April 8, 2003

Dear Client:

This year began with most equity indices losing from 3% to 6% in the first quarter as economic conditions continued to unravel. The Nasdaq Composite eked out a negligible gain and bonds gained about 1%.

Although stocks rebounded during the last Gulf war it is not clear that markets will react in a similar fashion now. There are more differences than similarities between conditions in 1991 and 2003. Now we have lower interest rates, higher costs of conflict and occupation, less damage to Iraqi oil fields and worldwide condemnation of U.S. actions.

There is a gamut of plausible scenarios, from a strangling U.S. deficit resulting from the costs of war and reconstruction to an increase in worldwide consumer spending, decreasing oil prices and an increase in U.S. economic growth. Although the focus is now on the battle, the economic implications depend more on what happens after the war.

Who will benefit from reconstruction? Will the Iraqi people manage and participate in the expected infrastructure improvements? Will the U.S. award contracts only to U.S. interests? How will the existing French and Russian investments in Iraq be handled? Will the U.S. recoup some of the costs of occupation with revenues derived from Iraq's oil fields? Is it conceivable that the U.S. might put its economic interests ahead of political restructuring in Iraq?

Congress has approved $75 billion for war expenses. This is in addition to a $30 billion dollar reduction in expected estate tax revenues this year, $700 billion in income tax cuts, an estimated $100 billion for occupation costs, not to mention the increase in economic aid to Jordan, Egypt and Saudi Arabia to buy their support. How about aid to the states for "Homeland Security"? You know, a few hundred billion here and a few hundred billion there, and pretty soon you are talking about some real money.

Meanwhile, interest rates have bumped up a bit, and high quality corporate bonds and preferred stocks offer higher yields. Inflation-protection securities (TIPS) allow conservative investors to protect themselves against future inflation increases. With interest rates bouncing up off forty-year lows and inflation at 1.5%, inflation-protection is a prudent move.

If you have any questions about your portfolio please feel free to contact us at any time.

Regards,

Audrey Grubman, CFP^®