Congratulations! You made it through the second worst bear market of the last 100 years. Recovery most likely will be uneven, with periods of extreme volatility, but recovery is coming.

Two and one-half years from top to bottom is what it took for this bear market to work itself out. (The stock market decline at the beginning of the Great Depression of the 1930s only took two months longer.) The S&P 500, from top to bottom, declined almost 50% and the NASDAQ about 80%. No wonder we feel awful. Most of us will we never see another one of these.

On October 10th, USA Today ran a full-page story on the front of its Money section about the decline of the market. It portrayed a graph with a downward arrow, with predictions of further decline (to as low as 777 on the Dow Jones Industrial average). Fortunately, October 10th was the bottom: not only were the predictions incorrect, but an explosive eight-week rally ensued. It is amazing how bottoms often occur when popular opinion gives up on the prospect.

Lost in the news about the stock market was the fact that the US economy grew at over three percent. Corporate profits are recovering. Though the market rebounded from its lows in early October, it remains well below our estimates of fair value. In fact, the Federal Reserve’s own valuation model indicates that the broad market is about 35% undervalued.

Skepticism is widespread, but glimmers of optimism are emerging. We expect a much better 2003.

As we look forward to the new year, some things to keep in mind are:

• Economic recovery is underway.

• A stock market recovery is also underway.

• Stocks are on average undervalued; bonds and real estate are probably overvalued.

• The same Wall Street analyst community that failed to see the top is unlikely to see the bottom.

• To meet your own financial goals, you will have to invest.

• One old rule remains: Buy quality and stick with it. Many quality companies

• And finally, investing is a marathon, not a sprint. Most of us will be investing for the rest of our lives. Take the longer view.

The potential for war with Iraq is on a lot of investors’ minds. However, our country has gone to war before. The world has always been complex, uncertain, and dangerous. We are simply fixated on that fact for the moment. Iraq is not the USSR or Nazi Germany. Terrorists can be defeated. War is not necessarily a negative for the economy or the stock market.

At the end of the year, many investors are saying good-riddance to 2002. With the end of the three-year decline came some important lessons. We can never know as much as we would like about any particular company. People are the same from one era to the next and sometimes will overreact both positively and negatively. Greed always exists and needs checks and balances. The challenge for us is to continually refine selection processes and fortify our methodology to control risk.

Recovery is underway. No second dip or significant decline is likely. After growing over three percent this year, next year's growth rate should show some acceleration. Some things are difficult to predict, but one event is certain; there will be a presidential election in November of 2004. President Bush has a new economic team and it has a mandate: to accelerate economic growth going into the presidential election cycle. The team will be successful. With renewed presidential emphasis on the economy, we believe growth will accelerate next year to about four percent.

Growth in the economy already is broadening. The capital-spending decline bottomed during the second quarter and is now growing between two and three percent. Consumer spending has leveled off, but remains healthy. Investor confidence slowly is returning. The one big unknowable wild card is war. An unsuccessful or protracted war in Iraq most likely would dampen economic and stock market recovery. (This is not a high probability.)

It will take some time for markets to attain their previous highs, but we do expect good returns from current levels. The stimulus package that we expect to see from the President should help corporate profits. Better corporate profits means better stock prices.

We believe that the American equity market is at the early stages of a new bull market, one that is broader than the last in the number of sectors participating and one that is based upon more solid fundamentals: better accounting, better regulatory over-sight, and reinvigorated corporate governance.

We remain cautious on fixed income investments. Interest rates for five and ten-year treasury obligations already have begun to rise. Investors who rushed into these bonds during the frightening days of summer already have sustained losses. (As interest rates move up, bond values move down.)

There is a chorus of prognosticators predicting low inflation for some time to come. That may be true but, in actuality, pressures are building for higher interest rates. Our federal government now is running a deficit and it is likely to grow. As the government needs to borrow more and competes with other borrowers, rates will increase. A better economy also will eliminate the need for low rates.

Our world trade balances, negative for many years, are getting dramatically worse. This puts downward pressure on the value of the dollar, which inevitably makes foreign goods more expensive. The need to prevent the dollar from losing too much value may at some point force our Federal Reserve Board to raise interest rates in order to make the dollar more attractive to foreign holders.

With these pressures and more, we believe interest rates will rise next year.

Although we may have been early in investing for economic recovery, we are beginning to see rewards. Growth stocks benefit the most from an improving economy. In the third quarter these stocks performed better than more value-oriented ones. As the market late in the year vacillated back and forth between optimism and pessimism, so did the performance of growth versus value.

We are staying with our strategy. The only instances where we have made specific changes are in response to a particular disappointment or compelling opportunity. However, because uncertainty looms so large over conflict with Iraq and continuing terrorist threats, we are still holding more cash reserves than usual.

Our fixed income policy remains cautious. We now are benefiting, as long-term rates are moving irregularly higher.

Our maturity target for new commitments is within a range of two to three years. Our preference is to buy corporate bonds because they offer the best value at this point and should benefit from increased confidence in their credit worthiness as the economy continues to recover. However, cash reserves also remain a priority.

We are proud of the investment analytical team that we have assembled. Two analysts have Masters of Business Administration (MBA) degrees and two are Certified Financial Analysts. One has also held CPA and CFP certificates. All have many years of investment experience. Our team grew over the past year (see our earlier Perspectives), allowing us to further subdivide and focus our efforts to follow active and prospective investments.

Each analyst concentrates on following and seeking additional opportunities within assigned sectors. Then, as a team, these efforts are combined, reviewed, and refined. The result is a model portfolio backed by a very active watch list (to provide replacements when necessary). Every holding and every prospect is evaluated continually and screened for its respective quantitative and qualitative characteristics.

Sell disciplines are established and enforced by analysts not assigned to the sectors. This helps prevent an analyst from becoming too committed to his stocks.

The analysts meet as a formal investment committee weekly and more often if necessary. The weekly meetings review the past weeks performance of the model and actual representative accounts. These are compared to market and sector performance. In addition, each sector of the model is compared to appropriate indices and representative sector performance. Lastly each stock is reviewed. This includes both active and prospective holdings.

Although each analyst focuses on specific, assigned sectors, all contribute to the review process. When necessary, a holding may be replaced. The committee sets the parameters for that process. Holdings that may have transferred in with new relationships may also call for special research and a recommended course of action. Broader issues, such as the prospect for eliminating the double taxation of dividends, may be analyzed for their implications for our investments.

We learn continuously and take every lesson to heart in order to improve our performance.

Our model has fifty stocks. These are identified using our stated processes. At any point in time, only so many model positions are relegated to each economic sector in the economy. This weighting of each sector reflects the opportunity or risk we foresee. Every effort is made to simulate the model’s characteristics in client portfolios.

The fixed income portion of a balanced account is conservatively managed. Individual fixed-income securities are limited to "A" rated or better quality issues that have fixed maturities and coupons. Bond maturity positions are laddered based upon our interest rate forecast, with no more than 25 percent of the portfolio allowed to mature in one year, and no single maturity allowed beyond ten years.

We are committed to providing the best investment management service possible. Our clients’ needs and success are our priorities. So if this is what you are looking for, Talk With Us.

Large Cap Stocks (S&P 500) -23.37%

Dow Jones Industrial Average -16.76%

Mid Cap Stocks (S&P 400) -15.45%

NASDAQ Composite -31.53%

Small Cap Stocks (Russell 2000) -21.58%

MSCI EAFE -17.52%

Lehman Corp. Bond Index 11.48%

Inflation 2.60%

(Equity indices are twelve-month returns excluding dividends)