First Quarter, 2001

The recent stock market debacle continued unabated through the first quarter of the new year. Investment returns of different major stock market indices tell the unfortunate story:

During early April, stocks moved sharply higher on the hope that an economic recovery has begun, particularly in the manufacturing area. So far, only a few shreds of evidence indicate that a turnaround is at hand but many other indicators, including those which track employment and consumer confidence, continue to plummet. A number of tech stocks have moved up so sharply this past month that they have again become, in our opinion, overpriced.

If we are in the early stages of a true bear market which ultimately corrects the over-valuations of the past 10-year bull market, then we either have a long way to go on the downside to remove investor over-optimism, or we may experience a protracted period of mediocre stock market returns as P/E ratios decline to historic norms through future earnings growth.

We have maintained client accounts at the low end of their agreed-upon equity ranges since before the market break which began 14 months ago. During the first quarter, we allowed client equity allocations to drift lower without rebalancing to minimum target levels. Given the ongoing market decline, we were not in any hurry to reach client minimum targets for stocks. Now, however, after the Fed’s fourth rate cut and some glimmerings of a possible economic turnaround, we have begun once again to increase client stockholdings.

Around the end of the first quarter, we began to engage in tax loss selling for our taxable client accounts. One of our objectives while security prices remain down is to accumulate some tax losses for clients that can be applied later against other realized gains. Our equity rebuilding process combined with the deliberate realization of capital losses may appear confusing as clients look at the transactions in their accounts, but there is structure to our actions.

Individual technology stocks continue to be more volatile than the overall market, but they also exhibit stronger growth characteristics through complete economic cycles vis a vis the typical non-tech stock. For this reason, we continue to place emphasis on acquiring leading tech sector stocks at reasonable prices for clients' long-term portfolio growth. Presently all but our most conservative accounts continue to be overweighted in technology compared to its weighting in the S&P 500 Index. We anticipate that these types of securities will once again lead the market when growth resumes.

During the first quarter, we began shifting some of our clients' bond portfolios out of corporate bonds and into U.S. Treasury bonds and government agency paper as a safety precaution in the event the economic slowdown developed into a serious recession. If a recession develops, corporate credit quality will deteriorate and government debt can be expected to outperform corporate bonds.

Halfway into the first quarter, we observed that long-term interest rates were trending higher in spite of the Fed's rate-cutting efforts. Furthermore, gold prices were beginning to stir, and the press began picking up on the notion that the Fed's actions might actually foster accelerating inflation. As a result, we shortened the maturities of our government debt in client accounts to not more than 5years. Subsequent events have validated our actions as long-term treasury rates continued to increase during the remainder of the quarter.