2004 ended with the S&P 500 index advancing by 9% for the year building on a 26.4% advance in 2003. Among the best performing sectors in the S&P 500 were the Energy sector and Utilities; up by 29 % and 20% respectively. The worst performing sectors were Healthcare, up 0.24% and Information Technology, up 2.13%. The real strength though lies in the performance of the 4^th quarter. The S&P 500 advanced by 8.7% in the last 3 months of the year and its Information Technology and Consumer Discretionary components were the best performers advancing 13.4% and 13.1% respectively. The orderly conclusion of the U.S. presidential elections, declining oil prices, and the absence of any disrupting events lead to a stellar fourth quarter, which, in turn, made the difference between a fairly flat year and one that is historically respectable in terms of equity returns. Some of the trends that stood out in 2004 were the return of mergers and acquisitions, initial public offerings, and corporate dividends; both in size/quantity and quality. In addition, a multi-year weak dollar, high oil prices, and hi commodities and gold prices dominated throughout 2004.

Looking ahead we believe that it is futile to try to predict where the market will be one year from now. Although we enter 2005 with a very cautious and conservative view, we do believe that the momentum we have seen in the fourth quarter will carry over into the first half of the new year hampered only by some potential profit taking as some of the smart money might lock in some fourth quarter gains as it awaits more clarity on the direction of inflation and the levels of jobs creation. Nevertheless, our cautiously optimistic view is predicated on our belief that inflation will continue to be moderate, oil prices will continue a gradual decline, while the labor markets, consumer spending, and consumer confidence will be at least steady. Perhaps the reason why we are somewhat positive is the fact that we are either bullish or cautiously optimistic on the largest three sectors of the S&P, namely Financials, Information Technology, and Healthcare. These three sectors combined make up almost 50% of the market weight of the index. Regardless, as value investors, we continue to look at companies with compelling valuations while showing a distinct preference for dividends in 2005.

Although we are undoubtedly in a rising interest rate environment, we are cautiously optimistic on financial stocks as we believe that they will at least hold their own in 2005. Aside from mortgage lenders who will be negatively impacted by rising rates, we believe that Insurers will benefit from increased returns on invested assets and international growth while at the same time; the dark cloud of investigations by state regulators will have slowly drifted away. Investment Banks will benefit from increased equity underwriting and advisory activities while trading revenues (recently the largest component of earnings for many I-banks) will not be materially affected by changes in interest rates. The most compelling valuations we see in this sector are among the multi-national Insurers.

Information Technology stocks were a mixed bag in 2004. Internet names did exceptionally well while most software, semi conductor and equipment makers faired poorly. Going into 2005 we see many value plays among software and semi conductor stocks. We believe that there will be a lot of consolidation among the semis in an effort to lower costs and have a better control over capacity. Merger and acquisition activity will ramp up in 2005 as we see many software and semi names trading at compelling valuations. We are bullish on select semis particularly those catering to the wireless telecommunications markets.

In Healthcare, we are bullish on the big pharmaceutical makers. Select drug makers are selling at very compelling valuations and attractive dividend yields. There has been a lot of headline risk in this group

that affected companies beyond those mentioned in the news lately. We also see value in select healthcare providers that are in the midst of turnarounds after having suffered a lot of headline risk in 2004 and 2003.

Beyond these three sectors, we are finding value in select names in the Airline industry, Chemical stocks, Retailers, Cable companies and Automakers. We also continue to add International exposure in our portfolios particularly among Telecommunication providers and Utilities as we see more value in those sectors abroad rather than domestically.

2005 has the potential to be more in line with historic equity market returns of high single digits but among the many factors that might work against the markets are Geo-political risks, weak labor markets, and high oil prices. One scenario that we would like to see play out in 2005 is an increase in manufacturing activity spurred by the low dollar. This in turn will make any economic expansion more sustainable by boosting employment levels as well as business spending.