Q1-08 Update

The stock market declined almost 10% in the first quarter. The performance was poor and there could be some more downside to stocks. The Dow and S&P 500 are yet to reach 20% declines from the highs of last year so do not meet the traditional definition of a bear market that usually accompany recessions. First quarter lows of March 10th were down 17%-19% from the all time high establish last October. (The Nasdaq lost 14% in the first quarter which does put it in bear market territory). Despite the risks, the alternatives are poor. Safe fixed income investments have low yields and little opportunity to appreciate in value. We believe there is relatively more upside in equities and stocks have rebounded over 4% from the lows of March. We do not want to miss out when it does turn higher. April 1st was a big day that was really unexpected. The S&P 500 finished higher by about 3.5% on that one day.

Tumultuous credit market conditions forced unprecedented actions from the Federal Reserve to shore up the financial system. Amid cutting short term rates from 4.25% to 2.25%, the Fed moved to provide assurance to banks and securities firms that they will have access to credit funding. The yield on 10-year Treasury Notes closed at 3.43%.

Recession concerns are moving to the forefront with declining corporate profits and slowing gross domestic product growth. Sentiment has gone largely from whether or not it will occur to how long it will last. Traditionally, a recession is defined as consecutive quarters of negative gross domestic product growth. Corporate earnings growth rates were down in the fourth quarter and are expected to post declines for the first and second quarter as well. Gross domestic product was up slightly (0.6%) in the fourth quarter. The first quarter of 2008 is expected to go negative.

Commodity prices continued to move higher. This is a source of worry as input costs are ultimately reflected in profits or are passed on to the consumer. Oil futures were up another 6% in the 1st quarter closing over $101 per barrel. Gold hit $1,000 per ounce before closing the quarter at $916 up almost 10% from December. Other commodities like wheat (up 5%) were also higher for the quarter but finished below the highs established in the middle of March. Despite the volatility in commodity prices, inflation measured by core personal consumption expenditure (PCE) was up only 2.2% in January.

The consumer may finally be showing signs of weakness as well. Retail sales reports showed a decline of 0.6% in February. The unemployment rate jumped to 5.1% in March after 3 consecutive months of losses in the number of jobs.

International equity market results were down almost everywhere too. The financial system issues in the U.S. led to selling of stocks across the globe. The Dow Jones World Index (excluding the U.S.) fell 8.7% in the first quarter. Even emerging markets like China and India which had widely outperformed previously were down more than 20%. Developed countries showed losses with Japan down 18%, Germany down 19%, France down 16%, and the U.K. down 12%. International markets moved largely in the same direction as the U.S. despite a world economy that continues to expand.

Please let us know if you would like additional information on any of the above.

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