2nd 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 were not being put back to work? This question was asked time and again during the first three months of the year as
the economy offered feeble growth in the labor market, leading many to further question whether the lack of job growth would cause
the economy to falter and the markets to decline.

To the comfort of both investors and those in need of work, this question did not need an answer, as the second quarter brought a
surge in demand for labor and a clear view that the economy is healthy and well positioned for sustained growth.  In general, the
equity markets responded favorably to this growth during the quarter, while fixed income and
REIT markets suffered due to concerns
over rising interest rates.

                                                                                      Source: Wilshire Associates
                                                                                     Past performance is no guarantee of future results

As so often seems the case in the financial markets, the answer to one question just leads to another question. The question now is
focused on strong labor growth and how it may influence the economy,
inflation and interest rates. Non-farm payroll growth in the
second quarter totaled 925,000 .  This surge in job growth pushed inflation expectations higher and bond yields followed. The impact
of this is seen in second quarter returns for the Lehman Aggregate and High Yield Bond indices, as well as the Wilshire REIT index.
Clearly, the markets are looking for higher inflation and bond investors are demanding higher yields because of this, while REIT
investors are concerned that real estate returns might decline as interest rates move higher.

The factors pushing interest rates higher fueled muted optimism in the equity markets.  The added catalyst of strong job growth
improved the potential for higher consumer spending. If consumers spend more then earnings should increase and stock prices
should move higher. But rising interest rates dampen the impact of earnings growth when stock analysts value equity securities. So the
rise in interest rates in the second quarter softened the positive impact of improved earnings forecasts and slowed the equity markets
in the second quarter of 2004.   

Midway through 2004, the economy remains robust and the outlook is generally positive. However, several factors over the coming
months may overshadow this continued economic strength. The June 30th hike of 0.25% in short-term rates by the Fed is the first of
what may be many. Uncertainty regarding how high short-term rates will rise, and how long it will take before they peak, will have some
impact in both the bond and equity markets. Geopolitical concerns, volatile elevated energy costs and the November election should
also have some influence on the markets. Each of these factors may distract investors over the coming months, but, with the exception
of the expected Fed activity, these factors should have little impact on the strong near-term economic fundamentals.

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