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July 6, 1999

July 6, 1999

Hi, we hope our quarterly economic review finds you enjoying the summer season. As is our custom, we will be discussing our views on the economy, interest rates, the stock market, and the trends and themes we have identified as creating opportunities for investment. We also want to take this opportunity to give you some insight into our process of researching investment ideas.

As we write this letter, we remain confident that the U.S. economy and many stocks will continue to be robust despite modestly higher interest rates. We are also seeing positive developments in Asia. In Japan, after years of recession, the economy and market are beginning a recovery phase. In addition, other Asian countries are showing signs of recovery, and are becoming more economically well balanced. Canada’s economy and currency appear to be strengthening. Meanwhile, Europe continues to experience problems with their currency, the Euro, and Latin America continues to battle unwise political and fiscal policies. As a result, we are focusing on opportunities for investors in certain sectors of the U.S. economy, in Canada, Japan, as well as, Korea.

ECONOMICS

On June 30th, the U.S. Federal Reserve Board (Fed) raised interest rates by 1/4%. It is expected by many economists, including several former members of the Fed, that we will see one or two more interest rate increases in the next 12 months. Most analysts, including ourselves, believe that because the world’s economies are more interdependent today, and that the U.S. economy is less predictable than it has been historically, the Fed is raising interest rates in smaller incremental amounts. Stronger economic activity in Asia and a recovery in Europe, plus strong earnings growth in the U.S.A., have led the Fed to fear a resurgence in inflation in the year 2000. Thus, they are raising interest rates now to slow economic growth and moderate inflation.

STOCKS

Historically, higher interest rates have been negative for stock prices. This was evidenced this year when Treasury Bond yields began to rise in April. The stock market, with a one month delay began to move sideways and many sectors declined in May. Higher interest rates make the yields on bonds look more attractive vis a vis stocks. Money moves from stocks to the more conservative world of bonds to lock in fixed returns. Furthermore, as interest rates rise, price to earnings ratios fall, causing higher P/E stocks to decline.

Even in a period of rising interest rates some stocks rise such as, shares of companies with very high rates of earnings growth. These companies’ declining P/E ratios do not counterbalance their very rapid earnings growth, and the premium the market is willing to pay for that growth. In addition, foreign stocks, in countries where interest rates are flat or falling, or where earnings growth rates are very rapid, can do well. This often occurs when a country is recovering from a recession. Such is the case in Japan and several other Asian countries.

THE RESEARCH PROCESS

As you know, our job involves in-depth research of the global trends, including social, political, demographic, economic, technological, financial and in taxation that create change in the way societies operate and the way people live.

From these trends, we identify major themes that create investment opportunities. After we have identified the themes, we identify the regions, countries and industries where these themes will play out. Finally, we research the companies in the industries that have superior growth prospects. This process involves speaking to, and visiting with, the managements of the companies, researching their fundamental business and financial performance and double-checking with their customers, as well as their competitors, to determine how their business trends are developing. We may hire consultants in specific areas to analyze a company’s activities or technologies, or to give us specific information about their industry. In addition, we frequently share information and confer with other analysts and money managers to gain new insights into specific technologies, companies and industries. In short, our process is thorough.

DEVELOPING TRENDS AND THE INDUSTRIES THAT WILL BENEFIT FROM THEM

We are presently applying our research process to the following five major themes: (1) the global need for telecommunications that expand capacity, or bandwidth; (2) the implications of the mapping of the human genome; (3) increasing world trade friction; (4) the explosive growth and impact of the Internet and; (5) the economic recovery of Asia.

We have positioned the portfolios to capitalize on these trends. Within the U.S., we own companies that supply bandwidth and equipment to the telecom revolution that is underway. We own retailers that will be able to add the Internet to their existing store base to increase sales and profits. We also own selected companies that provide technology to the Internet. We own entertainment stocks that will provide software and content to the Internet and telecom worlds. We own pharmaceuticals that will benefit from the mapping of the human genome, which should help in curing diseases. We own positions in Japan and Korea which will benefit from the continuing turnaround in the fortunes of Asia.

Finally, we are holding some cash, as we believe coming weeks will provide periods of weakness in selected companies, and we will use these periods to deploy your cash in companies that benefit from the above trends.

For more information or deeper insights into any trends, or if you have any questions, we welcome your calls.