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January 1, 2002

January 1, 2002

As 2002 is at our doorstep I am writing to share our views on the global markets for securities and currencies in the coming year.

2001 saw a major climactic market decline, which culminated in a widespread market panic following the tragic events of September 11. The climactic sell off that ensued set the stage for a market rally, which continues at this writing.

This market rally can be characterized by bounces in badly battered technology stocks, and by a continuing rally in quality low P/E growth stocks that had been ignored in the technology bubble of 1999 and early 2000.

ECONOMIC OUTLOOK

The recent collapse of the Argentine financial system has created ripple effects throughout the world.

As a result, U.S. long-term interest rates have risen and bond prices have fallen. Simultaneously, short-term interest rates in secure instruments have fallen as investors have run for safety, abandoning high yield instruments. With longer maturities we believe the collapse of the Argentine bond market may presage collapses of other shaky government bond markets, (Russia comes to mind). This could lead to continued upward pressure on long-term U.S. interest rates for a few weeks or months. After the panic subsides, we expect U.S. interest rates to level off or rise more slowly.

We do not see a widespread recovery in the U.S. economy beginning in 2002. A recovery will begin in certain sectors of the economy and elude other sectors.

Homebuilding, medical and the consumer sectors (retailing, restaurants, apparel) will be relatively strong. Capital spending will remain weak especially in the telecommunications sector. Business services and consumer services should grow in strength as the year progresses.

U.S. MARKETS

In our opinion the U.S. market is still characterized by areas of overvaluation and undervaluation.

Many companies in the technology sector are still overpriced. After one year and nine months of decline, many technology stocks still sell at 50 times earnings with uncertain growth prospects. At the same time, lower P/E growth companies in medical, electronic games, retailing, restaurants, consumer services, business services, home building and software sell at valuations below their growth rates.

Today, small capitalization companies are cheaper than large companies. Companies in non-technology areas are cheaper than technology companies. We see opportunities in small fast growing companies that are able to change and adapt to today’s recessionary climate. These companies will be able to grow earnings even in an economic downturn, and thus will gain market recognition.

We consider these areas attractive. We would like to reiterate that, leaders of the last bull market almost never repeat as leaders of the next bull phase. We must be alert for new leadership as the economy and market continue to recover. Thus far, the industries mentioned above are the best candidates for leadership.

CURRENCIES

THE EURO

Today, January 1, the Euro begins to be the primary public currency of Europe. All business will be transacted in Euros including all cash and credit card consumer transactions.

The Euro has completed its integration into all facets of European commercial life. The European Capital Bank (ECB) and the countries of the Euro block are determined to make the introduction a success. Enormous resources will be committed to doing so. Because of all the banking muscle going into guaranteeing a successful launch, we are bullish in the Euro for at least the next few months. The Euro should rise versus the U.S. dollar and for those of you who are set up to hold foreign currencies, we will be holding some of your cash in Euros, where they will earn interest.

THE JAPANESE YEN

Japanese officials continue to reiterate that the yen is too high. The Japanese strategy is to let the yen fall to stimulate exports and to better compete with Korea, Taiwan, China and other Asian economic powers. We expect the yen to continue to decline versus the U.S. dollar in coming weeks. For our more aggressive accounts we are short the yen.

FOREIGN MARKETS

In general, stocks in emerging markets may have difficulties over the next few months as the ripple effects of Argentina spread.

Stocks in developed markets like Europe may be under pressure as the rising Euro makes their exports less competitive.

Canada and Australia are economies which are largely based on raw materials, energy, minerals, and farm products. These markets may prosper as energy prices begin to rise in the latter part of 2002.

Japan is a special case, it continues in a multi year bear market. At a very slow pace, Japan is beginning to approach their problems. Because they are acting very slowly however, their caution does not engender confidence. For at least the first few months of 2002 we do not expect a big rally in Japan.

SUMMARY

We see three major themes in 2002. (1) Small capitalization stocks in the U.S. will attract some of the surplus cash that has been injected into the global financial system.

This cash has been created by an unprecedented expansion of money supply by the U.S., European and Japanese central banks. This abundance of liquidity will follow the markets that have visible growth characteristics. Many U.S. small capitalization stocks have good growth characteristics.

(2) The Euro will rise versus the U.S. Dollar and other major currencies for at least a few months, as European central bankers manipulate all economic and financial indices to provide a warm welcome to the new currency and simultaneously to promote their own political futures.

(3) The Japanese government will continue to talk down the yen in order to increase Japanese competitive efficiency in the Asian manufacturing environment, and to increase Japanese exports to Europe and North America.
We are looking forward to 2002 and the opportunities that are presenting themselves. All our warmest regards for a new year filled with health, happiness and success. Please call us if we can be of any service or if you have any questions.