International

Japan
Japan remains in a rut. Koizumi’s plans for reform have gone nowhere and expectations for any change at this point are overly optimistic. The level of the yen is sufficiently high to prevent any surge in exports. Should the yen retreat to the 135-to-the-dollar range seen earlier this year, one could again become optimistic about the opportunity for exports to provide a lift to the economy. However, a flat performance may be all that one can expect with the yen at approximately 120. The Nikkei index reflects this lack of enthusiasm with an under 10,000 level.

Europe
The euro-sector performance also has been less than spectacular. Very slow growth in Germany has caused the euro to decline from par to 97 to the dollar. The various euro-exchanges have delivered results similar to the US, ex the currency change. While we believe the longer-term prospect for the euro-sector countries is very bright, the current economic results are no better than the US, and perhaps worse. We still believe the US offers superior investment opportunities for investors in the rest of the world. As long as the stock markets do not fall into another long decline, which we do NOT expect, we believe the flow of cash into the US dollar will be reasonably strong.

LATIN AMERICA
Brazil and Uruguay moved much closer to monetary stability last week as Treasury Sec. O’Neill promised US support for IMF loans and provided Uruguay with a short-term bridge loan of $1.5 billion. Uruguay has felt the pressure of Argentina’s chaotic situation more than other countries because it is where significant Argentine assets were deposited. Much has been withdrawn because of the lack of availability from Argentina’s banking system. We believe the support of the Uruguay banks to be appropriate. Further, the $30 billion for Brazil seems necessary to prevent economic chaos in the region, but we are less confident that Brazil has done enough to bring its economic house in order. The poll-leading candidacy of Mr. Lula, often described as a Marxist who, in the past, has advocated abrogating the debt, does not increase our confidence in the long-term economic stability of the region. There is little doubt that Brazil helped to bring much of the economic pressure by devaluing its currency a couple of years ago. The real has now fallen to 3 per dollar after settling at a little better than 2 to the dollar after the devaluation.