Third Quarter Newsletter—October 1, 2004

PLEASE NOTE: All checks to be added to your accounts should be made payable to: Fidelity

To Our Valued Clients and Friends:

I. Wrong!
II. Gas prices
III. Interest rates
IV. Real Estate
V. Harry Dent Revisited
VI. Where do we go from here?

I. Wrong – My mid year letter closed with the suggestion that the markets might rally 10% by year-end. As noted below, the Dow has barely budged since June 30 although interest rates firmed and corporate earnings have improved.

Investment   Indexes -	12/31/03	3/30/04*	6/30/04*	9/30/04*
Dow	10,321	-.9	-1.1	-2.3
S&P 500	1095	+1.3	+1.5	+1.3
NASDAQ	1973	-.05	+2.1	-5.2
Russell Value	569	+2.1	+3.3	+4.7
Russell Growth	462	+.004	+2.3	-2.5
REIT Index	99.27	+9.09	+2.4	+8
Ten Year Treasury	85.85	+3.80	-2.56	+4.2
*percentage change since 12/30/03

While the investment markets may rally after the presidential election, assuming George Bush wins, I believe that many managers will use the opportunity to sell into the rally and take profits they have been enjoying since early 2003. While there are some that continue to sing a bullish tune for the market, many of these singers are retained by major brokerage firms and have a vested interest in encouraging everyone to stay invested in traditional stocks and bonds. Other advisors, such as Jim Rogers, George Soros and Warren Buffet are more pessimistic, suggesting that returns for the market over the next several years might be modest. I find myself in the middle, concerned about higher oil prices, creeping interest rates and a general disinterest by the investing public because of the tech bubble bursting in 2000-2002.

II. A brief comment on oil prices – Now that most Americans seem to be driving SUV'sand getting about 14 miles to the gallon, I am concerned that with gasoline costs nearing $2 a gallon, the high cost of fuel will begin to affect the spending habits of the average American. Gas prices are about .75 cents a gallon higher than this time last year and with the average American driving 15,000 miles a year monthly fuel costs are approximately $70-$75 a month higher than last year. While many of us can afford this figure there are some two-car couples that find this combined $150 a month increase in fuel cost difficult to swallow. Many Americans have approximately $800 to $1,000 a month in discretionary income. This increase in fuel cost results in an 18% decline in discretionary income and will undoubtedly begin to have an impact on the spending habits of the average American. Since the economy is 66% driven by the consumer do not underestimate the effect that prolonged higher fuel cost could have on the economy.

[Do not be too disheartened by my concerns over the price of oil. Economists are predicting that the price of oil will decline next year to approximately $35 a barrel from the current near $50 price. This is primarily due to the potential elimination of the "terrorist premium" that is currently priced into oil. I doubt that we will have four hurricanes next year which have disrupted the production of oil in the gulf and contributed to higher prices.]

III. INTEREST RATES - Many of you have heard me express my concern about higher interest rates and how they affect what price earnings ratio investors are willing to pay for a dollars worth of corporate earnings. There is a calculation that has remarkable correctness in defining what price earning ratio should be a fair evaluation of a stock based on interest rates. With the exception of periodic investment bubbles this calculation is remarkably accurate. This calculation is determined by dividing the prime rate into 1. This will provide a fair value for establishing a fair price earnings ratio.

Please find below the execution of this calculation based on the current prime rate of 4.25%, a projected climb of the prime rate to 6.25% and 8.25%. The analysis is computed based on a stock earning $1 a share and the estimation of what that stock should sell for:

Prime Rate	“Fair” Price Earning Ratio	Price for which a stock earning $1 a share should sell for:
4.25%	23.5	$23.50
6.25%	16	$16.00
8.25%	12	$12.00

Please note that a company making $1 a share could find itself trading at a market price ranging from $12 to $23.50 depending on interest rates. The suggestion here is that even though the economy may continue to do fairly well, an increase in interest rates could immediately offset the increased appreciation that you would hope to enjoy in the price of the stock because of the increase in earnings. As an example, if the company mentioned above were to find itself in an environment where the prime rate increased from 4.25% to 6.25% the company would have to increase it's earnings by almost 47% to continue to justify the $23.50 trading price that the stock enjoyed when interest rates were only 4.25%.

As you can see, it does not take a substantial increase in interest rates to place downward pressure on the market. Perhaps the good news here is that interest rates for the next year are predicted to move up no more than a single percentage point. The current long term bond rate is about 4.4% with the projection for next year being approximately 5.4%. As a result, I believe you will continue to see relatively low interest rates and mortgage rates will continue to be appealing while inflation will remain in check. The projection for next year?s inflation rate suggests a decline to 2.5% versus 3.3% for the current year.

IV. REAL ESTATE – I am sure that everyone has heard the stories of the incredible real estate appreciation on the gulf during the last thirty-six months. Apparently that appreciation reached a crescendo this summer with values increasing by as much as 40%-50% in the last year. I believe this incredible appreciation may be over for awhile, or at least we may be entering a cooling off period. Even before Hurricane Ivan property values were reported to have dropped by a full 15% in just the first few weeks of September, when vacationing buyers returned home, and to the –“real world.”

WaterColor, a St. Joe panhandle resort next to Seaside, had a lottery in July to sell fifty of their fifty foot wide lots for $700,000 a piece. It did not seem to matter that the lots were a full ten minute bike ride from the beach, over one hundred and fifty people signed up to participate in the “lot lottery”. When the lucky fifty were chosen, some chose to profit before they even left the tent by selling their position to disappointed participants. In August, WaterColor tried the same lottery for an additional fifty lots. They only had fifteen potential buyers sign up.The gulf is a real estate appreciation aberration, but across the country housing real estate prices have risen to a point that Fortune, Money Magazine and Forbes have all written articles within the last sixty days suggesting that the real estate bubble may be about to burst. Each of these articles drew a sound analysis comparing the real estate bubble to the tech bubble of early 2000. Their analysis is well founded and drew from their observation of the historical comparison between average family income and housing prices. Historically, families have purchased homes that are valued at approximately 2.9 times their average annual income. Current real estate prices place average housing cost at 6.5 times the average citizen's annual salary and as a result reveal that this ratio is now well out of line with historical proportion.

Low interest rates, combined with adjustable rate mortgages and the introduction of interest only mortgages have made home ownership entry simply too easy. The percentage of adjustable rate mortgages, or interest only mortgages, have increased from 16% of written mortgages to over 35% in the past year. While interest rates are not projected to explode any time soon, they certainly are projected to go up and 35% of new home buyers will immediately feel an increase in monthly housing cost.

Each of the mentioned real estate articles focuses primarily on major metropolitan areas and ocean or gulf front properties when discussing overvalued properties. There are substantial areas of the country that are not overvalued and still reflect the opportunity for sound investment. Nevertheless, I believe if you have been looking for ways to access your pension plan to buy condominiums on the gulf you might want to seek a more traditional investment.

V. HARRY DENT REVISITED - Many of you will recall that a couple of years ago I introduced some of Harry Dent's predictions to you regarding the stock market increasing in value dramatically as the baby boomers continued to invest in the early 2000's. Harry had suggested that the market would reach substantial levels about the year 2013 and then go into a ten year decline as the baby boom generation began to retire and no longer “fed” the market. This analysis has played out in the Japanese market as the age bubble in Japan is approximately ten years older than our own. The Japanese market index crossed 36,000 ten years ago and is now at about the same level of the Dow at about 10,000-11,000. During the period when the index fell from 36,000 to 9,000, interest rates declined dramatically as people exited the market seeking the safety of fixed income.

I believe it is time to revisit Harry?s theory as I think that while the theory is still sound I believe that the investment bubble bursting in 2000-2002 took a great deal of steam out of the possibility of a dramatic decline. Harry Dent suggested that the Dow would reach 41,000 by the year 2013, a level that would require a 300% rise in the Dow from current levels, a figure that will not be achieved.

Perhaps there is good news here as things are returning to normality. Although it may be hard to believe, perhaps long term investors should actually applaud the crashing of the tech bubble. The NASDAQ's decline from 5,000 to current levels, reminding you that the NASDAQ would have to increase in value by 160% to reclaim the high ground that was established in March of 2000, disheartened so many investors that the markets probably will not achieve the level that Harry Dent had suggested in the late 90's. As a result, since the market peaks will not be achieved the predicted decline can not be as great, or as dramatic. This reduced drama will slow investors from moving into fixed income for safety which will relieve the downward pressure on interest rates that would have been caused with investors exiting the stock market. For those baby boomers who will appreciate higher interest rates for fixed income investments during retirement this will certainly be a blessing.

VI. Where do we go from here? - Before I begin I would like to add a comment on the real estate articles I mentioned above. It appears that many investors, who have purchased recreational real estate over the past several years, have stated that they were looking for increases in real estate values of over 20% a year. I know that you may not recall, but in early 1999 I quoted from a survey completed by Fidelity Investments which said that the average investor expected returns, from the stock market, of over 20% a year in early 1999. The similarities between these two investment expectations and the speculative levels that both sectors achieved during the last five years should have perhaps been predictable. As the baby boom generation became disenchanted with the stock market they switched their focus to the only other major investment sector available - real estate. Historically, real estate and the stock market have generated virtually identical returns going back to the 1920?s. This annual return is between 10% and 12% and what we have seen over the last five years is an aberration of appreciation in both of these investment sectors. While I do not believe that the real estate sector will drop as dramatically as the NASDAQ, I believe that a cooling off period will begin and I believe there may be an immediate decline of as much as 20% in over-valued real estate. With the speculative bubble in both the stock market and real estate being punctured, perhaps it is time for both investment sectors to return to some degree of normality.

I would like to emphasize that in looking at the 10% average rate of return of the stock market from 1920 to the current date, most people overlook that as much as 40% to 45% of a stock?s return was generated by dividends. You remember dividends?they are the return of profits by the corporation to the investor. In the late 1990?s virtually everyone forgot dividends. Dividends are found in value oriented securities and I believe that over the next ten years that is where you will find more consistent returns. If you will revisit the indexes that were in the first portion of this letter you will notice that the Russell Value index was up 4.7% year to date, while the broader Dow Jones Industrial Average was down 2.3%. Those dividends, being reinvested, provide us with a slight safety net. Lower price earnings ratios, which are reflected in the value sector, provide a higher degree of consistency and less volatility.

[Although you can not completely ignore growth oriented securities, you can not allow all them to be the backbone of your investment portfolio. As a result, while you will continue to see us take periodic growth oriented positions, they will never become the majority position within our portfolios.]

While we are looking at indexes I encourage you to look at the real estate investment trust index which is also in the first portion of the report. The index enjoyed a substantial return over the last several years but reflects a good deal of volatility this year. As you will note, in the first quarter, the index was up a full 9%, but fell over 7% during the second quarter. The index increased 6% in the third quarter bringing it?s year to date return to approximately 8%.

Below this letter you will see an analysis of how our various mutual funds within our Thoroughbred program are performing compared to their comparative index. We are pleased that all of our funds are outperforming their respective Lipper index as well as outperforming both the Dow and the NASDAQ. One new addition you will see within the selection of funds is the Alpha Hedged Strategies Fund which is a fund that is operated like a hedge fund without the substantial fees associated with such a fund. The Alpha management team has chosen a number of sub advisors, and has chosen to use the sub advisor expertise in areas such as shorting the market, taking straddle positions, etc. . .without the normal 20% + of the profits that most hedge fund managers demand. As you will note the fund is up over 8% year to date and represents an attractive alternative investment scenario for our mutual fund program.

One of the main reasons that we have chosen to move the firm directly under the auspices of the Securities and Exchange Commission and removed ourselves from the NASDA and broker/dealer network is that we now have the flexibility to provide our clients with alternative investments without the fee structure imposed by broker/dealers. One of the major areas that we will be reviewing will be Northeast Alabama real estate. I believe that there are many areas of farmland, timberland and potential development property in this geographic area that have been ignored far too long. Unlike the I-20 corridor between Atlanta and Birmingham, the I-59 corridor seems to have been forgotten, but increased activity is certainly occurring.

Our goal for the next several years will be to continue to create conservative, balanced portfolios that will provide a high degree of liquidity for our investors. At the same time it will be our goal to begin acquiring selected "undervalued" real estate properties, on an all cash basis, which will be held for three, five, seven and ten years respectively. These properties will be purchased through limited liability corporations formed by our investors. A great deal of emphasis will be placed on ensuring that there is a minimal fee structure in regard to the acquisition, operation, and ultimate divestiture of these properties. While many of these properties may seem boring to "high powered" investors we believe that they offer the opportunity for attractive and somewhat more predictable rates of return for our investors.

"See you" after the election!

Warmest Regards,

M. Brooks Clark

PLEASE NOTE: All checks to be added to your accounts should be made payable to: Fidelity

*Clark Financial Advisors is registered with the Securities and Exchange Commission (SEC) as a registered investment advisor and annually files an ADV with the SEC, as required. The ADV II form provides background on the firm and its principals. If you would like to receive a copy of this form please contact Jennifer Gibbs via email at Jennifer@clarkfinancialadvisors.com to receive a copy. You may also return this page of the letter with a note signifying your request for a copy of the ADV II filing for Clark Financial Advisors.