PERFORMANCE ANNOUNCEMENT

As Of: April 21, 2004

NOISE

A Volatile & Confusing Market That Goes Nowhere

      The first quarter of 2004 was three months of hope and disappointment. While some individual stocks careened around like pool balls, the stock market as a whole finished where it began. As an exercise, I looked at the Standard & Poor's Index and compared the daily high for every trading day in the first quarter with the prior day's low. I also compared the prior day's high with the current day's low. To my surprise, I found that there were 44 days out of 63 trading days in which the market swung more than 1% between two trading days. That is a 1% volatility occurring more than two-thirds of the time! In fact 1.5% was not unusual, and we had five days of more than 2%, and two days of more than a 3% swing. One million dollar portfolios saw $10,000 and $20,000 daily changes in value on a regular basis.

      The other thing that really surprised me when I collected this data is that there was not a single day during all three months when the current day's high was lower than the prior day's low. Likewise, there was not a single day when the current day's low was higher than the prior day's high. Therefore, what we saw was a market with a significant amount of daily volatility, but no real trend that ran in either direction with any conviction. This fact is born out when you realize that there are individual days during the quarter when the market fluctuated more (in degree) than its net change for the entire quarter!

      What explains this action? Uncertainty. A compulsion to stay invested, combined with a complete lack of confidence, explains a random walk to nowhere. The stock market went straight up for a year. It has already factored in all the good news, and it hasn't received enough bad news to cause people to sell. The result is that we are waiting for a tipping factor. I suspect that the fear of higher interest rates may be sufficient to eventually tip the market to a more prolonged downward slide. But that fear may be more than offset by good quarterly earnings reports which are currently filtering in. The fact is, we are waiting for a stampede. It is in the air. You can feel that it is coming. The herd is nervous and getting ready to run, but it is hard to call the direction with any certainty in the short run. Now is the time to decide: Are you going to stay in the market and allow yourself to be swept with the tidal wave, or should you stand aside?