July 23, 2004

Dear Client:

Financial markets were quiet in the second quarter. Equities were unchanged, white bond markets lost about 2%. Year-to-date through June 30th, equities had modest gains: 4% for large company stocks and 6% for small company stocks. Bonds are unchanged for the year.

Interest rate increases are on many investors' minds. The combination of economic growth and the size of the national budget deficit make it likely that the cost of borrowing will increase in the next two years.

In general, increases in interest rates reduce the value of existing bond portfolios, but specialized bonds can offer varying amounts of protection against rising interest rates:

• Floating rate bonds, which adjust monthly to current interest rates

• Short maturity bonds, which allow for reinvestment at higher future rates

• Mortgage pools, whose monthly repayments include principal that can be reinvested at higher future rates

• Inflation bonds, whose payments adjust annually with inflation

• I-bonds, similar to Inflation bonds, but limited to $30,000

• Dividend-paying stocks, whose dividends generally increase with earnings

We have already incorporated these bonds for all of our clients with a fixed income component in their asset allocation, and will continue to do so as long as interest rates are historically low, as they are now.

The anticipation of rate increases is already reflected in current prices and yields. Currently, bonds with short-term maturities have priced in a total 1.5% increase in the federal funds rate by January 2005. Short-term interest rates would need to increase more than this expectation to have an adverse effect on existing bond prices.

I recently read "The Price of Loyalty", former Treasury Secretary Paul O'Neill's disturbing view of the current administration. Mr. O'Neill and Alan Greenspan have a forty year history working together with Presidents from Nixon through George W. Bush. Mr. O'Neill shows a knack for clear explanations of the interaction between public policy and the economy. If you are interested in reading his book let me know and we will send you a copy.

Much can happen between now and election day, but it is safe to assume the incumbents will use every tool available to increase employment and maintain low interest rates until November. As James Carville so eloquently pointed out in Clinton's 1992 campaign, "it's the economy, stupid".

Finally, this is a reminder for 401k and 403b participants: contribution limits for 2004 increased to $13,000 plus an extra $3,000 for folks who are 50 or older. Now is a good time to check that your payroll withholding is on track to reach your goal for the year.

As always, if you have any questions about your financial matters, please don't hesitate to pick up the phone or send an email.

I hope you are enjoying the summer.

Regards,

Audrey Grubman, CFP^®