The Good, the Bad and the Ugly; August was good, July was bad and September was ugly. So far, this description also sounds like a pretty-good one for the year. However you describe it, it has not been easy. Record volatility, dot-com collapse, "tech wrecks", constant Fed-watch and economic slowing has made it all interesting. (Remember the old Chinese curse, "may you live in interesting times"?)

Within all this confusion, one trend emerges; the equity markets have broadened. (Remember that last year was pretty much a "tech show.") Our prediction of good returns in most other sectors except technology has come true. Riverplace Capital is capturing these returns for its clients and is having another good year.

So far, equity markets have been in a violent trading range. This has been the most volatile year ever. Most of the major indices at the end of the third quarter are showing negative returns, but they are not too bad when put into the perspective of the fantastic returns the markets have produced for the past five years.

The one notable exception, is the S&P 400 Mid-Cap Index. Mid-cap stocks are having a stellar year. After years of under performance, these stocks are playing catch-up. The durability of this trend will depend upon the overall health of the economy. "Catch-up runs" by out-of –favor sectors or stocks, often occur at the end of long up cycles.

The Federal Reserve capped off its tightening phase with a one-half point move in May. It is now obvious that they have been successful in slowing the economy.

Oil prices have been the big news this quarter. They spiked to a level that was unexpected. A major factor in the sell-off in stocks in September was concern about the impact of these prices on the economy and future corporate earnings.

September was the worst month for the NASDAQin over 20 years, losing 12%. Bonds, so far this year, are out-performing most stocks.

The US economy’s growth rate is continuing to slow. Not only is the last one-half percent rate hike in May still affecting it, the high-energy costs are adding to the deceleration. A growing concern for market participants may be that the economy grows too slowly or even dips into a recession. This is unlikely at this point, but is a risk.

Europe and the Far East regions are already showing signs of economic stress and commensurate slowing. We have been counting on these regions’ recovery and acceleration of economic growth to help sustain the expansion in the US.

The key to answering the question as to whether our slowing leads to a recession is the behavior of oil prices over the next 60-90 days. Sustained prices well above $30 per barrel may lead us to conclude that a recession is on the way.

The same key to forecasting the economy is also the key to the future course of the equity markets. It is possible to make good returns in equity markets during slow growth or even recessions, but would require us to modify our approach. We are not putting these strategies into place yet, but are preparing for the possibility.

Normally, presidential election years have proven excellent years for stock market returns. Incumbent administrations have an interest in providing whatever near term boost they can, or at least not doing anything that might derail a good environment.

Although the markets have pretty much marked time so far this year, we still believe good returns are likely. They should reflect the excellent profit growth of the underlying companies. We see a strong fourth quarter as the oil situation settles down, interest rate policy stays on hold and the economy proves that it has eased but is still robust.

The Fed has finished raising rates. Interest rates are likely to go lower. A slowing economy and recent high-energy prices just do not create much risk of an upside surprise here. High credit quality will be the key to benefiting from this decline in rates. As the economy continues to slow or even go into a recession, credit quality will come under intense scrutiny. The Fed is likely to lower rates as its next move.

The best values in the fixed income markets are in municipal bonds, agencies, mortgage pass-throughs, and high-grade corporates. Longer maturity Treasury yields may back up slightly in the slow-down environment. This is because the large government surpluses may decline with a weakening economy and reduce or eliminate the Treasury bond buy-backs currently under way. Treasury prices have benefited from these buy-backs over the past several months. The big spread between Treasury and corporate bond yields is narrowing with Treasuries’ moving up and corporates’ moving down.

For the time being, we are continuing a growth strategy. We are preparing, however, for a more defensive approach. We put the probabilities of the current slow-down evolving into a recession at about 25%.

We have identified core changes and prepared for their implementation. We hope this will not be necessary.

During the third quarter, we removed five holdings from our equity portfolios and replaced them with new ones. We used market setbacks to make these upgrades. We selected these stocks from our watch list. It became obvious to us that these candidates were performing much better than several of our portfolio holdings.

Although the removed holdings were in good companies, they were unlikely to provide returns we would consider acceptable over the next 3-5 years. The growth for the companies they represent fell below our hurdle rates. The additions have potentially far better growth rates than the companies they replaced and were purchased at prices that represent good value.

The relative performance of these new additions have so far been excellent. We foresee possibly one or two additional changes between now and the end of the year.

Our consistent policy of only investing in high quality fixed income securities prepares for difficult periods. We are extending our targeted average maturity for fixed income portfolios from 6-8 to 7-9 years. Higher rates are not much of a risk at this point and we want to capture these excellent real returns for a slightly longer period.

Chuck Thompson retired from Riverplace Capital effective September 30. All of us in the firm want to thank him for providing the opportunity to begin building the money management firm of our aspirations. Chuck has provided a steady hand through the transitions that we have made.

Charles M. Thompson celebrated his 70^th birthday in March of this year. It’s a long way from graduation at the University of Florida in 1956. It was there that Chuck first met Andy Sears, his roommate and fraternity brother. Their careers took different paths until 1993, when Chuck retired from Winn Dixie. Chuck was not yet ready for full retirement; he joined his old friend at Tricon in the brokerage and money management business. They renamed the company Sears Thompson and hoped to enjoy this association for many years to come.

Before joining Andy, Chuck had spent twenty-seven years helping Winn Dixie grow its pension assets. He had had also worked closely with J.E. Davis and A.D. Davis in managing their personal investments. At Winn Dixie, he had a chance to apply his prior nine years experience as a stockbroker with Pierce, Wulbern and Murphy. Chuck’s entire career has been in the investment field.

When Andy Sears died in December of 1996, Chuck faced a most unexpected challenge. Andy’s illness was brief, and his death sudden. Chuck held the firm together and began to look for means to provide for the long-term viability of the firm. At the same time, I was searching for an appropriate platform from which to build a high quality investment advisory firm.

When I joined Chuck in 1998, I brought along a long-term associate from Merrill Lynch, Ron Belton. I became the President of the newly renamed Riverplace Capital and Chuck its Chairman. We envisioned a two-year transition period, after which Chuck would enjoy his deserved but postponed retirement.

Building Riverplace Capital has provided us with one of the more enjoyable challenges of our professional lives. I am pleased to report that since 1998, we have multiplied the original assets under management many times. The investment approach has been redirected, refined and codified. Staff has been strengthened, efforts focused and needed tools acquired. Chuck helped where appropriate, and stepped aside from time to time, to let the firm gel and develop its own culture.

Before I joined the firm, Chuck and I separated the investment advisory business from the broker dealer, Sears Thompson. The original broker-dealer firm, Sears Thompson, was sold to Sheila Collins in 1999. All of us expect Sears Thompson, under Sheila’s leadership, to thrive by providing custodial, trading and other investment services not only to Riverplace Capital, but to other financial service firms as well.

Riverplace Capital is a successful player in the money management business, not only in Jacksonville, but also throughout Florida. The firm has produced investment results greatly exceeding market benchmarks each year of its existence. It has a cohesive team of experienced professionals. We are increasing assets under management and the firm’s revenues at a most satisfactory pace. Our reputation continues to grow. We love the challenges. Chuck we thank you.

Throughout his career, Chuck has had the love and support of his wife, Dolly. They have raised three children and countless roses. Chuck has countless entertaining war stories from his career. He has many friends Travel, entertaining, golf, roses, and many other activities are sure to fill his time. We at Riverplace Capital wish him an abundance of all these pleasures.

Chuck leaves a firm sound, secure and confidently moving forward.

Large Cap Stocks (S&P 500) -2.23

Dow Jones Industrial Average -7.36

Mid Cap Stocks (S&P 400) 21.17

NASDAQ Composite -9.74

Small Cap Stocks (Russell 2000) 3.29

MSCI EAFE -12.58

Lehman Corp. Bond Index 6.48

Inflation 3.4%

(Equity indices are six-month returns excluding dividends)