Dear Clients,

It has now been a week since the terrorist attacks in New York and Washington and the plane crash in PA. Even though a week has passed and the media continues non-stop coverage, it is still hard for me to believe this could have happened.

These events have changed so many things. I wish I could tell you what will happen in the weeks and months ahead, but no one knows for sure.

The US stock markets opened yesterday with a loss of apprx. 7%. As I reported on Sept. 13, most of the foreign markets had stabilized and actually gained modestly before our markets opened yesterday. So, the losses we took here were somewhat more than it would have taken to merely realign with the foreign markets. All of the major market indexes are well below their March/April major lows.

Unlike the record volume seen on Monday, the markets are very quiet so far today. The major indexes have been both up and down slightly on the day. I doubt, however, that all the selling is over. As noted in my last update, the markets have recovered strongly following crises in the past. I expect the same this time, although it is going to take some time to evaluate just how much damage has been done to various sectors that have been unusually impacted by this tragedy.

The airlines, for example, today requested an immediate government bailout which could total as much as $25 billion over the next year. The airline executives said several carriers will be bankrupt in the next week or so without assistance. The entire travel industry, which represents apprx. 10% of GDP, is in a full-blown crisis. Several large carriers saw their stock plunge by 50% on Monday. I expect the government will bail out the airlines, but this industry may never be the same.

Several of our futures Trading Advisors tell us the currency and foreign exchange markets are still badly shaken and jittery. They report erratic trading on very low volume, even today, as many of the largest players, including the Bank of New York, are still shut down. Others are reluctant to take large positions.

For the last 18 months, The Bank Credit Analyst, and accordingly yours truly, have maintained a positive outlook for the US economy. We felt that the Fed had been successful in engineering a soft landing, and that a recession would be avoided. That is all out the window now. We are in a recession now. The question is, how long and how deep? Unfortunately, there is no way to know at this point.

The Bank Credit Analyst has arranged a teleconference for this Thursday to offer their latest thinking on the economy and the markets. I have been invited to participate in that teleconference. Hopefully I will be able to share BCA's latest thinking with you on Thursday or Friday.

There is widespread support among the American people for military action against the terrorists. President Bush and other officials in his Cabinet have promised a war on terrorists. While I agree with such actions, we should all realize that there is great danger, and many different kinds of danger, in doing so.

As you probably know, Afghanistan is an extremely difficult place to wage war at any time, and winter is fast approaching. The Soviet Union, which bordered Afghanistan at the time, spent 10 years fighting there and ultimately lost. It was during that war that Osama bin Laden became a local hero, and the defacto leader of militant Muslims in many parts of the world.

Afghanistan does not have a lot of high value targets that could be destroyed by our missiles. Many Americans want us to level Kabul with bombs and missiles if the Taliban does not hand over bin Laden. We could certainly do that; however, our inventories of cruise missiles and other tactical missiles dwindled during the Clinton administration (see Stratfor link below); and bombing Kabul probably would not yield bin Laden.

I am particularly concerned that we could concentrate our forces in attacking Afghanistan, and Saddam Hussein would take that opportunity to launch an attack on Israel. He may very well figure that Iraq is next on the US hit list, so why not preemptively attack Israel while we are preoccupied? Obviously, there are many different scenarios which could unfold.

Fortunately, President Bush has probably the strongest and most experienced team of advisors since WWII: Dick Cheney, Colin Powell, Donald Rumsfeld and others. While the nation is anxious to react to this tragedy, these men will carefully weigh all the options before they take action. I don't know that anything will happen for a while yet.

We should all pray for them. They will need it given what could happen as soon as the US starts attacking terrorist groups. Above all, they should use every necessary means to protect the US from further attacks before we begin a military campaign.

The Diversified Fund, Alternative Fund and Long/Short Fund were all fractionally lower yesterday and again so far today. What gains we had were offset largely by losses in bonds. The bond market has fallen sharply because the government will almost certainly 1) increase defense spending, 2) fund part of the rebuilding efforts and 3) take other measures to stimulate the economy. This could more than eat up the surplus and create a deficit, and as a result there would be more bonds on the market in the months to come, as opposed to fewer, as was expected until recently.

Even considering the fractional losses yesterday, and possibly today, the Diversified and Alternative Funds are still up apprx. 6% for the month, and Long/Short is still up apprx. 2% for the month. Several of the Trading Advisors have told us they will probably reduce their positions somewhat, in general, due to the expectation of increased volatility and the possibility for more surprises. Past performance is not necessarily indicative of future results.

We are obviously monitoring the news and the markets very closely. I will continue these updates as long as there are developments I think you would want to know. As noted above, I will send you another update on Thursday or Friday with BCA's latest assessment and recommendations. Again today, I am including links to several articles you may find helpful or interesting. You may feel free to share these updates with friends or others who you think might appreciate them.

Thanks again for your loyalty!

Sincerely, and with a heavy heart, yours,

Interesting Articles

History of Osama bin Laden

http://www.independent.co.uk/story.jsp?story=94340

Pakistani pledge of help could be false.

http://www.newsday.com/news/opinion/ny-vptak182370255sep18.story?coll=ny%2Dviewpoints%2Dheadlines

Cruise missiles not an option in Afghan assault.

http://www.stratfor.com/home/0109181410.htm

Taliban launches offensive against dissidents.

http://www.hindustantimes.com/nonfram/180901/dlfor13.asp

Taliban give conditions for bin Laden extradition.

http://www.newsmax.com/archives/articles/2001/9/18/63247.shtml

Morris looks at President Bush.

http://www.nypost.com/postopinion/opedcolumnists/4338.htm

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