Clark Asset Management + Associates, Inc.

October 19, 2001 This past quarter has been a very volatile one, stimulated by the events of September 11. Recently, the NASDAQ was down 40% for the year to date, while the S&P were down about 20%. It was a big drop when the market reopened on September 17th. However, most market indices topped out in 1999, and have been more or less tracing out a pattern of lower highs and lower lows since that time. The Dow Theory generated a sell signal in 1999. Currently we see three operative positive factors.

1. First, the monetary environment is favorable. The most significant factor to note is the growth rates of the monetary aggregates.
2. Fiscal policy will be stimulative. A good war generally increases aggregate demand.
3. Valuations are more reasonable. However, many analysts are using $55 as the earnings for next year’s S&P500 earnings, and this is high for now, but we’ll get there eventually.

Valuations are not as favorable as they have been at some other market bottoms. On the negative side,

1. All the new hysteria and regulations will be a burden and a drag on productivity. A lot of stupid things will be done, many by bureaucrats more concerned with their own enhancement than the protection of the Fatherland.

2. The economy has encountered a serious bump, which is likely to be reflected as a recession in the data. Several data series were already declining before September 11. A lot of firms have announced earnings declines or lowered their guidance.

3. There perhaps hasn’t yet been a serious market capitulation, that final selling climax, which occurs at classic market bottoms. On the other hand, this may not be a classic market bottom, and we may have seen the bottom for this cycle.

4. Europe has turned somewhat weak. EAFE declined materially over the past year. However, there are still areas of strength, and we feel the outlook for France, Germany, and the U.K. is favorable.

5. Japan has been fixed. While there are pockets of strength, the banking system is still carrying a heavy amount of bad loans, and the banking system efficacy in channeling society’s savings to areas of productive investment is greatly diminished.
 
6. This last one worries us the most, perhaps because it is not entirely acknowledged. There has been a lot of damage done to personal and institutional balance sheets as a result of the crash in tech.

People see the immediate effect; however, we think this will have a material and unforeseen domino affect as the damage works its way through the system. So it may be rocky in the near term, but in 8 years things will be great. As always, we endeavor to structure portfolios so that performance and resiliency is not materially dependent upon our views. (GNC, October 19, 2001)