NOVEMBER 2000 – TALKING POINTS COMMENTARY

We are looking for good news; but, unfortunately, it is hard to come by. Therefore, we thought we would mention several “Talking Points” (not necessarily in order of importance) that are currently affecting the stock and bond markets.

– The momentum of the American economy is beginning to slow. Its age is beginning to show.

– As a result there is little reason at this time for the Federal Reserve to increase interest rates. The economy’s expected “soft” landing may not be so soft, and any Fed action toward raising rates would be counterproductive.

– The price of oil continues to be very high with the result that corporate
profits around the world are being affected. We are enjoying autumn’s beautiful days with the warnings that heating oil and natural gas prices will escalate significantly from these levels with the advent of cold weather. Here in the northeast the warnings go beyond the cost of these fuels to include the likelihood of severe shortages — especially if we were to experience a cold winter as opposed to the mild temperatures of the last two winters.

– There will be no peace pact between the Israelis and the Palestinians. The true reason that will not be reported by the media or the governments involved is the fact that neither side wants peace. The degree to which the U.S. alignment with Israel will affect Arab oil production cannot be predicted except that under no circumstance will it be a positive for additional oil supplies from the region.

– The Euro continues to trade at record lows against the dollar and the yen. The European Central Bank along with the Americans and Japanese intervened several weeks ago. The reaction was a jump in the Euro that has subsequently disappeared. Recent unilateral interventions by the European Central Bank continue to be unsuccessful as the Euro returns to its lows.

– Recently interest rates in Euroland have been raised in the face of its slowing
economies. We believe this will prove to be counterproductive for one of the world’s two largest economies – the same as if the Fed were to raise rates in the
U. S. at this time.

– Please note our comments in our Quarterly Reports, Mailings and Commentaries that appear on our Web site: www.hamiltonadvisors.com concerning what we
perceive to be a stock market “Bubble” that has developed in recent years. It
appears that the “Bubble” at long last has finally burst. For example, Priceline.com is now trading at 3 versus its high of 104. VA Linux, once a star performer, is now trading around 17. At its debut last December it jumped more than 700% on the first day of trading. Its high for the year was 320. There is a multitude of similar examples.

– The speculative boom in technology and dot-com stocks has been fueled by investors having stars (huge profits) in their eyes. Now that many of the dot-coms have gone out of business and others not earning profits are getting close to burning the remainder of their cash, the enthusiasm in many instances for refinancing these companies has vanished. Many of these are going out of business at an accelerating rate. How will these companies refinance their debt and access additional capital for continuing their business models?

– For the week of October 6th to 12th Mutual fund outflows amounted to a five-day
cash redemption record of $12.1 billion according to Trimtabs.com. Also stated in the October 13th CNBC.com article: “During that period, the net asset value of equity mutual funds fell 9 percent.”

– Adding to the risk in the stock markets is margin debt – $250.8 Billion as of
September 30th. This does not include money borrowed against credit cards, home equity loans and second mortgages where the proceeds have been used to buy stocks. We understand that the Chairman of WorldCom had a $70 million margin call recently that caused him to consider selling 3,000,000 shares of that stock.

– There is considerable concern about the creditworthiness of corporate debt. Nobody knows how much American and European banks have loaned to speculative telecom companies and Internet start-ups. And these are only two areas of lending to untested new companies by banks, institutions, venture capital firms and corporations. Somewhere during the chase some folks apparently forgot that those loans would have to be repaid. The question now is how they will be repaid – if at all.

– Funds are flowing into Treasury and U. S. Agency bonds, which are providing
attractive yields while being “safe havens.”

It is at times such as these that the wisdom of prudent investing can be understood and appreciated.

John, W. Hamilton
November 7th, 2000