C.Mack

<body topmargin=0 leftmargin=0 marginheight=0 marginwidth=0> <table cellpadding=0 cellspacing=0 border=0 height="100%"><tr> <td valign="top" width=170 BGCOLOR="#000066" TEXT="#F7F7FF"> <bR> <bR> <bR> <bR> <bR> <div> <A HREF="index.htm" TARGET="_top" TITLE="Home"><U><U>Home</U></U></A></div> <bR> <div> <A HREF="id23.htm" TARGET="_top" TITLE="History"><U><U>History of the Firm</U></U></A></div> <bR> <div> <A HREF="id25.htm" TARGET="_top" TITLE="Investment Procedures Disciplines"><U><U>Investment</U></U></A></div> <div>    <A HREF="id25.htm" TARGET="_top" TITLE="Investment Procedures Disciplines"><U><U>Procedures &</U></U></A></div> <div>          <A HREF="id25.htm" TARGET="_top" TITLE="Investment Procedures Disciplines"><U><U>Disciplines</U></U></A></div> <bR> <div> <A HREF="id27.htm" TARGET="_top" TITLE="Client Letters"><U><U>Client Letters</U></U></A></div> <bR> <div> <A HREF="id29.htm" TARGET="_top" TITLE="C.Mack"><U><U>Contact Information</U></U></A></div> <bR> <div> <A HREF="http://www.dunvegan.com" TARGET="_top" TITLE="http://www.dunvegan.com"><U><U>Client Log-in</U></U></A></div> <bR> <bR> <bR> </td> <td valign="top" BGCOLOR="#000066" TEXT="#F7F7FF"> <bR> <bR> <bR> <div> <TABLE BORDER="0" CELLPADDING="2" CELLSPACING="1" WIDTH="723" BORDERCOLORLIGHT="#C0C0C0" BORDERCOLORDARK="#808080" FRAME="BOX" RULES="ALL" HSPACE="0" VSPACE="0" > <tR> <tD VALIGN=TOP COLSPAN=2 HEIGHT= 164 ><NOBR><div> <B><U>D U N V E G A N   A S S O C I A T E S,   I N C.</U></B></div> <bR> <bR> <div> <I>(Performance)</I></div> <div> <I>if displayed, ask for footnotes</I></div> </NOBR></tD> </tR> <tR> <tD VALIGN=TOP HEIGHT= 20 WIDTH="596"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="20" ALIGN="bottom" WIDTH="596" HSPACE="0" VSPACE="0"></tD> <tD VALIGN=TOP WIDTH="116"><IMG BORDER="0" SRC="1x1.gif" HEIGHT="20" ALIGN="bottom" WIDTH="116" HSPACE="0" VSPACE="0"></tD> </tR> </TABLE></div> <bR> <div> <IMG SRC="08069940.jpg" border=0 width="617" height="404" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <bR> <bR> <div> <U>5 years (August 98-August 03)</U></div> <bR> <div> S&P 500:        +5.30</div> <div> Conservative:  +20.30</div> <div> Aggressive:        +33.76</div> <bR> <div> <U>YTD (August 03)</U></div> <bR> <div> S&P 500:          +14.57</div> <div> Conservative:      +8.85</div> <div> Aggressive:          +10.01</div> <bR> <bR> <bR> <div> <I><B>(RECENT Unedited Report)</B></I></div> <bR> <div> <I>Value, Value, Value</I></div> <bR> <div> Twelve months ago, financial markets looked bleak to the unpracticed eye.  Recession, looming war, deflationary pressures, and corporate scandal had taken their toll on markets.  Yet, markets offered value and opportunity with the mother of all liquidity stimulations beginning to unfold.  A declining dollar, war spending, collapsing yields, tax cuts, retail demand and housing market strength, all converged to send unprecedented waves of liquidity through the system, lifting all financial boats.  </div> <bR> <div> A general sense of security has returned to markets, which is seen in the Vix or volatility indicator that is similar to our proprietary “Complacency” calculation. Lower levels of volatility relate to higher complacency, which is usually associated with more unfavorable risk/reward relationships in financial markets.</div> <bR> <bR> <div> <IMG SRC="0823bbd0.png" border=0 width="571" height="189" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <bR> <bR> <div> Despite the psychological warning signs of high complacency, stocks do offer reasonable value relative to fixed income opportunities.  There could be sector shakeouts as financial markets begin to cope with the realities of corporate earnings expansion with no second act available for monetary and fiscal stimulus.  There could be, though, continued strength in value-based assets, owing to continuing attractive valuations.</div> <bR> <div> Although there are pockets of excess owing to the proliferation of sector indexing, the overall market is still reasonably priced.  The dividend yield on the S&P 500 is currently 1.7 percent; earnings yield is 3.3 percent.  These numbers compare with 12-month CD's that offer only a 1.1 percent yield.  In our “Equity Pricing Model” work, fair value requires earnings yield to be lower than a blend of low-risk fixed income securities, not higher, keeping in mind that corporations increase their yield over time, assuming no change in stock prices, while fixed instruments do not.  Since this is a very different economic cycle as a consequence of Asian disinflationary influences, there is almost no pricing power available to most American companies and, thus, no inflation.  Precipitous dollar weakness could, nonetheless, cause interest rates to move higher.  But, some of our work suggests that the dollar will trend lower rather than fall lower, which has not been problematic for interest rates.  Thus, stocks might continue to be attractively priced versus fixed income markets for some time to come.  </div> <bR> <div> In addition to valuation and ample liquidity, there remain two other primary drivers of this financial cycle, viz., the new tax treatment of dividends, and the higher levels of corporate profitability as the fruit of an expanding economy.  Reasonable valuation, the sea change in dividend tax treatment, and higher-trending corporate profits could shield quality issues from overpriced sector shakeouts over the next few months.</div> <bR> <div> Economic circumstances in China will continue to affect world economies and financial markets for the foreseeable future.  Some of the evidence suggests that Chinese goods will start to lift in price over the next 12 to 18 months, as investment there slows and their cost of capital rises as non-performing loans take their toll. This could add a bit of needed inflation to world economies and resultant pricing power to major American industrial concerns.  Already, fixed-asset investment is about 45 percent of the Chinese GDP and still growing above 15 percent per year.  Compared to a high-water mark of 38 percent that fixed-asset investment reached as a percentage of GDP in Korea in 1991, China would appear to be near to cresting over the next 12 months.  Once China begins to consume less foreign fixed-asset capital, not only will the Yuan begin to rise for easier debt repayment, but also major problems could develop in Taiwan and Korea.  A capital goods export boom to China has been supporting these two countries even as their own manufactured goods exports have been gutted by cheaper Chinese goods, leaving them little to fall back on when capital goods exports to China begins to diminish. Simultaneously, mounting bad loans in China and the elusiveness of a Chinese consumer-based economy may well result in Asian economic shocks over the next 12-18 months, helping to underscore the attractiveness of more secure economic prospects in America.</div> <div>  </div> <div> Over time, American will earn out of its budget deficit, even if its trade deficit stays entrenched.  A firmer dollar over the longer term is the likely result, following a dollar decline over the next several months.    American companies are lean and competitive and operate in the fairest business climate that the world has ever known.  For example, looking at recent developments in Russia, where their richest man was seized at gunpoint and will be potentially stripped of the bulk of his wealth, all the historical power plays, chicanery, and wealth accumulation in the United States appear benign by comparison.  In America, there have been and will continue to be Enron-type problems, especially during expansionist periods when the popular mood turns a blind eye on excess.   However, there is also a well-oiled process of dealing with problems in this country, which steadily improves the overall business environment.  </div> <bR> <div> Yet, there is every reason to be selective.  There is not likely a repeat of the 1990's for decades to come, when another round of political, economic, and technological change converge to numb the investing public's memory of the pitfalls of excess.  Currently, media attention focuses on the 20 or 40 percent gain here or there, forgetting that if you lose half of your money, it takes a 100 percent gain just to get even.  At the end of the third quarter, the S&P 500 was still down 27 percent from its highs while the NASDAQ Composite was off by 62 percent.  At the same time, value issues chug along, showing long-term, sustainable, wealth-building gains.  </div> <bR> <bR> <bR> <DIV ALIGN="LEFT"></DIV> <div> <B>(A few CHARTS YOU MIGHT FIND INTERESTING)</B></div> <bR> <div> (longer term Money Flows are still positive, although velocity is diminishing)</div> <bR> <div> <IMG SRC="083402e0.jpg" border=0 width="576" height="558" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <bR> <div> (In the 5 to 15% area, stocks are still not overbought)</div> <div> <IMG SRC="084402e0.jpg" border=0 width="576" height="558" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <bR> <bR> <div> (this shows that the US is competitive on a world real rate of return basis -GDP minus inflation- in the competition for world capital.  This suggests that the dollar may erode but will not decline precipitiously)</div> <div> <IMG SRC="08549290.jpg" border=0 width="585" height="553" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <bR> <bR> <div> (this chart reflects a an adjusted calculation of the stock/bond yield gap)</div> <div> <IMG SRC="08749290.jpg" border=0 width="585" height="553" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <bR> <bR> <div> (Only Valuation below Sell Levels suggest Overvaluation historically (98, 90, 87, 81,73,62)</div> <div> Levels above Fair Value suggest reasonable or undervaluation for stocks vs fixed income alternatives</div> <div> <IMG SRC="0895ac00.jpg" border=0 width="602" height="448" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <bR> <bR> <div> Short term Money Flow is currently positive</div> <div> <IMG SRC="08b3d700.jpg" border=0 width="573" height="624" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <bR> <bR> <div> Short term, Velocity is diminishing from a mildly overbought condition.</div> <div> <IMG SRC="08c3d700.jpg" border=0 width="573" height="624" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <bR> <bR> <div> The Minor Trend Model (1-5% moves) is Neutral but weakening</div> <div> <IMG SRC="08d7ec10.jpg" border=0 width="638" height="705" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <bR> <bR> <div> Core Equity List Holdings with Valuation Calculation readouts</div> <div> <IMG SRC="08e06610.jpg" border=0 width="1030" height="609" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <bR> <bR> <DIV ALIGN="LEFT"></DIV> <div> (some stuff about me)</div> <div> <B>A. C. Moore</B></div> <div> Chief Investment Strategist</div> <bR> <div> A. C. Moore has over thirty years of Wall Street experience as a securities analyst, research director, and portfolio manager.  Previously, Mr. Moore was senior vice president of Argus Investment Management and senior vice president and director of research of Argus Research Corporation.  Prior to his affiliation with Argus, Mr. Moore was a principal and portfolio manager with Dunvegan Associates, Inc.  Prior to Dunvegan, Mr. Moore was Director of Institutional Research with Reynolds Securities, Inc., now a part of Morgan Stanley. </div> <bR> <div> Mr. Moore was a consultant to the Council of Economic Advisors during two presidential administrations.  Noted for his multi-disciplinary capabilities as an investment strategist and portfolio manager, his opinions on market and business cycles are often quoted in the financial press.  Named as among the top five most quoted market strategists in America*, he has been a frequent guest on CNBC, CNN, BBC, CBS, and PBS (including Louis Rukeyser's Wall Street Week).  </div> <bR> <div> Mr. Moore holds a Bachelor of Arts degree in Finance from Wake Forest University and a JD from the University of North Carolina, Chapel Hill School of Law.  He is a member of the New York Society of Security Analysts, the Market Technicians Association, the Financial Analysts Federation, the American Bar Association, the Board of Directors of the Santa Barbara Symphony, Chairman of the Santa Barbara Symphony Endowment Fund, and the Board of Visitors for Wake Forest University.  </div> <bR> <bR> <bR> <bR> <DIV ALIGN="LEFT"></DIV> <div> (here is the last client letter, still germane, that is not in the Guest Area)</div> <bR> <div> <FONT SIZE="4" COLOR="#FFFFFF" FACE="Times New Roman" ><B>A Matter of Interest      </B></FONT>                              <B>July 2003</B></div> <bR> <div>      When there is an absence of fear and uncertainty, there will also be an absence of investment opportunity.  A look back over historical business and investment cycles reveals the obvious places where to buy low and sell high as a consequence of the endless interplay of hope and fear in markets.  Currently, fear and uncertainty have diminished from the levels prior to the Iraq invasion.  However, the investment mindset remains cautious, and opportunities for investment continue. </div> <bR> <div>  Popular worries among professionals primarily center on concerns that the American economy will go into a Japan-like deflation, triggered by the collapse of the dotcoms, a potential sharp downturn in the housing market, and the relentless toll on corporate pricing power by the Chinese economic juggernaut.   Investment worries are also widely voiced with regard to the mounting national deficits caused by lower tax receipts and the business in Iraq. </div> <bR> <div>  These concerns are articulated so well and often in the investment community that probabilities are high that markets have already priced in, or discounted, these difficulties.  In fact, the data suggests that markets continue to be reasonably priced.  A further unfolding of the recovery, as confirmed by a wide variety of economic data but most notably by the ISM Services report for July, would suggest that, at some point, pent-up needs for capital goods will be unleashed into orders, translating into further increases in corporate profitability.  The job market is also likely to start to firm, enhancing national tax receipts, and helping to reduce the specter of deflation, particularly in the housing market.  And yet, interest rates might remain at low levels; Chinese production will likely see to that.  </div> <bR> <div> The Federal Reserve wants to reflate the economy by making credit readily available.  It can do so without fear of inflation because of worldwide manufacturing surpluses and the impact of cheap imports from China.  The Fed is sending strong signals that further cuts in interest rates may not be necessary because of indications of continuing economic recovery.  Apparently, the Fed views that the risk of deflation remains but that no further easing of rates may be needed.  At the same time, the Fed has signaled that increases in rates may not be forthcoming for a considerable period because of the lack of inflationary pressures.  What are the results of this for markets and portfolio strategy?</div> <bR> <div>      First, the stock market has more attraction than does the bond market.   One of the components of our Equity Pricing Model is a set of algorithms that depict, during any period, whether stocks or bonds are the best value as an alternative investment.  The following chart portrays those conclusions over the past ten years.  Currently, stocks clearly have the advantage.  And, stocks are available at a reasonable price.  The Standard and Poor's 500 continues to sell at a better than 50 percent discount to its calculated fair value, despite the lift in equity prices this year.  This is, of course, a function of the sharp declines in interest rates over the past several months as well as improved corporate profitability.   From year-ago levels, interest rates in short-term Treasury securities have declined 233 basis points or over two full percentage points.  Corporate profits for the S&P 500 have risen 19 percent during the same period.  The result, despite the rise in stock prices to date, is continued value in markets.</div> <bR> <bR> <div> <IMG SRC="0903d220.png" border=0 width="573" height="546" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <bR> <div>      </div> <bR> <div>      For the period immediately ahead, there may well be setbacks and consolidation as investors gauge the impact of a weaker dollar and the resultant firmer tone to interest rates on their portfolio.  Essentially, the American government, practicing seniorage, can print as many dollars as it needs to in order to finance its large budget and current account deficits, unless printing dollars results in a depreciation of the dollar in a rapid manner and to such an extent that an interest rate hike is necessary to attract capital.  The dollar declined sharply against both the Euro and the Yen earlier this year but stabilized versus the Euro in recent weeks, with the European Community continuing to struggle with its new union along with an out-dated inflation-fighting monetary policy.  The dollar has continued to lose strength versus the Yen.  </div> <bR> <div> <IMG SRC="0923d220.png" border=0 width="573" height="546" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <div>   </div> <bR> <div> The essential question, again, is whether world creditors, and most notably Japan, will continue to be supportive of dollar-valued financial markets.  Our conclusion, given a continued economic recovery, is that the dollar can earn its way out of this corner in view of the lack of alternatives in major capital markets.  When you look at the following chart of world real rates of return, the United States is in parity with the European Community in the competition of who has the best net returns (GDP-inflation).   Japan and the United Kingdom will likely continue to be sources of capital versus their domestic alternatives.  China, which is not charted, will continue to draw funds at the expense of major world capital markets, but should not materially affect dollar stability.  </div> <bR> <bR> <div> <IMG SRC="0943d220.png" border=0 width="573" height="546" ALIGN="BOTTOM" HSPACE="0" VSPACE="0"></div> <bR> <bR> <div> With respect to investment sectors in the domestic stock market, the capital goods area will likely be the place to look for investment performance over the next few months.  Financial sectors, including bonds, will likely underperform, as interest rates remain firm and, perhaps, gently uptick.  Our preference and investment methodology directs us toward growth companies, rather than cyclicals, when the growth companies are available at a reasonable price.  Growth companies have staying power, whereas cyclical companies do not.  With many cyclicals, corporate profitability ends up back or below where you started after a few years, whereas profit increases of growth companies continue.  Some of our growth companies, however, have elements of economic sensitivity.  They will be emphasized for portfolio holdings to the extent such issues comply with value and risk/reward parameters.</div> <div>                                         <FONT SIZE="4" COLOR="#FFFFFF" FACE="Times New Roman" ><B>A.C. Moore</B></FONT></div> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <bR> <DIV ALIGN="LEFT"></DIV> <div>  <IMG SRC="http://members.tripod.com/bin/counter/id29.htm?FFFFFF" ALT="[Tripod Counter]">  </div> <bR> <bR> </td> </tr></table></body>