July 22, 2002

Dear Clients and Friends:

Our belief that a widespread investor capitulation would not be necessary for the stock market to bottom was incorrect. The underlying fundamentals were improving and many stocks and investors had not participated in the great technology bubble, but hindsight is 20/20. Up until June, we managed to avoid most of the damage from this bear market, which began in early 2000. Now, with stocks plunging, investors are panicking and few stocks have been spared. Here is an update on our thinking.

Our expectations are separated into shorter-term and longer-term time horizons. Over the long-term-stock market returns correlate to earnings growth, and both America and its economy are fundamentally healthy. As Barton Biggs suggested in his July 7 investment overview, it hasn't paid to bet against America. No doubt there were substantial excesses in the stock market, and a significant amount of wrongdoing by Corporate America, but there have been excesses and scandals before, and America has always had, in Biggs' words, "an incredible capacity to heal and reform itself." That has not changed in our opinion.

What has changed in our longer-term outlook is valuation. With the recent plunge in equity prices, stocks are now relatively fairly valued. Where previously we talked about long-term stock-market returns reverting to the norm by means of a series of less-than-average return years, that process has occurred much more quickly than we expected. Now, with valuations having come down, we can look forward toward more positive returns over coming years. In other words, as the stock market declines, we are becoming more bullish about the long term.

However, we are unsure about how the shorter term may play out. A bottom could be near, but we do not think the give-up stage is over yet. One possible scenario is a sharp final spike of panic selling. That might actually be the least painful outcome, as it would happen quickly and then be over. An alternative scenario could be more drawn out, with occasional rallies that fail and give way, each time, to lower lows until, finally, the bottom is made. But the end result should be the same. We suspect the bottom will be reached over the next few months.

Are there legitimate risks? Yes: additional corporate malfeasance, terrorism, of course, and the possibility that the stock market could be a self-fulfilling forecast of a weakening economy by causing the consumer to slow spending. But much of the potential risk is already priced into the market. Our bottom line is that it is too late to sell, but perhaps still too early to aggressively invest cash reserves.

So we are not bearish, but we are not yet short-term bullish either. In our opinion, we are in the 8th or 9th inning of a secular bear market that began in early 2000. And it is our very strong belief that, while we may not yet be at the final bottom, investment returns from these levels should be quite favorable. Investors who choose to hold good stocks at good prices should be well rewarded over time.

Please do not hesitate to call upon us with your thoughts or questions.

Lewis H. Katcher, CFA
Stephen P. Yeatman
John A. Stratton, CPA, CFA

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST. The information contained herein is based on sources which we believe reliable but is not guaranteed by us and is not to be construed as an offer or the solicitation of an offer to sell or buy the securities herein mentioned. Opinions expressed herein are subject to change without notice. This firm and/or its individuals and/or members of their families may have a position in the securities mentioned and may make purchases and/or sales of these securities from time to time in the open market or otherwise.