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December 31, 1998

December 31, 1998

We would like to convey our warmest wishes for a happy, healthy and prosperous New Year.

As is our custom, we are writing to share our views on 1999 from the point of view of global investment markets. We look at the investment markets as an amalgam of trends from the current and expected social, political, and economic environment in the world. Based on our research, we are reasonably optimistic about the environment for 1999. We see opportunities and we see problems. Let us discuss both of them and why we believe at this time next year we will be looking back at 1999 as a good year.

Social, political, and economic forces shape world markets. The following are the key determinates of stock market appreciation, in our opinion:

(a) Liquidity – The amount of liquidity available in global markets. To which markets that liquidity is headed.

(b) Profits – Corporate profits in major countries. Are they rising or falling?

(c) Lifestyle Changes – Major technological, social or political trends that shape investors and consumers in years to come.

LIQUIDITY

In 1999, we see liquidity flowing at a rate unseen since the late 1960’s. The U.S. Federal Reserve has recently lowered rates twice recently in response to low inflation and the crisis in Asia. Interest rates are at multi-year lows in the U.S. U.S. money supply is growing rapidly, feeding further liquidity into the global economic system. Tax and Pension laws favor investment in stocks and bonds over real estate. Because of this, we expect massive liquidity from Europe, Asia and North America will flow into the U.S. stock market.

Western Europe was for years a haven of stable money as the conservative Bundesbank (the German Central bank) forced other Central Banks to be prudent. The Germans grew their money supply slowly and other nations had to be reasonably conservative or risk having their currency fall dramatically versus the Deutsche Mark. Now the Euro (European currency) has been implemented, and three major elections have brought socialists to power in France, Germany and Italy. The new European Central Banks are likely to be weak, politically motivated and should accommodate the call for liquidity, and low interest rates.

Currently, Japan and Asia are printing money and incentivising cheap credit in response to the continuing economic and real estate deflation in Japan. The bubble in Japanese real estate and the ensuing bank problems are gradually being addressed by a torturously slow reform program, and by a massive wave of liquidity that the Japanese Central Bank has created.

CORPORATE PROFITS

U.S. corporate profits should be modestly higher in 1999. Low interest rates, cost cutting, strong domestic consumer demand, and low inflation all argue for stronger overall corporate profits. In the U.S and Europe, companies which produce technology, communications, entertainment, healthcare or financial products or services should continue to have strong profit growth. Companies that produce commodities (steel, paper, oil, metals, chemicals) especially those that export may have very poor profits in 1999.

MAJOR TRENDS

We are living through a technological change much like the industrial revolution. This revolution in information technology and communications is creating new industries, damaging and destroying certain old ones and influencing how business is done in the rest of the economy. In our industry, the investment management business, we have seen dozens of changes in communications, portfolio management, research, trading, administration and marketing as a result of technological and communications advances.

New technologies in telecommunications, software and hardware are radically reorganizing the way we live, shop, travel, entertain ourselves, communicate and assimilate data. All of these changes create new industries. For example, electronic commerce, the internet, electronic banking, electronic brokerage, lower phone bills, faster communication, new consumer electronic products, such as digital phones, cameras, TV’s and computer screens are changing communication.

POTENTIAL NEGATIVES

1. The impeachment of President Clinton. Wherever we stand in the Clinton impeachment issue we must remember the Clinton scandals have been around for several years while the market has been rising substantially. While during the Watergate scandal, the market fell substantially. Why can’t that happen again? Several reasons explain the contrasting impact on the markets. Let us compare the 1998-1999 economy to 1973-1974.

(a) In 1973-1974, U.S. inflation was high and rising. The prime rate reached 20%, today inflation is 2% and not rising.

(b) In 1973, U.S. corporate profits were deteriorating substantially from 1972 levels. This is because costs were rising due to commodity price inflation and higher interest expense. Today corporate profits are rising slowly.

(c) In 1973-74, the U.S. was running a budget deficit versus a budget surplus today.

(d) Taxes were high and rising 1973-74. Today taxes are flat or falling slightly.

2. U.S. market is not cheap. In general, the U.S. market is fairly priced. Some sectors and industries are overpriced, some underpriced. In addition, we believe the market to be fairly priced versus bond yields and real property yields. While the market has made substantial gains, the strong fundamentals still leave room for further opportunity.

SUMMARY

After carefully considering all the opportunities and problems we have discussed, we expect a positive year for stocks in North America and Europe. We will see continued volatility. However, it is our opinion that the average stock in the U.S. will rise 10% in 1999 and that companies in new emerging industries especially leaders in these industries may rise much more than 10% this year.

Here are some of the industries where we see the greatest opportunity:

Telecommunication Equipment

Telecommunication Services

Software

Computer Equipment

Computer Services

Entertainment and Cable TV

Entertainment Services

Discount Retailers

Electronic Retailers

Youth Apparel Retailers

Biotechnology

Medical Technology

Financial Services

We look forward to your calls and comments.