Commentary and Articles

1st Quarter 2004 Quarterly Synopsis

“Stocks Bog Down”

With record economic growth in late 2003, expectations were high for continued strengthening as we moved into 2004. However, with growing threats of terrorism abroad against the U.S. and its allies and a general feeling of uncertainty about the strength of the U.S. economy, investors saw a flat market in the 1st Quarter of 2004.

Unemployment continued to be the primary concern of economists as job growth lagged behind all expectations. Inflation remained low, and productivity remained high, and the Federal Reserve gave every indication that they would continue to maintain the low interest rate environment for the near term.

As the 1st Quarter came to a close, several indicators showed favorable trends in the U.S. economy. Personal income rose 0.04% in February, above expectations, while inflation, as measured by the Personal Consumption Expenditures, rose 0.02% for the same period. Overall, the economy seemed to be on track to grow at a healthy 3.5% to 4.0% in 2004.

This climate of smaller than expected upward steps in the U.S. economy set against the backdrop of election year uncertainties and geopolitical concerns, led to a lackluster 1st Quarter in the U.S. equity markets. For most of the period, the market looked as if it would backup substantially from where it ended 2003.

Although technology was not as robust as one might expect given the growing economy, our holding in Qualcomm (QCOM, NASDAQ), continued to march upward in price with management raising forecasts again for 2004. In pharmaceuticals, Teva (TEVA-ADR, NASDAQ) made strides as growth was seen in generic drug production, where Teva leads the industry. Focus List newcomer Biogen-Idec (BIIB, NASDAQ), a biotech research company, also showed a stellar performance as it rose 28% within 2 months of our purchase.

Somewhat less pleasing was the slowed pace of growth in major industrials, which had appreciated greatly in price in late 2003. We have continued to hold positions in General Dynamics (GD, NYSE), and United Technologies (UTX, NYSE), and expect that these will continue to be good long-term holdings, even with the recent slowing of growth.

With the Federal Reserve showing sings that rates will probably remain unchanged for the foreseeable future, we will maintain our bond portfolios with an intermediate duration. We no longer anticipate a major rate adjustment prior to the 3rd Quarter of 2004, unless the economy makes a major move to the upside of the growth expectations and begins to show signs of inflationary pressure. However, longer term rates will rise more quickly if even a small degree of inflation is felt in prices, such continued increases in fuel costs, which will cause us to increase our risk measures for equities as a whole.