THE MARKETS

Despite a fresh round of weak economic data and analyst’s downgrades on GE and Intel the Dow Jones Industrial Average managed to extend its win streak to six-weeks in a row. Volatility was the name of the game as the Dow lost 171 points on Monday and then gained 144 points on Thursday. After it was all said and done the Dow ended the week where it started. For the period, the DJIA lost 41 points (+0.5%) and closed at 8578. The NASDAQ fared better as it gained 51 points (+3.8%) and settled at 1410.

The percentage of bullish investment advisors inched up again to 50.6%, from 49.4%. This indicator is now regarded as neutral after having been a very bullish 28.4% four weeks ago. Readings over 55% are regarded as bearish. Redemptions of U.S. equity mutual funds have outpaced cash inflows for twelve of the last fifteen weeks. For the period ending 11/13/02, outflows totaled $278 million compared to outflows of $765 million the previous week.

THE COMPASS PORTFOLIOS

No changes to our models during the past week. We continue to hold moderately bullish allocations, and have now ventured deeper into the markets than we have for the past six months. Our quantitative models indicate improving support for the equity markets, despite a less-than-secure geopolitical backdrop. The markets tend to be a terrific forecasting tool for future events, and are now forecasting an improved earnings outlook for 2003, progress in the war on terrorism, and a resolution (perhaps temporary) to the disarmament of Iraq.

Our objective and assertive method of money management has performed admirably in the weak markets of the past 2 ½ years, helping our clients steer successfully through the worst bear market since the early 1970s. The true test will be whether it will perform as well in a bull market. Here is where I believe we will truly separate ourselves from other independent money managers. Our wealth management process has the flexibility to exhibit an offensive posture when warranted, and a defensive posture when warranted. If the worst of the bear market is behind us (which is still unclear), we will be able to remain more fully invested and our clients will participate in the next leg upward. At the same time, we will be able to closely monitor the markets and take the appropriate steps to deal with the next bear market. I look forward to whatever the markets of the next decade throw our way, and I’m confident our clients will feel comfortable knowing that a professional is on the job, objectively helping them meet whatever financial goals they have.

THE ECONOMY

Everything’s coming up roses, at least from the perspective of Thursday’s economic data. Jobs figures are improving, consumers are spending, and there’s been a slight pick-up in import prices, debunking the myth of a U.S. bout of deflation. Should this type of economic news continue, then the fourth quarter might not be as dire as our 1.0% GDP forecast. While these figures paint a picture of rosy economic activity, there are miles to go before the economy is completely out of the woods.

Initial claims for unemployment benefit insurance fell for the second consecutive week to a seasonally adjusted annual rate of 388,000. This decline of 8,000 claims places the less volatile four-week moving average of claims at 396,750 during the week ended November 9, below the critical 400,000 level that economists usually associate with recession.

The low long-term interest rates present in today’s bond market are good for the economy, stimulating housing demand and capital spending, and they help to justify above-average price-earnings ratios. Just now, though, it might be better for T-bond yields to climb somewhat. That would say that institutional investors, whose support for stocks has been erratic, are now serious about moving out of bonds and into equities. We’d be encouraged, moreover, if the dollar, which has been weak recently, were to stabilize, perhaps with the help of rate cuts by the European Central Bank and Bank of England. Currency-sensitive foreign investors would then be more inclined to step up their buying of U.S. assets, including stocks.