VEON FINANCIAL SERVICES, INC. A Registered Investment Advisor

14 Woodmere Circle Middletown, MD 21769 301/371-0540 (F) 301/371-0543 September 2002

"UNDERSTANDING THE MARKET'S UNRAVELING IN A
TIME OF DECEIT AND WAR"

By Joan M. Veon
Veon Financial Services, Inc.

"Those who believe this is merely a cyclical downturn are mad.
They cannot see what is happening in front of their eyes."

Larry Ellison, Chairman and CE of Oracle

EDITORS NOTE: Every time I am delayed in writing a newsletter, it is because of late-breaking market moves which are important in putting together the "whole picture." By the end of September, I was quite pleased when I finished the first 25 pages of abstracts thinking I was ready to write. Then the first two weeks of October brought a number of market moves that required another 15 pages. In order to complete the newsletter, 40 pages were then condensed into 20.

As a result of compiling financial news into abstracts, I am usually able to get a mental picture that becomes a word or phrase of what is occurring in the markets. For the June newsletter, the word "rotation" described what I saw. This means that a complete turnover of investments and trends was taking place. I basically wrote that what used to be is no longer. For this newsletter, the word which came to mind is "unraveling". As you proceed, you will understand. I try not to be complex, but the world is complex and what is transpiring is complex.

In my mind and heart, my job as an investment adviser is to not only help you invest, but to also warn or take the necessary steps to protect your investments. We entered the third millennium via the Y2k scare and then September 11. It appears that our lives and world have become more volatile, and as a result, the markets have as well. However, the reason for market volatility has everything to do with integrity and honesty. The purpose of the market and its structure has changed in order to facilitate deceit, deception and distortion.

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Most recently I viewed a video about a health product. In it, a man who I think is an expert in Health Education, explained about the cells in the body. Healthy cells generate an electrical field. To keep this "electrical generator" going, cells must have: oxygen to convert glucose into energy and a high potassium to low sodium ratio inside the cells. In order to maintain the right balance, the body requires natural whole foods such as fruits and vegetables. A whole food consists of five elements: vitamins, minerals, protein, carbohydrates and fat. Since our cells are constantly producing waste products, internal cleansing is a critical body function. If this cleansing process becomes weakened through the wrong intake of foods, i.e. junk foods, high fat, high sodium, high sugar (which distort the ability of the cell to keep the electrical field) impurities will build up which weaken the body and eventually lead to disease and sickness.

Everything has its own balance: a legal system needs the right kind of laws that reflect moral integrity and truth and honesty in order to have law and order instead of anarchy. If an engine does not have enough oil, it will burn out. If children do not have correction when they are out of line, then they may grow up with bad social behaviors. If we eat too much sugar, we not only get fat (even though it tastes so good) but it will create imbalances that could lead to diabetes, etc. We take it for granted that when we eat at our favorite restaurant, the kitchen is clean and free of rodents, even with the Health Dept.

What I am about to explain is why the market or the "body" is out of balanceùwhy investors and consumers are not responding to the call of the market which is lower interest rates and prices. This is as a result of bad practices by banks, corporations and governments. If proper correction is not applied,

the results may either lead to a serious illness such as a war or they may even be fatal such as a depression (as in 1933). The market or "body" can only take so much abuse before illness begins to show the unraveling of unhealthy eating practices.

If the 1990s boom was due to corporate buy-outs that were financed by debt, 2002 is about the unraveling of the debt and foolishness of greed and power. Unfortunately, Wall Street forgot about honesty and integrity and our government somehow closed their eyes to the promises made in the Security Exchange Act of 1934 (which was repealed several months ago). Four phrases explain what is occurring: Deceitful Markets and Players, Disillusioned Investors, a Sick Economy and War as the Solution to Avoid Depression.

In order to explain the above, we need to look at the following diagram:

I. THE MARKET	IV.RESULTS: BUSINESS CYCLE
A. Laws	A. Consumer
B. Corporations	1. Interest Rates
C. Investment Banks	2. Ability to Spend
	B. Corporation
II.INVESTOR CONSUMER	1. Mergers/Acquisitions
A. Consumer Debt	2. Bad Practices
B. Disillusionment
III. SICK ECONOMY	V.MARKET REACTION
Debt	Business Cycle
1. Consumer	War as a Solution
2. Corporations

THE MARKET

What is the market comprised of? Laws to guide it and players to make it work. Businesses, be they set up as sole proprietors, partnerships or corporations, comprise the foundation of the entrepreneurial spirit as characterized by a free market society, normally found in capitalistic countries. In order for corporations to go public and be listed on the stock exchange, they turn to investment bankers to examine if they have the strength to go public and if there is a demand for their product. Investment bankers have analysts who "analyze" the prospects in light of the entire economy and offer their opinion about this or that stock in light of the current market. It is not enough to offer and analyze a stock; you need brokers or registered representatives to get the public to buy the shares so that there is demand. Basically, one feeds on the other. Interestingly enough, the investment banks employ the analysts and the brokers, which means their relationship is incestuous. Therefore, there is not a lot of individual freedom. Unless you work for an independent brokerage firm, such as Mutual Service Corporation that does not bring stock public, you are usually under a quota system to sell so many shares of this new wonderful stock that just came on the market to your clients.

What the market has experienced as a result Enron and WorldCom and the subsequent fix by Congress when they passed the Sarbanes-Oxley bill is not only a distortion of what the law was meant to do, but a complete transfer of economic power from Congress to international bankers. While I briefly touched upon this in the June newsletter, in doing more research, I was able to make a very, very important connection. The two laws, which Congress passed in 1933 and 1934 to prevent distortions by unscrupulous bankers and corporate presidents, have been repealed and as I wrote, the wolves are chasing the foxes to the chicken coop.

In order to understand how the banking and economic legal framework in the United States has changed, we need to discuss the Federal Reserve Act of 1913, the Glass-Steagall Act of 1933 and the Securities Exchange Act of 1934.

A. LAWS STRUCTURING AND AFFECTING THE MARKET

1. The Federal Reserve Act of 1913

In 1913, Congress voted to transfer the oversight and management of the monetary system of the United States to a private corporation, the Federal Reserve Bank. Don't let the title fool you. They are not part of the U.S. government. In 1913, this private corporation was given control of the creation and supply of money, thus they are able to create booms and busts in the business cycle purely by injecting or reducing the amount of money (liquidity) in the market. The Fed did not gain access over the stock markets or insurance companies.

2. Post-1929 Protective Barriers

After the Stock Market Crash of 1929, Congress did several studies and concluded that what caused the stock market crash was the fact that banks could bring the stock of companies to market and sell stocks and bonds through its branches. They passed two bills, which put "firewalls" or protective barriers between the banking industry and the stock market. The first was the Glass-Steagall Act which separated the functions of banks into two types of banks: the commercial bank which takes deposits and makes consumer loans and the investment bank like Merrill Lynch and Salomon Smith Barney which bring new companies public and offer shares of those stocks to their clients through their brokerages services. The other law, the Securities Exchange Act of 1934, put Congress in charge of reviewing annual reports of corporations, as well as monitoring the stock exchange, to name a few of its functions.

3. Repeal of the Glass-Steagall Act

I have written extensively about the December 1999 repeal of the Glass-Steagall Act in previous economic newsletters. Interestingly enough, many analysts have attributed the increased market volatility to the repeal of Glass-Steagall.

Just recently I connected the fact that without the repeal of the Glass-Steagall Act, THE FEDERAL RESERVE WOULD NOT OBTAIN CONTROL OVER THE OTHER TWO PIECES OF OUR ECONOMIC SYSTEM: THE STOCK EXCHANGE AND THE INSURANCE COMPANIES BECAUSE BY LAW THEY HAD NO JURISDICTION OVER THOSE AREAS. BY REPEALING THE GLASS-STEAGALL ACT and ALLOWING INVESTMENT BANKS TO OWN INSURANCE AND BROKERAGE FIRMS, THIS PROVIDED LEGAL ACCESS TO THESE AREAS BY THE FEDERAL RESERVE WHICH IS OWNED BY INTERNATIONAL INVESTMENT BANKS.

Congress and the Fed did not stop at the repeal of Glass-Steagall. A month earlier in November 1999, they passed the little known LaFalce Bill that became known as the Gramm-Leach-Bliley Act.

4. Passage of Gramm-Leach-Bliley Act

In order to make their takeover complete of the final vestiges of our economic system, this particular bill basically amends most of our key banking legislation such as the Banking Act of 1933, the Bank Holding Company Act of 1956, the Federal Deposit Institutions Act, the Community Reinvestment Act of 1977 and the International Banking Act of 1978 TO SUBSTITUTE CONGRESSIONAL OVERSIGHT WITH THAT OF THE FEDERAL RESERVE! Do you understand what you just read? The Senate, President and Treasury Secretary of the United States AGREED to a bill which SHIFTED OVERSIGHT OF OUR FINANICAL SYSTEM TO THE FEDERAL RESERVE, A PRIVATE CORPORATION OWNED BY INTERNATIONAL BANKERS!

1. Repeal of the Securities Exchange Act of 1934


In order to protect our market system against another 1929 stock market crash, Congress was given the power to examine the prospectuses and annual reports of American corporations to ensure that they were not lying to their investors.

Sometime in the mid-1990s, the SEC stopped examining companies because there were too many new public offerings and they did not have the staff, so corporations like Enron went un-examined. As a result, we were told that the Securities Exchange Commission (SEC) was broken and needed new legislation. Interestingly enough, the SEC worked fine up until 1990 under the astute leadership of its former chairman Arthur Levitt. Then it somehow stopped working. Mr. Levitt played on the global level and supported the concept of a global stock exchange and global accounting standards, as he was one of the two Americans to work with the International Accounting Standards Board (IASB) in London to help bring it to its present position. Furthermore, the international banking connections between the Federal Reserve, the SEC and the IASB are seen in the role which the former Fed Chairman Paul Volcker has, as Chairman of the Board of Trustees of that organization.

The Securities Exchange Act was replaced by the Sarbanes-Oxley Bill, which became law August 1. This bill transfers many of the key oversights that Congress had to an independent board that has direct ties to the International Accounting Standards Board. Furthermore, the bill specifically states that Congress has no authority or oversight over the independent accounting board.

All of this legislation has helped magnify market volatility because Congress does not have the power or authority they once hadùthey are too busy legislating it to international bankers.

B. INVESTMENTS BANKS

As a result of the repeal of key structural economic laws, you can now see how investment banks could bring a stock to market which should not have been brought to market, use their analysts to hype the stock and get the public to buy it, while the corporate CEO's were offered shares of the initial public offering to sell in the first few days of going public and the initial euphoric rise as a result of market momentum.

Let's take a look at why investors should be disillusioned. As a result of the practices of the investment bankers, of the 21 issues underwritten by Goldman Sachs, 16 are down at least 89% and several went bankrupt. Then look at the investment analysts who kept telling the public "everything was fine". Solomon Brothers telecom analyst Jack Grubman kept companies at a buy when they were near bankruptcy. This allowed executives to make $1.7B by selling their shares before the price collapsed. To compound the situation, most brokers who work for investment bankers are taught that the investor should "buy and hold" because it will come back. Ask those holding Nasdaq stocks if and when they believe those companies will climb back 85% just to break even.

C. CORPORATIONS

The song says, "It takes two." On the corporate side, investment bankers Goldman Sachs and Credit Suisse First Boston enticed CEO's to go public by offering them IPOs. These CEO's then sold their shares quickly, cashing in on the enormous price rise in early trading. New York's attorney general Elliott Spitzer has launched a lawsuit to recover more than $28M made by five telecommunications tycoons through IPO's launched by Salomon Smith Barney which received $241M in investment banking fees.

With regard to Enron, investment banks facilitated Enron's off-balance sheet partnerships by extending credit and disguising its true debt position with commodity deals through offshore vehicles. The Enron partnership LJM2 took nearly $400M from investors in 2000, but declared assets of $68.8M when it filed for bankruptcy. Banks using this technique include Credit Suisse First Boston, JP Morgan Chase and Citigroup.

One year after Enron, regulators have accused Duke Energy of deceptive or round-trip trading to inflate volumes and energy. Mirant has disclosed "honest" accounting errors and Dynergy has been forced to restate their financials. One year later, the five major energy traders have seen $1.65B in profits swing into losses. From one year ago, Dynergy's stock is down 97.9%, Mirant is down 95.5%, Williams Co. is down 93.6%, Reliant Resources is down 92.7% and El Paso Energy is down 87.6%.

Unfortunately, Enron and others are not the first to use "creative" practices such as off-balance sheet partnerships. According to The Wall Street Journal, newly unearthed documents showed that when Harken Energy needed help because they used off-balance sheet partnerships to jettison trouble assets and large debt, Harvard Management came to their rescue, ultimately buying 30% of its stock, loaning it millions of dollars and transferring oil properties to it. Furthermore, they were involved in a number of other transactions that did not require Harken to show the relationship because of being able to avoid minimum accounting rules requirements. Later Harvard sold Harken stock at a high, making a lucrative profit. President Bush, who ran and owned Harken, has forgotten that actions speak louder than words.

D. UNLOADING RISK

It used to be that the local commercial bank that you did business with for years was rock solid in all it did. Unfortunately, while the investment banks were fleecing the public through greedy deceptive practices listed above, commercial banks were making loans at a record pace, without worrying about good credit and banking risks through a new technique called "securitization." This involves the bank assembling auto loans, mortgages and credit card debt into packages (also called syndication) and then selling them to mutual funds, smaller banks and pension plans. Actually it is a form of risk re-distribution so that banks do not have to be accountable for their actions. While this allows banks to "reuse" money that they had lent out because pension plans and mutual funds have paid them, it also has meant that they did not rely on their own credit judgments as cautiously as they should have and in some cases, used lenient lending practices. Currently the securitization or syndication industry is valued at more than $7T. Think about what has happened--the bank is making loans to people that they never should be lending money to and turning around and selling these high risk loans to your mutual fund or pension plan. How safe is your retirement?

Il. CONSUMER/INVESTOR

Consumer

You and I play two roles: we are consumers and investors. If we spend and purchase something, we consume; if we save and invest, we are building up for the future. In June 2001, I reviewed eighteen different variables with regard to the strength of the economy. I concluded that it was debt that has kept the world economy stimulated as a result of our spending habits. Furthermore, debt enabled and fueled corporate mergers and acquisitions of the 1990s, which changed the investment landscape.

A BusinessWeek analysis shows that the mergers from July 1 1995 to August 31 2001 shattered record after record. It was five times greater than any previous M&A boom in U.S. economic history: in 1998 to 2000, deals totaled nearly $4T, more than in the previous 30 years combined. Deals like AOL's $166B all stock buyout of Time Warner contributed to the bust. Bidders simply paid too much.

In March 2001, I reviewed various pieces of economic activity that took place in the 1990s. The Kuwait War opened the decade with Japan's stock market falling 50% and the Dow reached a high of 3,000. In 1999, the Dow closed out the decade by quadrupling at 11,452. The rise in our stock markets was due to foreign investment, tax cuts, securitization or syndication of debt and the Federal Reserve increasing the money supply.

As a result of the above corporate and banking greed and deceit, investors have begun to pull money out of the stock market. Let us take a look at the economy.

III. SICK ECONOMY

Is the economy sick or is it like our bodies, able to heal itself given good eating habitsùno caffeine (monetary stimulus), sugar (high risk) or fat (debt)? On the other hand, are we at a point of no return? Has all the caffeine, sugar and fat caught up with our health to the point where we can't go on and need a sugar high to take the next step and create a false sense of energy?

I know that I have written some of the same things in the pastùbut now we are two, three or five years later. At some point, we will not be able to continue. Let us consider some new figures:
 
 

Corporations

A. According to The Financial Times, corporate scandals will cost the US economy $35B, which is as much as a $10 per barrel rise in the price of oil (FT, 9/5/02).

B. According to BusinessWeek, "it is estimated that banks will write off a record of more than $130B for loan lossesùa record" (BW, 10/28/02, 98).

C. Many of the stocks and bonds floated during the 1990s probably never should have come to market. A record $880B worth of corporate bonds and loans are in distress or default. In the 1990-91 recession defaults were running at more than 12%. In December 1933, they peaked at more than 16%. In 2001, there were only 57 investment-grade companies that dropped down to non-investment grade. This year so far, there are 540 or 10 times the number.

D. Ford Motor, as a result of their corporate bonds being quoted like junk bonds, has had to turn to securitized bonds or asset-backed bonds in Europe and Australia to gain access to funding. Ford's down 40% even in light of recent events and an announcement by their president that they will cut expenses by $1B next year.

E. The average junk bond is now trading at some 1000 basis points over Treasuries, up from 900 basis points at the start of the year. The $43B in new junk bond issuances this year has been surpassed by the $91B in fallen debt that entered the market as investment grade debt that has been downgraded.

F. Oliver, Wyman & Co., New York financial consultants estimate that banks in the U.S. and Europe will write off more than $130B, a record, for loan losses this year. Banking regulators say company debt is 6.1 times the cash flow available to pay for it, the highest since recordkeeping began in 1966 (BW, 10/28/02, 98).

G. As a result of General Motor's "Keep American Rolling" campaign after 9/11, as many as one fourth of all vehicles sold by the Big 3 are now under "zero percent" financial officers. In order to keep this going, GM is holding down costs at every turn. The main change has been to issue more bonds secured on car buyer's monthly payments. As a result of GM and Ford using securitization, analyst's estimate that $22B of existing unsecured debt will need to be rolled over.

H. Corporations are selling various assets from art collections, such as Vivendi that owns Seagrams. They are liquidating their collection of Picasso, Miro tapestries and lithographs by Roy Lichtenstein along with 2500 other pieces. Enron has sold their art and Anderson has sold parts of their collection (FT, 10/16/02, 14). Most recently Citigroup declared they met their 3^rd quarter earnings, but that was because they sold their Manhattan headquarters for $1.1B.

Consumer

I. Low interest rates for the past several years have kept the mortgage market humming. It appears that whenever the mortgage market or economy is going to stall, the Fed reduces interest rates, thus spurring both the sale of new homes and mortgage refinancing. The real objective is to keep money moving. Once it stops, who knows what it will reveal. Currently interest rates have been reduced from 30-year lows to 40 year lows. When people refinance, they usually take money out of their home and spend it. This sweetener can only stimulate the economy for so long. Right now the Fed is at a dead end. If they continue to lower interest rates, the word "Japan" will start to crop up and people, analysts, economists and foreign investors will wonder if America is going the way of Japan.

J. The percentage of homeowners starting foreclosure, or are somewhere in the process both hit 30-year highs in the second quarter. The foreclosure rate for April-June jumped to 0.40% from 0.37% the previous quarter. Mortgages in foreclosure climbed to 1.23%, also a 30 year high from 1.11% last quarter. Families falling behind on mortgage payments by at least 30 days climbed to 4.77%, the highest in the past 10 years. Currently 1 in 20 mortgages are delinquent.

IV. RESULT OF DECEITFUL MARKETS AND A SICK ECONOMY

Most recently the Washington Post did an article on Dr. Ancel Keys was a pioneer in discovering the causes of heart disease. He showed that bloodstream cholesterol was the chief determinant of heart disease and that saturated fat in the dietùbutter, red meat, fried foodùwas the chief determinant of bloodstream cholesterol. In other words, heart disease is from what you eat which may be abusing your body.

In analyzing the economy, Hugh Johnson, chief investment office at First Albany Corporation said, "This is the worst market I have seen in my lifetime. The reason why this is so different is because we're unwinding the biggest financial bubble in at least 100 years. That's a lot of excess."

Alan Beattie who writes for The Financial Times said, "Without American consumers there was no boom and if they decide not to spend we may see no recovery. The one constant of the past few years has been the indefatigable US consumer, courageously and consistently spending the US's way into debt but out of recession. The long consumption boom has defied the Asian financial crisis, the worries over Y2K and 9/11."

Perhaps Larry Ellison, Chairman and CE of Oracle said it best, "Those who believe this is merely a cyclical downturn are mad. They cannot see what is happening in front of their eyes."

V. THE BUSINESS CYCLE AND THE RESULTS OF A SICK ECONOMY

There has been increased volatility in the stock market. Coming on the heels of the incredible and unprecedented crash of the Nasdaq, the structural change in financial laws and the greedy conniving of Wall Street, is it any wonder that the investor is "gun shy"? Before we take a look at what economists are saying about the health of the economy, let us take a look at additional reasons contributing to market volatility.

Program Buying and Selling

In a key Washington Post article, they wrote about the stock markets surging ahead for the second consecutive day with the Dow and Nasdaq gaining more than 4% that capped a very turbulent week of trading. The two-day advance was 6.7%, the largest since March 2000 when the current bear market began, with the Dow closing at 7850. The Dow hit a low for the year before it closed up. According to Andy Engel, senior research analyst at Leuthod Group, an increase in volatility tends to signal a market in transition. Most analysts are quick to add that there's never been a market quite like this one. THE LAST TIME THE STOCK MARKET FINISHED DOWN THREE YEARS IN A ROW WAS IN THE 1930's (WP, 10/12/02). As we write, the Dow is down 17% instead of its high of 25%.

Why all the volatility? Program trading is a key. Today program trading accounts for more than 35% of all New York Stock Exchange trading volume. A year ago it was 28%. Program trading involves pre-set buys and sells. When the market hits a buy or sell point, it goes off automatically. On October 9 when the Dow lost 200 points, program trades accounted for 45% of the decline. So far this year, the S&P500 index has closed up or down by at least 1% on HALF OF THE TRADING DAYS. In 2000, this happened only 40% of the time, while in 1995 it occurred on just 5% of the trading days.

Another reason is the turnover of mutual fund holdings. As a result of the increased pressure to perform and turn out historic returns, portfolio managers are now turning over the entire portfolio; previously the turnover was much less than that.

Another reason is the huge amount of money investors are withdrawing from mutual funds. In the third quarter, a record $50B was withdrawn from funds. As stated previously, it is the U.S. investor that has stimulated the entire global economy. If people stop spending, the music and the flow of money stops. At this point, the Fed has used up all of its enticements. When 40-year interest rates are being used to keep stimulus going, where do you go after that round of stimulus wanes? To war or to recession or depression?

The Business Cycle

Where the economy is in the business cycle determines the strength of it and the measures necessary to stimulate it to a point of new growth. The basic problem for corporate America is that sales are barely growing. Demand is comprised of money available to be spent by the consumer, their personal financial strength, and their attitude and interest rates. In the past this newsletter has discussed the fact that consumer disposable income is almost equal to take-home pay. As a result of low interest rates, many people have taken on more debt by selling the old house that has appreciated and buying the bigger, more expensive house using a 30-year or 40-year low in mortgage rates. Furthermore, they have bought the new car because of incredible no-down-payment, no-interest incentives. The furniture is also on interest free, one-year delays in the first payment. How can anyone resist? Companies are giving away merchandise just to keep inventory moving! Tell me, is this healthy or does this point to a few problems? The Washington Post reported a University of Michigan survey that one third of all households report that their finances had worsened this yearùthe highest level in a decade (WP, 928/02, A1).

At every turn, major corporations are laying off: Delta 1500, Aetna 2750, Ford several thousand, SBC Communications 11,000. Companies like Wal-Mart, Philip Morris, Maytag, Nucor, Black & Decker and JDS Uniphase all have warned of lower profits. Sears's stock fell 32% after they revealed they set aside $222M to cover unpaid credit card bills.

Putnam Funds has seen $10B leave in the first eight months of this year; Janus has suffered a larger outflow of assets than most of its rivals. From the start of 2001 until June 2002, it had $18B in net redemptions with assets dropping 30%. Fidelity, the biggest US mutual fund manager is cutting 10% of its workforce. Assets under management have dropped 24% to $714.1B by the end of August compared to $938.5B two years ago. Said Anne Crowley of Fidelity, "The [US equity] market has seen the worst deterioration since the 1930s" (FT, 9/30/02, 15). Charles Schwab has layed off more than 1/3 of its workforce in the past 12 months.

Said James W. Paulsen, chief investment officer at Wells Capital management in Minneapolis, "It's not only jobless-it's priceless, profit-less, inventory-less, investment-less and totally without any gain in stock prices. We're still in the muck of a recession that has never really ended."

It is the job of the central bank to stimulate the economy through low interest rates and by injecting money into the economy. However, that will only work if there is demand. School sales were weak and with the dock strikes, there is concern holiday sales will be weak. Given consumer debt, they can only take on so much more additional debt. The question remains, will they be able to stimulate an economy that is reaching 20 and 30 year records on delinquencies? Add to this what appears to be the unraveling of years of corporate debt accumulation through merges and acquisitions seasoned with investment banking abuses as a result of unabated, unchecked and unparalleled corporate greed. What can rescue the economy?

WAR, RECESSION or DEPRESSION?

In the last paragraph of the June 2001 economic newsletter, I concluded that what we needed then was a war and that the war would have to be bigger than a regional war.

In a Letter to the Editor in The Financial Times (9/28-29/02), Daniel J. Arnoff, President/CE of The Landon Companies in Michigan wrote,

The historical record shows that the onset of every major war in the 20^th Century in which the US participated, from the outbreak of the first WW in 1914 to the Gulf war in 1991, was soon followed by a marked economic expansion. Since the domestic economy was often in recession at war's beginning, and since the onset of war coincided with significant increases in government expenditure to finance the war, economy theoryùboth Keynesian and monetaristsùpredicts an increase in gross domestic product resulting from the stimulus. If the economy is in recession and resources are under-utilized, the stimulus should increase employment and output and corporate profits. A war economy may pose risks if the private sector is operating at full capacity but that is not where the US is.

I have read a number of possible scenarios that could occur if we attack Iraq. Richard Maybury who writes Richard Maybury's Early Warning Report, said that Saddam Hussein has been able to keep peace between the three main groups in his country: the Kurds, Sunni Moslems and Shiite Moslems. If war erupts, these three groups will break up into 150 warring tribes that have the strong possibility of disrupting the ENTIRE Middle East. Furthermore, he writes that if Bush does not give Iraq back to the Turks who controlled it for four centuries, he will be in trouble. If Iraq is given back to the Turks, Bush will recreate the Ottoman Empire that was feared by Christian Europe.

Economist Paul Craig Roberts comments in the October 10-13 Washington Times Weekly Edition on Norman Podhoretz, who writes for the magazine of the American Jewish Committee. Podhoretz stated that it is not enough for the U.S. to only attack Afghanistan and Iraq, but that Bush needs to completely change the regime of the whole region. Podhoretz realizes that unless the US is willing and able to reconstruct the entire Middle East, invading Iraq will be like starting a Thirty Year War and that such a struggle would leave the U.S. exhausted and unable to confront the rising power of an ambitious China.

CONCLUSION

I think it is evident that America is weaker in many ways economically than it was a year or even two years ago. If we thought there was loss of confidence as a result of September 11, the deception of Wall Street puts us and the markets back to pre-1929 days. Compound this with the lack of debt that the consumer in 1929 and 1970 did not have. While the consumer was starting to take on more debt in 1990, it was less than it is today. The difference is the corporate debt excesses of the 1990s, market volatility, loss of consumer confidence and 30 and 40-year interest rate lows. War is not pretty and to be honest with you, I am totally against going into the Middle East. Your sons and daughters and grandsons and granddaughters will die. But if you look at history, this is how the world works.

Over the last two years, defense stocks have been the winners. Beginning at the end of 2001, gold stocks started to take off. Today, it appears they have reached a plateau.

Where to invest? There are always opportunities. I remember in March 2000, I recommended to a client that he invest a large amount in defense stocks. Well we were in the middle of the Nasdaq boom, he jumped all over the place. He had just been to a very prestigious meeting where a financial planner made a very impressive presentation about how tech stocks were going to go to Mars (since they were already to the moon). Well, he reduced the amount I recommended and we put more into tech stocks.

Gold and defense are still excellent investments. Most recently, I spoke with the co-portfolio manager of a favorite gold mutual fund. He tells me they have amended their investment opportunities to be able to now buy gold bullion. He feels that the next move will be the INVESTOR MOVING TO GOLD.

As I have mentioned on other occasions, I believe that there is a major shift from investments to tangibles: gold/silver, diamonds, art and antiques. All of these kinds of investments did well in the 70s. Are we going back to the 70s, I think we are which also means energy. While we cannot change how our spouse, child, parent or friend eats, we can change what we eat.

Lastly, is the current 1000 point rise a ruse (fake) as insiders manipulate the market in order to stop the hemorrhaging? Only time will tell. The economy, in my opinion, is being held up by small and medium size corporations which are closely held and not part of the manipulations of Wall Street. Did you know that half of all those employed in the U.S. work for companies with less than 500 employees and more than one third of all employed Americans, work for companies with fewer than 100 employees (FT 10/10/02,3).

In conclusion, we need to be informed and understand why the market is moving the way it is. In this newsletter I have tried to provide you with the BIG picture so that you can make good, sound investment decisions. With God's help, we will do so.