1.17.20032002 Fourth Quarter Client Letter January 17, 2003 Happy New Year! In the last newsletter we mentioned the "Perfect Storm". As weather storms end, so do financial storms. In early October, nearly two-thirds of people polled by the Associated Press said if they had $1,000 to spend, it would be a bad idea to invest it in the stock market. Since the low on October 9th, the stock market as measured by the largest 500 companies, the S&P 500, is up 19.2%. The moral of this story is don't listen to your neighbor. In the past couple of years, the consumer continues to spend while corporations continue to proceed cautiously. With mortgage and consumer interest rates plummeting, the consumer is spending less on interest. For example, in the past two years, mortgage rates have decreased from 8.5% to 6%. On a $100,000 mortgage, this is a $170 decrease in the monthly mortgage payment, or $2,038 per year. This excess cash flow has enabled the consumer to spend more elsewhere. On the other hand, corporations are not spending. They have reduced head count and expenses, but they are not committed to long-term expansion. Corporate profits in the 3rd quarter 2002 were up 5% versus 3rd quarter 2001, the quarter with the terrorist attack. This profit growth is more from cost reduction than revenue expansion. Corporate profit projections for the 4th quarter are 12%. Without revenue expansion, how are these projections going to be met? As a result of this overly optimistic outlook and lack of expansion, we remain cautious. While we wait for economic expansion, we are choosing strategic investments offering moderate upside with limited downside. For example, we like high yield bonds. High yield bonds are bonds with lower credit ratings, often called "junk" bonds. During the past two years as the economy has been weak, high yield bonds have gone down. High yield bonds are paying about 9% annual interest. Our strategy in buying these bonds is to use them as an equity-like holding without the risk of the stock market. We see three scenarios: 1. Stagnant Economy Result: We will receive our 9% interest only. 2. Contracting Economy Result: If high yield bond prices go down 9% and we receive 9% inerest, then we will break even. 3. Growing Economy Result: High yield bonds will appreciate AND we receive the 9% interest. In 2002, scenario 2 played out as the economy contracted. Our high yield bond fund, Janus High Yield, was up 2% in 2002. The interest income was 2% greater than the bond price decline. So, while the economy lags with an anticipated rebound, we will collect interest and wait for the rebound. In the last three months, Janus High Yield is up 5.8%. This indicates that high yield bonds have some appreciation potential. Thank you for your continued trust and support!