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					Market Notes by Chris Belchamber Investment Management LLC
         10/16/03 (www.ChrisBelchamber.com)

      Irrational Amnesia
       There is no question, at least in my mind, that valuation is a key component in the
investment process. It is not an exact science, but history has shown time and time again
that in the long term – let’s say a decade – valuation is key. The challenge for investors
in the US market in recent years is that equity indices have never reached cheap levels,
even though the S&P 500 halved in price terms. But once again, after the rally over the
last year clearly excessive valuation levels have returned. An analysis of the
semiconductor sector shows that on a range of measures this sector has become at least
as expensive as at any time during the heydays of the 1990s.

       Meanwhile, there are a great many alternative investments that continue to be
ignored. Foreign currencies, commodities, Asian stock markets, specific value stocks and
TIPS, have all provided attractive risk/return characteristics. Even within the US stock
market there are some incredibly attractive valuations that can be found. I have recently
been able to buy stocks trading below book value with insider buying and low debt levels.
In some cases these stocks have in addition provided yields above 6% or price to earnings
ratios down to 4!

       In this environment, sector and stock selection are crucial. If valuation is not on
your side your time horizon is short and you need very clearly defined risk management
or trading discipline to realize profits. If valuation is on your side you stand a much better
chance of success over a long term time horizon. That is the timeless truth has been
forgotten so quickly as the market has rallied, and it can only be described as irrational
amnesia after the massacre of the previous three year bear market. The importance of
valuation is demonstrated both in the study shown below as well as the table on the front
page of my web site (www.chrisbelchamber.com).

       Timing is another crucial and inexact science in investment. In order to provide
some guidance I have introduced Fibonacci (familiar to readers of “The Da Vinci Code”)
and Elliot Wave techniques and I hope this at least provides a frame of reference.

       The most profitable stocks of the last 76 years
       A value-oriented research firm called the Leuthold Group recently verified that low
PE stocks produce higher returns than high-priced growth stocks. Leuthold split the equity
market into ten pieces based on the price-to-earnings ratio. The cheapest stocks in the
study were those priced at 9.9 times earnings and below (Extreme Value territory). The
most expensive stocks were those above 20.9 times earnings. The Leuthold Group
examined each group of stocks for every 10-year period from 1926 to 2002 (1926-1936,
1927-1937, etc…up to 1992-2002). The results showed that stocks at 9.9 times earnings
or less performed best, averaging 16.9% a year. The next cheapest group performed next
best and so on, down to the most expensive group. Stocks above 20.9 times earnings
performed worst, averaging just 4.8% a year. The accompanying chart below makes this

Market Notes by Chris Belchamber Investment Management LLC
         10/16/03 (www.ChrisBelchamber.com)

On average, the cheapest stocks, bought and held for ten years, turned $10,000 into
$47,659.02, about 4.8 times your money. The highly valued stocks, on the other hand,
turned $10,000 into $15,981.33, about 1.6 times your money. The cheapest stocks
outperformed the most expensive stocks 3 to 1 over the last 76 years.

      Semiconductors – let’s be real!
       Technology and semiconductor stocks are poster childs for absurd valuations. The
price of the semiconductor index is already trading at 45.9 of next years higher
expected earnings. This is a level that was never reached before, even in the mania of
the late 1990s. Other measures such as price to forward sales and price to book value are
also indicative of peak levels. A more detailed analysis is given in the Appendix.

       Let’s be real. Although no-one knows when the current rally will end. Your chances
of success are minimal to non-existent if you invest in stocks like this. Semiconductor
insiders seem to think so too. In the third quarter there were $400 of sales for every $1 of
purchases by insiders according to Thompson Financial. A record ratio for the sector.
Insiders are often early but they are usually right.

       These extraordinary valuations are typical not only of semiconductor stocks in
particular but also of technology stocks in general. The Nasdaq index trades on 8 times
sales. When I buy a stock I find it hard to pay even 2 times sales, although it depends on

Market Notes by Chris Belchamber Investment Management LLC
         10/16/03 (www.ChrisBelchamber.com)
the type of stock. Furthermore, for volatile earnings I want a discount, instead investors
buy these stocks at a ridiculous premium. Check out if you own any of these stocks in
your portfolio or mutual fund. Can you really understand the valuation? Don’t take a Wall
Street buy recommendation as adequate due diligence. Don’t you remember all those buy
recommendations in March 2000? Are you trading or are you investing?

      Timing and The Da Vinci Code
       Readers of the #1 New York Times best seller “The Da Vinci Code” were introduced
to a mathematical series called the Fibonacci Series. This book highlights how this simple
series produces key ratios which are prevalent throughout nature. There is an award
winning web site, http://www.mcs.surrey.ac.uk/Personal/R.Knott/Fibonacci/fibnat.html,
which shows this clearly and graphically for those who are intrigued.

      These ratios are also applied to the markets, particularly in conjunction with a
technique known as the Elliot Wave Theory. This technique is often used to measure the
potential for market moves and often generates key levels that market participants use as
major support and resistance.

      Weekly prices on the S&P 500 since 2000

Market Notes by Chris Belchamber Investment Management LLC
         10/16/03 (www.ChrisBelchamber.com)

       Briefly, the chart shows the major bear market that began on March 24 2000 and
stopped at exactly half (a key Fibonacci level) the peak price on October 11 2002, a date
which had multiple Fibonacci time confluence. Since this low point the market has
recovered but despite the significant bounce, this move up has displayed many
characteristics of a corrective move. This is my own opinion and I can explain why if
anyone wants to pursue my reasoning. The rally could easily have further to go in time
and price and still be classified as a corrective move. The chart shows that the market
could rally to 1253 by May 7 2004 and still be called a correction. That’s another 20%
over the next 6 months. Then again the market has now already reached the minimum
time for a correction, October 3 2003, although it has still not reached the minimum .382
price correction at 1068 (not shown).

      If the current rally does indeed turn out to be a correction the next major wave
down is likely to be at least as large as the initial 3 year bear market. This would be one
way for the market to return to historically normal valuations. There are many different
possible outcomes and it could be a far more benign and orderly a process, trading
sideways for a decade or so as earnings rise to correct the overvaluation, but investors
need to be aware of all the possible outcomes and the risks of staying invested in an
overvalued market.

        Given the excessive valuation levels in the major stock indices in the US the current
rally is giving investors another chance to reallocate their assets away from excessively
valued stocks to alternative assets with better prospects and valuations. Foreign
currencies, commodities, Asian stock markets, specific value stocks and TIPS, are where
my focus will be for investment. In the next few years the bulk of my earnings from the
Nasdaq and the S&P500 indices will come from the short side, but I will have to remain
patient for the set up. In the mean time it may be a good strategy to average in to long-
term put options on the Nasdaq index while these options remain remarkably cheap.

Market Notes by Chris Belchamber Investment Management LLC
         10/16/03 (www.ChrisBelchamber.com)

Appendix – Semiconductor valuations
Global chip sales have climbed fairly steadily since bottoming early last year following the
steepest contraction on record in 2001. Monthly chip sales are currently one-third above their
recent nadir reached early last year, but are still about one-quarter below their late-2000
peak. Since the beginning of 1999 the overall rise is around 20% or a little less than 5% per
annum, although clearly it is difficult to be too dogmatic about the longer term trend growth
rate, given the volatility of the cycle.

      In the last year semiconductor stocks have more or less doubled. This spectacular
performance has priced in the expectation that economic recovery will pick up speed in 2004
and that there will be a strong holiday season in PC, wireless, and other consumer products.
However, the current 4Q YoY semiconductor industry consensus of 9% growth is already
baking in a strong recovery. Furthermore, semiconductor stocks may be in the final innings of
the upturn as multiples are already higher than at similar times in past cycles. The table
below, compiled by Bear Stearns, shows this clearly.

Market Notes by Chris Belchamber Investment Management LLC
         10/16/03 (www.ChrisBelchamber.com)

        All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment
recommendations may change and readers are urged to check with their investment counselors before making any
investment decisions.

        Opinions expressed in these reports may change without prior notice. Chris Belchamber (the author) may or may
not have investments or positions in any assets or derivatives cited above.

         Communications from the author are intended solely for informational purposes. Statements made by various
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be construed as an endorsement by the author, either expressed or implied. The author is not responsible for typographic
errors or other inaccuracies in the content. We believe the information contained herein to be accurate and reliable.
However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty
of any kind. Past results are not indicative of future results.