There is an old saying in the forecasting business. �Give them a number but don�t give them a date�, or �Give them a date but don�t give them a number!� The investment game, and life for that matter, is more about probabilities than precision or perfection. �The odds are in your favor.�, �There is a better chance than not.�, �There is a better chance of finding a needle in a haystack�� are everyday references to the chances life entails.

In our investment committee meeting in mid October, a question was presented to the group. The question was �What were the probabilities that our equity portfolios would produce positive returns in the ensuing 15 months?� The average of our bright, but not so famous group was 85%. For an otherwise pretty realistic group, this was a bullish sentiment. As a frame of reference, since 1926 on a calendar basis the markets have been positive 70% of the time.

We considered the September decline as a buying opportunity. That is to say we believed the markets were within 85% to 90% of their bottoms, assuming a �somewhat� efficient or �somewhat� rational market. Part of this analysis was based on fundamentals, part on long-term growth averages and part on the pervasive risk sentiment in the markets. Though we are not convinced a great many investors understand risk, the prevalence of the �awareness� of risk was at levels we have not seen in the better part of 20 years. Investment opportunity and the perception of risk are most often positively correlated. When the perception of risk is highest (actual risk is at its lowest) investment opportunity is at its highest (investment prices are at their lowest.)

The professionals at Harris Associates recently reminded shareholders that Warren Buffet in 1999 stated in a Fortune article that the returns for stocks for the next 17 years would be 6%. This was at the height of the market bubble. Prices were their highest and risk perception was at its lowest. Because returns for the 17 years leading up to 1999 had averaged 19%, Buffet was temporarily exiled to the Rest Home for Old Economy Thinkers.

Three years later the S&P 500 and the Nasdaq have lost 40% and 70% of their respective values! Prices are significantly lower and yet the risk perception is much higher! Assuming Mr. Buffet was right in 1999 about 6% annualized returns through 2016, the market will have to average approximately 11% from this point forward to average 6%.

The fixed income markets and the economy were benefactors of an additional aggressive easing from the Federal Reserve. The cut in short-term rates was from 1.75% to 1.25%. The easing was in response to the deflationary pressures that continue to linger and an additional shot of adrenaline for an economy that is grinding its way through recession-like conditions. The stock markets began trending up swiftly on the rhetoric preceding the cut. In the fixed income markets high yield securities rallied on the rhetoric of rate cuts as well. The price of the Pimco High Yield Fund went from a low of $7.74 on October 10 to $8.52 on December 31. This was a rise of 10.10% on NAV (exclusive of dividends received for October, November and December.) The bond market is forecasting an improving credit scenario for fixed income markets and an improving economy with this action.

A general consensus prevails that we may have seen the bottom in interest rates. High yield securities have moved up in price, mortgage rates are up off their lows and the yield spread between treasuries and lower grade bonds has narrowed. It is a great time to be a long-term borrower. If it is a great time to be a borrower, what does that mean about the prospects for being a long-term lender? We would suggest, �Long-term Lender Beware!�

As we close 2002 with a third consecutive year of equity market losses we are reminded of a recent quip from Art Cashen, a floor trader often seen on CNBC. Art is the author (or at least mouthpiece) for such notables as �Why martinis are like Federal Reserve rate cuts.� In a discussion on seasonally adjusted unemployment numbers, Art reminded us that December could very well be the warmest month of the year, on a seasonally adjusted basis. Or said another way, December on a relative basis was the warmest month of the year. Yet during the month of December the only people swimming in Lake Michigan were members of The Polar Bear Club!

Likewise, over the last three years we have spoken many times about the relative performance of your accounts. Trust us, we do understand that relative performance doesn�t necessarily equate to larger checks to be cashed at the bank. However, we do believe our clients have more absolute dollars available today than if they were in an index portfolio, a large cap growth portfolio, one of any number of company-owned stock plans or a host of many other possibilities. It is our belief that from this point, this larger residual capital base will make the likelihood of you achieving your long-term financial goals greater.