"Boring, Boring, within the Boring, terror." This is how Vince Farrell, a Principal of a well-known Money Management firm, described the current market action on a recent CNBC interview. He was referring to the continuing group rotations and corrections of sectors within the overall market. Financial stocks have been in a downtrend since April. Technology stocks have recovered from their spring correction, while retail stocks have entered one of theirs. The averages, in the meantime, have remained in trading ranges.

Daily volatility is the norm, with many 100 and 200 "Dow" point swings. In some sectors we’ve seen a $40 stock up $2 in the morning and down $4 in the afternoon. It’s hard to be smart on a daily basis when faced with this kind of action. Most short-term traders have been punished. No full year this decade has had more than three 5% declines. We have already had four with a quarter of the year to go.

Large Capitalization Growth Stocks regained market leadership this quarter. In the second quarter, Value and Small Capitalization Stocks led the market. We forecasted this catch-up rally. So far however, it appears this is all that has happened. The broadening of the market that we initially saw has now reverted back to the same narrow leadership we have seen for some time. This includes many of our core holdings.

Since April of 1998, the average stock is down 20%. We said it would be a stock-picker’s market, and it has. One could look at this as a negative. It could also be argued that the market has already had a significant correction and it has lasted 18 months. This is long for a correction so it may soon be over.

In addition to Alan Greenspan and the Federal Reserve, the exchange value of the dollar has emerged as another concern for both the bond and stock markets. The dollar has weakened significantly against the Japanese Yen, but remained fairly even against most other currencies. It’s a case of a strong Yen not a weak dollar.

The trade deficit has reached extraordinary size, over $24 Billion for August. For July it was $25.2 Billion. This reflects our economic strength relative to the rest of the world. As recoveries take hold in Asia and Europe’s economies accelerate, these deficits should decline.

The end of the quarter finished with a correction. During the week of September 20, the Dow lost 524 points or about 5%. The S&P also declined to a level 10% below its recent July high. In spite of excellent fundamentals, volatility continues. Our focus on businesses, not stocks, and a commitment to a reasonable investment horizon makes more sense than ever.

Strong economic growth is now the problem, not the answer. GDP growth has continued to be much stronger than anticipated. This has created great concern for the direction and level of interest rates. We forecasted a slowing in this growth rate, but so far we haven’t seen any. We still believe slowing is a matter of time.

We have now seen 102 months of economic expansion. There is no basis for predicting an end to this yet. Domestic and International fundamentals are intact for this expansion to continue. If anything, the International fundamentals are still improving.

Trying to predict the growth rate of the economy is of little use to us except to give us a basis for predicting likely changes in interest rates and as a barometer of business conditions. Precision is not as important as to get the general outlook correct. We also have to recognize that extreme conditions invite intervention in the economy by the government. This is precisely what the "Fed" is doing now. Betting that the "Fed" will be successful in slowing the economy is still a good.

In short, we believe the economy will slow, but remain healthy. Including capital gains, the U.S. savings rate is 8%. Consumer’s spending and income has risen at the same pace during the 1990s. The huge increase in unrealized capital gains pushed household net worth to record levels relative to income or any other measure. Assets are growing more rapidly than debts. Americans are in the best financial shape in history. This will continue to be a good environment for stocks and a better one for bonds.

A broad trading range for equities may last for some time. The markets continue to be frozen by concerns that interest rates will continue to rise. At the same time, they are supported by the excellent economy and earnings growth.

It appears that third quarter earnings will increase about 17% over the same period last year. This is the best earnings growth in years. We normally see this rate of increase when coming out of a recession. We expect to see corporate earnings jump 15% this year and 8% next year.

Some people have concerns about Y2K effects on the market at the end of the year, be they real or only psychological. This may prove to be very positive for the markets. To offset cash hoarding and withdrawals from the banking system, the "Fed" is likely to provide extra liquidity to the economy. This liquidity often fuels stock prices. So look for a good rally either going into the year-end or soon after the first of the new millenium.

Today’s winners will probably be tomorrow’s winners as well. We aren’t looking for significant changes in stock leadership. Large Cap Growth Companies, which continue to deliver good earnings, should also continue to lead market advances.

The same liquidity supplied by the "Fed" at the end of the year that provides fuel to move the equity markets, will most likely have the same effect on the fixed income markets. Look for a good rally.

The near term is of more concern. Will the Open Market Committee of the Federal Reserve be forced to increase rates further in order to slow the economy? We have to admit that we simply do not know. We remain confident that they will eventually be successful and rates will come down.

We remain fully invested. Even though the volatility is, at times, disconcerting, the economic backdrop still looks excellent. Many of the companies in our model portfolio should report record results for the third quarter. We continue to find additional attractive candidates.

Excluding the "tech" sector, the S&P 500 are selling at 21 times the 1999 estimated operating earnings. This is in line with past experience. Productivity growth in the past five years is double that of the past twenty-five and is accelerating.

As we hoped, several of our large international franchise companies are doing very well, especially in technology. We are continuing to emphasize these firms. The Capital Goods Sector is another area of recent emphasis for us. Most other sectors are being maintained at recent weightings in portfolios.

We have used the market volatility to add to or initiate new positions at favorable prices. We’ve done the same with fixed income investments.

Our target average life and duration for fixed income portfolio’s remains 5-7 years. This is a cautious policy. If rates should increase much further, we are likely to raise the target. The core rate of inflation is running at 1.6%. Real returns at current rates are excellent, especially when compared to historic norms.

Maintaining discipline, controlling risk, and staying the course continues to make sense to us.

How do you choose an Investment Advisory Firm? What are the important factors? Which are the most important to you?

The keys to an investment advisory firm are no different from any other business: management, management, management. Start with the management of the firm. Is it vibrant, dedicated and disciplined? Is there a team or is management a one-man band?

Look at the people. Are they experienced with a reasonable tenure in the firm, or is there constant turnover, poor attitudes or other signs of no management or even bad management? Do they have and keep talent?

Look at the service. Is the firm responsive? Is the work accurate or fraught with error?

Can you count on the firm and not have to continually follow-up? Human beings aren’t perfect and no firm is perfect, but most of us know good service.

Is the management of your portfolio good? Do they deliver? Remember that none of us control the investing environment. Delivering doesn’t necessarily mean beating benchmarks every quarter, but measuring up well against them over time.

Just as important are they consistent in their approach? Do you understand and agree with it? Many different approaches to investing can produce excellent results. The key is consistency and discipline.

Managing a portfolio against your criteria is vital. It must be the risk level you are able or willing to accept. If the management of your portfolio varies from your criteria, ask why. After all it’s your money and your future.

It all goes back to the management of the firm. None of these measures stay good over time if the firm is poorly managed.

We believe Riverplace Capital measures up well against these criteria. We have a seasoned management team, a talented staff, and commitment to our clients. Talk With Us.

Send Letters to Editor to pbower@ilnk.com

Large Cap Stocks (S&P 500) 4.35

Dow Jones Industrial Average 12.59

Mid Cap Stocks (S&P 400) -2.99

NASDQ Composite 25.24

Small Cap Stocks (Russell 2000) 1.27

MSCI EAFE 7.41

ML Corp Bond Index -1.97

(7-10 yrs. Maturities)

Consumer Price Index Annual Rate 2.3%

(Equity indices are nine-month returns excluding dividends)