1st Quarter

April 15, 2001

The chilliest quarter in recent memory has finally come to an end. The grinch not only stole Christmas but also the entire first quarter and seems to be on a roll. Whichever way you slice it, the first quarter of 2001 was undoubtedly a trying one. The world experienced four earthquakes – one in India, two in El Salvador, and one in our own backyard in Seattle. The European Union, which was already fighting Mad Cow disease, had to grapple with the ramifications of foot and mouth disease and the endless cycle of violence in the Middle East continued unabated. On the financial end of the spectrum, we witnessed, what is hoped by many, to be the bottom of the equity markets.

For the record, the S&P 500 and the NASDAQ are now in bear market territory while the blue-chip laden Dow Industrials briefly touched bear market levels in mid-March only to bounce back. Except for a handful of blue-chip bellwether stocks and a few select value stocks that bucked the trend, most equities, be they large, mid or small-cap, foreign or domestic, were roughed-up. The one clear winner that emerged was bonds. All bonds (treasuries, municipals, corporates or high yields) have been the beneficiaries of a slumping stock market since last year.

In the final analysis, it was evident that the Fed had over-reached itself on interest rate hikes which were ultimately instrumental in throttling company earnings. The endless stream of corporate earnings’ warnings and layoffs that followed soured investor sentiment, particularly towards technology, and led to the NASDAQ’s fall from grace.

Yet, in the depths of winter we found an invincible summer in the form of a robust U.S. economy. The much-touted economy is on track towards achieving its eleventh year of expansion. The U.S. consumer’s penchant for goods has been the cornerstone of this success story. Consumer confidence, which had been flagging, made an upswing in March. Even with the massive lay-offs, unemployment remains under control and inflation is dormant. The most heartening aspect of the economy has been the virulent home sales market. Sales of new and existing homes are well on the way to recording their best year ever.

Therefore, looking towards the future we remain confident that the decreases in interest rates initiated by the Federal Reserve, coupled with prudent fiscal policy, will be the catalyst to turn the equity markets around. We also remain bullish on our favorite sectors – healthcare, financials, telecommunications, and technology – which we believe to be the future drivers of this economy. Nevertheless, we are well aware that prudent investing dictates that we combine growth with appropriate levels of value and fixed income securities when creating portfolios for our clients.

Be that as it may, this certainly is not the time for the faint hearted. It is not an appropriate time to take a myopic view of the economic and investment climate. As intelligent investors we should always maintain our focus on long-term objectives. We would be the first to acknowledge that it might be at least six to nine months before we see any semblance of a recovery in the equity markets.

In conclusion, if you are overly uncomfortable with the state of the market – we encourage you to schedule a meeting to re-evaluate your portfolio(s). We would like to thank our clients for standing steadfastly by our side during these most testing times in recent memory. To paraphrase the immortal words of Charles Dickens – the worst of times, the age of foolishness, and the epoch of incredulity may well be behind us – the best of times, the age of wisdom and the epoch of belief may just be around the corner…

If you desire Morningstar reports, or the most recent copy of our Form ADV, Part II, please call us. If your investment objective or personal financial situation has changed, it is important to notify us so we can reevaluate your portfolio(s).

Enclosed you will find your Portfolio Performance Summaries, Portfolio Holdings Statement as of March 31, and a quarterly Account Management Fee Statement

Sincerely,

 

P.S. American Investment Advisors Inc. welcomes Robert J. Kleinschmidt as our newest associate. Bob comes to us with many years of experience in the financial services industry. We look forward to his continued success.