The market correction at the end of February was triggered by a
seemingly inconsequential event – a sharp sell off in the tiny Shanghai
stock market motivated by profit taking.  Predictions of a global
meltdown in financial markets were overblown.  Most stock indices
have subsequently fully recovered.

This correction, the fourth of such magnitude since 2001, exposed
areas of vulnerability in the markets and global economy.  Excessive
liquidity facilitated by easy credit and a global saving glut has fueled
low quality, unsustainable growth in housing and emerging markets.  
These conditions suggest that periodic, short term, technically-driven
corrections should be expected in the future.  In retrospect, we will
likely appreciate this most recent correction for imposing a timely
reassessment of underlying fundamentals.

In our view US economic growth has slowed, and corporate profit
growth is not expected to demonstrate the robustness of the past four
years.  The probability of a recession has risen somewhat with the
sharp slowdown in residential construction. Notwithstanding the robust
March employment data, which benefited from mild weather, we
remain concerned about the economy’s ability to generate replacement
jobs.

Global growth appears robust relative to the US.  Europe, in particular,
is accelerating while Japan’s recovery is demonstrating sustainability.  
This view is supported by rising demand for oil, energy, and other
commodities.  Energy continues to be one of our favorite long term
sectors.

In terms of asset classes, equities remain relatively attractive based
on valuation and fundamental support.  We anticipate that this four-
year bull market will continue but begin to narrow, with ongoing
emphasis on high quality cash flow generation.  The bond market has
already factored in an easing by the Fed.  Although a slowing economy
and moderating inflation could eventually “force the hand” of the Fed,
we view current yields as too low and are therefore defensive with
regard to the bond market.  Risks with regard to stagflation have
subsided, but we remain concerned that there are no obvious sector
replacements for housing’s impact on economic growth going forward.

We have just completed our annual NY research trip, and you can
anticipate receiving a summary of the interesting and relevant themes
we gathered. We appreciate the opportunity to provide  investment
management guidance to you.