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October 1, 1998

October 1, 1998

To say the third quarter of 1998 has been eventful, would be a substantial understatement.

Asia has continued to slow, with major cracks in the banking systems of Japan and several Southeast Asian nations exacerbating the situation. Russia has imploded and officials there have made a number of serious blunders which may guarantee against a recovery of their economy anytime soon. Latin America has joined in the decline as bankers feared the problems in Asia and Eastern Europe were contagious. This caused them to call in loans in Latin America. While Latin America was not in default, this lack of capital could eventually cause major defaults in the region. It has already caused near defaults.

Finally, some high profile speculators operating with 95%+ debt to only 5% equity, or 19 to 1 margin, collapsed and lost all their capital. This caused panic that potentially could have led to the failure of some major brokerage houses and banks. In order to create an orderly liquidation of these debtors, a consortium of brokerage firms purchased and bailed out Long Term Capital Management, L.P. , the most visible bankrupt speculator.

The bubble, which led up to the recent U.S. market decline and global collapse of speculators, was highly visible to us before it burst, and we were well prepared when the difficulties hit. After 30 years as an analyst and portfolio manager, I have seen many bubbles and their aftermath and I view the current one as fairly typical. Knowing that the euphoria, egotism and greed that we saw in June and early July could not last, we took 3 steps: (1) for all clients, we took profits and raised cash to cut our market exposure; (2) for all clients, we made sure our cash was held in secure instruments so that nothing could be lost in case of the failure of any financial institution. Presently, all cash is held either in U.S Treasury Securities (the world’s safest interest bearing instruments) or in money market funds which hold only U.S. Treasury Securities.; (3) for those aggressive clients, who were able to do so, we sold short stocks of U.S. companies that were overvalued and vulnerable to decline in the bubble environment.

The result is that our clients’ portfolios held their value much better than the market. We believe that you are going to be pleasantly surprised when you see your portfolio value as of 9/30/98.

Today, we see opportunity. The Dow Jones Average is down over 16% from its high and we believe that opportunity is at hand. Although areas of the market continue to be dangerously overvalued, many companies are at good prices.

We will continue our policy of researching global social, political and economic events and then selecting those industries most likely to benefit from the major trends we have identified. Current trends include:

1. Increase in both voice and data telecom usage.

2. Increase in telecom equipment sales.

3. Increase in biotechnology as a means for developing new pharmaceuticals.

4. Increase in the number of pharmaceuticals approved by the FDA.

5. Increase in investment for retirement by aging baby boomers.

6. Increased usage of all types of computer technology.

7. Lower prices for imports in U.S. and Europe as a result of deflation and currency devaluations in Asia and Latin America.

We are focusing on industries which will benefit from these trends. We are looking especially at:

Telecom service providers

Telecom equipment manufacturers.

Pharmaceutical manufacturers / biotech companies.

Low priced, high yield bonds on industries that serve media and telecom.

Cable, TV & Cable telephony.

Internet telephony.

Education.

Discount retailing.

CURRENCIES

After months of increasing versus most major currencies, the dollar has begun to weaken. The U.S. is lowering interest rates in order to add liquidity to the world banking system. As U.S. rates fall versus the Euro currency rates, the dollar will fall versus the Deutsche Mark, Swiss Franc and Dutch Guilder.

World interest rates are declining as deflation grips Asia and Eastern Europe. The U.S. as the world’s most powerful and activist economy feels that in order to protect our own prosperity, it must first cut rates here and second, support the IMF (which acts as the lender of last resort) to support global psychology during times of crisis. Supporting the international economy by bringing our interest rates down should cause our dollar to slowly decline in value. In addition, the advent of the European currency in January 1999 will also lead to a strong European currency which will cause some modest decline in the U.S. dollar from its current high levels.

FOREIGN MARKETS

In times of international turmoil, the U.S. offers a safe haven from global volatility. The U.S. economy is more insulated from currency and profit declines that are sweeping Asia, Eastern Europe and Latin America. Although foreign markets have fallen and created much better values for investment, the concomitant lack of confidence in these markets means they will take a long time to recover. Thus, we are avoiding Asia and Latin America. In Europe, big companies that are focused in certain fast growing industries like telecom, pharmaceuticals, and technology may offer opportunity.

SUMMARY

Although the Dow Jones Industrial Average fell over 20% from its high to its low in the recent correction, it masked much more substantial declines in the great majority of stocks. Declines of 40% are common among well-run companies in industries which are insulated from global economic turmoil. As a result, we are finding many high quality growth companies at compelling valuations in the United States. As is our custom we are researching the companies, speaking to their management, customers, suppliers and staff members. In so doing we are getting a good picture of their future prospects and the trends in their industries.

Those industries which currently offer a combination of visible earnings, growth and favorable demographics, social, political and economic trends listed above are where we are shopping for values. We want to make sure we are in a position to benefit when the market environment improves.

Please call with questions or suggestions.