4th Quarter

January 17, 2001

Once again we have arrived at the end of another quarter, and with it another year as well. It would not be an understatement to say that the new millenium started off with a bang. As we step into another winter we are all too well aware that it is going to be a long and frigid one. In the final analysis, it wasn’t the high energy prices, the presidential uncertainty or the weak Euro, but six Fed interest rate hikes within one year that wrought havoc on the financial markets. The hardest hit was the technology laden NASDAQ index whose companies are extremely sensitive to interest rates

There is no doubt that the economy has slowed down. GDP growth in the third quarter of 2000 was less than half of what it was in the previous two. Consumer spending and confidence have tapered off. Manufacturing (as gauged by the NAPM) has been contracting for the last three months and productivity is weakening. Nevertheless, as we move into the new year there is much to be optimistic about. Home sales, though slowing, are still on par to having one of the best years in recent times. Unemployment, though inching up, is still very much under control and inflation is tame.

As far as investment performance was concerned, growth stocks (large, mid or small-cap) had one of their worst years in recent times while value stocks rebounded from their relatively poor returns in the prior several years. International equities had a rough going while bond returns were the highlight of the year. Therefore, if there was any one lesson that we could take out of last year’s downturn, it was that asset allocation helps reduce portfolio volatility.

For those of you who are nervous about the current equity market, and it’s not easy to find one who’s not, we are still bullish on the three sectors we have been emphasizing – technology, healthcare and telecommunications. How ever much investors would like to deny it, there is no mistaking that we have entered a new technological revolution where so called “new economy” stocks have the greatest impact. Eventually, technology and telecommunication firms will benefit from a continued demand for faster data transfer and storage capabilities. Companies will continue their quest for a paperless office and it will become imperative that data, voice and images go through one cable, at even faster rates than what fiber optics can deliver today. Advances in biotechnology will lead to cures for diseases such as AIDS, cancer and Parkinson’s through the discoveries in the human genome. What is needed is a long-term investment time horizon and investor patience during the more difficult times.

Be assured that all of your cares are our concerns. Nevertheless, we realize that no amount of soothing words can calm the anxiety of our clients in times like these. Therefore, if the recent downturn made you overly uncomfortable, it would be advisable that we reevaluate your risk tolerance and in turn adjust your asset allocation accordingly. Hence, we encourage you to schedule a meeting with us to discuss your concerns and review your existing investment strategy.

Sincerely,

 

P.S. For all taxable accounts, we will mail 2000 information on income and realized gains and losses by the end of January. You will receive 1099 forms directly from your custodian at approximately the same time. If you prefer we mail our reports directly to your tax preparer, please advise us.