February 12, 2003

Client Communication Briefing

I feel that now is a good time for me to share my views on the markets, the geopolitical environ-ment and the war with Iraq which I believe may be just weeks away. All this uncertainty is the latest of an unending list of events that have made us all quite uneasy.

This uneasiness is reflected in the financial markets, with stocks dropping for four weeks in a row. After a quite optimistic start for stocks in the first ten days of 2003, the war fears, job losses and lack of confidence by business leaders knocked the market back down to levels we have not seen since the bottom last October. The main cause is the overhang of the geopolitical issues and as these are dealt with, markets will improve.

I have just returned from the annual TD Waterhouse Institutional Conference this past week where I heard from Former Secretary of the Defense, Casper Weinberger, Nobel Prize winner in Economics, Vernon Smith, Ph.D., Dean Jeffrey Garten, Dean of Yale School of Management and a number of institutional managers and economists. Their opinions, added to my world view, is reflected in the remainder of this Briefing.

The overwhelming consensus is that we will prevail with any military action and all institutions are in a state of paralysis until we see the beginning of that action. After the regime change in Iraq, expert opinions point to a continued war on terrorism with the next front to be determined by the events and actions of the terrorist organizations and the countries that harbor them. The war will most likely not be a military action, rather a battle in the economic, diplomatic and intelligence arena. Included on the list of countries are North Korea and Iran, but the worst of this war militarily will be in Iraq. For this reason I do not expect any recovery in the financial markets or confidence to return until either we start the military action in Iraq or Saddam gives up and quietly relocates to a retirement center for despots and dictators (which unfortunately is quite unlikely).

As the first wave of bombing starts and the fog of war rolls in, we will get a better idea of what to expect in post-Saddam Iraq. Are we going to see Saddam torch Iraq’s oil fields, thereby driving up the price of oil to levels we have never seen before, or will his Generals, whose loyalty to Hussein may evaporate like rain in the desert overthrow him before he can destroy the country with fire and weapons of mass destruction? And what kind of government will we see in post-Saddam Iraq? Three groups, the Sunnis, Shiites and the Kurds who have been battling for power for years need to cooperate in the rebuilding of a new Iraq. Will they put away their age-old religious differences and form a new, secular, representative government? In any case, we will prevail militarily and eventually Iraq will stabilize. With the vast natural resource of oil, Iraq can finance their own rebuilding and in the process oil prices will decline. A drop in the long-term price of oil will stimulate global economic activity better than any tax cut.

The cries for a diplomatic solution in Iraq now and North Korea later are a flawed position. Diplomatic solutions can only work when they are based on truth not lies – otherwise to attempt this solution is a mistake. Words are meaningless to liars – look at North Korea’s recent breaking of the nuclear non-proliferation agreement they signed in 1998. Prior to WWII, Hitler and Chamberlain had a diplomatic solution to avoid war. Less than 12 months later we saw a war where upwards of 12 million people perished before it was over. Over and over we see the cause of diplomatic failures coming from negotiations with pathological liars who use diplomacy as a time buying device.

We have always had a “peace crowd” wishing for diplomatic solutions to avoid war – after all, war is hell and should be avoided when possible. Even after we were in WWII as late as 1944, dissenters were suggesting that we should settle for something less than “unconditional surrender” from Germany and Japan to end the war and make peace. Their position was based on the theory that if the leaders of Japan and Germany were backed in a corner with nothing to lose, they would be even more dangerous than we had already experienced.

Imagine what the world would be like today if that position was followed and we did not eliminate those evil regimes. Arguably the mess we are dealing with in Iraq is because we attempted to use diplomacy in 1991 instead of finishing the job in Iraq with the removal of Saddam.

As we can see, times are very uncertain and we are at a turning point – or perhaps a point of no return. But just as we prevailed in WWII and the Cold war that followed, and our enemy then has become a member of our free market with open, democratic governments, I expect we will overcome the last of the world’s despots and dictators.

They harbor and support terrorists because of the alliance of hatred they hold against free people around the world. And what country best represents that freedom? None other than United States of America. That is why we are a target and that is why we must and will prevail.

When we prevail and the last of the despot regimes are liberated, globalization will hit full stride. Technology will continue to connect us and reduce the costs and barriers to trade. We will see the creation of wealth beyond our wildest expectations. History has shown that freedom and free people will prevail. Never take freedom for granted – it needs to be defended from tyrants.

I hope my views and observations provide some comfort in these trying times. I thank you for providing the opportunity for me to serve you as your advisor. I look forward to hearing your comments as we travel together towards better times. Please feel free to call or email any time.

Sincerely,

Michael P. Haubrich, CFP