Quarterly Client Update - September 2002   Whatever men attempt they seem driven to try to overdo. When hopes are soaring I always repeat to myself “two and two still make four  and no one has ever invented a way of getting something for nothing.” When the outlook is steeped in pessimism I remind myself “two and two still  make four and you can’t keep mankind down for long.” Bernard Baruch  There can be little doubt that coping with the market’s volatility in the last three years has been a challenge for us all.  It is in markets such as these, that our job as investment advisors is to provide leadership and guidance. Our bedrock principles of balance, asset diversification, discipline, patience, and diligent research have worked together to generate steady long-term returns. Therefore, let’s review some important concepts:   Market History Prior to the current downturn, the S&P 500 had experienced three similar declines: §   The Great Depression (1929-1932) §   The first half of World War II (1939-1941) §   The Nixon Resignation and the global recession and oil embargo (1973-1974)   Today we are not in a similar economic climate. Therefore, what is the correlation between those periods and now? In past declines, the press sensationalized the situation and predicted an end to the capitalistic system. It didn’t happen then, and we are confident it is not happening today.  Accordingly, short-term events and market downturns should not overshadow long-term future goals.   New Home Sales * New home sales will top 942,000 this year, eclipsing the all-time record of 908,000 sold last year.  Home sales and consumer spending are the driving forces in the current economy. Home refinancing has allowed consumers to reduce higher interest rate debt and has put more cash into their pockets.   Consumer Spending * Sustained consumer spending was strong in the third quarter. Non-defense spending rose for a second straight month, and is 2.2% higher than August 2001. These numbers suggest the recovery is still on track.   Federal Reserve Policy * On September 24th, the Federal Reserve held rates at 1.75% for the tenth straight month. This is a 41-year low.  Indications for a future rate decrease are strong, but simple monetary policy cannot smooth out the bumpy road we are experiencing. The Fed said, “The current overnight rate, coupled with still-robust underlying growth in productivity, should be sufficient to foster an improving business climate.” There is also a strong probability of another rate cut by the Federal Reserve in November.    Drawing Some Lessons from the Gulf War A possible war with Iraq is a dark cloud currently hanging over the markets.  Until the status of the war becomes clear, there will be continuous uncertainty in the markets. If the Gulf War a decade ago is any indication, when the conflict starts, the markets could immediately start going up.   Preparing for Recovery We may be early but we are getting prepared. We are sensitive to the anxiety the market is creating for our clients.  We are shoring up the portfolios, without overreacting by panic selling.   Changes to our Portfolios The rationale can be explained at several levels. First, we have continued to monitor the economic climate. While stock performance remains weak, we do see fundamentals improving, in particular within the earnings arena. Despite what has been reported in the media, corporate earnings have been improving over the past two quarters. Unfortunately, there has not been a direct relationship between this improvement and stock performance due to the 'perceived' low quality of those earnings. We feel strongly that the corporate governance issue was resolved, and the economy will deem the actual earnings as credible.   We know from research and history that small cap growth stocks lead economic recoveries. It was decided in our regular investment committee meetings to begin shifting to this area. We've seen solid out-performance from small cap value stocks, and felt that this would be an appropriate area to trim. To put this in numbers, 5% of small cap value was switched to small cap growth. These shifts will continue in the future, allowing us to capture as much relative excess return as possible.  We've monitored a host of indices over the past year, and are starting to see a shift of 'growth' indices outperforming 'value' indices. This is an early trend.   Secondly, on the fund level we took this opportunity to adjust some of the individual holdings within each sector. Though asset allocation does provide most of your returns, we feel that individual holdings within each asset class provide an additional opportunity for excess returns. From an intuitive perspective, we know not all funds within a sector perform equally. Our fund model allows us to determine the funds within each sector that are best suited to outperform their peers. Any sustained deterioration amongst a fund’s fundamentals is cause for us to adjust within each fund category.   Here are some of the important changes we have made in your portfolio over the last several weeks.   1) Excelsior Value Fund was sold - 50% of this fund was switched into Babson Value and the remaining 50% was moved into a Real Estate Investment Trust (REIT) fund. We felt superior large cap value funds exist, such as Babson Value, a fundamentally better choice. Going forward, REITs still have high yield potential, approximately 6.5%, based on our belief that occupancy rates will remain steady.   2) State Street Mid Cap Value Fund and Aurora Fund were sold. These funds had deteriorated in performance and fundamentals. Recently, State Street fired 62 people, some on the research side. Any positive changes going forward would be highly unlikely.   3) Wasatch Small Cap Growth Fund was also sold. The performance of this fund, our only small cap growth fund, had dropped based on sector rotations within the fund. When the fund was first purchased, the manager stated he did not invest in any area he did not understand (technology). This common sense approach, in addition to quantitative measures, made Wasatch a compelling choice. However, since early 2002, he has continued to add technology stocks. Since May, we have been researching small cap growth names to add to our working list.  Proceeds from Wasatch were divided amongst our two best small cap growth choices. Baron Growth represents a stock pickers fund. This compliments the JP Morgan Small Cap Equity Fund, which is more model driven. These funds will provide potential for excess returns during a market recovery.   4) Cash - the cash portion of your portfolios has been increased. This is in preparation for the recovery, when we will start to increase our allocation to the small cap growth sector. The positive side of the current decline is that prices are much more reasonable, thus creating better buying opportunities.   The Effects on Your Portfolio Year to date, the S&P 500 is down 29% and the NASDAQ is down 40%. As noted on pages 2 & 3 of your performance reports and graphs, your year-to-date performance was down far less than the overall markets. While we understand that no one likes negative numbers, our highest priority during this correction has been the preservation of capital.     News at Singer Xenos This year we are proud to have been named for the second year to Worth Magazine's list of top 250 advisors. In addition, we will be named to the Medical Economics list of 150 top advisors for physicians, to be published in December. We are also pleased to announce the addition of our new financial advisor associate, Cathy Pareto, bringing our total advisors in the firm to six.     We are committed to earning the confidence you have entrusted to us during these challenging times, and are confident that the 4th quarter newsletter will bring better news.   Singer Xenos Wealth Management