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					       The Peter Dag

        Portfolio Strategy and Management
                                The right advice. At the right time. Depend on it.

Vol. 26 No. 4                George Dagnino, Ph. D. , Editor             www.peterdag.com                               2-25-02


                                                               cruising the Cape Cod area: Nantucket, Marta’s
   Dag’s Commentary                                            Vineyard, Newport, and Block Island. Wonderful places.

A phone call. I was working with my assistant,                 “My wife died”, he said. Suddenly. A friend in pain. I
reviewing my clients’ portfolios. We were analyzing            screamed with rage.
their performance and thinking about ways to improve
returns. Should we sell some of XYZ and buy more of                         -----------------------------------------
ABC?

The stocks and mutual funds in the portfolios were
compared to benchmarks. How can I reduce the                        Portfolio Strategy
volatility within the limit of my strategy? I do not
believe diversification is the answer to minimizing            History repeats itself. “The business cycle moved
volatility. If one diversifies too much, he/she risks          beyond configuration F.” This is a simple statement. As
mimicking the market averages. The answer lies in              I read it, it sounded dry, boring, and lacking any call for
finding stocks and mutual funds with low volatility.           action. Yet, I thought about it for hours, after analyzing
                                                               all the most recently available data. I believe it is an
The financial TV channels were reporting the latest            important statement because it has significant investment
news. The market seemed strong. The dollar was firm.           implications.
Good. Gold was still trading around $300. It was
surprising, given the sharp move of the past few weeks.        The business and financial environment is changing.
The fact that it was not correcting was good news,             What is happening now has been put in motion 1-2 years
because it meant there was more buying power than I            ago. The fact that the US and the global economy are
thought.                                                       turning around (more details below) is crucial. It will set
                                                               in motion important developments in the next 1-2 years.
The sun was filling the room where I work with its
bright light. Finally. In this part of the country it is an    As the business cycle goes through its various
event we celebrate. The many plants around me also             configurations (see my book Profiting in Bull or Bear
seemed to enjoy the view of the sun. The lake was still        Markets, chapter14), some assets tend to under-perform,
frozen. A cold, bluish color. My yellow kayak, still on        while others are likely to outperform the averages. As
the dock, added some color. I keep it there, hoping that a     some of you noticed, the stocks I have been
heat wave melts the ice and I can go out on the lake. A        recommending have different profiles from those of last
dream for this time of the year. But I am ready.               year.

I was really at peace, enjoying my work. Thinking about        The patterns continue to repeat themselves with amazing
history. Strategizing. Trying to find the ideal solutions      regularity.
for my clients. Executing my ideas. Trying to time them
in tune with the markets. It is exciting. The adrenaline       In 1995 the economy was growing slowly. A strong
moves rapidly when decision time comes. Measuring my           injection of liquidity by the Fed caused business to grow
performance is even more demanding.                            rapidly in 1997-1999. Not even the Asian, Russian, and
                                                               Latin American crises could slow it down. Because of
Suddenly the ring of the phone broke into my world. It         the strong economy, short-term interest rates soared
was Bob, my sailing buddy. We had great times together         from 4% to 6% in 1999 and 2000. Commodities matched
                                                              2
the rise in interest rates, with natural gas jumping from
$2 to $10.                                                              Financial Markets
In 1999, because of the increase in interest rates,                               The stock market
borrowing began to subside and liquidity slowed down.
The market averages started to sputter as the Nasdaq’s
                                                                  The stock market cycle is in the same position as in mid
bubble kept inflating.
                                                                  1998. Short-term rates have stopped declining, and it is
                                                                  no coincidence that the money supply is beginning to
In 2000 the economy grew more slowly because of the
                                                                  slow down. In fact, I believe we have seen the peak in
delayed effect of less liquidity. As the economy
                                                                  the growth in liquidity for this cycle (which started in
weakened, short-term interest rates and commodities
                                                                  late 2000).
peaked in 2000 and declined in 2001. Copper weakened
from $0.90 to $0.60, and natural gas sagged to $2 from
                                                                  Monetary aggregates, although slowing down, are
$10.
                                                                  expanding at a historically torrid pace. Commodities are
                                                                  bouncing off a bottom. The economy is gradually
In late 2000, because of declining interest rates, demand
                                                                  coming out of a period of slow growth. The scenario is
for money increased, and liquidity began to rise sharply
                                                                  the same as in mid 1998.
in 2001 (as it happened in 1995). A new cycle was
underway. The advance-decline line headed higher, as
                                                                  This is an environment where you cannot throw darts at
the majority of stocks firmed.
                                                                  the stock page and make money. In other words, you
                                                                  have to be selective and have a sound strategy in place.
In 2002 the economy is showing signs of turning
                                                                  The averages will provide you with little or no guidance
around, lagging the impact of higher liquidity by the
                                                                  on the strength of the market.
typical 1-2 years. Like in 1997, professional economists
are now skeptical that business can be robust in 2002
                                                                  The advance-decline line is reflecting a sound market.
because of the problems we are facing. But the economy
                                                                  The dollar is strong. Short-term interest rates are stable.
has turned the corner and the positive news will feed on
                                                                  Investors’ sentiment is somewhat bearish, which is
itself and the vigor of the business activity will surprise
                                                                  bullish from a contrarian viewpoint. These are all
us all.
                                                                  favorable developments for stocks.
In early 2002 the business cycle is in the exact position
                                                                  I need to emphasize, however, the importance to be
it was in mid 1998. Now, as then, the economy is
                                                                  selective and buy the sectors that have historically done
beginning to turn around. Now, as then, short-term
                                                                  well in this environment (see below for more details).
interest rates and commodities have stopped declining.
They are likely to trade in a range for the next several
months as the economy gradually, but steadily, gains                               Sector analysis
momentum. Commodities will eventually rise with
surprising strength because of the excessive easing of the        The charts showing the analysis of the major Dow Jones
Fed in the past 2 years (see below for more details).             Industry Sectors and their relationship with the business
                                                                  cycle are found on our website www.peterdag.com.
If history repeats itself, why not learn from it. From an
investment strategy viewpoint, if I am correct that the           The sectors that are likely to outperform the broad
current position of the business cycle is the same as in          market averages are: real estate, industrials, energy,
mid 1998, bonds and financial stocks are out.                     basic materials, and precious metals. The other sectors
Commodity based stocks are in.                                    are ranked as under performing, or neutral.

Our model portfolios and stock recommendations                                Foreign interest rates
will continue to reflect this view and will emphasize                          and equity markets
gold and precious metals, energy and crude oil, natural
gas and industrial materials, pipelines, REITs, and               There is no doubt the global economy is turning around.
tobacco. These sectors are also attractive because they           All the major industrialized countries are gaining
are out of favor and reflect great value. This is the main        strength in perfect synchronism. Even Japan’s economy
reason they are holding up so well.                               is rebounding. The UK is the only major country
                                                                  struggling at this particular point in time. The charts
                ------------------------------
                                                                3
showing the current business cycle position for the major           On the other hand, real short-term interest rates are too
economies are shown on the Internet version of this                 low and inflationary. The strength in gold and other
advisory.                                                           commodities suggests the system has an inflationary
                                                                    bias. I still believe the odds favor higher yields ahead.
Foreign bond yields have an upward bias, reflecting a
strengthening global economy. Foreign short-term                                       Commodities
interest rates have stopped declining in perfect
synchronism with US rates. The dollar remains strong,               There is an amazing synchronism between commodities
which makes foreign equity markets unattractive.                    and short-term interest rates. Commodities stop
                                                                    declining as soon as the economy strengthens. They will
          Short-term interest rates                                 remain in a trading range. The seesaw will continue until
                and the Fed                                         there is more evidence the economy is strengthening.
                                                                    Then, they will start rising, accompanied by higher
The Fed is trying very hard to keep short-term interest             short-term interest rates.
rates below the level dictated by the market. Here is an
example.                                                            This is a good time to buy basic material stocks.
                                                                    Commodities are showing no trend and few investors are
There is a trade that is providing riskless returns for             paying attention to these stocks. Their low PE reflects
professional bond investors. This trade is based on                 this assessment. See our recommendations below. When
buying 5-year Treasury notes and selling them after one             the underlying commodity begins to rise, buying stocks
year. The total return (capital gain plus interest) is higher       in companies producing basic materials will be too late.
than the yield on the long-term Treasury bond. This
trade is profitable thanks to the steepening part of the                The business and financial cycle
yield curve between one and 5-year maturities.
                                                                    The most recent data show the following trends:
The Fed is distorting the market mechanism by keeping
short-term interest rates below market rates. And                   •   The ISM index (non-manufacturing) reflects a firm
professional traders are taking advantage of it. Market                 service sector.
rates should be somewhere between 3% and 4%. At                     •   Retail sales declined.
these levels the above trade would not be profitable.               •   Industrial production displayed a minor decline. It
                                                                        may be a sign the manufacturing sector is ready to
Meanwhile, lending officers are still keeping lending                   increase badly depleted inventories.
standards tight, which is typical at this point of the              •   Consumer confidence declined.
business cycle. Bankers are also reporting that business            •   Productivity was strong enough to bring down unit
loans are not improving. It is no surprise, given the high              labor costs.
spreads they are charging (see charts on the Internet).             •   Inflation at the producer level continues to decline.
Monetary aggregates are still rising at a torrid pace. The          The business cycle is past configuration “F”. This is
monetary base, which represents “raw” money, is also                characterized by:
growing rapidly, suggesting the Fed is determined to
keep short-term interest rates below market rates. Of               •   Leading indicators rising very sharply, pointing to
course, this is terribly inflationary. The Federal Reserve              a strong economy in the next several months
of St. Louis also mentioned this risk of inflation in a                 (coincident indicators).
recent publication on monetary trends.
                                                                    •   Coincident indicators (the economy) have turned
                                                                        around, pointing to stable and then rising
                    Bond yields                                         commodities, short-term interest rates, and inflation
                                                                        (lagging indicators).
Treasury bond yields are not rising as I anticipated.               •   Lagging indicators, such as inflation and growth in
Why? It is very difficult to answer this question. It is a              unit labor costs, and growth in consumer installment
fact that inflation is low and declining. Unit labor costs,             credit, are still declining. Others, such as short-term
for instance, have peaked and are heading down.                         interest rates and commodities, have bottomed.
Inflation at the producer level is well under control. The
dollar is reflecting the favorable inflation news by
remaining strong. This is bullish news for bonds.
                                                                       4
The current business cycle configuration is still                           REITs ………........................           5%    5%      5%
favorable for stocks. However, risk is gradually                             Healthcare …………………                         0%    0%      0%
increasing and selectivity is becoming very important.                       International stocks...............        0%    0%      0%
                                                                           Corporate bonds and utility stocks          20%   20%     20%
For a detailed analysis and graphs of the indicators                        Utility stocks..........................    0%    0%      0%
discussed in this issue and a review of the current                         High grade bonds..................          0%    0%      0%
position of the business cycle, we recommend that our                       High yield bonds....................       20%   20%     20%
subscribers download the Internet version of this service                  Money market instruments ...                 0%    0%      0%
(about 20 pages) at our website www.peterdag.com. It
                                                                               Past performance does not guarantee future results.
is an absolutely free service for the exclusive use of
the subscribers of The Peter Dag Portfolio Strategy
and Management. Please send us an e-mail showing
your name, address, and phone number. We will be glad                      Vanguard
to send you the information you need to access our                         Mutual Fund Model Portfolio
service.
                                                                           This portfolio is designed for those investors seeking
The powerful relationship between these indicators and                     long-term capital growth with low volatility of returns.
how it can be used in your investment program is also
discussed in detail in my book Profiting in Bull or Bear                   Recommendations: No changes are recommended at
Markets.                                                                   this time.
                  -------------------------
                                                                           The portfolio is now invested in the following Vanguard
                                                                           mutual funds:

                                                                           Stocks: Selected Value (VASVX) (30%)
                    Portfolio                                                       Wellesley Income (VWINX) (20%)
                                                                                     REIT Index (VGSIX) (5%)
                   Management                                              Inflation hedge stocks: Gold (VGPMX) (25%)
                                                                           Bonds: High-Yield Corporate Bond (VWEHX) (20%)
                                                                           Money market instruments: Prime Portfolio (0%)
Recommended asset allocation
                                                                           Portfolio performance. This model portfolio was
When our indicators reveal growing risk, we recommend                      started in January 1979. The value of the portfolio
you increase your cash position earning money market                       increased +1.7% (S&500: -1.6%) in January. This real-
returns. We build up the cash position gradually as risk                   money portfolio was up +3.4% in 2001 (S&P 500:
increases. When risk decreases, cash from the money                        -13.0%), and gained 0.9% (S&P500: -10.1%) in 2000.
market account is invested in various assets depending
on the opportunities.                                                      Please note, as pointed out by one of our subscribers,
                                                                           that Vanguard Select Value Fund requires a $25,000
This disciplined approach has been successful through                      minimum to get in and imposes a 1% redemption fee for
many market cycles and has reduced the volatility of the                   shares held less than five years. This type of hidden
returns and the risk to your portfolio.                                    loads is absurd.

The following asset allocation is only a guideline. The                    Alternative Vanguard mutual funds you can use are:
amount you invest in each asset depends on your                            Vanguard Wellesley (VWINX) and Vanguard Small
investment objectives and how aggressive you are in                        Cap Value Index (VISVX).
your investment approach.
                                                                           When we recommended Selected Value all these
As of 2/25 our proprietary indicators suggest you should                   restrictions were not in place. Vanguard is becoming
maintain the following asset allocation:                                   increasingly more selective of what type of investors
                                                                           they want. However, you can rest assured I will
                                                  2/25   2/11   1/28       continue to manage this flagship portfolio. It’s my
Stocks.........................................   80%    80%    80%        money.
  Domestic stocks......................           50%    55%    60%
  Gold stocks.............................        25%    20%    15%        This portfolio outperformed the Wilshire 5000 Total Return
                                                                           Index (risk adjusted) in the 1987-1994, 1987-1995 and 1987-
                                                                5
1997 periods (Source: M. Hulbert). On a risk-adjusted basis,        STOCKS                              DATE            PRICE
it was ranked No. 3 for total return for 10 years (Hulbert).                                          BOUGHT          CHANGE
The portfolio never had a down year since its inception. This
portfolio was ranked No.4 for its performance over 15 years         Enterprise Prod. Prtn. (NY: EPD) 11-29-01           +1.25%
and outperformed the Wilshire 5000 (timing only, risk               Lexington Corp (NY: LXP)           8-3-01           +2.87%
adjusted).                                                          Harbor Fl. Banc. (NY: HARB)       6-15-01          +15.95%
                                                                    Conmed (NY: CNMD)                 7-19-01           +4.12%
This portfolio outperformed the Wilshire 5000 Total Return          Philip Morris (NYSE: MO)         10-19-01           +4.13%
Index for 15 years. In 1999 its return was 4.5%. The 2000           UST Inc. (NY: UST)                6-15-01          +21.86%
appreciation was 0.9%. Risk: very low (Source: Hulbert).            Public Storage (NY: PSA)          2-15-02           +0.19%
                                                                    Phillips Petr. (NY: P)            8-13-01           -3.29%
                                                                    Nucor Corp. (NY: NUE)             7-29-01          +19.62%
Fidelity                                                            Plain All Am. Pip. (NYSE: PAA) 4-27-01              +2.75%

Mutual Fund Model Portfolio                                         The price of CONMED has been adjusted for stock splits.

This portfolio is managed more aggressively than the                 Portfolio performance. $100,000 invested in November
Vanguard portfolio and is designed for those investors              1995 would have grown to $190,067, or +90.68% (S&P 500:
seeking long-term capital growth with low volatility of             +84.01%). This portfolio is outperforming the S&P 500.
returns.                                                            Please note that this performance does not include
                                                                    commissions and dividend reinvestments.
Recommendations: Exchange 5% of your portfolio
from Cash Reserves to Fidelity Select Industrial                    This portfolio outperformed the Wilshire 5000 Total Return
Materials fund. The portfolio is now invested in the                Index in 1997 with a return of 35.5%. Its yearly gain for the
following mutual funds:                                             three years ending in 1998 was +22.7%. The 1999 return was
                                                                    25.4%, outperforming the Wilshire 5000 Total Return Index
Fidelity Value (FDVLX) (20%)                                        and it lost 28.3% in 2000. Risk: high (Source: Hulbert).
Fidelity Gold (FSAGX) (15%)
Fidelity Select Medical Delivery (FSHCX) (10%)
Fidelity Industrial Materials (FSDPX) (5%)
Am. Century Small Cap Value (ASVIX) (10%)
                                                                    Dag’s Exclusive Picks
Boston Partners Small Cap Value (BPSCX) (10%)
Oakmark Eq. & Inc. (OAKBX) (10%)                                    Recommendations:
UAM Crescent Portfolio (FPACX) (10%)
                                                                    • Buy: Westcoast Energy (NYSE: WE). Recent price:
Rydex Juno (RYJUX) (10%)
                                                                       $26.65 on Feb 21, 2002 @ 9:00am ET.
Money market instruments: Cash Reserves (0%).
                                                                    • Buy: Libert Property Trust (NYSE: LRY). Recent price:
                                                                       $30.00 on Feb 21, 2002 @ 9:00am ET.
Portfolio performance. This portfolio was started in
1994 with an initial investment of $100,000. It increased           Westcoast Energy Inc. is organized into the following
+1.9% in January (S&P 500: -1.6%). This real-money                  major business segments: Transmission and Field
portfolio declined –2.2% in 2001 (S&P 500:                          Services, Gas Distribution, Power Generation,
-13.0%), and gained 3.7% in 2000 (S&P 500: -10.1%).
                                                                    International and Services. The Company owns and
                                                                    operates facilities and businesses relating to natural gas
For those subscribers who cannot invest in non-Fidelity
                                                                    gathering, processing and transmission. Union Gas
mutual funds we recommend Fidelity Low-priced
                                                                    Limited, a wholly owned subsidiary of the Company, is
Stock Fund.
                                                                    engaged in the transportation and storage of natural gas
This portfolio had an average gain of 13.3% per year for the        and the distribution of natural gas to residential,
5 years ending in 1999. In 1999 it appreciated 13.4% and            commercial and industrial customers in Ontario.
3.7% in 2000. Risk: low (Source: Hulbert).                          Through subsidiaries, the Company wholly owns natural
                                                                    gas fired cogeneration plants at Fort Frances and
                                                                    Windsor, Ontario and a natural gas fired cogeneration
                                                                    plant on Vancouver Island, which is being
The Equity-10 Model Portfolio                                       commissioned for service.
Recommendations: No recommendations are made at
                                                                    WE, through its four divisions, provides pipeline
this time.
                                                                    storage, transportation and services; engages in natural
                                                               6
gas distribution; provides power generation; and pursues            Lancaster Clny (NS: LANC)       10-15-01         +13.12%
energy ventures. For the nine months ended 9/30/01,                 Lear Corp. (NY: LEA)             9-25-00         +90.56%
revenues rose 68% to C$9.53 billion. Net income                     Lexington Prop. (NY: LXP)        7-30-01          -1.51%
applicable to Common rose 70% to C$361 million.                     Liberty Property (NY: LRY)       2-25-02              NA
Results reflect a strong performance by British                     Meridian Gold (NY: MDG)         12-26-01         +23.76%
Columbia Pipeline and Field Services operations and an              Natl. Home Health Care (NS: NHHC)8-27-01          +8.72%
increase in investment income.                                      Nucor Corp (NY: NUE)              4-9-01         +50.99%
                                                                    Plum Creek Timber (NY: PCL)     12-10-01          +6.37%
For the 3 months ended 12/31/2001, revenues were                    Sappi Ltd. (NY: SPP)             6-11-01         +20.85%
2,364,000; after tax earnings were 175,000.                         Seacoast Fncl Svcs (NS: SCFS)    7-16-01         +24.67%
(Preliminary; reported in thousands of Canadian                     Suburban Propane (NY: SPH)      10-29-01          -6.96%
Dollars.)                                                           Sunoco Inc. (NY: SUN)            1-14-02          +1.47%
                                                                    Teekay Shipping (NYSE: TK)       9-29-01          +6.83%
                                                                    UST Inc. (NY: UST)               2-05-01         +28.59%
Liberty Property Trust is a self-administered and self-
                                                                    Westcoast Energy (NY: WE)        2-25-02              NA
managed real estate investment trust. Substantially all of
the Trust's assets are owned, directly or indirectly, and
                                                                    The price of CONMED, KIM has been adjusted for stock
substantially all of the Trust's operations are conducted,
                                                                    splits.
directly or indirectly, by its subsidiary, Liberty Property
Limited Partnership. The Company provides leasing,                  Note: NS stands for NASDAQ, NY for NYSE, and A for
property management, acquisition, development,                      AMEX.
construction management, design management and other
related services for a portfolio that, as of December 31,
2000, consisted of 652 industrial and office properties
totaling approximately 48.2 million leaseable square
feet.

LRY is a REIT providing leasing, acquisition,
development, property management and other related
services for properties located in the Southeastern, Mid-
Atlantic and Mid-Western U.S. For the fiscal year ended
12/31/01, revenues rose 10% to $587.2 million. Net
income applicable to Common before extraordinary
items rose 3% to $155.5 million. Revenues reflect an               George Dagnino, Ph.D., Editor & Publisher. Since 1977.
increased number of properties in operation. Earnings
were partially offset by higher property expenses.                 Please write or call us:
                                                                   Peter Dag & Associates, Inc.
The portfolio is currently invested in the following stocks.       65 Lakefront Drive, Akron, OH 44319-3698

STOCK                            DATE      PRICE                   Phone your orders: 800-833-2782, 330-644-2782
                             RECOMMENDED CHANGE                    Fax credit card orders: 330-644-2798
                                                                   E-mail orders: gdagnino@peterdag.com
Archstone (NY: ASN)               11-29-00          +8.02%         Subscribe on our website: www.peterdag.com
Bedford Prop. (NY: BED)            7/30/01         +13.36%
Chevron (NY: CVX)                  7-16-01          -6.78%
CONMED (NS: CNMD)                  6-25-01         +29.56%         ISSN 0196-9323. 24 issues per year: $295
Enterprise Prod Part. (NY: EPD)   11-26-09          +2.86%
FirstEnergy (NY: FE)              10-29-01          +2.55%
Frontier Oil (NY: FTO)             1-28-02          -0.79%
Gold Fields (NS: GOLD)              4-9-01        +100.97%             The next issue will be mailed on March 8, 2002
Harbor Fl. Banc. (NS: HARB)        3-19-01         +27.90%
Home Prop. of N.Y. (NY: HME)       2-11-02          -3.01%
Idacorp (NY: IDA)                 10-29-01          +6.13%
Imperial Oil Ltd. (A: IMO)         6-11-01          -2.15%
Kadant Inc. (A: KAI)               9-29-01         +10.21%               The content of this advisory is copyrighted
Kimco Realty (NY: KIM)            12-11-00         +12.65%
                         BUSINESS AND FINANCIAL CYCLE DEVELOPMENTS

                                                 As of 2-25-02

The following information and charts are provided to our subscribers to support our analysis, forecasts, and
recommendations. They closely reflect the approach to managing portfolio risk as discussed in Dr. George
Dagnino’s book Profiting in Bull or Bear Markets.




                                                      You are here
                  1999




 STOCK MARKET AND
 MONEY SUPPLY
                                                  2001




                            2000
                                                                 2002
 THE ECONOMY




                                       2001
                                                              2002       2003

 COMMODITIES AND
 INTEREST RATES



The business cycle moved slightly beyond configuration “F”. The news on the economy will continue to
improve.
              • Leading indicators: rising
              • Coincident indicators: beginning to rise
              • Lagging indicators: declining

This configuration remains favorable for stock prices and will be in place for the next few months. Commodity
driven stocks will perform well in this environment.
                LEADING INDICATORS: POINTING TO A STRONG ECONOMY IN 2002-2003

100
                                        PROPRIETARY LEADING INDICATOR




 50




     0




 -50




-100




-150
         1955              1965                1975                           1985     1995


                      This gauge is pointing to a strong economy in the coming months.


                                                  YIELD CURVE
 5
                                               10 year yields less-T.Bills

 4


 3


 2


 1


 0


-1


-2


-3
     1955                 1965                1975                           1985     1995


                       The steepness of the yield curve is pointing to a strong economy.
               COINCIDENT INDICATORS: THE ECONOMY WILL CONTINUE TO IMPROVE

 550
                                                             UNEMPLOYMENT CLAIMS
                                                                 4 weeks mvg avg, thousands
 500


 450


 400


 350


 300


 250
        1993               1995                   1997                              1999              2001          2003

                 Unemployment claims are declining, a sign that the economy is strengthening.



                                                         RETAIL SALES
16
                                              3 months mvg avg of % change, 12 months


14


12


10


 8


 6


 4


 2


 0


-2
 1979              1982       1985         1988                 1991                    1994   1997          2000   2003



                             Retail sales are not strong, but are at a turning point.
                                            INDUSTRIAL PRODUCTION
15                                         Percent change, 12 months



10




 5




 0




 -5




-10
   1982        1985          1988             1991              1994         1997    2000          2003


                      The manufacturing sector is at a turning point.


 60
                                     CONSUMER CONFIDENCE
 50                                          University of Michigan
                                             % change, 12 months
 40

 30

 20

 10

  0

-10

-20

-30

-40
      1978   1981     1984          1987             1990             1993   1996   1999    2002

                         Consumer confidence is at a turning point.
                               LAGGING INDICATORS:
            POINTING TO MORE STABLE GROWTH IN THE LEADING INDICATORS

25
                                    CONSUMER INSTALLMENT CREDIT
                                         % change, 12 months
20



15



10



5



0



-5
  1978         1981       1984       1987        1990        1993           1996   1999      2002


                              Consumers are borrowing at a slower pace.



 20                               CONSUMER CREDIT AS % OF INCOME
                                   Installment credit and personal income
 19


 18


 17


 16


 15


 14


 13


 12
     1978       1981       1984       1987        1990        1993          1996   1999     2002


     Consumers are heavily in debt. This is one of the reasons they are borrowing at a slower pace.
380                                                                                                                  290

                                                        CRB COMMODITY INDICES
360                                                 Raw industrials (spot) and CRB futures
                                                                                                                     270

340



320                                                Industrials                                                       250



300

                                                                                                                     230

280



260                                                                                                                  210



240

                                                                                                                     190

220

                                                                                                Futures
200                                                                                                                  170
      1987         1989       1991          1993                 1995          1997          1999          2001   2003


                    Commodities remain firm, a reliable sign the economy is improving.



                                                   NATURAL GAS AND T. BILLS
11
                                                     Gas:$/MMbtu; T. Bills: %
10                                                                                                                       7.0

 9
                                                                                                                         6.0
 8

 7                                                         T. BILLS
                                                                                                                         5.0
 6

 5
                                                                                                                         4.0
 4

 3                                                                                                                       3.0
 2
                                                                                NATURAL GAS
 1                                                                                                                   2.0
      1996           1997            1998             1999              2000             2001             2002    2003


             Natural gas is at an important bottom, making natural gas driven stocks attractive.
                                                                                                           6.5
                                     CRUDE OIL AND TREASURY BILLS
35                                        Oil:LHS; T bills: RHS
                                                                                                           6.0


                                      T. BILLS                                                             5.5
30
                                                                                                           5.0

                                                                                                           4.5
25
                                                                                                           4.0

                                                                                                           3.5
20
                                                                                                           3.0


15                                                                                                         2.5
                                                                          CRUDE OIL
                                                                                                           2.0

10                                                                                                         1.5
     1993          1995                  1997                      1999                   2001          2003

            Crude oil is at a bottom, making crude oil driven stocks attractive.




40                                                                                                             12
                                  NATURAL GAS AND CRUDE OIL
                                 Nat. Gas: $/MMbtu; Crude oil: $/barrel

35                                                                                                             10


                                                    Crude oil

30                                                                                                             8




25                                                                                                             6




20                                                                                                             4




15                                                                                                             2

                                                                            Natural gas


10                                                                                                             0
     1996   1997          1998               1999               2000            2001             2002    2003


                          Natural gas and crude oil are at a bottom.
                        Measures of Supply and Demand for C&I Loans,
                                by Size of Firm Seeking Loan

Net Percentage of Domestic Respondents Tightening Standards for C&I Loans
                                                                                                                    Percent
                                                                                                                              80


                                                                                                                              60
                                                               Large and medium
                                                               Small
                                                                                                                              40


                                                                                                                              20


                                                                                                                               0


                                                                                                                              -20
       1990      1991     1992    1993   1994   1995    1996        1997          1998      1999     2000    2001     2002




Net Percentage of Domestic Respondents Increasing Spreads of Loan Rates over Banks’ Costs of Funds
                                                                                                                    Percent
                                                                                                                              80

                                                                                                                              60

                                                                                                                              40

                                                                                                                              20

                                                                                                                               0

                                                                                                                              -20

                                                                                                                              -40

                                                                                                                              -60
       1990      1991     1992    1993   1994   1995    1996        1997          1998      1999     2000    2001     2002




Net Percentage of Domestic Respondents Reporting Stronger Demand for C&I Loans
                                                                                                                    Percent
                                                                                                                              60


                                                                                                                              40

                                                                                                                              20


                                                                                                                               0

                                                                                                                              -20

                                                                                                                              -40


                                                                                                                              -60


1991          1992      1993     1994    1995    1996      1997            1998          1999      2000     2001      2002
              Measures of Supply and Demand for Loans to Households


Net Percentage of Domestic Respondents Tightening Standards on Consumer Loans
                                                                                                                                        Percent
                                                                                                                                                  60


       Credit cards                                                                                                                               50


                                                                                                                                                  40


                                                                                                                                                  30


                                                                                                                                                  20


                                                                                                                                                  10
       Other consumer loans
                                                                                                                                                   0

               1996               1997             1998                  1999                        2000                 2001              2002




Net Percentage of Domestic Respondents Reporting Stronger Demand for Loans to Households
                                                                                                                                        Percent
                                                                                                                                                   80

         Residential mortgages                                                                                                                     60

                                                                                                                                                   40

                                                                                                                                                   20

                                                                                                                                                   0

                                                                                                                                                  -20

        Consumer loans                                                                                                                            -40

                                                                                                                                                  -60

                                                                                                                                                  -80
1991         1992          1993     1994    1995          1996          1997           1998            1999        2000          2001     2002




Net Percentage of Domestic Respondents Tightening Standards for Mortgages to Individuals
                                                                                                                                        Percent
                                                                                                                                                  40


                                                                                                                                                  30


                                                                                                                                                  20


                                                                                                                                                  10


                                                                                                                                                   0


                                                                                                                                                  -10


  1990         1991        1992    1993    1994      1995        1996           1997          1998          1999     2000        2001     2002
                                   THE STOCK MARKET: CONSOLIDATING

  1600                                            ADV-DEC LINE AND S&P 500

  1400                                                                                             S&P 500


  1200


  1000


   800


   600


   400

                                                                                    ADVANCE-DECLINE LINE
   200


         0
         4/3/00   7/3/00      10/3/00          1/3/01         4/3/01       7/3/01       10/3/01              1/3/02


                           The advance decline line is acting better than the market.

   7.5
                                                       SHORT-TERM INTEREST RATES


   6.5



                                        Bankers Acc.
   5.5




   4.5


                                                                T. Bills

   3.5




   2.5




   1.5
    1/2/98                   12/30/98                        12/28/99                   12/21/00                      12/26/01




Short-term interest rates have stabilized as they did in late 1998, when the economy began to strengthen
following the Asian crisis. They are now at the same level as last December. The stock market has entered
a new phase, with slightly higher risk (as in late 1998). See Market Risk Barometer on our website
www.peterdag.com under Understanding the Markets for a complete description of the 3 stock market
phases. It is important to be selective. Diversification is not going to help. Focus on commodity driven
stocks.
                          GLOBAL BUSINESS CYCLE: GOING UP

                                                  FOREIGN MARKETS
230                                               Jap,Fra,UK,Ger,Can,Aus,Ita
                                                     (% change from 1993)


180


                                                   S&P 500
130




80




30                                                                             FOREIGN MARKETS




-20
   1994            1995         1996      1997        1998          1999          2000      2001   2002    2003

                   Foreign markets, like the US market, have shown no appreciation since 1998.

      125                                            US DOLLAR INDEX
                                                  New York Board of Trade


      120




      115




      110




      105




      100
            2000                           2001                                   2002                    2003


                          The dollar remains strong. Good news for our markets an economy.
   9
                                        GLOBAL SHORT-TERM INTEREST RATES
   8                                             CAN, US, JAP, UK, EUROPE


   7

   6

   5

   4                                                                                                              UK

                                                                                                                 EURO
   3
                                                                                                            CANADA
   2
                                                                                                                 US
   1

   0
                                                                                                            JAPAN
  -1
       1995     1996             1997          1998         1999            2000     2001          2002               2003

Foreign short-term interest rates have bottomed as the global business cycle turns around (see eblow).
 12
                                                GLOBAL BOND YIELDS
                                          Australia, UK, France, Germ, Jap, US
 10
                         AUSTRALIA


  8



  6
                                                                                                            US
                                                                                                            FRANCE
  4                                                                                                         GERMANY
                                                                                                             UK


  2

                                                                                                             JAPAN

  0
       1994   1995        1996          1997      1998       1999       2000       2001     2002          2003

                       Bond yields have bottomed as the global economy strengthens.
                                                                                                                                              Paris, 8 February 2002
                                                                 OECD COMPOSITE LEADING INDICATORS

Figure: Trend restored CLI (annualised 6-month rate of change). Percentage change.

- Total OECD

       1 2


            8


            4


            0


           -4


           -8
                1 9 9 2            1 99 3           1 9 9 4        19 9 5         1 9 96   19 9 7    1 9 98         1 9 9 9     2 00 0        2 0 0 1




- Euro area, Japan and USA
                                                                                  Japan      USA        Euro area

   12

       8

       4

       0

   -4

   -8

  -12
           1992                  1993              1994           1995            1996     1997       1998            1999        2000           2001




- France, Germany and Italy                                                                   - Canada and UK

                                   France             Germany             Italy                                        Canada            UK

  12

  8                                                                                          12


  4


  0
                                                                                             0
  -4

  -8

 -12                                                                                        -12
   1997                   1998              1999          2000           2001                 1997     1998           1999       2000          2001

				
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