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Dear Shareholder:
The year 2001 is drawing to a close and what a year it has been! At the start of the year the Standard & Poor's 500 Stock Index was about 1350, having declined from about 1510 in September 2000. This index dropped to about 980 after the September 11, 2001 attack and looks like it will finish the year at something around 1150. That's a swing of 35% in value between September high and low, and a drop for the year of about 15% after the late recovery.
Meanwhile, the municipal bond market is close to where it started the year, in spite of numerous Federal Reserve rate reductions to the lowest current rate in many years. And at its peak a week after September 11th it was only a little over 1% higher than year-end.
Gold is cheaper. Inflation is not in evidence; in fact, deflation may be what's happening now. So what does all of this tell us?
Well, let's see:
Bubbles still happen.
Stocks CAN go down sharply.
The "new valuation stock market" looks more and more like the "old valuation stock market".
Bonds don't always go up (rates down) when the Fed rate goes down.
Inflation does not always happen.
Fed rate cuts don't always accomplish what we expect them to accomplish.
The Fed isn't always right.
What the heck: the stock market isn't always right.
Nor, for that matter, is the bond market always right.
Maybe, just maybe, ... nobody is in charge!
So what do we do? Give up? Of course not!: Theologically, I firmly believe Someone is in charge. That comforts me in uncertainty, and I have always lived with uncertainty.
By suggesting that "nobody is in charge" I am simply pointing out that most of the economic guides we have come to rely on are simply not working as well as they have in the past. Neither the Federal Reserve Board, the President and Congress nor the ubiquitous "Market" that sees all and knows all, have been doing real well at influencing our future in a way that allows us to proceed with confidence.
Oh, we still have our mantras and aphorisms to guide and encourage us. "The economy always recovers." (Only true if you give it a long enough time frame; about ten years in the last great depression. Look to the Japanese economy for more recent guidance.) "Bonds go down when stocks go up, and vice versa." (There is no real economic connection, but it can be self-fulfilling if enough people believe it.) "We can control the economy and inflation by manipulating interest rates through the central bank." (Not working well lately. The Japanese have lowered bank rates to almost nothing and for 10 years have continued to experience deflation and a weak economy. Are we next?)
This is a time of great financial and economic uncertainty. What would I suggest? Don't leave the stock market completely. There are reasons to hope recovery is on the way. Fed rates are very low and the war on terrorism is providing a spending stimulus as well as helping us feel safer. But balance your investments. Probably 40% in good quality bonds is right for now. Actually a higher ratio of bonds might be best for older folks (like me). Bonds are relatively cheap compared with other fixed-income investments, especially bank certificates of deposit. Municipal bonds have dropped about 1.25% in value recently on the belief that stocks are going up again. I believe the money moving out of bank CDs will stop this decline and may even reverse it. With about 40% of your portfolio in good quality bonds you can stand any weather that comes, either rough or fair.
Earlier Daily Closing Time: One of the changes to our prospectus approved at the fall shareholder meeting was the time we re-price our shares. It was moved from 4:00 PM to 3:00 PM EST. This was done to make it easier to meet deadlines on getting the new price published in the national newspapers. If you want to buy shares at today's price, you have to have your money in before 3:00 PM. If you are wiring funds to us, let us know the wire is coming.
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