Losers became Winners! During the first half of April, the market made an abrupt shift in leadership. High-flying growth stocks were sold as a group, and so-called "value" stocks were bid up. Volatility continued with the second biggest NASDAQ decline ever on April 19 at 138.4 points. Another tech wreck, the second for the year, took place. Then, over the next two days, the NASDAQ recovered most of its losses.

Meanwhile, stocks in the basic material and cyclical categories were in a "catch-up" rally. In our last "Perspectives" we forecasted this move, but also felt that this rally would not lead to sustained leadership.

By late April, it appeared that the first quarter earnings for the S&P group of companies would be up over 9%. This is the first quarterly increase in this measure in about two years. This bodes well for continued capital spending and stock prices in general. The IRS also reported that refunds are up 14% this year.

The consumer obviously had purchasing power, and the strength in retail sales proved he was using it. This strength began to alarm the Federal Reserve and Alan Greenspan began hinting that the economy was becoming too "hot" and might need a little "cooling- off". After this, all eyes were on interest rates and the Bond Market.

At the end of April, the first quarter GDP was reported to have grown 4.5%. The long U.S. Treasury bond plunged 1 7/8 points to yield 5.66%. The stock market is not the only market showing volatility. By early May, yields rose to over 5.8%.

In mid-May the "techs" came roaring back. Cisco Systems reported record earnings and greater than expected revenue growth. This lifted the entire sector. On May 14, 1999 the CPI was reported for April and showed a larger-than-expected increase in inflation. The overall rate was reported to be up 0.7% and the core rate, which excludes food and energy, was reported to have increased 0.4%. The long benchmark Treasury bond sold off 2 points to yield 5.9%. The stock market sold off 194 "Dow" points. Then, in early June the CPI for May was reported to have shown no increase and the core rate was up 0.1%. Everybody was confused.

In June, yields almost reached 6.2%. Interest rates became the market’s focal point. Would Greenspan raise rates at the June 30 Federal Reserve Open Market Committee Meeting or not? In testimony before Congress, he strongly hinted that he would. And on June 30, he did. The "Fed funds rate" was increased 0.25%.

During the first half of this year the S&P suffered declines of over 5% on three different occasions. No full year has seen more than three 5%-plus dips in this decade.

The NASDAQ Market suffered a decline of over 10% during the quarter and the Internet stocks as a group declined 50% from their highs. The "Internet Bubble" had popped.

In late June the growth stocks that had been sold off so heavily during the early part of the quarter rallied. The value stocks went sideways or backed off modestly. A difficult and confusing quarter ended.

We are again ratcheting up our growth expectations for the economy. We now expect the economy to grow between 3% and 3.5% for the full year. Since the growth in the early part of the year was much stronger, we obviously see declining growth for the second half. Our belief is that the "Fed" is determined to see a cooling in the growth rate and will apply the necessary changes to reach this goal.

We feel confident in this general direction, but the timing and pace of slowing are uncertain. We do not see a recession in the near future. Ninety-nine months of sustained economic expansion are behind us and we see quite a few more. The economic pictures of Japan and the Far East are improving. Europe also looks to be experiencing a modest re-acceleration in economic growth. Increasing growth rates in these areas should help cushion the slowing in our own economy.

The markets have broadened out. As the economy cools, either as a result of "Fed" action or on its own, growth stocks should once again perform well. But since we see a cooling and not an abrupt slowing, the market leadership and performance may remain broader than before.

Some of the value and secondary issues may continue to provide good opportunities for returns. The brightening international picture should help the profits of commodity and intermediate-goods producers for a while. This is a shift in our thinking from earlier in the year. This broadening is very healthy for sustaining continued gains in the stock market.

Earning expectations for the S&P 500 companies in the second quarter average an increase of 11% over the same quarter last year. This is would be the best increase in years and it’s hard to see a serious market correction with this as a backdrop.

We remain strongly committed to the economic sectors, which should sustain growth over the longer term. These are technology, financial services, and health care. As interest rates level off and begin to decline, these sectors should once again lead the market. However, we are modestly increasing investments to "value" stocks and smaller companies in the mean time. We are optimistic and remain fully invested.

We expected a trading range for bonds in the second quarter, but got a correction. Our cautious fixed income policy of maintaining a 5-7 year maturity range for both average life and duration have helped cushion the impact on portfolios. As we expected, lower quality and foreign bonds outperformed high-grade bonds during this period. However, all grades produced either flat or negative returns.

Bonds may continue to produce poor returns until buyers are more confident that the economy is slowing. No one event or statistic is likely to bring about this perception. In fact, confidence in a slowing trend may take some time. In the mean time, we are staying with our cautious fixed income policy.

We are fully invested and intend to stay that way. We have increased allocations to large international-franchise companies and expect to see these firms do well as the expansion in the rest of the world takes hold. We are already seeing the beneficial impact of this phenomenon in the earnings of some of our large technology companies.

We added two value names to our model portfolio. Both these companies have shown the ability to grow in a variety of economic environments. We feel that technology and financial services will continue to be the keys to performance. Our allocation to these sectors has not changed.

We evaluate the performance of each individual company in our model and will make changes if warranted. Our turnover this year has been light and we expect it to remain so. Our commitment to all-economic sectors and proper diversification within those sectors has helped us weather a volatile and confusing second quarter.

By now, everyone has heard of computers potentially not recognizing the difference between the year 1900 and 2000 when using date calculations. This problem has enormous implications for financial transactions. Billions of dollars are being spent throughout the world to correct this problem. We want you to know what Riverplace Capital is doing to correct this problem and prepare for the new millenium.

In the summer of 1998, Riverplace Capital hired an external consultant to evaluate our internal network operating systems and to upgrade them for year 2000 compliance.

Most of our internal systems were already compliant and no major upgrades were needed. For example, the software we use for portfolio management and reporting was compliant with the latest upgrade in 1998. We are now pleased to say that our systems are now entirely Y2K compliant.

We are also required to make sure that all firms we conduct business with confirm that they are Y2K compliant. We began this audit process ahead of the industry in 1998 and are 90% complete as of May 31, 1999. We are also testing with our custodians to assure that January 1, 2000 is a just another business day. In fact, the financial industry at large has undergone several test runs on its systems and except for a few minor glitches, the industry seems to be ready.

We believe that most industries and institutions in the U.S. will have little trouble with this problem at the turn of the year. We assure you we have taken the steps necessary to continue the integrity of your accounts. We are working closely with our custodians to ensure that the turn of the millenium is a cause for celebration and not a concern for our clients.

Large Cap Stocks (S&P 500) 11.67%

Dow Jones Industrial Average 19.49%

Mid Cap Stocks (S&P 400) 6.22%

NASDAQ Composite 22.50%

Small Cap Stocks (Russell 2000) 8.47%

MSCI EAFE 3.28%

ML Corp Bond Index (7-10 yr. maturities) -2.25%

Consumer Price Index Annual Rate 2.00%

(Equity Indices are six-month returns excluding dividends)