1st Quarter 2004 Newsletter
Investors were faced with a perplexing question as we entered the second quarter of 2004. How could the economy continue to grow if
the unemployed

The first quarter of 2004 provided a clear example of why diversification is so important to any long term investor.  Portfolios allocated
across several asset classes in the first quarter produced strong returns despite tame performance in portions of the US equity
market. Returns for real estate, bonds, and international and
small cap equities significantly outpaced modest declines in the Nasdaq
and Dow. Those with even small allocations in the strong
market sectors realized healthy performance for the quarter despite the late
quarter fade in technology and large-cap industrial stocks.























                                                                              
Source: Security/APL
                                                                             Past performance is no guarantee of future results        

Best among the class of positive performers was real estate with the Wilshire
REIT Index posting a strong 12.07% for the quarter.
Small-cap equity followed with the Russell 2000 Index returning 6.26%. Morgan Stanley’s International Equity EAFE index gained
4.40%.  These returns, when combined with the gain of 1.69% for the S&P 500 or the –0.35% return of the Nasdaq, left the diversified
investor in good shape at quarter end.

Several factors combined to support most market segments during the quarter. One major factor was the decline in interest rates for
bonds maturing in 10 years. Many lenders set long-term
mortgage rates around the 10 year US Treasury yield. As this yield declined
during the quarter we saw a pick-up in real estate values as more people became eligible to own property. The increased demand to
buy property pushed prices up. The return for the Wilshire REIT Index is evidence of this. Also benefiting directly from the drop in
rates was the bond market with bond prices moving up as rates declined.

The drop in interest rates was brought about by slow growth in employment during the quarter, low
inflation and what is called a “flight
to quality” in the markets. The term “flight to quality” is used to describe a rush to the US Treasury markets when events take place
that cause temporary market uncertainty. We saw this following the bombings in Madrid in March. The desire to own the safety of US
Treasury Bonds increased after the Madrid terrorist attacks and this pushed rates still lower.  

As we enter the second quarter the economy continues to look fundamentally solid. Year over year
CPI remains below 2% despite the
spike in fuel prices. Housing construction and home sales remain robust, durable goods orders have turned positive and the Federal
Open Market Committee (FOMC) seems content leaving interest rates low for now. The forces remain intact for continued economic
growth and this should have a positive influence on the US equity market.

Counter to data received during the first quarter, the second quarter opened with a strong employment report posted on April 2nd.
Job growth of 308,000 far exceeded the consensus forecast of 123,000
1.  This is a shift from the first quarter and should support
second quarter retail sales. Since the consumer represents 67% of
Gross Domestic Product in the US, the economy can really heat
up when the consumer has more
money to spend. The interest rate setting arm of the government, the FOMC, will keep a keen eye
on this. If month-to-month employment growth should continue above 200,000 going forward, the FOMC may look to hike rates
sooner as opposed to later.

The investment environment over the past 12 months has been quite robust. We see little over the near-term that should change
these conditions. The November Presidential election is several months away so any concern over a change in the political landscape
should be slow to develop. Although terrorism will continue as a wildcard, we remain optimistic that any market influence from another
event will be much like the Madrid impact, short-lived.  In any event, we remain confident in the strong capabilities and resources
dedicated to the ongoing monitoring and management of your portfolio.


Regards,



Robert Valentine

i Source: Bloomberg
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