To: Account Executives, Friends and Allies

From: Andrew E. Beer, Chief Investment strategist for the AFS Group

Date: August 14, 2000

Considerable volatility and many cross currents characterize the stock market even though the major averages have been consolidating in a trading range.

Recently there has been a tendency for investors to focus on the reliable quality growth stocks, many of which have stagnated over the last year or two. These stocks are among the most heavily weighted in the Dow Jones Industrial Average and the Standard and Poor's Index 500. Hence, we expect that the DJIA and the S & P 500 stocks may lead the market higher with the Nasdaq following suit eventually as well.

Inflation remains muted nor do there seem to be signs of an acceleration. Probably the curtailment of inflation is due much more to productivity gains than to the six increases in interest rates generated by the Federal Reserve over the last year. The increases in interest rates probably did not bring about any significant slowdown in the economy until the Federal Reserve worried investors by its concern over the wealth effect and raised interest rates by ˝ of 1% during May. Thereafter stock prices softened especially for high technology stocks and some indications of the economy slowing have shown up. In fact, it may well turn out that the economy is cruising along at a rate about twice as fast as the Federal Reserve would prefer it to, without coming in to a soft landing, and quite surely not for a hard landing.

If the economy does cruise along at 5 or 6% annual growth for a few months, there should be less pressure on earnings than if a slowing occurs, but investors may be nervous about whether or not the Federal Reserve would risk being condemned for raising interest rates until well after the election, if at all. It seems also likely that the Federal Reserve is carefully reviewing its premise that inflation would be stimulated with the unemployment rate at about 4% in the light of current circumstances, particularly in light of the strong rate of productivity gains.

We believe investors will favor more conservative stocks for a while, but eventually will refocus on some of the fastest growing high technology stocks at more reasonable multiples of anticipated earnings.