Client Update – June 2004

Rising interest rates, fear that the housing market may be starting to roll over, a growing current-account deficit, volatile commodity prices, ongoing turmoil in the Middle East—all of these concerns have been on investors’ minds lately. Looking past short-term noise is important in making good investment decisions; but many of these issues are more than noise, and require that we evaluate and try to put them in an investment context.

Given an almost endless list of positives and negatives to consider, our goal is to make a realistic assessment that weighs optimism and pessimism fairly. We give more weight to factors that are material and knowable, and then try to evaluate how they might relate to a clear argument for making a move in your portfolio. Therefore, over the past several years we have made many strategic changes to portfolios due to opportunities and threats created by ever-changing geopolitical and economic events.

There are problems on the horizon. The current-account deficit, the impact of a slowdown in housing prices, and other macro-level risks could all create scenarios where earnings could decline significantly (e.g., a weak dollar would lead to higher interest rates and a recession; lower housing prices could hurt consumer spending, etc.). Earnings growth is still quite good at the moment, but profit margins are near all-time highs, which leaves little room for improvement. All these variables—as well as others—contribute to our belief that the market is fairly valued at this time.

Though there are still plenty of risks in the outlook, and the U.S. and global economies remain volatile, we continue to find opportunities to take advantage of the market and its volatility. We seek opportunities where others see problems. For example, as the dollar falls in value, foreign stocks and bonds reap the benefit. Thus we are inclined to stay with a positive view and will continue to find investments that add value and minimize risk.

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