First Quarter 2003

From the Desk of Ron Rowland

There are reasons for optimism. Although many would have you believe that the worst is yet to come, I firmly believe that better days lie ahead. But just because I am optimistic, it does not imply that I have turned a blind eye to the problems that currently exist, and to the potential for additional problems down the road. 

As I write this today, I am watching a television broadcast of the toppling of a statue of Saddam Hussein in the central part of Baghdad. The immediate reaction of the Iraqi people seems to be one of jubilation. They, too, are optimistic. They believe that better days now lie ahead. However, they are also realistic, and they realize they cannot just sit back and wait for better times. They will have to work to make it happen. A falling statue does not physically change anything. However, the symbolism created by that same falling statue can be a powerful and motivating force. Although it is mostly symbolic, it marks the beginning of change and the beginning of newly found optimism. Never underestimate the power of symbolism.

As investors, we need to adopt a similar reality. Better times will not just happen automatically. There is much work to be done. I'm not sure we can count on a symbolic event to turn around the spirit of U.S. investors, unless the culmination of the war effort provides that symbolism. Corporate executives have been using the uncertainty created by the fog of war as a primary excuse for sluggish corporate performance and their unwillingness to make any significant investments. It now appears that the fog will soon be lifted. Hopefully, we will start to see a trickle of new capital expenditures, signaling that the worst is truly behind us. Meanwhile, companies are taking significant steps to reduce their expenses, and when the uptick in orders finally comes, we should see a lot of that flow to the bottom line.

Fundamentally, there is reason for optimism. Interest rates are at historically low levels. The return on 10-year Treasury securities will be 4% a year over the next 10 years. This level of return will likely be unacceptable to major institutional investors and pension plans. If you couple this with the fact that the three-year bear market has caused these large institutional portfolios to be underweighted in equities, then I suspect that a significant reallocation into equities is not too far off. Many of these pension plans are already underfunded, which will only create a larger demand for equities. However, there is also a bearish interpretation regarding the current underfunding. Namely, that corporations will have to dig into their already weakened profits to shore up those pension plans.

Technically, there is reason for optimism. Although the stock market remains extremely volatile, the lows of last October have not been breached. For the first time in nearly three years we are starting to see the market build a base, instead of just cascading lower. Granted, the three-year downtrends have not been broken yet, but their downside momentum is clearly slowing.

I am an optimist by nature, and I have highlighted some of the psychological, fundamental, and technical reasons for my current optimism. But I am also a realist. I know that the market will commence its improvement on its own schedule and on its own terms. Market indicators are not infallible. They merely serve as guideposts, helping to indicate a possible course. For every bullish argument, an alternative bearish argument can be made. As always, it is important to maintain a balance and to have a healthy respect for the market.

The Quarter in Review

The markets turned in a fairly messy performance for the first quarter. The bear market continued throughout the quarter, punctuated by sharp rallies – one each month, as a matter of fact - that fizzled fairly quickly. Between the still-weak U.S. economy and the war in Iraq, the markets have had plenty to worry about. After rallying sharply in the opening days of January, the market indexes gave up all of the impressive gains they had posted in the first two weeks of the year by the end of the month. January’s rally lasted several days and acted as though it might have staying power, only to disappoint us all. February's rally was a two-day wonder, which was followed by sideways-to-downward action. March's rally was extremely powerful, but the markets were unable to best their January highs. The March rally lost steam when the perception of the war was that it was going to be a long struggle. The end result for the quarter was that the S&P 500 (including dividends) lost 3.2%, the Nasdaq rose 0.4%, and our 50/50 moderately aggressive benchmark slipped 1.4%. Over the past year, the S&P has lost 24.8%, the Nasdaq Composite has dropped 27.3%, and a 50/50 blend of the S&P and the Nasdaq (with monthly rebalancing) shed 26.0%.

At this writing it is not altogether clear whether or not the March rally will resume. Bullish and bearish cases abound for the stock market, and most of them seem equally plausible at this point, though we will say that most long-term technical trends remain negative. Bonds, on the other hand, continued to do well. The Vanguard Total Bond Index rose 1.3% for the quarter and gained 9.6% over the past year.

International News

The obvious international news for the quarter was the war in Iraq – both the events leading up to that war and the actual onset of the fighting. Anticipation of war gave the U.S. markets a bit of a roller coaster ride as the market would go up or down in response to the almost daily changes in perceptions about whether there would or would not be a war. Occasionally, a TV market commentator would try to remind viewers not to forget about the economy and earnings as the true driver of market valuations, but the market itself continued to focus on "all Iraq, all the time." Once the war began, the market continued its roller coaster ride, focusing on whether the war would be long and difficult, or short, swift, and decisive. At this writing, it certainly seems that the latter scenario is most likely going to prove itself to be closest to the truth. When the war is over, markets will still have plenty to worry about internationally. Rebuilding and remaking Iraq should prove challenging, we still have a war on terrorism, and then there’s North Korea…. The U.S. markets may or may not – at any given point in time – worry about these subjects.

CCAM News

John Schloegel – We would like to welcome the latest addition to our staff, John Schloegel. John is joining our team as Director of Client Services and will head up our sales and service department. He has spent the last five years at Fisher Investments and has more than 10 years experience in assisting investors achieve their financial goals. John and his family are in the process of moving to Texas, and he anticipates being fully onboard by the end of the month.

Final Tax Reports for 2002 – Final tax reports have been sent for the 2002 tax year. If you have taxable accounts with CCAM and have not received your final report, please call us at (800) 767-2595. If you would like copies of these reports sent directly to your accountant, send us a signed letter or fax with your accountant’s name, address, and phone number along with instructions to send these reports on your behalf. 

Proxy Voting – The disclosure of proxy voting has been one of the latest items on the agenda of the Securities and Exchange Commission, and it is adopting new rules pertaining to this topic. The new rules require that advisors who have proxy voting authority to adopt proxy voting policies, disclose to clients its proxy voting policy, and explain to clients how they can obtain information about how proxies are voted on their behalf. In the advisory agreement you signed with CCAM, it stated that you retain the authority to vote proxies and that CCAM neither has that authority nor responsibility unless we have a separate agreement in writing. In essence, CCAM is unable to vote proxies on your behalf, so it is our policy that we do not vote proxies on behalf of our clients. 

If you have any questions about the latest news at CCAM, please call your account executive at (800) 767-2595.

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