The Mills of the Gods grind slowly but exceedingly fine.

September 30, 2002

– The DJIA was down 14.09% for the last 12 months and -24.24% for the first 9 months of 2002.

– The Nasdaq Composite was down 20.83% for the last 12 months and –39.91% for the first 9 months of 2002.

– The S&P 500 was down 21.50% for the last 12 months and –28.99% for the first 9 months of 2002.

February 21, 2001 Our Commentary asked “Buy on the Dip? Or Is the Bear Still Hungry?”

November 7, 2000 In our “Talking Points” Commentary we wrote:

– “At times it is more important to be concerned about the return of one’s capital than the return on one’s capital.”

– At the same time we stressed “It is at times such as these that the wisdom of prudent investing can be understood and appreciated.”

– “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.”

– We wrote that on November 7, 2000, and the Financial Times reported on September 30, 2002 “Paper debt defaults hit record $140bn (Billion).”

– “It appears that the ‘Bubble’ at long last has finally burst.”

September 18, 1999 “Investing — Still Like Shooting Fish in a Barrel? — Don’t Try This at Home”

– “While we do not predict markets, we certainly recognize that this bull market is just like Old Man River and that it will just keep rolling along…. until it stops. While it may not be stopping, we believe that it is looking quite tired.” Hoping that we would be wrong we said, “This could come to tears.”

Mr. Market did indeed get tired. He not only stopped but also rolled over. The result has been that since March 2000 approximately $8.6 Trillion or half the value of all stocks at the time has been lost as stocks traded at five year lows on October 9, 2002.

The question is what to do now.

The answers remain unchanged. The best way to make money is to keep from losing it.

It is and has been for quite some time our judgment that the best way to minimize losses is to have a large percentage of one’s investments be in cash equivalents and Treasuries having a maturity approximating two years. Further, we would not hold a stock that we would not want to buy today.

The most indisputable characteristic of the stock markets is that they will CHANGE. We will wait for clarification of many factors affecting the stock and bond markets and pay higher prices, if necessary, for stocks when the investment outlook brightens.

In our opinion, the most serious of many problems affecting the markets is that of excessive debt. Far too many debt and credit problems cannot be quantified because they cannot be analyzed on corporate and, especially, on bank balance sheets. These problems are not “transparent,” and we still have no idea as to the amount of “off balance sheet financing” that is outstanding.

Japan’s credit problems are still worsening after 19 years as their stock market is at 19 year lows.

There is great concern in Europe concerning the viability of many of the largest banks and insurance companies. In our electronic world their problems become our problems and vice versa.

There is real concern about debt in America. As mentioned, the Financial Times on September 30, 2002 reported corporate debt defaults hitting a record $140 billion. At the same time foreclosures on residential real estate are at record highs.

The stock of 99 year old Ford Motor Company, the world’s second largest carmaker, traded down to $6.90, a ten year low, on October 9, 2002, largely as result of worry about the company’s and its subsidiary, Ford Motor Credit’s, staggering $170 billion debt. Ford Motor Credit is reportedly the largest issuer of corporate debt in the U. S. The company’s bonds are trading at junk bond levels as servicing this debt is becoming more of a problem.

As corporations and banks are unable to extricate themselves from record outstanding debt, they are hampered even more by a failing economy that does not permit profit margins with which to pay down that debt. Add to this environment the very real possibility of rising interest rates.

We repeat our November 2000 comment that at times it is more important to be concerned about the return of one’s capital than the return on one’s capital.

Meanwhile, for all the white-collar criminals whose greed cannot be fathomed, the Mills of the Gods are grinding exceedingly fine and, we hope, maybe not so slowly.

John W. Hamilton
October 15, 2002