Market Comment 10-27-09

Bridges Investment Management Market Comments October 27, 2009 Dear Shareholder, Strong returns for equities in the third quarter have reduced the level of undervaluation for stocks that existed in the first part of 2009. The S&P 500 is approximately 60% higher from the March 9, 2009 low, but it remains more than 30% below the all time high levels reached first in March of 2000 and again in October, 2007, and we believe equities remain undervalued on a long term basis. We remain constructive on the stock market for the following reasons. First, stocks are undervalued relative to normalized valuations assuming a reasonable economic recovery on balance over the next several years. Corporate earnings for both the second and third quarters have come in well above expectations, which leads us to believe economic conditions are in the process of bottoming. Given aggressive cost-cutting over the past year, many companies are in position to possibly see very strong earnings growth over the next several years as economic stabilization gives way to actual economic growth. Second, equity returns over the past decade are far below historic norms, despite reasonably solid corporate profit growth during that period. Notions of reversion to the mean for both equity returns and equity valuation levels argue that investors will achieve better returns from stocks over the next decade than they did during the past decade, and this idea is ...