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April 3, 2001

April 3, 2001

It’s April 3rd and the market has just turned in a terrible quarter. We were fortunate to have avoided the great majority of the damage due to our high cash position. During the quarter, the Nasdaq Composite and the S&P 500 were down 25.5% and 12.1% respectively. While remaining sensitive to the suffering others have experienced, we are pleased to have held so much U.S. government debt earning interest, and to have been mostly on the sidelines during this slide.

The demoralization and fear that often accompany market bottoms are beginning to be seen not only in the U.S. but also in Japan and parts of Europe. For about a year, we have been holding a large percentage of cash while maintaining a cautious modus operandi. We are extremely gratified that our client accounts are up very nicely in the last 3 years while the Nasdaq, S&P 500 and mutual funds in general, have not appreciated over the same period. The rise in the S&P 500 and Nasdaq Composite of 1998, 1999 and early 2000 have been erased by the decline of late 2000 and early 2001.

U.S. MARKET
The U.S. market has 3 major tiers at the present juncture.
Tier 1 – The large capitalization industrial leaders (major blue chip companies in retailing, consumer goods, manufacturing and finance). These companies are represented in the S&P 500 and have been treading water for 2-3 years. The S&P 500 first reached the level at which it sits in mid-1998. It has fallen 30% from its highs. The S&P rose until a year ago and has retraced its rise of 1998, 1999 and early 2000 in the past twelve months.
Tier 2 – The glamour growth stocks of the Nasdaq 100. These big tech stocks became ridiculously overvalued prior to their peak in March 2000 and have fallen 67% from that peak. They are back to their price levels of early 1998.
Tier 3 – The large and mid-sized quality growth companies, which were ignored during the tech mania and the Internet bubble, are beginning to re-attract interest from investors. Many market professionals, who are always looking for quality growth stocks, ignored these mid-sized companies because their clients did not understand them and the media was focused on the big tech stocks. Many of these companies bottomed in January and have begun to gradually rise in February and March.
The media, many professionals, and the public were in a frenzy to acquire shares in the glamorous technology giants. The media puffery and public ignorance led to a once-in-a-generation valuation bubble for most major technology companies. When the stocks began to falter, these companies ran out of buyers as wise investors began shifting their attention to less expensive companies with visible and consistent growth.

At Guild Investment Management, we have always had a research focus and we currently have several people researching companies, large and mid-sized, which are growing steadily yet are selling at low price earnings ratios. We believe that these types of companies are an exceptional value now and will lead the market when it begins to rise in coming months.

OUR INVESTMENT PROCESS

First, we do global research to identify which industries are benefiting from social, economic and political trends. Then, we thoroughly research these industries, talking to customers, suppliers and competitors to determine who are the best companies in the industry. After meeting with the managements of these companies we select a few that exhibit superior characteristics and focus on those. Our portfolio may contain 30 companies culled from 6 or 8 industries with top growth characteristics. Once we purchase companies we keep in touch with them by telephone and/or in person to monitor their progress.

OUR INDUSTRY SELECTIONS

Today on a global basis, several industries stand out as best opportunities.

ENERGY
A confluence of circumstances, primarily the lack of spending for infrastructure, gas pipelines, hydroelectric plants, new electric generating stations, and a growing need for high quality electricity for hi-tech applications, have created opportunities in the energy sector.
Some interesting areas are:
1. Energy discovery – Oil service companies that make equipment or provide services for drilling oil and gas wells. There is an energy crisis in the U.S. and it is expanding to Europe and parts of Latin America.
2. Energy transportation – Companies that own or build pipelines, processing or distribution facilities. This is an area where 10 years of underbuilding has created a backlog of work for consulting, site engineering, and construction engineering companies.
3. Electricity generation and brokerage – The U.S., especially the Western U.S. and Brazil are already experiencing electricity dislocations. These will spread to the Eastern U.S., to other parts of Latin America and to Europe. These dislocations create opportunity for electricity generators and those who design and construct electrical facilities.
4. “Clean” Electricity – This is an industry which is rapidly becoming recognized. Its role is to supply and transport “clean” electricity. Many hi-tech organizations require non-interruptible, high quality “clean” electricity to run their industrial processes. For example, computer server farms and semiconductor manufacturing plants can’t be shut down or have their electric power interrupted without a major impact on the quality of their product or service.

PHARMACEUTICALS
The aging populations in the United States, Canada, and Europe are increasing the demand for high quality drugs, treatments, and cures. In addition, new exciting technologies are speeding up drug development, and companies are able to bring new treatments to the market more quickly than ever before.

HEALTHCARE EQUIPMENT AND SERVICES
These companies are also beneficiaries of the aging population.

SECURE FOOD PRODUCTION AND RETAILING
More and more people are becoming concerned about the quality and availability of wholesome food. Due to fears of mad-cow disease, and the allergenic dangers of some genetically engineered foods (Starlink corn, etc.), many consumers are seeking safer food sources. Food producers or retailers, that focus on high quality and organic foods, may prove interesting for investment.

SUMMARY
To the seasoned investor, the fundamental and psychological indicators are predicting a bottom for part of the market (Tier 3 stocks) while most of the market (Tier 1 and Tier 2 stocks) could continue to go sideways or decline further.

This is a normal pattern. The leaders of the last bull market (Tier 2 stocks in the current case) usually continue to decline for up to a year after the new leaders begin to rise. This disguises the beginning of a new bull market to the casual observer.

We are grateful that we have grown your account and protected your assets over the volatile markets of the last 3 years. Now that many stocks are more reasonably valued, we are thoroughly evaluating companies for future investment. We believe that thorough research will identify excellent companies at low prices and we will accumulate them when the market bottom forms over coming months.
Although it may seem hard to believe given the current market conditions, we are very grateful that stocks have declined to levels not seen for three or more years. Because, most companies outside of the technology area will have decent earnings in 2001 and even better earnings in 2002. This will, within weeks or at most months, provide a platform for a new bull market.
Please call with any questions, suggestions, or concerns you may have.