On September 11, “America was Attacked” by terrorists in hijacked jetliners that completely destroyed the World Trade Center in Manhattan and damaged the Pentagon in Washington, D.C. The President on Air Force One, the Capitol Building and the White House may also have been targets. More than 6,000 people were killed – double the number of Pearl Harbor! The heroic actions to overcome the hijackers by those on United Airlines Flight 93 that crashed in Pennsylvania prevented more death and destruction. This attack was the worst and most audacious terror attack in American history and an “Act of War” against the United States of America. In response, President Bush declared a “War on Terrorism.” The House and Senate unanimously approved a joint resolution against those nations, organizations or persons that planned, authorized, committed or aided these attacks. The objective is to prevent future acts of international terrorism against the United States. We must retaliate for these evil crimes and we expect a broad based economic and military campaign against those directly and indirectly responsible for these despicable acts in the months and years ahead. And, may God bless and protect the brave men and women in our Armed Forces as they enter harm’s way.

Our initial thoughts regarding the horror of Tuesday’s catastrophic terrorism focuses on the conviction that many in the US have been taking too much for granted, particularly since the end of the Cold War. The US is the pinnacle of economic and military power in the world today, but that is no longer sufficient to provide immunity, safety and security from terrorism. Terrorism is, in most cases, a manifestation of envy and hatred. This hatred, fueled by religious fervor, has become almost as dangerous and explosive as the sophisticated weapons in our military arsenal. The objective of these terrorists is to cripple, demoralize and destroy our most fundamental values of personal liberty and the institutions of an open society. This is an assault on the “foundation of America” and the very character of our society is at risk. It is also a malignant threat that can destabilize the foundation of the world economy and civil society.

This attack on our citizens, financial resources and military headquarters is the end of our era of invulnerability. We will no longer have immunity from the fear of mass destruction. It is our conclusion that this attack is a “wake-up” call from our complacency against those dangers that threaten our country. The most deadly include covert biological, chemical and nuclear attacks. The position of the US in the world today requires constant reminders of our responsibilities for others. It should also be accompanied by an articulation of our duties and responsibilities to protect what we believe to be our inalienable rights. The mantle we wear is now under siege on our soil. From this point forward, we will not be able to enjoy and perpetuate our country’s prosperity in a relaxed atmosphere since we are vulnerable and likely to experience more death and destruction. In the future, our lives will be different because we must be more vigilant to protect our freedom and resources from this clear and present danger. We will need more security and it will be costly, inconvenient and require personal sacrifices. These actions will strengthen our resolve, ignite our spirit and unify our country as we effectively deal with our enemies and rally the world of nations. It will be necessary to assemble a coalition of nations to provide strong international support as we deal with those nations that support terrorist activities.

On the economic front, there will be a meaningful economic slowdown in September because of business disruptions and transportation delays caused by these attacks. The third quarter will report a decline in real GDP. We may also experience another decline in the fourth quarter and a “classic recession” as economic disruptions continue, uncertainty causes consumer spending to moderate and housing begins to weaken. This will cause a further decline in inflation, interest rates and corporate profits. Offsetting these negatives will be large insurance payments to corporations and families. The Federal Government and New York State authorized a combined amount of $28 billion to rebuild the economic infrastructure that was destroyed. We also expect that Congress will provide financial assistance to those industries in need. In addition, military spending will increase with an initial authorization of $20 billion. Another tax reduction package is also likely that may include a reduction in the capital gains tax and a minimum wage increase. The Federal Reserve has already injected $70 billion into the banking system – the largest ever – to provide a cushion of liquidity and reduced interest rates another 50 basis points. More cuts will come as necessary. These actions will eventually be a strong stimulus to our economy. There will be a coordinated effort to develop a new “plan of growth” to stabilize and grow our economy over the intermediate term. We believe that our economy will begin to strengthen next year and may recover more sharply than previously expected.

The investment environment may be volatile over the near term because of the horrific attacks and increasing uncertainty of world events. Statistically, the stock market is reasonably valued based upon the current level of inflation, interest rates and price earnings multiples. We may also experience unusual trading activity due to the emotional toll this has taken on investors. But, the demand / supply balance continues to be favorable with a continued net reduction in shares outstanding, rising cash percentage and increasing flow of pension and retirement funds available for investment. The Government also eased corporate buyback rules to encourage companies to purchase their shares if prices decline sharply. The dollar’s strength has continued to attract foreign investment because of the liquidity, potential and safety of our capital markets. And, the USA continues to be the best growth stock in the world. This year, many quality small and medium sized growth companies increased in price through July while the majority of large capitalization stocks declined. Since then, both market segments declined and are approaching major technical support levels. In our opinion, the probability of higher stock prices over the next year is favorable because of our expectation of an economic recovery and the historical impact that significant and consistent interest rate reductions by the Fed has had on stock prices. For example, when the Fed reduced interest rates six or more times, the stock market had an average increase of + 24% in 12 months. In addition, market studies of momentous, non-economic events over the past 60 years indicate a modest near-term impact with a 70% probability of higher prices within six months. In this environment, we believe that investors will continue to focus on smaller capitalization growth companies because of their improving relative technical strength, inherent flexibility, acquisition potential and attractive valuations. As a result, we will remain alert to take advantage of opportunities to invest in those companies on our universe list that appear attractive to enhance portfolio diversification and performance.

The terrorist attack on September 11 was the opening salvo in the first American war of the 21st Century. This will have a dramatic impact on world order in the years ahead. Our “War on Terrorism” will focus and prioritize our diplomatic, economic, military and political actions. It will no longer be business as usual. There will be a major analysis of our vulnerability and those economic, military and security measures necessary to protect our interests. The US Government will aggressively defend its assets, citizens and sovereignty. The resting tiger will become a ferocious hunter. We expect these developments to rapidly develop a strong, cohesive unity throughout our country and a strong commitment to develop a plan of growth for our economy. While there are greater risks, we are optimistic that our economy and stock market will strengthen in the years ahead. The USA is a strong, resilient country with flexibility, a broad-based infrastructure and entrepreneurial spirit. It is time to be calm, steer a firm steady course and focus on those companies that will stand the test of time.