Winter is over. Our period of discontent has evolved into one of cautious optimism. The economy is recovering and the stock market is reflecting a much better outlook.

No recovery is a straight line and during this past quarter the equity markets tested the late September lows. The catalyst for this test was concern that the accounting practices and corporate ethics of the Enron Corporation were endemic.

Certainly there are other examples of inappropriate accounting. However, Enron’s accounting is probably the most egregious of those. When it became obvious that management of the majority of public companies makes every attempt to report results and conditions honestly and openly, investors again focused on the business outlook. This outlook is looking increasingly better.

In February, the Labor Department revised the growth rate for the fourth quarter GDP from 0.2% to 1.4%, then revised it again in March to 1.7%. Then in March, the Institute for Supply Management (ISM) surveys for manufacturing and the service sectors reported that both were now expanding. On March 7^th, the February employment report indicated that 66,000 jobs were added in the month. This was the first increase in seven months. Also, durable goods were reported to have increased at a stronger than expected rate. By March even Alan Greenspan had to admit that the recession was over.

In fact, by March the recession probably had been over for months. "Enronitis" and the witch-hunt for additional examples of bad accounting practices obscured that fact. (Riverplace Capital used this period to add to positions with business cycle sensitivity and to further reduce exposure to longer maturity fixed income instruments in balanced accounts.)

During the first quarter the bond market suffered, as it became obvious that interest rates would have to move higher at some point. That point now looks to be sooner rather than later. The thirty-year Treasury bond interest rate moved from just under 5% to almost 6%. Most other Treasury bond maturities made similar moves. Corporate bonds held up better, buoyed by an improving credit quality outlook.

Stock leadership came from the industrial, selected technology, and consumer discretionary sectors. The energy and basic materials sectors also performed well, as it became apparent that much of the rest of the industrialized world was beginning to recover, and that usage of these commodities globally most likely will increase.

At the beginning of the year we forecast that the economy would recover sooner and with more strength than most analysts were anticipating. We were correct. The next concern is how corporate profits will recover. If the productivity report of plus 5.2% for the fourth quarter of 2001 is any indication, then profits also should rebound sooner, and to a greater degree, than is now anticipated by many analysts. This is what underlies our forecast for the equity markets.

We previously forecasted, and we again reiterate, that we expect better than average returns in the equity markets this year. We expect the markets to be led by those sectors most sensitive to economic activity: industrial, selective technology, consumer discretionary, basic materials and energy. Defensive sectors such as staples, utilities and communications should continue to lag.

Health care most likely will produce mixed results; with those companies that can produce excellent revenue growth doing well and more stable firms lagging. In the financial sector, firms that are asset managers should perform better than those firms that primarily function as liability managers. (The liability managers, primarily traditional banks, already have seen the widest spreads between what they pay for money and for what they can lend it. These spreads will narrow as their cost of money, i.e. interest rates, increase. The asset managers will see their assets and fees grow with the better equity markets.)

More so than usual, selecting the right companies within each sector will be important. The evolving environment rewards the strong and punishes the weak, poorly managed firms. (Target can do well as K-Mart falls by the wayside.) The challenging economy of the past two years has exposed a lot of weaknesses.

Because our economic forecast continues to be for a strong recovery, we were and are of the opinion that bonds are vulnerable to a back up in rates "sooner rather than later." The Federal Reserve may be cautious about increasing short-term rates until it is sure that the economic expansion is solidly under way; but market forces already are adjusting rates upward for longer-term obligations. (Remember the Fed only influences very short-term rates.) As we predicted, this adjustment has been less severe for corporate bonds, because increased optimism for credit quality is providing some offset to the cyclical forces. Treasury and municipal bonds have been most affected. Although Riverplace Capital does not invest in lower quality bonds, this environment should favor them.

We continue to maintain over-weighted positions in economically sensitive sectors, including industrial, selected technology, and consumer discretionary. We are under-weighting financial, communication, and utility sectors. All others are near market weightings. We always seek out strong companies with excellent management teams and strong fundamentals, but nonetheless in the aftermath of the Enron collapse we re-examined each holding.

Although fraud is almost impossible to foresee, we have identified several additional signals which may give us early warnings in similar situations. Accordingly, we have instituted additional defensive procedures, which may lead to a slightly increased turnover in our portfolios. This may be just one of the consequences for portfolio management as a result of the Enron collapse. We must say, though, that examples of outright fraud on the scale of Enron are, thankfully, rare.

We believe that interest rates have seen their lows and are on their way back up. For the reasons explained in our forecast, we favor high quality corporate obligations with no more than two to three year maturities. (Have you noticed how many companies are selling record amounts of bonds to take advantage of lower interest rates? We just don’t want them to take advantage of us.)

Enron has become a code word for egregious management behavior. It stands for everything wrong with ethics in the corporate world and includes collusion by accountants, analysts, and boards of directors, along with any other professional groups. It is greed run amok with few controls and protections for investors, employees, and the public at large. It also, to a degree, symbolizes the prerogatives of insiders.

For the past several months, market participants have been reacting to the magnitude of the Enron failure and all of these issues. The big question is, "How widespread is this type of behavior?" The short answer is that there are elements of this type of behavior spread throughout the corporate world, to varying degrees.

The fact that these issues are now out in the open is a big step forward. Besides the obvious consequences that such behavior might bring, boards of directors, auditors, and regulators now are most likely to err on the side of conservatism, safety, and full disclosure. Reporting will be more complete and reflective of the financial state of a firm. Management will have to better justify its compensation packages. Boards probably will be more proactive in looking after the owners’ interests, which they are supposed to serve.

The accounting profession will implement more stringent rules of reporting. Boards most likely will appoint more outsiders to their ranks to better ensure objectivity. Regulators have been given a severe scolding and are likely to be much more diligent in their oversight and stringent in the application of rules. Investors will react quickly to seemingly poor conduct in any of these areas, shutting such firms off from future financing and possibly making current credit and equity values tenuous.

The result of and silver lining to the Enron debacle: better boards of directors, more complete and conservative reporting, curtailment of management prerogatives, and more focused corporate objectives. It should lead to better investment opportunities for investors. Just as we believed the positive responses to the tragic events of September 11 would lead to a better economy, we believe that the Enron experience will lead to positive results and a stronger corporate community. If you share our optimism that bad events can lead to good results, then Talk with Us.

Riverplace Capital Management, Inc. is proud to announce the establishment of Riverplace Consulting Services, LLC. This is being done as a joint venture with Gerald F. Bott, formerly with Merrill Lynch Consulting. Jerry is the President and Chief Executive Officer of RCS and offers investment-consulting services to corporations, non-profit institutions, and high net worth individuals.

His service helps these clients best allocate their assets to achieve their goals with the least amount of risk. It also helps them select the appropriate investment managers, and measures their progress. This is investment consulting, not estate planning or financial planning. This process is objective, Jerry is not obligated to select Riverplace Capital or any other particular manager. Jerry brings with him an important set of clients and has a long and outstanding track record. He may be reached at (866) 752-5439 or (904) 399-2920. His e-mail is riverplacegfb@aol.com.

Large Cap Stocks (S&P 500) -0.6%

Dow Jones Industrial Average 3.82%

Mid Cap Stocks (S&P 400) 6.45%

NASDAQ Composite -5.39%

Small Cap Stocks (Russell 2000) 3.68%

MSCI EAFE 0.05%

Lehman Corp. Bond Index -0.22%

Inflation 1.1%

(Equity indices are three-month returns excluding dividends)