April 4, 2002

To Our Clients and Friends:

Two years ago in March the NASDAQ peaked at 5,049 and has since fallen 60%. Six months ago in September the markets reached a bear market low. How bad has it been the last two years? You have to look no further than the Bay Area. Of the over 500 Bay Area companies, 410 are trading lower today than two years ago, and 163 have fallen over 90 percent. The median performance of these companies was a negative 72 percent. Not a good two years. In fact, you have to go back to 1973/74 to find two consecutive years as brutal as the last two. Even the world's greatest investor, Warren Buffett, has endured a rocky road. His top five holdings were all down over the last 12 months. The average loss was 19%. It has been a tough climate for investors. But Warren Buffet is a model investor. He is a long term investor who cares little about the short term. He practices infinite patience and diversification which are the cornerstones of our investment philosophy.

Market Review

Arthur Burns, Chairman of the Federal Reserve in the 1970's said "never underestimate the inherent resilience of the U.S. economy." It seems as though the recession that was just declared a few months ago is looking very mild. Before Sept. 11th, the U.S. economy was teetering on the precipice of a recession. After the attacks, the first recession in 10 years became a reality and the outlook turned far bleaker. Some forecasters said the recession could be long and deep. But businesses cut costs, Congress opened up its pocketbook, and mortgage rates fell. All of these actions blunted the recession and started the recovery we are now in. Even Alan Greenspan has noted that a recovery has begun. The improving economic news has driven the stock market's recent surge. Consumer confidence has been steadily rising, and Wall Street's increasing optimism has helped also. For the first time in months, investors are thinking more about buying than selling. That change in attitude is the latest indication that a market and economic turnaround might have started. Yet, investors will be watching the earnings reports carefully after two years of disappointments. As earnings season begins in April, expectations are higher that more companies will report business is improving. Time will tell, but expect the stock market to seesaw back and forth over the next several months.

What to Expect

The U.S. Economy appears to be steaming out of recession, confounding the broad-based expectations of experts. Economists are raising their estimates of growth in the U. S. economy to the 4% range. Such a robust rebound would be extraordinary considering the shocks the economy has sustained in the last two years: the bursting of one of the biggest speculative stock bubbles in U.S. history, a spike in energy prices, terrorist attacks, and the collapses of Enron and Argentina, Latin America's third largest economy. If the economy continues improving, the stock markets will move upward cautiously especially if corporations resume capital spending later in the year. Maybe Arthur Burns had it right.

As usual, please feel free to call us. We are here to answer your questions, respond to your concerns, and help you make smart decisions about your money. Remember, as Yogi Berra said, "If you don't know where you are going, you might not get there." In our world, that means it is difficult to achieve your investment goals without having a solid investment plan.

Very truly yours,

ZRC Financial Services, LLC
A Registered Investment Advisor

By:
         Richard P. Clarke

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