Fourth Quarter 1999

Quarterly Review & Outlook

We have previously expressed our concerns about the rising levels of risk and volatility in the broad averages that have been caused by the disproportionate influence exerted by the technology and internet sector. The overwhelming majority of the gains attributable to the S&P 500 and NASDAQ are attributable to a relatively small number of technology related companies. By definition, many of the companies included in the growth indices are technology related. The following is a table detailing the performance for the year and the 4th quarter for growth vs. value indices in both the large cap, mid cap, and small cap sectors.

The table above illustrates the disparity in returns between growth and value sectors irrespective of the capitalization range. The overweighing of technology companies in the indices skews the returns of the broad averages. Even though the S&P 500 generated a return of 21% for the year, the majority of the 500 companies that comprise the index experienced declines for the year in their share price. The divergences in values between technology and all other types of companies are at an historic level. On the one hand, many technology companies are selling at historic price to earnings multiples and those that have no earnings are selling at ludicrous multiples in relation to their gross sales. Meanwhile many high quality, growing, “unexciting” companies are selling at or below normal valuation ranges and in some cases downright cheap. This has become the most bifurcated equity market that I have seen over the past 30 years and is a phenomenon which is most likely unsustainable.

We are also concerned about the increase in interest rates. During the last quarter, interest rates have risen by 1/3 of a percent to levels that have not been seen since 1997. In the past, a rise of almost 40% interest rates over a year and one quarter would have had very negative implications for the equity markets. Thus far, the market has been immune to this rise in rates. However, we believe that should rates continue to rise they will ultimately exert a negative impact on the equity markets. There are numerous and adequate values in the equity markets, however we do not believe that there is much value in the “technology and internet” sector. We are quite encouraged by the fact that the mid cap and value sectors have had recent periods of out performance relative to large cap and growth indices. We think that there is a likelihood that the valuations in these areas are compelling and that there will begin to be a flow of funds into the mid cap and small cap sectors.

We are continuing to maintain a somewhat defensive posture in client portfolios. We are continuing to maintain an emphasis in the mid cap and the small cap sectors of the equity markets as well as a healthy level of international exposure in client portfolios. We also anticipate the volatility will continue to increase in the equity markets, particularly should interest rates continue to rise. We hope to capitalize on this volatility and, as always, will seek to obtain attractive risk adjusted rates of returns for client portfolios.

We remain optimistic that the year 2000 will continue to provide opportunities for your portfolio. We hope that you are pleased with the performance for 1999 and once again, wish to express out thanks for the trust and confidence you have placed in us and our services. As always, should you have any questions concerning your portfolio please do not hesitate to give us a call.

Sincerely,

James A. Martin, III