HAMILTON ADVISORS — 2002 PERFORMANCE RESULTS FOR FULLY MANAGED ACCOUNTS

– 71.4% were in positive territory with results ranging from +0.75% to +5.30%.
– 28.6% were in negative territory with results ranging from –1.54% to –5.94%.

No margin/leverage or derivatives were used. Bond credit quality ranged from Investment Grade at the minimum to U S Treasuries.

Fully managed accounts are those where the investment advisor makes all investment decisions.
John W. Hamilton
January 30, 2003

POTPOURRI for 2003

Returns for bonds that may be news to many:

“The five-year average annual return for the S&P 500 through 2002 was a negative 0.6%, versus an 8.55% gain for 10-year Treasuries. For the past 10 years it’s a close race, with stocks at 9.34% to bonds’ 8.36%. And for 30 years, it’s even closer, at 10.68% for stocks to 10.11% for government bonds.” (BARRON’S, January 6, 2003)

Our position continues to be that Asset Allocation is of paramount importance. For example, several years ago bonds were not even in the public’s investment vocabulary unless one was over fifty. Now they are treated with more respect even though rates are very low. Bonds play an important role in investment strategy for people who place a higher premium on the return of their capital than the return on their capital.

Microsoft declared a 16-cent initial dividend on January 16th. The next day MSFT closed at 51.46, down 3.89 equivalent to 24.3 years of dividends.

The initial dividend of 16 cents was described by some as “chump change.” It will cost the company about $856 million per year. The company, sitting on $43.4 billion, generates cash at the rate of $1 billion a month.

Bill Gates, Chairman, and Steven Ballmer, CEO, will receive $97.9 million and $37.6 million a year respectively. (International Herald Tribune, January 18, 2003)

News from San Francisco:

Mayor Willie Brown who calls himself “Da Mayor” will likely be the next head of CalPERS, California’s Public Employees Retirement System. The largest Pension Fund in the U.S. has assets of $129 billion.

It used to be that Willie was “known for his fast wit, fast cars and fast women…Not long ago he fathered a child with a woman he didn’t marry, something which made only minor news…” (San Diego’s Union-Tribune, November 17, 2002)

To us it would appear the pension fund needs some expert financial guidance from the top as its value has plummeted from $172 billion since June 2000 to $128.5 billion at the end of September 2002. This 25 percent decline amounted to $43.5 billion. Perhaps Willie is the man.

Hamilton Advisors did not “Buy into the Bubble.” A year ago in our January 2002 Clients’ Report we wrote:

“2002 has started off as a most challenging year. We witnessed the bursting of the biggest bubble in financial history during the latter months of 2000 and in 2001.

“A review of our Commentaries and Clients’ Reports throughout the years — especially 1999, 2000 and 2001 — will show that we warned many times about the problems inherent in excessive speculation and incomprehensible valuations being put on New Economy Companies’ shares. Many valuations are, in our opinion, still excessive despite their fall.

“The most optimism we have heard is because of reasoning that ‘the worst is behind us.’ And that is not good reasoning.”

Investment banks were fined $1.4 billion in a “global settlement” and Jack Grubman was fined $15 million for research abuse on December 20, 2002.

A $15 million fine in addition to being barred for life from the securities business was Grubman’s punishment. However, Jack, Salomon Smith Barney/Citigroup’s telecom guru, may not have gotten off so badly for his “research flattery” of WorldCom and Global Crossing to mention a few among many.

We believe Jack was paid $20 million plus a year for a number of years preceding his retirement last August. At that time Salomon Smith Barney/Citigroup paid Jack, who said he was proud of his work, $32 million. Add those paychecks up and subtract $15 million.

“Does the Rot on Wall Street Reach Right to the Top?” asked Gretchen Morgenson. (The New York Times, November 17, 2002)

“As the latest in a long line of Wall Street morality plays, the one involving Sanford I. Weill, the chairman of Citigroup, and Jack B. Grubman, his firm’s former star telecommunications analyst, is unfolding in depressingly familiar fashion. But it differs too from some other dramas involving brokerage firm titans: thousands of individual investors lost millions of dollars because of what appear to have been self-interested actions by Mr. Grubman and Mr. Weill.

“It may not come as a surprise to people on Wall Street or those accustomed to its ways, that Mr. Weill inserted himself into the research process relating to AT&T. But that doesn’t mean it looks good. In fact, it looks awful. Sufficiently so that some large investors have dumped Citigroup shares as a result.

“Bill Dierker, vice president of equity securities at Nationwide Insurance in Columbus, Ohio, said he had sold the last of his company’s roughly 1.5 million Citigroup shares last Thursday. That was the day after Mr. Weill owned up to contacting Mr. Grubman about his AT&T rating.

“Why is it so hard for smart people who have been around awhile – Mr. Weill and Mr. Grubman qualify on both counts – to see that if the road to instant gratification requires taking a wrong moral turn, such a turn is inadvisable? I really and truly want to know.” (Copies of this article will be furnished upon request.)

Of the total $1.4 billion fines, $400 million was Salomon Smith Barney/Citigroup’s portion. Citigroup had net income of almost $4 billion in the quarter ending September 30, 2002. For the year 2001 Mr. Weill was paid $26.7 million and exercised options amounting to $15.9 million for a total of $42.6 million. Guess who will pay the fines.

Wall St. Firms Want Insurers to Cover Fines. (The New York Times, January 18, 2003)

“Now that the biggest firms on Wall Street have agreed to pay $1.4 billion to end investigations into the behavior of their stock analysts, some are trying to get their insurance companies to write the checks.

“Representatives of two big insurers, the American International Group and Chubb, have asked the regulators who are drawing up the final settlement to include a clause that says the firms must pay the penalties themselves, people involved in the negotiations said yesterday. Citigroup, which agreed to a $300 million fine and another $100 million in payments, is among the firms hoping to recover at least part of its share of the settlement, the people said.”

Bear markets continue: 2002 was another ugly year for the stock markets with declines in the Dow of 16.76%, the S&P 500 23.7% and the Nasdaq 31.53%.

“Gone for good, finally buried last year in the wreckage of corporate scandal and geopolitical uncertainty, is the former rock-solid conviction that the manifest destiny of financial markets is to move ever higher.” (International Herald Tribune, January 4, 2003)

While these have been very difficult times for the securities markets – some say the worst bear market in 70 years – we have successfully adhered to the principles that appear on the first page of our Web site. (www.HamiltonAdvisors.com)

“Emphasis is placed on Preservation of Capital then on Growth in accordance with the requirements of each client.

“Our objective, simply stated, is to maximize the rate of return while attempting to minimize risk in view of constantly and rapidly changing market conditions.”

Stocks will go up again when the economy, in general, and corporate earnings, in particular, are perceived to be moving toward a solid and sustainable recovery.
John W. Hamilton
January 20, 2003