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April 6, 1999

April 6, 1999

The first quarter has passed and we have seen 2 major developments.

(1) Narrowing of the U.S. market: share price increases in the U.S. market for a few large, seasoned and favored companies coinciding with actual price declines in most U.S. stocks. Although the S&P 500 was up slightly in the quarter, 63% of all New York Stock Exchange stocks, 47% of S&P 500 stocks, 55% of NASDAQ stocks declined in the first quarter according to Merrill Lynch.

(2) Japan has begun making good decisions to re liquidify their ailing economy. They have guaranteed bank loans and liquidated some overhanging real estate debt. We also believe they will cut capital gains rates, and float $1 trillion of bonds to help banks restructure. This should put an end to the 10-year bear market in Japanese stocks.

The upshot of the events in Japan is positive for the U.S. and for the world. Japan is a cornerstone of the global economy and a stronger Japan means a stronger Asia. Japan has been very slow to make these important changes, but now we could see a multi year recovery in the Japanese stock market.

U.S. STOCK MARKET

The stock market has been modestly higher, with some areas very strong and other areas very weak. Since January 1st, U.S. market volatility has risen to four times normal. This is due to an extended market rise and to the narrowness of the current leadership, primarily technology, internet, retail and telecommunication stocks.

We expect continued gains in these leading sectors as long as NATO does not commit ground troops to Kosovo. Should ground troops be committed, the market may trend sideways or reverse itself. Although we remain optimistic, we expect to see periods of violent stock market decline, such as the one we experienced between May and October 1998. These declines should present buying opportunities and we will hold some cash to await these opportunities.

WORLD STOCK MARKETS

Europe is suffering from two problems. Firstly, the new currency, the Euro, has been weak. Unfortunately, Europe does not have a cohesive plan to back the Euro should a crisis of confidence unfold. Secondly, the bombing and fighting in Kosovo has already begun to create dissension within Europe. Some countries support the NATO action, others resent the action and the U.S. involvement in it. Yugoslavia being directly adjacent to several nations has a disruptive effect on political and economic harmony. Therefore, the fighting in Kosovo has made us less bullish on Europe. We would rather focus our investments in the U.S. and Canada and secondarily, in Japan. Asia, apart from Japan, is slowly strengthening, but does not yet seem ready to rise decisively.

CURRENCIES

Because of the instability in the Balkans, we expect the Euro to continue to be relatively weak with the Swiss Franc remaining the strongest European currency. We also expect the U.S. dollar to remain strong. However, if the military cost of U.S. actions in Iraq and Kosovo begin to mount and the projected U.S. budget surplus for the October, 1999 fiscal year begins to disappear, we could see the dollar and the U.S. stock market begin to decline.

The Japanese yen should begin a period of strength. Over time, we expect several Asian nations to peg their currencies to the yen like some countries currently peg their currency to the U.S. dollar. China, Thailand, Taiwan, Korea and other nations may join this currency bloc which would help support the yen.

INTERESTING DEVELOPMENTS IN TECHNOLOGY

The internet and digital technology is creating massive changes in the way corporations in almost every industry do business. These changes will greatly effect life in the developed world as information, data, goods and services begin to flow more freely.

Price competition has proliferated. Product innovation and design cycles have been shortened, production processes shortened and systematized, inventories reduced, capital costs minimized, delivery times decreased. All of these and many other changes are a function of massive spending on information technology equipment and software over the last several years. Most businesses today are acutely aware that they must change or die. As analysts, we commonly visit with companies in a variety of industries and we have never seen the degree and speed of change that we see today.

These changes make for a much more cost effective, well-organized and efficient industrial base in the U.S. Over the coming years, we will see this focus on efficiency continue and expand globally. The message is clear – the world is becoming a much more competitive and efficient place. I will be sending you a bigger report on these developments in coming weeks.

SUMMARY

Currently, the U.S. market continues to rise, but it is increasingly volatile and the leadership is narrow. We are invested in big capitalization companies in a few sectors that have strong earnings, excellent revenue growth and high visibility of future growth. We are participating in the market rise but are becoming more concerned about the volatility of the market. We expect to see a market decline in 1999 much like the decline of 1998. We plan to add to our positions at lower prices during the decline. We remain optimistic that we will be able to profit earlier in the year, before the decline, and expect to have cash in late summer/early fall when the market will be at a good buying point. If our scenario is correct, 1999 should be a good year for all of us.

Please accept our warmest wishes for a healthy, happy and prosperous Spring season.