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April 1, 2002

April 1, 2002

Hello! Spring has arrived and we hope you are enjoying good health and the joys of life in this spring of 2002. Here is our latest quarterly outlook. Please call with any questions, suggestions or other inputs.

WHAT’S HAPPENING?

Recently, while walking on the street I met an old friend who greeted me with “Hi Monty, what’s happening?” At the time I was struck by the coincidence as I was cogitating about what is happening to the U.S. economy. It appears to me that the key to the U.S. market in 2002 is, what’s happening to the U.S. economy. What is happening to the economy, currencies and stock markets, and what is likely to happen in the future is the subject of this missive.

Has the recession ended? If it has ended, will growth be rapid or slow? Will growth be steady or erratic; moving forward in fits and starts? In our opinion, the U.S. economy has begun to recover from an overall mild but sectorally devastating recession. While the economy as a whole recessed modestly, certain sectors including the formerly high-flying tech and telecom sectors have been experiencing a serious and somewhat prolonged 4 or 5 quarter downturn.

Recently, lower interest rates (10 rate cuts by the Fed in 2001 and early 2002), slightly lower taxes, and increased spending on defense and homeland security have begun to expand economic growth a bit. The growth is certainly welcome. The source of the growth is a bit disturbing. Defense spending does not create the same degree of economic growth per dollar expended as non-defense spending does. The lower interest rates have led to a consumer refinance boom, greatly increasing new home sales and turnover among existing homes. Real wage increases above the inflation rate, combined with fears of foreign travel after the tragedy of September 11th, have led to increased spending on autos, furniture, home improvement goods and domestic travel. This has been the good news and we expect these economic sectors to continue to produce good news.

Some other sectors of the economy are producing bad news. For example, the fundamentals for high tech equipment, telecom equipment and services sectors remain weak. They are still working off grossly inflated inventories, the effects of double ordering by communication service providers and over-optimistic capital spending from technology

equipment manufacturers. These companies were over optimistic about their business prospects, and over built plant and equipment, developed products with less demand than they had foreseen, and made unwise acquisitions of technologies with dubious prospects. We expect this could continue for a few more quarters.

INTEREST RATES

Interest rates bottomed in October and have been rising due to improving economic numbers and the return to government deficit spending. In addition, we are getting some early signs of higher inflation in the future such as higher oil and gold prices as well as a weaker dollar. We remain cautious on long-term bonds, as their value will fall as rates continue to move higher.

FOREIGN MARKETS

East Asian and South East Asian markets have been rising so far this year reflecting optimism about an economic recovery in the U.S. China, Hong Kong, Thailand, Korea, Taiwan, and Japan are export driven economies. Strong demand from the U.S. and Europe creates potential sales. The stock markets in these countries are acting as a discounting mechanism. They are rising now as expectations of better days ahead filter through the investors’ psyche. We like these markets and are carefully evaluating several of them.

U.S. MARKET OUTLOOK

A bit of history: The U.S. stock market basically was flat for the 1st 20 years of the 20th century, it boomed in the 1920’s, declined from 1929 until 1948, boomed from 1948-1966 and was flat from 1966 to 1981. Then the market began a remarkable ascent from 1982-1999. By the peak in 1999 and early 2000 it was grossly overvalued by almost every historical measure. Especially overvalued, were the glamorous and favored technology and telecom companies. We have now had two years of market correction. Has the market become fairly valued? Our answer is a qualified, yes. Certain sectors have become fairly valued. Those sectors that did not reach euphoric heights of overvaluation are showing improving fundamentals. Sectors like energy, metals, some financial institutions, business services, consumer services, medical technology (selectively), and some restaurant and retail companies appear reasonably priced.

Our view in general is that we have a fairly valued market which will return 7-8% per year for the average stock over the remainder of the decade. While 7-8% per year returns seem modest in the after glow of the hoped-for returns of the volatile 90’s, the 20th century as a whole, saw stocks produce returns of 7% per year.

Our goal of course, is to create returns for our clients which exceed 7-8%. We have been able to do that very successfully for the 30 years that we have been in business. We do that by minimizing losses in bad markets, and by being invested in fast growing companies in neutral or strong markets. Today, as we find attractive values, we are investing in companies selling at low P/E ratios with highly visible earnings streams and good fundamentals.

AN INDUSTRY SUMMARY

Industries, just like companies, have fundamentals. The pharmaceutical industry has been a favorite among investors for some time. Recently, we have had lengthy discussions with several executives close to the pharmaceutical industry. These conversations have led us to be much less favorably inclined to pharmaceutical stocks for the next few years. Several negative forces will impact pharmaceutical prices and the profits of big pharmaceutical companies.

Force #1- HMO pricing pressure is increasing. For years pharmaceutical prices have been rising faster than HMO’s have been able to pass them on to their members. In 2002 we are seeing major increases in HMO rates to corporate and individual members. After receiving a backlash from their members, HMO’s are now pressuring big pharmaceutical companies for greater discounts.

Force #2- State Medicaid programs have begun (Florida most recently) to put pressure on big pharmaceutical companies for larger price discounts through the courts. Many other states are following Florida’s lead.

Force #3- President Bush is not supporting the pharmaceutical industry in keeping prices high. Too many Republican and independent voters want lower drug prices and Bush will not resist their request.

Force #4- Patent protection periods are shrinking. Time extensions from the FDA on existing patents are becoming harder for the companies to get.

As a result of these forces, we are avoiding commitments to the major pharmaceutical companies at this time. We believe these stocks could see their earnings growth rates fall to very low levels of growth for several years to come.

SOME PREDICTIONS

U.S. will let the dollar fall slightly as political pressure is exerted by export industries.

Inflation is currently at a low ebb and will begin to rise from these levels. We are not predicting a radical increase but a steady price increase to 3-4% inflation over the coming quarters.

The U.S. market will continue to get foreign investment, but at a lower rate once the dollar is no longer rising against most currencies.

Divesting of major technology stocks will continue and they will continue underperform the market.

Companies in medical technology, retailing, restaurants, energy, metals, medical services, consumer services and business services will outperform the market. Gold will continue to rise gradually as companies de hedge and Japanese consumers acquire gold and remove bank deposits where deposit insurance has been decreased. Rising inflation will also give impetus to gold and energy buyers. At some point, probably at $350 per ounce, the German Central Bank may have some gold for sale which will effectively cap the price for a while.

WHAT WE ARE DOING

We have identified 40 companies in the above industries to buy when they reach our price objectives. Some may never get cheap enough to buy. We expect that 20-25 will get to our price, and these should provide good opportunity for appreciation during the remainder of 2002 and into 2003.

SUMMARY

Interest rates have ceased falling and may rise later in 2002. U.S. dollar may fall slightly 4 or 5 % versus the Euro and the Swiss Franc. Gold continues to be in demand in Japan, where authorities have greatly reduced the deposit insurance on bank deposits. This combined with rising inflation and de hedging by major gold producers has put a bottom under gold’s price. Some US stocks are attractive and others remain overpriced. Opportunities are presenting themselves in some sectors and we are finding low P/E companies, with solid fundamentals and good growth rates, which are suitable for investment.

We hope our letters and telephonic communication are useful to you in thinking about issues and have made it easier to decipher today’s investment world. If you have any questions please call, we are always happy to hear from you and we look forward to being of assistance in helping you to decide which investment approaches are correct for you.

Thank you for your support and confidence. We will continue to work diligently to earn them both.