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July 5, 2000

July 5, 2000

I hope this memo finds you well, happy and content during the fullness of the summer season. In general, our views are sanguine. We remain invested in the high technology, pharmaceutical and energy areas. We continue to hold substantial cash which we intend to put to work during periods of market decline.

While we expect progress in the second half of 2000, we see crosscurrents which will produce progress but not smooth sailing. Some areas where we see these crosscurrents are:

Area I – Inflation

Potential problem – Commodity prices have bottomed and are turning up, labor is in short supply. Both are harbingers of inflation.

Positive angle – Productivity is rising, the price deflator, a key indicator, is not up. Real inflationary trends have yet to assert themselves.

Area II – Economic Growth

Potential problem – Economic growth is slowing especially in price-sensitive markets where it is difficult to raise prices. Meanwhile, costs continue to rise. Examples are: medical services, travel services, retail sales at lower price points due to cold early summer weather and internet bargain prices.

Positive angle – Economic growth is still robust in telecom equipment, software, electronic contract manufacturing (ECM), biotech research equipment, natural gas and other commodity areas where greater demand has raised prices.

Area III – Political Environment

Potential problem – Mr. Gore trails Mr. Bush. The market usually does best when one party controls both the executive and legislative branches of government. The recent combination of a Republican controlled Congress and Democratic controlled White House has led to a government which has been spending neither on traditional Republican nor Democratic priorities and thus, has seen a surplus. The election of 2000 may change that.

Positive angle – The markets now vote with their feet. No politician can spend on big social or big defense programs without international and U.S. bond holders selling bonds and smashing the dollar. If the dollar falls and rates rise, the economy slows, tax receipts dwindle and the incumbents all get tossed out in the next election.

Area IV – Corporate profits

Potential problem – Corporate profits growth is slowing.

Positive angle – Earnings are still strongly growing by historical standards and most growth is in technology areas where the U.S. has a strong competitive advantage.

Area V – Major corporations dominate the political process through the PAC system making it harder to innovate and create new products and services.

Potential problem – Both major political parties are beholden to the status quo as large corporations and labor organizations supply the great majority of money for their elections. This has caused the U.S. to lose the lead in some technologies, example cell phones and wireless internet.

Positive angle – A strong dollar. Venture capital availability in large quantities, tax laws that favor options distributions and U.S. financial markets which make going public easier than anywhere on earth. These positives attract money and talent to U.S. companies which fuels innovation and discovery.

Overview

The crosscurrents are the reflection of real change that is dominating business at this time. We believe this change leads to progress, but during the process the markets may experience bumps along the way.

Trends

The biggest trend in the world today is the Information Revolution. Like the electric utility industry of the early 20th Century, when families and business were able to outsource the age-old activity of finding sources and generating their own power. Now with the Information Revolution, families and business are able to outsource another age old activity information management. This has led to the most widespread undertaking in the world of business today, re-engineering the organization. The Internet has created a massive change in the way corporations see themselves and the way they see their relationships with customers, employees, suppliers and competitors. Every area of corporate life is being analyzed, often by outside consulting firms. As a result of this analysis and re-engineering, some key trends are developing.

Trend A – Corporations are outsourcing more. This trend has created or expanded several industries. They are moving to outsource personnel functions, procurement of materials, logistics, planning, the manufacturing, packing and shipping of their products, their client relations functions, such as, 800 number call centers and help desks, internet advertising and marketing. Companies have long outsourced advertising and payroll functions and some have outsourced part of their manufacturing, but recent announcements show this trend to be accelerating. We believe the outsourcing theme is a major investment theme for the next several years. The Information Revolution theme has spawned this outsourcing trend.

Industries Benefited by outsourcing Expected 3 Year Growth Rate

Electronic contract manufacturing 40%

Logistics 20%

Purchasing 20%

Internet consulting 35%

Software 35%

Value chain consulting 35%

Trend B – Back to our Information Revolution theme, we continue to believe in the strong outlook for telecommunications equipment, both wireless and wireline, and for software and suppliers for the telecom centric world of the future. The Internet is going mobile through cell phones, personal digital assistants, CD players (which will download music from the Internet), and cameras (which will upload photos to the Internet to send to friends and business associates). This will lead to new hybrid products which combine these technologies.

Interest Rates and Currencies

Interest rates continue to rise slowly and will eventually impact the market as P/E ratios gradually shrink and non-growth industries suffer profit margin contraction. It is important to focus on when rates will peak and we do not see that happening in 2000. The U. S. dollar remains reasonably strong versus the Euro, British Pound and Yen. We anticipate that this will continue until the U.S. election, as it behooves all political incumbents to have a strong economy. Thus, we predict reasonable interest rate stability through the rest of the year.

I look forward to chatting with anyone with questions about these views as we can certainly use input or criticism.