The following comments are extracted from an article by Bill Brennan that appeared in the July 2004 issue of Tax Hotline (Bill is the investment specialist on that publication's Advisory Board): Interest on Bonds issued to support "private purposes" such as airport and housing construction may produce interest income exempt from the regular income tax but subject to the dreaded Alternative Minimum Tax (AMT). Don't get trapped by the higher interest rates these bonds offer. Your broker should tell you if you're being offered an AMT bond but, unless you carefully read the prospectus, you may not learn about a bond mutual fund's AMT holdings until it's time to file your tax return!

The real trap is that tax-exempt bonds are most attractive to persons who live in high-tax states - "but these are also the persons who are most likely to owe AMT, since the federal deduction for state and local taxes is a major cause of AMT liability." The moral: tax exempt bonds and bond funds can be an excellent addition to your portfolio, just be a smart shopper and ask the right questions!

Third Avenue Value Fund, a mutual fund which we have owned for several years, has achieved a 22.44% year-to-date return for 2004. That's 3.5% more than its benchmark and about 17% more than the S&P 500 with dividends reinvested. What's most interesting is that much of this impressive performance can be attributed to an unusual holding: K-Mart! A company that declared bankruptcy two years ago and owes much of its revenues to the homemaking genius of the now jailed Martha Stewart. Here's another surprise: K-Mart's share price has risen 322.38% so far this year!

Third Avenue Value is difficult to fit into one asset class. About 50% of its holdings are in mid- size companies, with the balance in large or small companies. However, we continue to treat Third Avenue Value as a small-cap fund in our reports and analysis simply because that's the space it has occupied for many years. Under the leadership of Marty Whitman, an extraordinary manager, since 2000 this fund has consistently outperformed the S&P 500 and has rewarded its investors with a superior risk adjusted performance as measured by the huge "Alpha" (i.e. the premium return received for the risk assumed) reported by Morningstar at 11.47.

We regularly recommend Thornburg Mortgage to clients seeking a low cost, low interest, and flexible adjustable rate mortgage. The avoidance of middleman fees, and a built-in rebate of $490 at closing to customers who use the services of a fee-only advisor, add icing to the cake. A few weeks ago we learned that Thornburg Mortgage has introduced a program through which financial advisors can become Certified Mortgage Counselors after which they can collect a fee of $500 for placing a client's mortgage with Thornburg. We want to assure clients and others that we will not become "Certified Mortgage Counselors," that we will not accept referral fees for such recommendations, and that clients who tell Thornburg that Capital Management Group is their advisor will continue to receive the $490 rebate. To learn more about Thornburg Mortgage visit: www.thornburgmortgage.com.

Keep in mind that TD Waterhouse and Charles Schwab (custodial discount brokers that we use regularly) also offer low fee mortgages with attractive rates and terms. So, if you are searching for a mortgage, do some comparison shopping by checking these sources too.

In prepared comments released on November 19th IRS Commissioner Mark W. Everson offered several interesting statistics regarding audits of individual taxpayers:

1. Audits of high-income taxpayers-those earning $100,000 or more-topped 195,000. That's a 40 percent increase from 2003 and a 74 percent increase from 2002.
2. Total audits of all individual taxpayers topped 1 million for the first time since 1999. In 2004, we saw a nearly 19 percent increase from 2003 and almost a 36 percent jump from 2002.

Here's a surprising tidbit about international "country- specific" equity performance extracted from a mutual fund's brochure: "The United States has only ranked twice among the five best-performing developed countries since 1993 and never as the top performer." Among the top five performers, the USA placed fifth in 1997 and second in 1995. Countries consistently placing in the top five since 1997 include Sweden, New Zealand, Austria and Finland. The analysis was based on the Morgan Stanley Capital International (commonly referred to as MSCI) index for each country. Certainly this lends credence to including international equities as an investment class in most portfolios. However, in many situations, prudence dictates targeting international diversification rather than focusing on specific countries.

We encourage you to forward this newsletter to friends, relatives, and business associates who you think have an interest in the financial, investment and tax topics that we discuss each month.