Since 2/28/06: Dow Jones 1.43%, S&P 500 -0.86%, Nasdaq Composite -5.03%, Lehman Aggregate -1.37%. Since 3/31/06: Dow Jones 0.37%, S&P 500 -1.90%, Nasdaq Composite -7.17%, Lehman Aggregate -0.51%.

The recent market correction triggered by the uncertainty over interest rates represented a healthy reallocation of risk from riskier assets to less risky assets, and not any particular problems with underlying fundamentals. The fundamentals have remained strong and all indications suggest that despite a slowing pace in profits, second-quarter earnings will be good. If the consensus target is met, it will be the twelfth consecutive quarter of double-digit percentage earnings growth. A feat accomplished only once in the past fifty years according to First Call. Corporate America is in really good shape with companies reflecting high return on equity, high profit margins and strong balance sheets. Even more attractive is the fact that the market's price-to-earnings (P/E) ratio has come down, which means that at current prices, good value can be found. Yet again earnings growth seems to have gotten ahead of stock prices. This means that almost undoubtedly stock prices will play catch up at some point.

There is no question that the “threat du jour” will always be there to dampen confidence. We have had continued geopolitical concerns along with high oil prices, rising interest rates and concerns over inflation to contend with. After the recent move of the Fed to increase rates, we think the focus will return to corporate earnings as the earning season unfolds.

After strong economic growth during the first quarter, things are pointing toward a slower pace of growth led by reduced consumer spending and homebuilding activity. The pace of employment growth has also slowed in the past three months to a pace consistent with sustainable economic growth. The economy is now expected to grow around 3% annualized for the next few quarters, which is close to the long run non-inflationary growth target. First quarter growth was revised upward to 5.6%, which was the fastest rate in about three years and we are looking at a high likelihood that the economy is about to make a soft landing. All this to say that the economy is healthy, not too hot, not too cold and therefore continues to provide a favorable backdrop for stock investments.

These ebbs and flows in the financial markets are normal and expected. It is critical to stay focused on the long term and let the fundamentals be our guide. Instead of worrying as to why the market went down, which we will never know for certain, the focus should always be to look forward and concern ourselves with the values and opportunities that exist today. Thank you for the opportunity to provide you guidance during these volatile times.