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January, 02, 1998

January, 02, 1998

We sincerely wish this New Year will bring you health, happiness and prosperity.

The New Year is arriving full of opportunity and some risk. The newspapers and media have focused on the problems in Asia. We believe these problems are due to structural problems in East Asian economic and political environment and that they will resolve themselves gradually and give way to substantial opportunity in the latter part of 1998.


U.S. MARKET

Within the U.S. market, a major correction has been going on in some sectors. The big Dow stocks and major companies have been hurt, especially if they are in technology or oil service. Many smaller companies’ stocks have also declined leading to what I call a beneath-the-surface bear market.

Within the U.S. market, the strong groups are those that are focused domestically, and either have secure income, or are beneficiaries of industry consolidation, such as utilities, real estate investment trusts, radio broadcasting, cable TV, savings & loans, or newspapers. Both oil service and technology have been badly battered, but remain attractive, fundamentally.

We believe a substantial “January effect” rally began on December 29, 1997. We believe the rally will last for 3 or 4 weeks and is the result of: (1) the huge oversold condition of some market sectors after the bloodbath in technology and oil service that occurred in the 4th quarter; (2) the seasonal influx of cash into pensions and 401-K’s which should equal $1.2 – $1.6 billion per day for the first three weeks of 1998; (3) the shortage of supply of new issue and secondary issue offerings due to the holiday slowdown.

After January, we expect a correction in the U.S. market due to: (1) difficult earnings reports in March and June as weakness in Asian markets slows growth and hurts U.S. multinationals and domestic competitors; (2) continued active new issue calendar creates two effects – (a) more capital for new competitors in many fields leading to price competition and in some cases, over capacity, which hurts earnings; – (b) an increasing supply of stocks that exceeds the amount of new money coming into the market. This puts downward pressure on P/E ratios, especially on small capitalization companies. We will avoid small companies after January. Presently, we are purchasing high tech, oil service, savings & loans, and cable TV stocks to participate in the January rally.

After January, our strategy will be to continue to hold or take longer term positions in big growth stocks such as, Pepsi, Pfizer, Bristol Meyers, Eli Lilly, Axogen and Elan. We believe investors will seek out these superior companies in an uncertain market. We also plan to continue to hold real estate investment trusts or REITS. These instruments provide excellent income, an average of 8%, plus the potential for substantial appreciation as interest rates rise. We will also hold special situation companies selected for good and growing income and safety.

Because of our expectation of a substantial correction in the U.S. market between February and the 4th quarter, we will be safety conscious for you.


INTEREST RATES

Interest rates may continue to fall modestly in the U.S. and Europe, and the U.S. Dollar should continue to fare well as we expect it to rise slowly versus the major world currencies in 1998.


GLOBAL STOCK MARKETS

European shares can do well, especially those of industries that are European oriented. Those European companies, which export to the U.S. and Asia, may have a difficult time producing growing profits.

We will focus on a number of European shares, especially in the U.K. and Italy. Insurance, utilities, banking and investments are our favorite industries. We will avoid emerging markets until the Asian countries and companies have rearranged their financial priorities, made their markets more transparent and liquidated their bad loans.


SUMMARY

In summary, 1998 will be a year of change and opportunity. This year, conservatism, stability and security will be high among investors’ decision priorities. This favors the U.S., U.K. and a few strong European financial issues, domestic industries, and high yield shares in the U.S. and Europe. It also favors bonds.

By the 4th quarter, a U.S. market correction will have been completed and new bull market may begin. Historically, October and November have seen many market bottoms and we expect to see a new bull market begin in the 4th quarter of 1998.