July 9, 2002

To Our Clients and Friends:

Déjà vu

"To the question, What has gone wrong in the stock market? There can only be one real answer: the market came down because it had gone too high. It fell precipitously and for some people ruinously because so many stocks had so far to fall before they would reach any firm and solid foundation. It was such a vast bull market, rising so spectacularly, that anybody with eyes was bound to see it and anyone with a normal quota of human greed was bound to hanker to climb aboard. Over the past eight years, millions of new investors jumped into the market for shares listed on the New York Stock Exchange. When they ran out of growth stocks on the Big Board of the American Stock Exchange, people turned to the new issues traded over the counter. There were new companies with untried management, small earnings and dubious prospect - with nothing but a prayer and a catchy space-age name - which were bid up as much as 400% within a few months."                  From 1962 Life Magazine article after Dow dropped more than 20% to 550.

The volatile U.S. stock markets are very similar to a manic depressive child. One minute everyone is focused on doom-and-gloom scenarios (a floundering economy, the threat of further terrorist attacks, weak corporate profits, high debt levels), and then the next minute everyone is scrambling to BUY, BUY, BUY for fear of missing the next big rally. Meanwhile, the talking heads in the press and on TV seem to oscillate back and forth between these two extremes.

"Don't get caught in the bloodbath. Don't lose your shirt!" the bears yell.

"Don't miss the next big rally. Things will be okay!" the bulls shout.

What gets lost in all of this deafening noise? The truth.

No one can predict the future, but we sure can learn from the past. And if over 100 years of market history have taught us anything, it's that a reasonable, focused, long-term-oriented market strategy is the only way to go. Low points in cycles don't endure anymore than high points do. All markets have cycles including stock, bonds, gold, diamonds, real estate, interest rates, etc.

Market Review - Fear Factors

The markets are going down while economic news continues to be mostly good. This is irrational and a sign of investor capitulation.

Look beyond the economy for reasons why the stock market is moving lower. Look to the Middle East, where violence exploded once again. Look to the border of India and Pakistan, where the threat of war continues, despite continuing diplomatic efforts to diffuse the tensions. Look to American courthouses and Congressional committees, as investigations of corporate impropriety continue to take center stage in the business world. And, as the end of the second quarter draws near, look to companies confessing that they may not hit their earnings targets. For investors it was another quarter of fears and frayed confidence.

All of this worked together to overshadow increasing evidence that while the American economy may not be soaring, it is steadily improving.

What the market needs is simply time. Time for the world to settle down. Time for the clearly improving economic news to impact investor psychology. And time, finally, for all excesses of the final months of the great bull market to work themselves off. Those of us who have seen a few bull and bear markets know that this is really a matter of time. We believe the probability of a stock market rally is growing. We think the equity markets are oversold and in the process of making bottoms from which sustainable rallies can occur. In the investor community at this moment, there is a lot of fear and not much greed, a good sign for a market bottom. My guess is that the bearishness and selling have been overdone.

So how do depressed markets regain their health? Perhaps not surprisingly, in the exact same way that depressed people do. Long before things get much better, they stop getting worse. The selling and negativity continues, but stock by stock and sector by sector, issues stop making fresh lows.

Stock market declines are tough reminders of how important sticking to the investment plans and fundamentals can be.

Office Update

Karen Contos attended the Financial Planning Association conference in June. At the conference, she participated in six seminars: Monte Carlo Analysis, What Women Want from a Financial Planner, Retirement Spending Strategies, Life Planning, Real Estate Macro Trends, and Social Security - from Mystery to Mastery. Many distinguished speakers led the seminars, including Bob Veres, formerly from Morningstar and Dr. Clay Singleton, from Ibbotson & Associates. Karen found the seminars to be invaluable and useful to ZRC Financial Services in their ongoing efforts to be a trusted financial resource to its clients.

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 come to a fork in the road, take it." 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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