January came in like a lion! In the first week the market was up 5%. Someone joked, "at this rate we’ll be at 20,000 on the Dow by the end of the year". However, in February, on the way to 20,000, we had a "Tech Wreck". What went up came down. In actuality, the market advance at the first of the year was very narrow with only a handful of large technology, health care, and Internet stocks leading the way.

Interest rates also began climbing. By mid February the rate on the 30 year Treasury Bond had advanced from a little over 5.0% at the beginning of the year to 5.6%. February was the worst single monthly performance for Treasury Bonds in the 90’s and the fourth worst since the 1973 inception of the Lehman Treasury Index. Corporates fared a little better, but not by much.

The economy continued to surprise most forecasters by being more resilient and stronger than expected. The fourth quarter GDP was reported to have grown at a 6.1% rate. Traders were not amused. They sold both bonds and stocks. The NASDAQ had the biggest one-day decline ever.

Alan Greenspan during his February Humphrey-Hawkins testimony before Congress suggested that perhaps he had eased too much during the fall of 1998 and that policy shifts in the future would be toward tightening. The bond market immediately priced in a quarter point tightening.

The Stock market bounced back in early March. During the first week the Dow increased almost 5% and the S&P increased 3%: what a yo-yo! Group rotation continued with the energy and basic materials sectors coming back to life while the technology sector continued to languish. When the technology sector came back to life in mid March the Dow Jones average took a run at 10,000. The Dow 10,000 level was breached three times in Mid-March without a close above it. On March 23, 1999, Kosovo and some earnings warnings tripped up the market. The market closed down over 200 points.

Two days later, after the bombing campaign on Yugoslavia started, the Dow closed up over 160 points. In our last "Perspectives", we said we expected more volatility in 1999 and we got it!

On March 29, 1999 the Dow Jones Industrial Average closed above 10,000. What was interesting about the new advance was how broad it was. Small-Cap, Mid-Cap, Cyclical, and other laggard stocks all participated. This is very encouraging action and bodes well for near-term performance.

Ninety-six months of economic expansion and still counting! Expect more. We have under-estimated the snap back of economic growth after the correction in the markets and slow third quarter last year. We are again ratcheting up our GDP growth expectations for this year to 2%-3%. We still believe we will see a slowing of the torrid pace of growth that we are experiencing now. Some economists have expressed expectations of 3%-4% GDP growth in 1999. Of course some of these same economists were predicting a recession in 1999 during last summers’ correction.

The best that can be said is the near term future still looks like a very favorable business environment. Inflation is low, the lowest in 33 years. Corporate profits are growing. Asia has bottomed. Europe will be stimulating economic growth with interest rate cuts.

South America is still a worrisome sector, but seems to be affecting specific companies rather than creating a general problem. We continue to be optimistic about the economy for the foreseeable future.

The most obvious characteristic of the equity markets this quarter is that they have been narrow. The strong companies got stronger, others languished or went into corrections.

As we expected, growth was still the key to performance. However, toward the end of the quarter, other groups came to life. We may see more catch-up performance by these groups for a while. If, as we expect, the economy slows in the second half of the year, the large-cap growth companies will reassert their market leadership.

Large consumer franchise companies with international operations should begin to outperform the market for the rest of the year. Investors are anticipating some recovery in these companies’ foreign operations.

Technology will go through its manic-depressive phases, but will remain a leadership group in market performance. The Financial sector will also probably remain at the forefront of performance, especially those firms benefiting from the favorable investment environment.

These sectors continue to be emphasized in our management of your portfolios!

Bonds appear to be range-bound. If the economy slows in the second half of the year interest rates should retreat back toward their recent lows. We expect to earn our coupons on our bond holdings with very little capital gains or losses.

We are seeing some recovery in low-grade bonds as well as foreign bonds. We allowed for this possibility in our last "Perspectives". We see further catch-up performance out of these bonds and have maintained positions or very modestly increased positions in these bonds. Our fixed income allocation average life and duration policy remains at 5-7 years.

We are increasing allocations to the large international franchise companies. With the recent recovery in energy stocks we have reduced our weightings in this sector. Several equity positions have been eliminated because of management failures and our concern over the ethics of management in one instance. The others appear to have a deteriorating business outlook. We remain committed to low turnover, but we must also keep your assets growing. We have added several new companies to our model portfolio and deleted others. Some of these changes may be reflected in your portfolio.

We stated in our last "Perspectives", that risk on individual securities would be high. Perceived failure would result in severe declines. We have experienced some of this already. To reduce the risks to portfolios in this type of environment, we continue to maintain broad diversification and limit position sizes. We continue with a balanced approach to economic sectors.

We have also sought to limit the exposure to certain volatile sectors. Sector weightings have been reviewed and has resulted in some re-balancing.

In spite of the volatility and significant risks in individual securities, we are seeing encouraging results. Most portfolios are off to a very good start this year and we expect further gains. Wish us well!

After tax growth or taxable gains, what are you striving for in your portfolio? The power of compounding is most effective when it takes place without the payment of taxes. If every time you have a successful investment you have to lop off 20% to 40% to give to the government your success rate has to be exceptional in order to overcome this financial drag. Inevitably, brilliance will be offset by stupidity and after the "House (U.S. Government)", has taken its share, you may be lucky to end up as well off as you started.

This is one reason we at Riverplace Capital pursue strategies that attempt to produce excellent after tax results. We keep turnover low by focusing on investments, which are likely to do well for an extended period of time. Because we would like to hold investments indefinitely if possible, we focus upon high quality, large enterprises with excellent management and premier product lines. Management is usually the most telling factor in long term success.

We buy companies, not the stock market. A company’s success is the source of building increasing equity values year after year, not public perceptions, mania’s etc. Many stocks and sectors come in and out of favor over the course of a reasonable investment horizon. Companies build value over years, not quarters.

Just because you may operate within an account that defers taxes, such as an IRA, don’t think that the principles of producing wealth over time do not apply. Yes, turnover is not penalized, but how often are you making decisions that actually enhances your potential return rather than subtracts. Every time you make a sell and a buy decision, you entertain risk and incur transaction costs. It’s hard to be a genius every time.

Low transaction costs and compounding without tax consequences, that’s what produces results that are meaningful to you. Let Riverplace Management Company apply its over 100 years of collective experience to help you receive investment success. Talk With Us!

Large Cap Stocks (S&P 500) 4.65

Dow Jones Industrial Average 6.59

Mid Cap Stocks (S&P 400) -6.68

NASDAQ Composite 12.25

Small Cap Stocks (Russell 2000) -5.77

MSCI EAFE 1.77

ML Corp Bond Index (7-10 yrs. Maturities) -0.67

Consumer Price Index Annual Rate 1.6%