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Quarterly Letter to Clients 

July, 1999

Indices at quarter-end (June 30, 1999):

Dow Jones Industrials:  10,970.80     2ndQ'99:   +12.11%   YTD:    +19.50%

Standard & Poor's 500:  1,372.66      2ndQ'99:    +6.71%    YTD:    +11.67%


The averages notwithstanding, it has not been a particularly eventful quarter.

Interest rates, as you know, were recently nudged a quarter-point higher by the Fed.  But the Fed has been telegraphing its moves lately, and traders had spent the entire quarter pressuring  bonds.  So when the actual hike arrived, there was relief; it was a small raise and the Fed indicated a neutral stance toward future hikes.  Stocks responded positively, but the major bond indices were negative for the quarter and year-to-date.

My conservative bent leads me, as you know, to convertibles, whose performance is often linked to bonds.  Thus, as interest rates rise, these issues fall.  I feel fortunate that my fixed-income investments (bonds, convertibles and preferreds) have managed to stay positive through this turbulent period.

By nature, I am not a gambler, especially with your money, and this personality quirk prevents me from buying the latest fad stocks--meaning, lately, the "dot-coms".  So when in the first quarter the internet issues helped the S&P to a strong advance, I did not participate in that move.  And in the second quarter, when the hot money fled the bursting bubble of the 'net, and ran to, of all places, the capital-goods sector, that predisposition precluded me from purchasing the "rust-belt" issues that were largely responsible for the Dow's advance in that period.

Sometimes I feel like I'm driving in the middle lane and cars are passing me on both sides.  But I don't mind.  I have my safety belt on and I'm not in a hurry.  I know from experience that my methods will produce satisfactory returns without the gut-wrenching free-falls that attend momentum investing.  In this business, if you can't get used to the ups and downs, relative and absolute, you won't last long.

It's a form of mid-life crisis when you realize that you no longer want to take the risks that have gotten you to a certain level of comfort.  And just as I seek companies that are able to manage change, so, too, must I be able to manage change.  But managing change does not necessarily mean abandoning methods that are tried and true.  Nor does it mean taking untenable risk.

I look to invest in companies with solid growth and good prospects, combined with a strong balance sheet.  I seek out companies that are able to change with their markets, companies that will survive and thrive for the foreseeable future.  While they may not have glitz and glamour, they do have staying power.  I feel able to understand their businesses, and I know that their businesses will not be displaced next week.

While their stock prices may not be on the same timetable as other areas of the market, such companies will be viable for a long period to come, and their securities, whether stocks, bonds or convertibles, will prove rewarding holdings over the longer term.  I am certain that, with time and patience, I will attain my goals and yours through such investments.

Jim Pappas

copyright 1999 JPIC