The year just past was one with many economic headwinds both here at home and also abroad. The Euro economies slowed as the fate of some of their member countries hung in the balance. Greece, Italy, Portugal and Spain are all rearing from credit downgrades and some surely appear headed for default. Meanwhile the economy of Japan is still recovering from a Tsunami disaster and the associated meltdown at the Fukushima Dai-Ichi plants earlier in the year.

While the U.S. stock market was able to eke out a small gain for the year, many overseas markets suffered double-digit percentage losses. For example: Hong Kong lost 20%, Brazil was down 18%, France – 18%, Japan – 17%, Germany – 15% and Australia -15%. Gold recorded its 11th consecutive winning year, while other metals including Silver, Platinum and Copper retreated. Crude Oil prices increased more than 8% on the year as tensions rose in the middle east and supplies from North Africa went off-line.

For the year, the best stock returns were to be found in the stable, value oriented sectors of Utilities, Consumer Staples, Health Care and Telecommunications, as seen in the following table:

S&P 500 Sector	Weight % of Index	2011 Sector Performance
Utilities	3.70	17.87 %
Consumer Staples	11.24	11.88 %
Health Care	11.80	10.62 %
Telecommunications	2.84	4.15 %
Consumer Discretionary	10.77	4.02 %
Energy	12.27	2.61 %
Information Technology	19.19	0.30 %
Industrials	10.78	- 2.71 %
Materials	3.58	-11.86 %
Financials	13.83	-19.17 %
Total Return S&P 500		2.1 %

Our equity investments were able to out-perform the S&P 500 Index by 3.9% in 2011. Our investment performance showed the most strength through outperformance within the Materials, Utility, Industrial, Energy and Telecommunications sectors. Our performance lagged behind the Index mostly within the Consumer Staple and Consumer Discretionary sectors.

S&P 500 Sector	2011 Old Point Trust Equity Model Performance
Utilities	28.5 %
Telecommunications	13.2 %
Energy	12.5 %
Industrials	7.7 %
Health Care	7.5 %
Consumer Staples	3.6 %
Materials	- 0.6 %
Consumer Discretionary	- 3.7 %
Information Technology	- 6.4 %
Financials	- 12.6 %
Total Return Old Point Equities	6.0 %

Foreign Revenues

The following table from Northern Trust shows the geographic breakdown of revenue exposure (data reflect FY 2010 numbers as derived from 10K’s) for some of the equities that are widely held at Old Point Trust:

	U.S. Revenue	Non-US Developed	Emerging
Accenture (ACN)	44 %	0 %	56 %
Amgen (AMGN)	77 %	23 %	0 %
Baxter Int’l (BAX)	41 %	33 %	26 %
Baker Hughes (BHI)	42 %	31 %	28 %
ConocoPhillips (COP)	66 %	35 %	0 %
Cisco (CSCO)	53 %	20 %	27 %
DuPont (DD)	36 %	39 %	25 %
General Electric (GE)	47 %	38 %	15 %
Honeywell (HON)	59 %	41 %	0 %
HewlettPackard (HPQ)	35 %	65 %	0 %
Intel (INTC)	15 %	56 %	29 %
Johnson & Johnson (JNJ)	48 %	34 %	18 %
Coca Cola (KO)	32 %	43 %	25 %
Noble Corp. (NE)	20 %	29 %	52 %
PepsiCo. (PEP)	53 %	36 %	11 %
Proctor & Gamble (PG)	37 %	63 %	0 %
Spectra Energy (SE)	34 %	66 %	0 %
United Technologies (UTX)	53 %	32 %	15 %
ExxonMobil (XOM)	34 %	66 %	0 %
Yum! Brands (YUM)	36 %	27 %	36 %

The Consumer Price Index (CPI)

Although energy prices showed a slight decline during the quarter, consumer prices in general were up for the entire year. According to figures released from the Labor Department on January 19th, the cost of living increased 3.0% in 2011. Excluding food and energy, the CPI rose 2.2% for the year. Following is a table of how the components of the CPI fared over the fourth quarter of 2011:

	Dec. 2011	Nov. 2011	Oct. 2011
Consumer Price Index	0.01 %	- 0.02 %	- 0.08 %
Ex-food and energy	0.11 %	0.13%	0.10%
Services (60.0%)	0.13 %	0.09 %	0.10 %
Goods (40.0%)	- 0.12 %	- 0.11 %	- 0.18 %
The eight components by weight:
Housing (41.5%)	0.05 %	0.03 %	0.05 %
Transportation (17.3%)	- 0.13%	- 0.14 %	- 0.20 %
Food & Beverage (14.8%)	0.03 %	0.01 %	0.02 %
Medical Care (6.6%)	0.02 %	0.03 %	0.03 %
Education (6.4%)	0.01 %	0.02 %	0.01 %
Recreation (6.3%)	0.03 %	0.00 %	0.00 %
Apparel (3.6%)	0.00 %	0.02 %	0.01 %
Other Goods & Services (3.5%)	0.00 %	0.02 %	0.00 %

The energy component of the CPI increased 6.6% in 2011, with the gasoline index increasing 9.9% for the year. The household energy index rose 1.8% for the year, with the fuel oil index rising 18.0% and the electricity index increasing 2.2%. Contrasting that, Natural gas declined for the third straight year, falling 3.7%.

The index for food accelerated in 2011, rising 4.7%. Within this, the index for food at home rose 6.0% for the year. All six major grocery store food group indexes rose in 2011, with increases ranging from 2.3% for fruits and vegetables to 8.1% for dairy and related products. The index for food away from home rose 2.9% for the year.

Several of the other component sub-indexes showed larger than average gains for the year. The apparel index rose 4.6% for the year. The new vehicle index rose 3.2% for the year. The shelter index only advanced 1.9% for 2011. The indexes for used cars and trucks, medical care, education and personal care all rose more quickly in 2011 than in 2010.

2011 had the highest overall cost of living increase since 2007 and was noticeably above the 10 year average. For an historical context, the following table details the annual increase in the total consumer price index and also consumer prices excluding food and energy:

	Total CPI	CPI ex-food & energy
2011	3.0 %	2.2 %
2010	1.5 %	0.8 %
2009	2.7 %	1.8 %
2008	0.1 %	1.8 %
2007	4.1 %	2.4 %
2006	2.5 %	2.6 %
2005	3.4 %	2.2 %
2004	3.3 %	2.2 %
2003	1.9 %	1.1 %
2002	2.4 %	1.9 %
2001	1.6 %	2.7 %
10 year average prior to 2011	2.35 %	1.95 %

Commodity Inflation

While our domestic inflation was rising faster than average, commodity inflation was on the rise around the globe, spurred on by the enormous consumption demands that are being generated from the Emerging Markets. Blossoming middle class populations in China, India and Brazil are becoming voracious consumers. Following is a look at the six year trend in returns for nine of the most common commodities:

’06	’07	’08	’09	’10	’11
Corn 80.88%	Coal 93.02%	Gold 5.77%	Copper 153.14%	Silver 83.21%	Gold 10.06%
Wheat 47.68%	Wheat 76.65%	Corn -10.65%	Crude Oil 77.94%	Corn 51.75%	Crude Oil 8.15%
Silver 46.40%	Crude Oil 57.22%	Silver -23.01%	Platinum 56.82%	Wheat 46.68%	Coal 5.76%
Copper 37.20%	Platinum 34.33%	Coal -24.70%	Silver 48.16%	Coal 31.39%	Corn 2.78%
Gold 23.15%	Gold 30.98%	Nat. Gas -24.87%	Gold 24.36%	Copper 29.96%	Silver -9.94%
Platinum 17.05%	Nat. Gas 18.80%	Wheat -30.99%	Corn 1.84%	Gold 29.52%	Wheat -17.82%
Crude Oil 0.02%	Corn 16.72%	Platinum -38.76%	Nat. Gas -0.89%	Platinum 20.79%	Platinum -20.86%
Coal -25.22%	Silver 14.65%	Crude Oil -53.53%	Wheat -11.34%	Crude Oil 15.17%	Copper -21.35%
Nat. Gas -43.88%	Copper 6.14%	Copper -56.53%	Coal -13.36%	Nat. Gas -21.18%	Nat. Gas -32.15%

What is striking is that Natural Gas prices have dropped in five of the last six years and that of these commodities, it has placed dead last in three of those six years.

Fracking Opportunity

Today, the Energy Department says about 51% of U.S. households use gas for heating. Also according to the Energy Department, the U.S. holds an estimated 2,543 trillion cubic feet of gas; that’s enough to meet our domestic demand for more than a century at current consumption rates. In fact it has been said by many energy industry players that the United States has the capacity to become the Saudi Arabia of natural gas, as a result of the boom in "fracking” that has occurred over the last few years.

The drilling process of hydraulic fracturing, known as "fracking”, involves shooting water mixed with sand and chemicals at high pressure into shale formations to fracture the shale and unlock reservoirs of natural gas below. Unlocking vast reserves of shale gas could solve the US energy crisis, our current jobs crisis and most importantly our enormous deficit crisis.

Fracking has opened up enormous opportunity in the field of natural gas. Although hydraulic fracturing has been used in the natural gas industry for 65 years, fracking of shale production has increased from almost nothing ten years ago to now amount to more than 13 billion cubic feet per day. That represents nearly 30% of the country’s natural gas supply, up from 14% in 2009. Fracking has opened up vast shale plays in several geographic areas in the country, greatly benefiting the local economies. For instance, there’s the Bakken Shale in North Dakota, the Haynesville Shale in North Louisiana and South Arkansas, and the Marcellus Shale in Pennsylvania, Ohio, West Virginia and New York. Natural gas prices dropped 32% in 2011 (see above), driven mostly by the increase in production that has resulted from shale formations that have been opened through fracking.

As of January 20th, natural gas fell to the lowest price in more than ten years. Gas for February delivery fell to $2.34 per million British thermal units (BTUs).

The availability of inexpensive and cleaner domestic gas has encouraged some electric utilities to replace their coal burning units with gas fired ones. Natural gas burns more cleanly than coal and emits much less in the way of greenhouse gasses. Estimates are that burning natural gas for power produces about half the equivalent carbon dioxide emissions that burning coal does. The nation now gets 45% of its electricity from coal, 25% from natural gas, 20% from nuclear, 7% from hydro-electricity and 2% from wind. (Solar sources represent less than 1%.) So, we can reduce our overall carbon emissions by burning more natural gas and less coal.

As we look forward, history shows that gas-fired generators have also been the least expensive for the Utilities to construct. The cost, including construction, to produce one megawatt hour of gas-fueled electricity was $62.37 an hour in the third quarter of 2011, according to Bloomberg. This makes it cheaper than coal, wind or solar generators.

ConocoPhillips (COP) invested more than $2 billion in natural gas plays in 2011, up from $500 million just two years ago. According to Jim Mulva, Conoco’s CEO, "We believe so strongly in natural gas that it’s a major portion of our portfolio.” Likewise, ExxonMobil spent nearly $41 billion to buy XTO Energy in 2010. That deal immediately made ExxonMobil the second largest natural gas producer in North America after Chesapeake Energy (CHK).

Not only are new jobs being created at home, energy intensive manufacturers are now moving jobs here that had previously been abroad. For instance, Methanex Corp., the world’s largest methanol producer, plans to move an idled Chilean factory and reassemble it in Louisiana. The plant turns methane, a component of natural gas, into methanol. Methanol is used in the production of polyester and plastic bottles.

Now That’s One Big Scary Bankruptcy!

On Halloween, October 31st, MF Global Holdings filed the Eighth largest U.S. bankruptcy in history after $6.3 billion in bets on short term European (mostly Italian) bonds went very wrong. To compound the ugliness of the situation, at the time MF Global claimed that $1.2 billion in customer funds were missing and un-accounted for. The implication has been that the company improperly used its client’s assets to cover for it’s own house account bets on these European bonds. The New York Times reported that MF Global may have started improperly moving customer money to a middleman as early as October 27th.

MF Global Holdings was led by former Goldman Sachs Chairman, New Jersey Senator and New Jersey Governor Jon Corzine. During an October 25th conference call to MF Global investors, Corzine said that 91% of its $3.2 billion of short-term Italian holdings were in securities that were due to mature in December of 2012. During the same call, Corzine said " . . . our positions and the judgment about risk-mediation steps are my personal responsibility.” Yet he has repeatedly testified before Congress on subsequent occasions that he can not explain why his client’s money is missing and that he was "stunned” to learn on October 30th of the $1.2 billion of missing client funds. "I simply do not know where the money is,” Corzine said during one testimony before the House Agriculture Committee on December 8th. Perhaps his memory will improve before his next testimony.

In a show of disapproval of such behavior, President Obama’s re-election campaign has returned more than $70,000 in campaign contributions that it has received this cycle from Jon Corzine. Corzine and his wife Sharon each contributed $30,800 to the Democratic National Committee and $5,000 to the Obama campaign, the maximum amounts that individuals are allowed to give. Corzine has been one of the top fund raisers for the Obama campaign this election cycle and is one of 41 donors who has bundled more than $500,000 this year for the president’s re-election effort. The President’s campaign does not plan to return any of the other contributions that were bundled by Corzine.

Food for Thought

You can’t turn on your TV these days and escape the call made by some about the rich paying their "Fair Share” of taxes. Warren Buffet is saying that Millionaires and Billionaires should not have a lower tax rate than their secretaries do. Every time I hear the phrase "Millionaires and Billionaires” to describe the rich, I think, "How absurd is this?? Do the people who use the phrase ‘Millionaires and Billionaires’ have even the slightest idea what they are talking about?” Let me ask you a simple question: Do you know what the difference is between a Millionaire and a Billionaire? The answer - It’s Nine Hundred and Ninety Nine Million dollars. $999,000,000 Of course a Billionaire should pay more.

So What Did You Expect?

Finally, some good news from the Centers for Disease Control and Prevention: U.S. life expectancy has risen to another high yet again. A child who was born in 2010 can expect to live 37 days longer than one who was born in 2009. According to the CDC, the average American’s life has extended to be 78.7 years, due in part to a drop in instances of homicides, heart disease and cancer. While heart disease and cancer remained the two greatest causes of death, accounting for 47% of all deaths, heart disease declined 2.4% to 179 per 100,000 people while cancer related deaths dropped 0.6% to 173 per 100,000.

In addition to declines in heart disease and cancer, death rates have declined for five other leading causes of death, including influenza & pneumonia, blood infections, respiratory diseases, strokes and accidents. Death rates have actually increased for Alzheimer’s, Parkinson’s and Suicide.

There is a whole host of data and statistics available at the CDC’s web site. If you are interested, you can see them here: http://www.cdc.gov/DataStatistics
appy New Year to you all! May you live long and prosper.

McKim Williams, Jr.
Chief Investment Officer
January 21st, 2012