January 14, 2002

Dear Client:

What a difference three months makes.

Equity markets rebounded strongly in the fourth quarter, with gains of 11% in the S&P 500, 30% in the Nasdaq Composite, 20% in small cap stocks and 10% in European stocks.

Bonds reversed direction from the third quarter, with taxable corporate bonds showing negligible gains. Municipal, government and mortgage bonds had small losses.

The steep decline in equity prices and bond yields following September 11th appear to have been an overreaction. I am very pleased that our clients stayed the course with equity investments, and in many cases were able to increase equity exposure in the early part of October. We also see a handsome confirmation of our opinion in early October that bond prices were unsustainably high.

Stocks remain the most promising long-term investment, whether the annual returns end up at the historical average of 11% per year, or even regress to a lower than normal 9% per year. High-quality corporate bonds currently yield 6%, which, after taxes and inflation, is an insufficient return for capital appreciation.

Currently the price-to-earnings ratio of the S&P 500 stocks is 31, about 50% higher than the historical P/E. Stock prices reflect very high growth and productivity expectations considering the current economic environment. Although the annualized return of the S&P 500 has dropped to -1% for the last three years, the 15-year rate is 14%, high by historical measures.

Stocks are still and always a risky investment, but if you want to achieve higher returns than bonds offer you need to be invested in stocks. But stocks cover a wide range of regions and industries and a prudent investor distributes risk. Small cap and foreign stocks offer diversification alternatives as well as the potential for the higher returns of equity investments.

While reading Sunday's newspapers I was struck by the amount of risk to which investors are constantly exposed. Enron stock dropped from sixty dollars to sixty cents in seven months. Enron stock made up one-half of the value of the employees' 401(k) accounts at the end of 2000, and for a time employees were prevented from selling the Enron stock in their 401(k) accounts. Meanwhile 29 executives and directors sold $1.1 billion of stock from 1999 until 2001.

Morgan Stanley, Citibank, Arthur Anderson and many politicians and institutions may have had an interest in propping up the stock price. Kenneth Lay, Chairman and CEO of Enron, is a personal friend of both George Bushes, a leading contributor to the Republican party and to senators and congressman of both parties. Attorney General Ashcroft and the entire Dallas U.S. Attorney's office have recused themselves from the investigation, due to personal ties to the executives at the company.

Wendy Gramm, the wife of influential senator Phil Gramm, is on the board of Enron and sold $277,000 of Enron stock in 1998. One can imagine the conflicts of interest that exist throughout Wall Street and Washington when so many dollars are dependent on maintaining the illusion that Enron was a solid enduring business.

This is a fascinating story, but the question I ask is, who is looking out for the individual investor? The stock's performance was in the first percentile for its sector in 1998, and in the last percentile in 2001. Which of the involved bankers, underwriters, 401(k) plan advisors or stockbrokers alerted their small retail clients that something smelled bad? Or even reminded clients of the adage that if something sounds too good to be true, it's too good to be true?

As an independent investment advisor and financial planner it is my hope that you will view me as your partner in investing responsibly with reasonable expectations of return and risk.

Thank you for your continuing business and I hope you will contact me with any questions.

Regards,

Audrey Grubman, CFP^®