February 18, 2003

Equity markets continue to grind lower with sharp rallies from time to time and this action is likely to continue until the economy begins to show some solid signs of recovery. Real job growth is an essential element in any such recovery and no worthwhile signs of growing payrolls (even at the subsistence level) have appeared on the horizon. Growth in government payrolls (public sector) at the Federal and state levels produce no real growth in production - albeit, it adds to the money supply through deficit financing.

Consumer debt is becoming a real concern and has been the engine of past consumer consumption, as has home refinancing. This engine is running out of steam. Consumer confidence is dropping and with war worries becoming more real daily, the urge to conserve rather than spend is the current trend. We believe that this trend will continue until the international political situation stabilizes and prospects for a non-aggressive resolution to the Iraqi and North Korean situations come to the forefront. At this time, the rhetoric seems to be toward more name-calling and aggressive, military action.

From an investment standpoint, commencement of hostilities will likely have an immediate negative impact on stock prices. In the past similar situation, the impact was not long lasting because the economy was more stable and in a growth mode. This is not the situation today. The negative impact of war to our social and economic well-being could be much more long lasting and painful this time around.

The ratio between a unit of the S&P 500 index and an ounce of gold continues to decline from its peak of 5.26 ounces for a S&P 500 unit in August of 2000 down to the present level of 2.31 ounces: a decrease of 56.0% over the period. The ratio could well drop to the 1 gold ounce equals 1 unit of the S&P 500 in the years or even months ahead. What should an investor do?

Initially, all gold positions should be retained, i.e., gold coins, bullion and gold mining shares. Switches should be made where appropriate. In general, common stock allocations should be limited to roughly 50% of investment portfolios, as personal circumstances dictate. Finally, do not place great confidence in daily news reports, which are mostly hype and scare tactics.