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June 25, 2002

June 25, 2002

The end of June is approaching and I am writing to share my views. I have spoken to many of you recently and I have heard that many of you are deeply concerned about economic and other prospects in the U.S. There is reason to be concerned. We are in a bear market and as is our custom during every bear market since 1969 we are in cash, earning interest and waiting on the sidelines for resolution to some of the problems that will create market opportunity in coming months.

We currently hold small positions in gold shares, foreign currency debt instruments and a few small low priced U.S. growth companies. We hold the great majority of client assets in cash earning interest. As you know our policy in bear markets has always been to wait on the sidelines during the decline and to seek income yielding instruments. This bear market we will have the opportunity to earn interest and to seek capital gains as well in currencies such as Euro, Japanese Yen or Swiss Franc denominated income instruments.

Let’s enumerate the markets’ fears

Fear of terrorism

Fear that the American economic system is unsound

Fear of market overvaluation

1. FEAR OF TERRORISM- THE WAR ON TERROR AND U.S. ECONOMIC POWER

We believe U.S. economic power hit its apex in March of 2000 at the peak of the internet bubble. At that time global investors were grossly over invested in U.S. stocks and U.S. currency. The advent of the war on terror with the large spending commitment may well speed up the decline of the U.S. as the economic mega power. War means higher taxes, war means lower economic growth, war means uncertainty. Certainly the Asians and Europeans know this and are taking their money to invest elsewhere. After many years as a global investor we will use our experience in currencies and global debt markets to capitalize on these changes. Those who lack such experience may have a challenging time producing good investment returns in coming months.

Europe has highly socialized economies, which drag down growth, but opportunities still exist in Europe. Asia has numerous opportunities, South Asia, South East Asia and China most notably, while the U.S. languishes and fears the unknown. Optimism is rampant in much of the world while pessimism is rampant in the U.S.

2. FEAR THAT THE AMERICAN ECONOMIC SYSTEM IS UNSOUND

An economic recovery has begun in the U.S. led by the consumer. The economy itself is in good shape as we recover from a mild recession. Still, fear about the economic system continues. We believe much of this is due to media reports of dishonest analysts, executives and accountants. Clearly there have been abuses, however in our opinion, the current cathartic process of bringing past injustices to light and sending white collar criminals to jail will lead to better investor psychology over the long run.

3. FEAR OF MARKET OVERVALUATION

In actuality, the U.S. market is going from grossly overvalued in January 2000 to mixed today. Today, many small and medium sized flexible and well-managed companies have growth of 15-20% per year, yet they receive little or no recognition by the marketplace. Many of these stocks sell at ten times earnings. Meanwhile, many of the companies which were leaders of the last cycle, will probably grow at less than 5% and are selling for 20-30 times earnings. What’s worse is that their earnings are often accounting fantasies.

High Price/Earnings ratios remain a huge problem in the hi tech sector and in some large consumer companies as well. Insecurity about the accuracy of corporate earnings reports compounds the problem. All of this bodes ill for the performance of the favorites of the last bull market. When accurate and conservative accounting rules are used these stocks may even be selling at over 30 times earnings. These companies may under perform for many years to come. On the other hand, other sectors of the U.S. market offer good value. While some stocks are overvalued. Many are undervalued.

THE POSITIVES

(1) A consumer led economic recovery has begun. The market usually discounts an economic recovery, but this time the economy is moving ahead while the above mentioned fears are keeping the market grounded.

(2) Many companies never reached stratospheric valuation levels in the bubble like years of the late 90’s. These companies grew internally, made fewer acquisitions and were forced to cut costs and keep their eye on their daily operating businesses. In general, they did not diversify and dilute management talent by entering other areas of business.

(3) Simple businesses are usually profitable. Simple businesses are understandable. The Enron situation has shown that complexity and obfuscation of the facts often go hand in hand. Simple, strong growing businesses with conservative accounting and solid operating procedures were deemed too old fashioned for the bubble years. Now investors will be seeking them out.

THE DOLLAR

The U.S. dollar may get a reflex rally in the next few days but we believe that it is headed lower over the long run. This provides an excellent investment opportunity for us. We can hold foreign currency bonds, earn interest and seek gains in the currency. We can hold gold shares which historically move inversely to the dollar. We can look to foreign markets and find fast growing companies at low valuations. We plan a conservative approach seeking income and capital gains from foreign currency debt until world markets stabilize and rebound.

SUMMARY

These are frightening times for many Americans. In speaking to clients there is concern about terrorism. The investment climate remains poor for most stocks as we approach a 3rd year of bear market. The dollar, after years of increasing, has begun to decline and some foreign currencies have become attractive for investment. A conservative way to invest in currencies is to hold short maturity debt instruments. An investor gets interest and an opportunity for appreciation if the Euro, Yen or Swiss Franc rise over time.