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BIRKELBACH INVESTMENT SECURITIES, INC. MEMBER FINRA / S.I.P.C.

Background and Questions answered:

BIRKELBACH INVESTMENT SECURITIES INC.
and
CARL BIRKELBACH, “THE LONE BULL”

Housed on LaSalle Street less than a block from the Chicago Board of Trade, Birkelbach Investment Securities (BIS) Inc. has provided a full range of brokerage services to investors since 1978. The firm combines personalized service, independent research and financial planning capabilities with safekeeping and execution services provided through its correspondent relationship with Pershing LLC, a division of The Bank of New York. Pershing LLC is the world's leader in brokerage services, handling 10 percent to 13 percent of the volume on the New York Stock Exchange, and holds $474 billion in customer assets.
Staffed by 25 registered securities representatives, BIS is a FINRA - registered broker dealer and a member of Securities Investor Protection Corporation (SPIC). Birkelbach Management Corporation is a registered investment adviser.
Founder, chairman and chief executive of BIS and Birkelbach Management is Carl M. Birkelbach, who became known to the investment community in the early 1980’s as the Lone Bull and has issued over 500 Investment Strategy Letters since then. He earned the Lone Bull nickname by being one of the few stock market commentators who, in the sideways-moving market of the 1970’s and early 1980’s, foresaw the bull market of the rest of the 1980’s and 1990’s.

Birkelbach authored “Stock Market Forecasting Through Charting,” which explains the technical approach to forecasting, and writes the monthly BIS “Investment Strategy Letter” and “Current Market Comment.” These publications can be viewed on the BIS Web site, http://www.my-broker.com. So can images of the mathematically-inspired “Stock Market Art” Birkelbach has painted as one of his many avocations.
On the following pages, Carl Birkelbach gives investors insight into some of today’s most perplexing investment issues and describes his firm’s resources to help investors reach their goals.

QUESTIONS FOR CARL BIRKELBACH

Carl M. Birkelbach, chairman and chief executive officer, Birkelbach Investment Securities Inc. (BIS), answers questions about individual investing in the wake of the 2000-2002 bear market and about the resources of BIS for the investor who seeks double-digit returns.

Q. Investors are still shell-shocked not only from their losses in the bear market but also their loss of confidence in accountants, corporate officers and securities analysts because of corporate scandals. How have investors reacted, and are they in danger of suffering even more disappointment?
A. The most popular current trend is to take money out of the risky stock market and put it into the so-called “safe” investments in bonds or money market funds or with professional money managers. However, unless one buys short maturities and doesn’t need the money until the bond matures, there still is price risk in bonds. Just as bonds went up in price as interest rates went down, bond prices will fall if interest rates rise. The risk of money markets is that a 1- percent return will not keep up with forecasted inflation or with a better stock market.With professional money managers you still have the risk that your money manager is wrong or that fees equal return in a market that is moving sideways. There also is the risk that bond mutual funds will never reach maturity and that most mutual funds are inconvenient from a tax-planning standpoint as capital gains can be issued before you decide to sell.

Q. Then what’s an investor to do?
A. The answer is different for each investor. However, one alternative is to take charge of your own destiny and create a portfolio of individual bonds, preferred stock and individual stock issues. Market timing and portfolio building have their own set of risks and are not for everyone. Being independent of Wall Street conformity takes time, training and tolerance. But if you still want double-digit return, it’s worth considering.

Q. You mentioned “market timing.” What is it, and when should you use it?

A. Market timing is simply buying low and selling high, using the technical approach to stock market forecasting, also known as charting. The technician believes that price reflects all factors influencing the market and that price movements show each investor's fundamental knowledge and emotions. Thus the price is the end result of all economic and psychological pressures. By studying these price movements, the technician forecasts future price swings by charting the prices of stocks and interpreting their formations and trends using historic precedent as a guide. The charts let you “listen” to the market. It will tell you where it’s going.

Q. Can you give an example of how you can read the charts to “listen” to the market?
A. When people buy a stock at a certain price – say $20 a share -- and the price goes down to say, $10, chances are that when the price returns to $20, they will be anxious to get their money back and will sell. This area where people have a tendency to sell is called a resistance area.On the other hand, when people buy a stock at $20, and it goes up to $30 and then returns to $20, the stock will usually receive support at that level. This is because the people who purchase at $20 have conditioned themselves to sell only at a profit, and now will not sell to just break even on their investment. Also to many people the old price of $20 appears to be a bargain price at which to buy. This area where people have a tendency to buy or hold is called a support area.

Q. So what should the investor do when stocks reach resistance and support areas?
A. Each base area – the price at which people originally bought the stock -- is a potential resistance or support area. When prices return to the base area, they will tend to be stopped in this area. If prices break through the base area, they will tend to stop at the next resistance or support area.So, in general, when the price keeps going up past the resistance area, it is giving a buy signal. If the price keeps going down past the support area, it is giving a sell signal.To put market trends into decision-making perspective for investors, Birkelbach Investment Securities offers The Strategy Index, an exclusive technical indicator of whether the general market, industry sectors or individual stocks are overbought or oversold.

Q. How can the individual investor learn more about the technical approach?
A. I reviewed and analyzed the technical methods of stock price forecasting in “Stock Market Forecasting Through Charting.” This publication can be viewed on the Birkelbach Investment Securities Web site, http:\\www.my-broker.com.

Q. Using the technical approach, what has been your track record in forecasting the market so that your clients can buy and sell to their advantage?
A. During the 1960’s and 1970’s the Dow Jones Industrial Average had been going sideways for over 15 years, unable to break above 1000. In 1982 I came out with my Lone Bull Letter, outlining my long term bullish scenario. Sure enough the market reached new highs in the mid-1980’s. Then before the October 1987 crash, I discouraged stock purchases, but soon thereafter made bullish forecasts of an 8000 Dow, which stayed on course throughout the 1990’s.

Q. Did you see foresee the bursting of the bubble in 2000?
A. When the Nasdaq was on its way down from about 5000, I expected it to keep going to about 2500 – but then hit a bottom. But then Sept. 11 happened and it went lower than I -- and a lot of other people -- thought it would.But I did issue warnings in the firm’s May 1998 Investment Strategy Letter, when the prevalent attitude was, “Don't worry, be happy.” I wrote, “One must be ever vigilant and aware of risks…I think it's time for a little reality check” and that the widely heralded “Goldilocks Economy” of the time “is a fairy tale and this is real life where things can go wrong.” Then in 2000 I forecasted that the bear market could last for up to three years – as it virtually has since then.

The reality is, stock forecasting by any approach or combination of approaches is not a perfect science. The best approach for any individual investor is to go with an adviser who understands your situation, goals and risk tolerance, and can tailor your investment method accordingly.

What happens all too often is that the average investor, left to his or her own devices, ends up selling winners too soon and rides losses lower and lower. So the broker-client relationship is still important for the investor to receive clear-headed investment advice and to have a plan. Sadly, the Wall Street scandals have eroded trust in this relationship.

But – unlike leaving everything to a money manager – establishing a relationship with a broker enables the investor to regain control and use certain tools – only one of which is charting -- to become self-reliant. That doesn’t mean you don’t ask for help. In the bull market of the ‘90s, investors thought they didn’t need any advice. Now that they need it, they don’t know where to turn.

Q. We hear that a lot of the big brokers are turning clients over to money managers or even call centers if they don’t meet a certain net worth level.
A. That’s right, so it’s important to find a broker – as the slogan of Birkelbach Investment Securities puts it – “Where people are important.” Mid-sized brokers like us may well be able to handle clients who have gotten the cold shoulder from the big Wall Street firms.

For example, our 25 experienced brokers are committed to understanding each client's situation and investment objectives. We tailor our advice and financial planning reports to meet investors’ goals. We include a full range of investment alternatives and strategies –not just market timing, but also the fundamental forecasting approach, which considers all accounting methods and ratios, future earnings possibilities, current news events and various other pertinent facts about a company and its industry. Too often, the fundamental approach is set up as an either-or proposition to the technical approach. We give both appropriate weight.

Nor should investors consider only stocks. Among the tools we can use to implement clients’ objectives are mutual funds, money market funds, municipal and corporate bonds, certificates of deposit, limited partnerships, options, government securities, unit investment trusts, CMO’s [collateralized mortgage obligations], GNMA's [Government National Mortgage Association mortgage backed securities], annuities and life and long-term care insurance.

Q. Can a mid-sized broker such as Birkelbach Investment Securities provide the sophistication, specialization, safety and speed investors demand today?
A. Investors can have the best of both worlds – that is, Wall Street sophistication and Main Street attentiveness to their individual needs.

Speaking for BIS, we offer superior safekeeping and execution services through our correspondent relationship with Pershing LLC, a division of The Bank of New York. Pershing LLC, the world's leader in brokerage services, handles 10 percent to 13 percent of the volume on the New York Stock Exchange, and holds $474 billion in customer assets. The firm executes our orders, issues confirmations and monthly statements, accepts payment, holds cash and securities and covers our clients with its Pershing Account Protection program.

Our clients receive our personalized service, independent research and financial planning capabilities, together with the safety, back-office efficiency and execution capabilities of Pershing. It’s a desirable alternative to the standardized products and treatment typical of Wall Street.

Q. What’s your last word for the investor seeking financial security in these turbulent first years of the 21st century?
A. This is a period of dynamic change. Gone is the concept of “In the long run if you just hold on to your stocks in a diversified portfolio, they will grow at 8 percent a year.” That isn’t “buy and hold,” it’s “buy and forget.” This was never a primary truth. A primary truth that does apply is “buy low, sell high.” To apply this truth, the average family will need more help in making financial decisions that are tailored to their needs. At Birkelbach Investment
Securities, we believe this goal can best be met through the individual-to-individual broker/client relationship.

July 2003