Quarterly Client Update - June 2004 The second quarter saw the U.S. economy continue its sustained recovery. The government just announced the tenth straight week of employment growth. More potential employees have joined the search for new jobs, since businesses are looking to hire. Corporate earnings and profit growth and productivity gains have increased. Therefore, it isn’t surprising to see growth stocks continue to outperform value stocks. In May, we provided an interim update because of the extreme market volatility experienced in the previous two months. At the time, investor sentiment had turned slightly negative as a result of geo-political concerns following the Madrid bombing, Iraq prisoner abuse scandal, interest rate hike concerns, and rising oil and gas prices. We continue to believe that much of the negative news is short-term noise that should not affect the long-term continued growth of the U.S. economy. Since our May letter, the equity markets have rallied considerably. Concerns have subsided about oil prices rising to $42/barrel with OPEC’s announcement that they will pump more oil to meet worldwide demand. Crude oil now stands at $36/barrel. Turning over control of Iraq to Iraq’s new interim government should be seen as a good faith effort by the U.S., and will hopefully pave the way for other European and Middle Eastern countries to assist in the rebuilding effort of Iraq. The Federal Reserve, after much anticipation, raised interest rates this past week, trying to keep inflation moderate. We have said for some time that the historically low rates would not last forever. The CPI is currently below its long-term average. If the economy continues to stay on solid ground, the CPI will probably creep slowly upwards. In periods of strong economic growth, it is both natural and expected to see a modest increase in price levels. This does not mean that we will see runaway inflation as seen in the 1970s and early ’80s. What does this mean for your portfolios? On the equity side, we have continued our trend of investing in Growth funds, especially in Mid and Small Cap Growth (Buffalo Mid Cap and Baron Small Cap). In addition, we have increased our international exposure (Laudus Rosenberg Intl). Year-to-date, the Mid and Small Cap Growth sector, and International sectors have outperformed the Large Cap Growth (S&P 500) sector of the market. As a result, your equity holdings have done noticeably better than the market. With regard to bonds, we have made significant adjustments to your bond holdings to account for the Fed’s recent actions. We have allocated more bond funds to extremely short-term funds (ING Senior Income and Pimco Low Duration), and high yield bonds (Pioneer High Yield) that should perform better than long and intermediate term bonds. Through the first half of the year, we have been able to achieve superior returns through some uncertain times. We will continue to work diligently on your behalf. As always, please feel free to call with any concerns.