In historical context just how bad was the recent activity? Unfortunately in many ways it was history in the making�

�September was the worst month for the broader markets since 1937.

�It was the worst quarter for the markets since 1974.

�The duration of this bear market (25 months and counting) has surpassed the 21- month bear market from December 1972 to September 1974.

�The magnitude of this market�s decline is also worse than the 1970�s market decline; i.e. 44.70% vs. 42.60% as measured by the S&P 500.

�From its peak in March 2000, the Nasdaq is down �77%.

�Approximately $6 Trillion of US corporate value has disappeared since the markets tops.

�Residential mortgage rates reached 40 year lows during the quarter.

5-year treasuries yield less than 3% and 10-year treasuries less than 4% by quarter end.

What were the contributing factors to this atrocious performance? Some of the factors were the same old news of the recent past. The �blast from the past� includes the continued unveiling of corporate executives conducting their own version of Robin Hood in reverse; i.e. steal from the shareholder and give to the investment banker, favorite clients or just themselves. In addition the market continues to experience reductions in earnings forecasts across a wide spectrum of companies and industries. There have been additional high profile bankruptcies and the foreshadowing of others. We continue to experience a lingering recession and the heightened fear of deflation. And finally we live daily with the prospects of possible terrorist attacks and the threat of war with Iraq. There is more, but describing it would be over-kill.

What has been the good news for investors? For the quarter, year-to-date, and three years all major bond indices (except high yields) are in positive territory. Intermediate treasuries total return is 9% year to date and 8.75% for 3 years. Long-term municipal annualized total return is 8.75% year to date and 7.20% for 3 years.

There are a lot of ways to explain the market of the last 5 years. One over-simplified but articulate version is explained by �excess growth�. During the period of 1997-2000, the �New Economy� definition of growth rewrote the books. �Old Economy� growth rates of 2-4% were being redefined with new growth rates of 6-8%. And in some industries growth rates exceeded annualized projections of 25%!

Businesses made capital investments and built up inventories based upon financial analysis with New Economy metrics. Capital markets raised debt and equity financing based on business plans with �New Accounting�. Investors bought into stocks and market forecasts that �New Age� analysts built on �New Technology� PCs and software. All of this led to a speculative fever in the market unlike any ever seen.

However, as some �Old Economy� has-beens warned us with their yellow pad analysis, the New Economy was the Old Economy on steroids. We are now learning steroid induced growth does come with severe side effects.

What we are experiencing in the economy and the markets are the givebacks of the �98-�00 time period. If you review the revenue numbers across a large number of industries they are backtracking to 1997-98 numbers. Unfortunately, so is the market. It is our guess that this is a reasonable benchmark for regression (and rational) analysis from this point forward.

�Experience is a good teacher, but she sends in terrific bills.� Minna Atrium

�When the intensity of emotional conviction subsides, a man who is in the habit of reasoning will search for logical grounds in favor of the belief which he finds in himself.� Bertrand Russell