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December 29, 2003

Brief Holiday Update

John P. Hussman, Ph.D.
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As of last week, the Market Climate for stocks remained characterized by unusually unfavorable valuations and still moderately favorable market action. This combination held the Strategic Growth Fund to a partially hedged position. The Fund remains fully invested in stocks that we believe have some combination of favorable valuation and market action, with just over half of that exposure hedged against the impact of market fluctuations. An additional portion of nearly 25% of the Fund's exposure is hedged using out-of-the-money put options alone, with strike prices about 3-4% below current levels. We would estimate the overall exposure of the Fund to market fluctuations, then, to be somewhere about 40% here, increasing toward 50% if the market advances (because the impact of the put options becomes smaller and smaller on market advances), and moving toward about 25% in the event that the market was to decline substantially from here.

Our exposure to market risk here should not be considered a bearish position, however. Our measures of market action remain generally favorable, and we remain positioned to gain primarily from market advances. Still, there are enough factors such as valuations, excessive bullish sentiment, extreme insider selling, overpricing of the prospects for economic and earnings growth, and various early deteriorations in market internals, to create a situation where we are unwilling to risk substantial exposure to market fluctuations on the basis of speculative merit (favorable market action) alone.

In bonds, the Market Climate remains characterized by moderately unfavorable valuations and moderately unfavorable market action, holding the Strategic Total Return Fund to a short-duration profile of less than 2 years. A 1% (100 basis point) move in interest rates would be expected to impact the Fund by less than 2% on account of bond price fluctuations. We continue to hold about half of the Fund's assets in alternative investments such as Treasury Inflation Protected Securities, utility stocks, foreign government notes, and a few percent of assets in precious metals shares.

Happy New Year!


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