What a year it was! What a decade and what a century! The unbelievable scope of 100 years of change now meeting a new beginning and probably even more change at an accelerating pace.

We began the Twentieth Century with an accelerating Industrial Revolution and a transportation revolution, the automobile. With some symmetry, we are now entering a new century with accelerating change in Information Technology and a new type of transportation revolution, the Internet.

During this last year of the Twentieth Century, investors embraced the obvious explosion of Information Technology and it’s many uses and applications. Companies that seemed to be at the forefront of this accelerating change were bid up to unbelievable levels.

Some valuations for these companies reflect expectations well beyond mere optimism. In spite of "Tech wrecks" and extreme volatility, investors kept coming back to these stocks. It became a market of "Etches" versus everything else. The NASDAQ set an all-time record for an annual gain in any broad-based U.S. index. The previous record was set by the Dow Jones Industrial Average in 1915. This was quite a year and quite an end to the century.

The S&P 500 in 1999 lagged both the NASDAQ and the Dow Jones Industrial Average. Actually, fifty "Tech" stocks were responsible for most of the gains in the S&P 500 in 1999. Without these stocks, the S&P 500 gain would have been under 5%. As a sector, Technology was the clear winner. Most other sectors had either negative or only slightly positive returns. In fact, 70% of the stocks on the New York Stock Exchange had negative returns. Although the index gains look spectacular, the markets were very narrow. For professionals, beating the averages meant over-weighting Technology and picking well in other sectors. Thankfully, we did both.

The first quarter of the year started where 1998 left off: with growth-stocks extending their rallies. During the second quarter, however, the equity markets shifted abruptly to "value" stocks. This catch-up rally only lasted one quarter, then again these stocks under-performed for the rest of the year. The third quarter produced a -6.25% return and proved that markets could go down.

The forth quarter was spectacular. Most of the year’s gains came during this period. However, it was mostly a "Tech" show.

During the entire year, market participants remained on "Fed Watch." The Open Market Committee of the Federal Reserve raised the target for the "fed funds" rate three times and the discount rate twice. The interest rate for the "benchmark" 30-year Treasury bond climbed from 5% to almost 6.5%. 1999 was the worst year for bonds ever.

Toward the later part of the year, small-cap stocks were showing signs of life after years of under-performance. Some value and cyclical issues also began performing after brief spurts in the second quarter. The question now is "What's next?"

Europe’s economies look better, Asia’s are recovering and South America’s have probably seen the worst. With that kind of world economic picture, it's hard to predict anything but a continuation of economic expansion here. Fed attempts to slow the economy have, yet, shown little to no results.

We predicted a slowing in the second half of 1999, but we were wrong. However, we would not proclaim the Federal Reserve impotent. We are again predicting a slowing in the economy, but sooner rather than later.

The last of 1999 may have benefited from some inventory building in preparation for Y2K. These increased inventories will need to be worked off. The extra liquidity that the Fed provided to accommodated Y2K cash needs at the end of the year also needs to be reversed. Look for interest rates to rise in the near term as this takes place.

We reaffirm our confidence in the Fed, they will be successful, the economy’s current torrid growth will slow.

Technology will not provide the same returns that it did in 1999. In many cases, already high valuations limit further gains. Internet companies will need to prove themselves; most will not. The real question is: "How broad and dramatic will the adjustments be?"

If the economy slows, the Financial Sector should provide excellent performance. Moreover, if the economy slows only modestly, then many value and cyclical stocks should participate as well. This could be a much broader market than we have seen in some years. Almost all sectors, except Technology, offer good potential.

Count on even more volatility, with more reactions and risk to the downside. This will probably not be a year for the faint of heart. Good returns should be possible, but require discipline and control of risk.

We may see another spike in interest rates at the beginning of the year, as the excess Y2K liquidity gets sopped-up by the Fed. The Fed supplied approximately $80 Billion of additional liquidity at the end of the year. This was to accommodate hoarding and holiday needs. In 1998 the extra liquidity supplied was $26 Billion. Therefore, the Fed really went overboard this year because of Y2K concerns. It will now take this liquidity back. The Fed may also tighten further in February. After these events, the Bond Market may have an easier time.

One characteristic of the Bond Market is that eventually it creates the conditions for a rally by slowing down the economy. Even if rates go higher than we believe, they should not last long. In spite of great volatility, we believe the Bond Market will produce good total returns this year.

We remained fully invested throughout this past year and are continuing this policy into the new one. During this past year equities have out-performed fixed income assets and have become over-weighted in balanced portfolio’s. We have been reallocating some of these equity assets back to fixed income. This is a good discipline over time because it implies selling high and re-applying assets to under-valued sectors.

Based upon our forecast, we are reducing the overweight in the Technology sector and reapplying these assets to other sectors. We are, however, still maintaining a market weight in Techs. We are in no position to call a top here, but we recognize that the risk of disappointment has grown considerably.

We have added holdings to the Capital Goods and Communications sectors. Reallocation and reducing position sizes have allowed us to "beef-up" these holdings. Presently our Financial sector is modestly over-weighted. We hope this sector will capitalize on a slowing economy and moderating interest rates later in the year. Most other sectors are near market weightings.

We are pleased with the performance of most of our current equity holdings and anticipate few if any changes.

Our fixed income strategy is becoming more aggressive. We are modestly moving our target average life out from 5-7 years to 6-8. Should rates approach 7%, we will become increasingly aggressive, moving to 7-9 years.

Attention to risk, a disciplined approach to sector weightings, and good "stock-picking" should again be the keys to good performance in this new year.

What now? That is the question. Investing is a forward looking, anticipatory endeavor.

Anyone who relates what you should have done in the past offers no value whatsoever!

Over time, everything changes. Today’s winners may be tomorrow’s losers and vice versa. Good money management needs to adapt to tomorrow’s opportunities. Yesterday’s insights may have little value tomorrow.

Popularity of opinion doesn’t necessarily forecast good investment returns. Good investment management requires an effort to understand underlying trends with courage to act. We not only analyze individual companies, but we also try to understand what the markets are signaling as opportunity or risk. The market itself often gives clues to these trends or likely change.

Good money managers recognize trends and go with them, but constantly remain on alert for signs of reversal. There is no mechanical approach that spots this; it comes down to experience and often common sense. Nothing grows to the sky, and many unpopular industries and sectors come back into favor at some point.

Some money managers use preset parameters for buying and selling. This approach may have the appeal of simplicity, but usually works poorly over time. This approach would have sold too early many of the biggest winners over the past number of years. It may have also pointed toward buying poor business’s in poor industries. Instead of using parameters, we try to be good observers of business trends and apply our experience.

Some managers prefer to invest in "value" stocks, others in "growth" stocks, and still others in "small-cap" stocks, etc. We happen to prefer "large-cap growth" stocks. However, we are not here to tell the markets where opportunities ought to be. We have a responsibility to seek good returns regardless of the sector or style in current favor. We know that over time we will need to adjust our approach.

Purity of style means nothing to us and purity of approach may become a hindrance in the future. We are in business to provide our clients the best returns with the least risk possible. This is a constant balancing act. It requires hard work and the application of our collective experience every day. If this is what you are looking for, Talk With Us.

Large Cap Stocks (S&P 500) 19.53%

Dow Jones Industrial Average 25.22%

Mid Cap Stocks (S&P 400) 13.35%

NASDAQ Composite 85.59%

Small Cap Stocks (Russell 2000) 19.62%

MSCI EAFE 25.27%

ML Corp Bond Index -1.89%

(7-10 yr. Maturates)

Consumer Price Index Annual Rate 2.6%

(Equity indices are twelve-month returns excluding dividends)