PERFORMANCE ANNOUNCEMENT

As Of: June 30, 2003

Cash Is Trash

Should you believe it?

      In a traditional deflation, consumers do not purchase because prices will be lower tomorrow. (In other words, they hold on to their cash. "Cash is king.") The Federal government has responded to the fear of deflation by doing everything possible to reduce the value of cash. Interest rates are at historic lows, penalizing savings. The money supply has been pumped up, encouraging inflation. The dollar has been allowed to drop in foreign exchange markets, causing the importation of inflation. Low interest rates are driving homeowners to refinance their mortgages, pumping more cash into the system. And the tax act was passed, placing even more cash in the hands of consumers. In short, cash is trash. It doesn't pay to hold on to cash. The government wants its citizens to spend, spend, spend.

      It is ironic that part of the problem that has prevented capital spending and caused a rise in unemployment is high debt and a lack of savings. The government's response has been to reduce interest rates which encourages more debt and penalizes savings. But in the short run, it has motivated the consumer to keep spending, and it has provided fuel to the stock market. The gnawing question is what will happen in the long run?

      The second quarter was a magic period when the stock and bond markets rose together. The stock market turned in the best quarterly performance since the fourth quarter of 1998. However, it is not clear that the economy has recovered, or will recover, anywhere near the degree that the stock market has risen. It is now time for earnings to start growing at a rate that can support current market prices. We need to see not only real top line growth in revenue, but real net earnings without hidden liabilities for underfunded pensions, without onetime write-offs for discontinued operations, without non-expensed options, and without more excuses and smoke and mirrors.

      The government's actions have two objectives: 1) to get the Republicans reelected in 2004, and 2) to produce jobs and a growing economy. It is questionable whether either goal will be achieved. Nowhere do I see the foundation for lasting job creation. Without new jobs, an economy that grows from spending savings and increasing debt is doomed. There is a very real and severe risk that the stock market will experience another large drop. It doesn't mean that we can't enjoy the party while it lasts, but the day of the never-ending virtuous cycle is over. Knowing how fragile the possibility of economic recovery is, perhaps we should view that cash is only temporarily trash. There may well be a time in the future when low debt and a pocketful of cash will be the best possible position to be in.