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Letter to Clients

To Our Clients:

This note is being sent to you for two reasons. First, I am as skittish about the various stock markets around the world and in the United States as I have been in years and, secondly, to ask for your help.

At this moment, and I hope that by the time you get this my concerns will have proven unfounded, equity markets in the country seem poised on the edge of a significant correction. The issues, addressed by Neil Rose in the piece you received with your 2nd quarter statement, are coming home to roost. The mortgage meltdown is continuing and the carry trade is unwinding. Evidence of this is the collapse of several mortgage-related funds and the drop in price of banks, mortgage lenders, brokerage firms and insurers. While this sector comprises over 20% of the market as a whole, we consciously decided to underweight and eventually void portfolios of this sector well over a year ago. Except in very special situations, this process was completed well prior to the subprime problem.

Over the past several days we have pared your equity exposure by selling portions of your holdings in various stocks. We have done this to protect portfolio values and to raise cash which will serve as a buffer. There are strategies in place to continue this process should various “trigger” points so dictate. Presently, however, we are comfortable with a moderate level of equity exposure for most clients.

In the nearly 40 years I have been in this business, there have been several critical market junctures and I believe we may be rapidly nearing another one. While the mortgage debt problem is worrisome, it pales next to the prospect of larger government and the high tax rates that always go with it. By advocating an increase in the tax rate on corporate dividends to 40% from the current 15%, our aspiring political leaders also promise to proportionately cut the valuation on most common stocks. Combined with promised increases in the income tax and capital gains tax, they unknowingly will hurt not only the wealthy, but all Americans who save, invest and have retirement plans. Much of Wall Street does not feel that this is eminent or could occur prior to 2009-2010. We feel the issue may well be right around the corner when the budget process comes to a head this year. At the end of the day, we would not be surprised by the closing of government, which will be George Bush’s only recourse to stop a tax increase hidden in the budget. We will be watching this carefully.

Our commitment to you has always been that our first efforts will be to preserve the assets with which you have entrusted us. Rest assured that the Investment Committee has for many months been taking steps on your behalf as the result of our analysis; and, that plans are in place not only to protect your portfolios, but also to have you positioned to take advantage of unique opportunities which will surely arise.

Secondly, our communications with you in times such as these could be greatly enhanced if we have the ability to get them to you in as timely a way as possible. To continue working towards this end, please complete the enclosed communication form.

As always, thank you for your continued trust. All of us value it deeply.

About the Author


Harlan J. Cadinha
Founder, Chairman and Chief Strategist
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