The economic outlook outlined in our January summary is continuing according to plan. World growth is the engine with projected growth over +4% while the U.S. is experiencing a “soft landing” because of a slowdown in autos, capital expenditures and the housing slump. As a result, real GDP increased +1.3% in the first quarter and is projected around +1.7% this year with further strength in 2008. The March quarter was probably the low point in the cycle and we expect our economy to gradually strengthen with support from consumer spending and exports because of rising employment, wage gains and the weak dollar. In addition, the declining level of inventories indicates a rebuilding period ahead with an improvement in capital spending.

Corporate profit growth compounded over +10% annually for the last four years, but has begun a period of single digit growth because of our economic slowdown. However, profits were stronger than expected in the first quarter primarily because the strength of international operations more than offset domestic sluggishness. It is important to note that for the S&P 500 companies, almost 40% of revenues and 30% of profits are derived from exports and overseas operations.

Inflation, a lagging indicator, has strengthened somewhat in the first quarter. However, the “core” rate-excluding food and energy-moderated somewhat because of the decline in energy prices, but this may reverse this quarter. Overall, inflation should moderate in the second half as our slowing economy eases industrial capacity and wage pressures, but there is continuing underlying pricing strength in commodities that has the Fed concerned. Longer term, inflation should be controlled by the intense worldwide competitive pressures caused by excess labor and industrial capacity. The Fed has recognized the potential downside risks for our economy and is likely to begin reducing rates in the second half if inflation eases somewhat. The objective will be to insure steady growth and a favorable economic environment in 2008 – an election year. The key economic risks include a weaker and prolonged housing slump, accelerating inflation, higher interest rates, protectionism and potential terrorist attacks that may negatively impact the world economy and investor psychology.

The stock market experienced a modest correction in the first quarter and has strengthened in recent weeks with the major indices reaching new highs. Dow theorists have reaffirmed a primary bull market, but it is beginning to appear overbought. Interestingly, new bull market highs is a global theme. Looking ahead, the market may strengthen further, but we expect continued volatility. More importantly, the supply demand equation for stocks is favorable. For example, the stock market’s value of approximately $14 trillion was reduced by $600 billion last year and M&A activity was 100% greater in the first quarter. Also, hedge funds have raised an enormous amount of money and the search for private equity investments in the public market is accelerating. These are positive signs. We continue to believe that the stock market is reasonably priced and that we will experience a favorable investment environment this year and next.