Looking into the Crystal Ball

�Nothing gives one person so much advantage over another as to remain always cool and unruffled under all circumstances.� Thomas Jefferson

There are a lot of parallels being drawn today to stock markets and economies of the past. For most market watchers the parallels are drawn between the period of 1928-1936, the Depression Era, and the period of 1972-1976, the Oil Crisis.

The Depression Era, the Oil Crisis and today�s markets were preceded by periods of tremendous economic growth. These periods of growth were classic examples of American progress at work. The periods were marked by individuals and companies who had imaginative ideas, tenaciously and persistently put them into action, sold them against the consensus opinion and profited beyond anything seen before it. The financiers of the period created opportunities for the masses to participate in the growth and speculation of the periods, for good or bad.

Excesses were the common themes in these great economic and stock market booms and busts. Our current economic circumstances have seen their share of excesses. We have wiped out $6 trillion of corporate values in three years. Companies with tens of billions of dollars of market value three years ago are now worth next to nothing. Companies with virtually $0 revenues were valued at $500,000,000+. We have seen market indices up 100% and down 80% in the span of 5 years! A host of businesses and industries have watched revenues drop 60-70% in the course of two years.

Economically, the period of the 30�s and the 70�s were accompanied by two extreme measures, high real interest rates and price instability. For example, in the 30�s the treasury-bill rate less the inflation rate was an extraordinarily high rate of 12%. The chief contributor to the 30�s debacle was price depreciation or deflation. The values of goods and services in the country were plunging at a rate of 12% annually. This led to a debt debacle, corporate bankruptcies and 20+ percent unemployment.

The early 70�s were punctuated with spiraling interest rates and exploding inflation. Treasury bills went from 4% to 10% in a 2-year period. Inflation rates as measured by CPI went from 3.50% to 12% during this same 2-year period.

In both instances, the 30�s and the 70�s, these extremes in the price of money and price instability sent shock waves to the confidence of the corporate and public participants. They reacted with significant stock market sell-offs.

Up to this point in the current market and economic cycle, real interest rates and price stability are at enviable levels. We are enjoying the benefits of 40-year low interest rates and inflation remains at its low ebb in the 2% range. The question of hyper- inflation is not an issue.

In our opinion, two economic scenarios confront the markets. One scenario is the deflation story. The other scenario is a slow grinding economy. In our opinion, the most likely scenario is that of an extended period of slow growth. The early part of this period, the period we are in now, will be punctuated with a series of negative news; i.e. bankruptcies, lower than expected earnings, pre-bubble mergers unraveling, and tremendous volatility in the stock and bond markets. Company by company, industry by industry, the market will correct the excesses of the past leaving investors and corporate leaders with �hangovers� of the likes they have never experienced. Though we believe the worst of this period is over, our best guesstimate is that we are 12-18 months from concluding this period.

The second phase of this period will be an extended period of unspectacular growth rates. Consumer spending will be good as baby boomers move through their �peak� spending periods (ages 40-50). However, the consumer spending growth rates will be less as this demographic group approaches retirement ages. Industry consolidations; i.e. telecom, utilities, technology will provide fewer but stronger businesses. Businesses will be lean and more transparent. This will provide a greater degree of sensitivity to earnings improvement and earnings growth rates. Companies will focus on risk reduction by reducing debt and improving cash flow. There will be fewer stock buy backs and an increase in dividend payouts.

Based on this scenario, our expectations of investment returns are a return to long-term averages. In the equity asset classes, Large Cap Stock returns of 7-9%, Small Cap Stock returns of 9-11%, and International Stock returns of 10-12% represent our 3-5 year total return projections. As the economy and markets stabilize and deflation fears subside, interest rate policy will tighten and rates will gradually rise.

With all of this in mind, we have assigned a high confidence level to our opinion that the markets will set in lows in the next 12 months. It goes without saying that the markets have tested the faith and patience of all investors. We do believe this patience and faith will be rewarded. The following highlight two previous market debacles and how remaining committed to being an investor was rewarded. The following highlights two previous market debacles and how remaining committed to being an investor was rewarded.


	O c t o b e r 2 0 0 2

	Looking into the Crystal Ball �Nothing gives one person so much advantage over another as to remain always cool and unruffled under all circumstances.� Thomas Jefferson There are a lot of parallels being drawn today to stock markets and economies of the past. For most market watchers the parallels are drawn between the period of 1928-1936, the Depression Era, and the period of 1972-1976, the Oil Crisis. The Depression Era, the Oil Crisis and today�s markets were preceded by periods of tremendous economic growth. These periods of growth were classic examples of American progress at work. The periods were marked by individuals and companies who had imaginative ideas, tenaciously and persistently put them into action, sold them against the consensus opinion and profited beyond anything seen before it. The financiers of the period created opportunities for the masses to participate in the growth and speculation of the periods, for good or bad. Excesses were the common themes in these great economic and stock market booms and busts. Our current economic circumstances have seen their share of excesses. We have wiped out $6 trillion of corporate values in three years. Companies with tens of billions of dollars of market value three years ago are now worth next to nothing. Companies with virtually $0 revenues were valued at $500,000,000+. We have seen market indices up 100% and down 80% in the span of 5 years! A host of businesses and industries have watched revenues drop 60-70% in the course of two years. Economically, the period of the 30�s and the 70�s were accompanied by two extreme measures, high real interest rates and price instability. For example, in the 30�s the treasury-bill rate less the inflation rate was an extraordinarily high rate of 12%. The chief contributor to the 30�s debacle was price depreciation or deflation. The values of goods and services in the country were plunging at a rate of 12% annually. This led to a debt debacle, corporate bankruptcies and 20+ percent unemployment. The early 70�s were punctuated with spiraling interest rates and exploding inflation. Treasury bills went from 4% to 10% in a 2-year period. Inflation rates as measured by CPI went from 3.50% to 12% during this same 2-year period. In both instances, the 30�s and the 70�s, these extremes in the price of money and price instability sent shock waves to the confidence of the corporate and public participants. They reacted with significant stock market sell-offs. Up to this point in the current market and economic cycle, real interest rates and price stability are at enviable levels. We are enjoying the benefits of 40-year low interest rates and inflation remains at its low ebb in the 2% range. The question of hyper- inflation is not an issue. In our opinion, two economic scenarios confront the markets. One scenario is the deflation story. The other scenario is a slow grinding economy. In our opinion, the most likely scenario is that of an extended period of slow growth. The early part of this period, the period we are in now, will be punctuated with a series of negative news; i.e. bankruptcies, lower than expected earnings, pre-bubble mergers unraveling, and tremendous volatility in the stock and bond markets. Company by company, industry by industry, the market will correct the excesses of the past leaving investors and corporate leaders with �hangovers� of the likes they have never experienced. Though we believe the worst of this period is over, our best guesstimate is that we are 12-18 months from concluding this period. The second phase of this period will be an extended period of unspectacular growth rates. Consumer spending will be good as baby boomers move through their �peak� spending periods (ages 40-50). However, the consumer spending growth rates will be less as this demographic group approaches retirement ages. Industry consolidations; i.e. telecom, utilities, technology will provide fewer but stronger businesses. Businesses will be lean and more transparent. This will provide a greater degree of sensitivity to earnings improvement and earnings growth rates. Companies will focus on risk reduction by reducing debt and improving cash flow. There will be fewer stock buy backs and an increase in dividend payouts. Based on this scenario, our expectations of investment returns are a return to long-term averages. In the equity asset classes, Large Cap Stock returns of 7-9%, Small Cap Stock returns of 9-11%, and International Stock returns of 10-12% represent our 3-5 year total return projections. As the economy and markets stabilize and deflation fears subside, interest rate policy will tighten and rates will gradually rise. With all of this in mind, we have assigned a high confidence level to our opinion that the markets will set in lows in the next 12 months. It goes without saying that the markets have tested the faith and patience of all investors. We do believe this patience and faith will be rewarded. The following highlight two previous market debacles and how remaining committed to being an investor was rewarded. The following highlights two previous market debacles and how remaining committed to being an investor was rewarded.



	The Great Depression - Investor Experience 1928 - 1936 Market Bottom..............................06/01/32 Did Nothing..................................Recovered in 4yrs, 4mos. Bought More ($10,000 addl.).........Recovered in 3mos. Sold Out........................................Realized 78% Loss 1yr Recovery from Bottom...........+137.6%



	Recession - Oil Crisis - Investor Experience 1972 - 1976 Market Bottom..............................10/03/74 Did Nothing..................................Recovered in 1yr, 8mos. Bought More ($10,000 addl.).........Recovered in 5mos. Sold Out........................................Realized 44% Loss 1yr Recovery from Bottom...........+44.4%

	The last three months are the worst we have ever experienced. We realize it has been a terribly difficult time for you as an investor. These times are filled with fear and can be paralyzing. Sometimes hope seems like your only strategy. We do not believe hope is a strategy. We always welcome a little luck, but don�t count on it. We are committed to our investment discipline and believe it will prevail in the long-term. As seen above, investing around the bottoms of these extreme markets and remaining a committed equity investor can prove to be very profitable.

	"The real moment of success is not the moment apparent to the crowd." George Bernard Shaw

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