The market correction that began in October 2007 continued through the first quarter. As of 3/31/08, the Russell 3000 Index is off 9.52% for the year. Not only was it a down quarter, it was extremely volatile. Of the 61 trading days, 31 witnessed a daily change of +/- 1%. The largest one-day loss was 3.13%; the largest one-day gain was 4.24%.

There were no clear winners from a market cap perspective. The Russell 2000 Index slipped 9.90% while the Russell Top 200 Index lost 9.29%. Value outperformed Growth thanks to Value being beaten down in 2007 and investors scooping up overly punished names. The MSCI EAFE gave up 8.91% as international stocks fared slightly better than domestic stocks. US Treasuries were far and away the leaders of the quarter as the Fed dropped rates and investors exhibited a flight to quality. The yield on the 10-year Treasury fell nearly 15% to 3.432%.

Investors began the year with suspicion and caution and have not been able to shake off their fears. Consumer confidence and spending have eroded with a loss of wealth from stocks and homes and pressure from higher costs for food and energy. Unemployment is rising. Weakness in the housing market continues. Home prices trend lower as inventories remain high and home sales continue to decline. Credit related losses have been huge. The negative feedback loop between the financial markets and the broad economy is not yet broken. Not yet, but there is hope. Excluding financials and unlike consumers, corporations have been disciplined in their spending and have healthy balance sheets. Exports continue to add value thanks to a weaker dollar and relatively healthy foreign economies. Fiscal stimulus will arrive shortly in the form of rebate checks. And then there?s Ben & Co. Under Ben Bernanke's direction, the Federal Reserve has been aggressive and creative in its efforts to prevent financial markets from seizing up. Over the past six months, the Fed has slashed rates to 2.25% and left the door open for more cuts if necessary. It has opened its discount window to investment banks. It has swapped Treasuries for loans. It helped negotiate JP Morgan's purchase of Bear Stearns, avoiding a textbook run on the bank. Fannie Mae and Freddie Mac have been given greater flexibility to initiate mortgages via a reduction in their capital holding requirements and increases in conforming loan limits. Market turning points are only clear when viewed through history, but often occur with extreme volatility. The market's ability to absorb bad news offers some sign that the bottoming process has begun. Markets will be higher a year from now, but not without additional volatility.

It is painful to see one's investments tumble. In a perfect world, markets would only go up, and, over the long term, they do. Unfortunately the recent market direction is down, but corrections offer great investment opportunities and knowledge for the future. We are learning from the market, and rather than emotionally reacting to the unpredictable short-term jolts, are maintaining our focus on the long term.

Kerry Luria, Portfolio Manager