During the first quarter of 2008, the financial markets struggled with the on going credit crisis of which we haven't seen the likes since the savings and loan fiasco of the early 1980s and1990s. In response to this crisis, the concerns over the rest of the economy and the uncertainty that prevailed, the Federal Reserve lowered the fed funds rate from 4.25% to 2.25% as well as the discount rate from 4.75% to 2.5% during the first quarter of 2008. Furthermore, the Federal Reserve opened the discount window to investment banks and reduced the capital holding requirements for Fannie Mae and Freddie Mac.

These are certainly unusual times and policymakers are pursuing aggressive and creative strategies to reduce the cost of capital, inject considerable liquidity and attempt to facilitate activities in the credit markets. The Federal Reserve also allowed its primary dealers, the major financial firms through which the central bank conducts its business, to borrow from it using mortgage-backed securities as collateral. In another unusual move, the Federal Reserve decided to lend $30 billion to JP Morgan Chase & Co. to help consummate a purchase of Bear Stearns on the verge of imploding under the strain of its own leverage. This type of move had not been seen since 1936 as the Federal Reserve extended its resources beyond simply allowing the banks to borrow from its discount window. More recently, investors had the opportunity to review a government plan to overhaul the way Wall Street is regulated and the oversight structure concerning the banking system. Lawmakers have voted in a stimulus package in the form of tax rebates that should hopefully find its way back into our economy. Much is happening in order to calm and restore our economy and the effect of these actions will not be fully seen for probably 12 to18 months.

Investors went into the first quarter of 2008 with higher expectations thinking that the worst might be over given the large write downs already taken by the financial companies in the last quarter of 2007 and the anticipation of rate cuts by the Federal Reserve. However much of the uneasiness remained with concerns about recession, inflation, higher oil prices, a weak dollar, the health of consumer spending and the significant unknowns related to the widespread impact of the mortgage-backed securities which continued to fuel much of the uncertainty. The problem today remains a highly leveraged credit system with potentially massive and unquantifiable credit losses. The impact of significant declines in home prices is a significant issue in that the typical homeowner is highly leveraged and a lot of their net worth is tied to the equity in their home. A drop in value for many can cause millions of homeowners to be upside down on their mortgages.

The economic data continues to be weak and fear as well as risk aversion have the potential to feed into a self fulfilling prophecy, and although certain areas such as housing and financial sectors have experienced recessionary times, we think that the jury is still out on whether a widespread recession is in effect or will play out as defined by two quarters of negative growth. The issues with the credit markets have the potential to hurt the economy, however if the actions taken by the government work favorably and given the resiliency of our economy we remain cautiously optimistic.

It is important to not confuse the behavior of the equity markets with that of the economy. For the most part, the stock market is forward looking in nature and by the time we have figured out if a recession was underway, we probably will be in the midst of a recovery and the equity markets will most likely have bounced back significantly from their lows looking to price in what may happen on a forward looking basis. We feel that the equity markets are in the process of bottoming out and given the policy shifts, the lower interest rates and the impending stimulus, we could be on the verge of something significant on the upside for the stock market at these valuation levels. It seems that in an election year, there is nothing that the Fed or lawmakers aren't prepared to do to help fix some of the problems we face. The question is will it work and will there be any undesired side effects. It probably won't be without its usual volatility and more negative news will continue to test the markets. We have been at this long enough to know that patience and fortitude are always rewarded and opportunities often present themselves when the average investor out there continues on their tendencies to overreact to bad news. Thank you for the opportunity to guide you during these volatile times.