The market is driven by economic expectations. Knowing this one should be able to make positive investment decisions, but in practice, timing the market is very difficult. We believe that the capital markets are generally efficient. Investors use available information to assess the economic outlook and make decisions on that basis. Changes in market values are driven by changes in longer term outlooks. If conditions appear to be improving, investors buy, driving up valuations to reflect a more positive outlook. If various events are seen to reduce economic output, stocks as a whole, decline in value.

The problem is, expectations are easily influenced by emotion. Towards the end of the first quarter, investors chose to focus on positive news items. The financial talk centered around possible stabilization of the housing market, a fix of the banking crisis, and improving credit market conditions. The subsequent rally was impressive. Though the Dow and the S&P are still down year to date, they are up considerably from their lows, while the Nasdaq closed up nearly 9% year-to-date through the end of April.

Unfortunately there's much to be concerned about and for that reason we are remaining conservatively positions. We have increased our equity exposure, but only marginally. At the end of the year our average account held only 8% of assets in stocks. In more than 30 years we' ve never had so little exposure to equities. We' ve increased that exposure, but not in a meaningful way. There are some signs of improvement, but our expectation is for stabilization. In our view, real improvement is a long ways off and there is real risk that elements of the economy might get worse first.

Unemployment will go higher. This will continue to create downward pressure on consumer spending. So far spending has been affected less than we had anticipated, but it is weak and will likely get weaker with increased unemployment and stagnant wage growth.

Housing is stabilizing and in some areas showing real improvement. That's not to say that prices are going up, however, inventory is moving faster and prices are more stable than they have been.

Expectations for GDP growth continue to be revised downward. Generally after a recession, growth accelerates as lean companies realize outsize gains in profitability as the economy and spending recovers. Current forecasts call for negative growth through the third quarter with only marginal subsequent gains. Due to tighter credit, neither consumer nor corporate spending is likely to bounce back.

The overall outlook has stabilized. We no longer hear the word depression bandied about. With this stabilization came the, somewhat predictable, first quarter rally. This recession has already run longer than any since the 1930s and by all accounts, the recovery is expected to take much longer. We anticipate stock market that reflects this. Some profit taking from the recent rally followed by very gradual gains assuming the outlook continues to improve.