objective is met, the process for removing 'highly accommodative' policy could unfold at a quickened pace. Or, if inflation were to materialize beyond the Federal Reserves 2.5% expectations, the 'highly accommodative' policy could be unwound sooner than expected.

The current pace for removing monetary stimulus appears to be a slight reduction in asset purchases at some point during 2013, a gradual removal of all asset purchases taking place during 2014 and interest rates beginning to rise in 2015.

Mr. Bernanke has done an excellent job steering the economy through the financial crisis, and I have confidence that his plan can continue to be executed successfully.

My concern is an external shock to the global economy or another natural recession occurring prior to the stimulus unwind.

Mr. Bernanke seems to be saying that the risks associated with speeding up the process for unwinding the monetary stimulus are greater than the risks of continuing a gradual unwind. In other words, an external shock or natural recession at this stage in the cycle are not highly probable events, and Mr. Bernanke has to make his judgments based on the most likely outcomes, versus a fear of the unknown.

April marks the beginning of earnings season for companies reporting based on calendar Q1 2013. We look forward to reviewing the results for the companies that we own and follow, then relaying the information to you in the May Report.

I admit that greed can be detected in the form of our recent airline stock purchases. The airline shares are speculative purchases and not investments. Therefore, we bought small positions and diversified into four companies. Airlines have never made good long term investments, and I do not believe this time is different. I was lured into the trade based on my fear of inflation and the growth potential for earnings in the airline industry due to consolidation and pricing power. The stocks are trading at very attractive multiples relative to current year earnings and extremely attractive multiples relative to future projected earnings. It remains to be seen whether or not these projections will be realized. We do not expect that the projections will be entirely realized, but if the airlines do half as good as projections, we could still do well in the trade. If the projections prove to be materially off, due to a slower than expected economy; higher than expected fuel costs; greater than expected replacement costs, i.e. they spend all of the cash flow on new planes; or for any other reasons; we will take our losses and move on.