2004 1st Quarter Commentary
and Planning Ideas
Commentary and Planning Ideas, Market Perspective, and Market Review are
written and published quarterly by Caves & Associates.

April 22, 2004
Dear Clients and Friends,

I have enclosed your copy of Caves & Associates’ Market Review for the first quarter of 2004.  The review highlights the rewarding quarter for investors, including positive returns for both stocks and bonds.  However, stock results seemed modest compared with skyrocketing price appreciation in 2003.  On the other hand, bond returns were a pleasant surprise, and confounded skeptics, who had predicted an end to the bond bull market.  The backside of the Market Review is a table of global investment returns for the winter quarter this year and twelve months ending March 31, 2004 .   A second enclosure headed "Economic Review and Market Perspective" provides a longer-term interpretation of current economic and market data.
During the quarter there was plenty of good news about the economy and prospects for growth, and after the quarter came news of impressive job growth in the U.S. Coming after a series of disappointing reports on employment, the report mitigated, at lease temporarily, concerns of a jobless recovery and criticism of widespread outsourcing to overseas locations.  However, the news, coupled with a recent very significant uptick in inflation data, reinforced arguments of bond bears that interest rate increases are coming sooner rather than later.
The world situation remains tense.  There is sobering news of terrorist attacks, highlighted by the appalling train bombings in Spain, and almost a daily reminder of the volatility of certain geographic regions.  The news from Iraq worsens, and comparisons to Vietnam are surfacing.  Finally, the world’s developed economies continue to heavily depend upon energy supplies from a volatile, Islamic middle east, and the mounting twin U.S. deficits (budget and trade) rely on foreign financing and raise the question of how long will it last?

Our near-term outlook is unchanged from what I wrote three months ago, which we have been describing as market neutral.  That’s because it is hard to formulate a compelling argument favoring any particular asset class.  Notwithstanding, we are wary of interest rate increases and are quite defensive in our bond positioning.  Additionally, we are assuming good fiscal and monetary policy decisions and execution, gradual transitions, and no major external shocks to support the sanguine outlook.

Caves & Associates discourages focusing much attention on short-term investment results because a broadly diversified portfolio is structured for the long-term.  As we often state, there is no way to completely eliminate short-term risk from an investment portfolio.  As you review the data, think in terms of markets (plural), not “the market.”  You will notice that typically at least some part of your portfolio is providing positive results. 

Additionally, it is impossible to consider every possible cause and effect with regard to markets.  Thus, we believe the more useful approach is to maintain a broadly diversified investment plan customized to your specific time horizon which can meet your investment objectives over a variety of potential scenarios.  Further, we continue to believe that a disciplined investment approach emphasizing diligent fundamental research, diversification, and rebalancing will provide sound long-term investment returns.

We appreciate your continued confidence in your broadly diversified portfolio designed by Caves & Associates
What's Timely and Topical
The following are of interest or concern; give us a call if you would like further information:
  1. The growth rate of the Chinese economy is tremendous, the barriers to foreign   investment are coming down, and a huge market is emerging.  This is an area ripe for attention by businesses, policy-makers, and investors alike.
  2. Income taxes continue to decline in 2004, and most taxpayers have seen appreciable savings on their 2003 returns.  It’s fine to spend some of your refund, but we can identify a number of good reasons to save at least some of those tax savings, including:  a) concerns about future lower investment returns after the historic U.S. bull market from 1982-2000, b) hedging the risk of longer life expectancies and rising health and custodial care costs, and c) passing on more to our children to help them with skyrocketing housing costs and the high national debt burden they’re inheriting.

  3. The estate tax exemption is $1,500,000 for this year and next (it was $1 million last year, and is scheduled to rise to $2 million in 2006).  Thus, with proper planning, a married couple can pass $3 million to heirs estate tax-free during 2004-2005.

  4. Identity thieves remain hard at work and are now trolling the Internet.  Their efforts to invade your finances grow increasingly sophisticated.  Cleverly disguised e-mail scams, which trick consumers into turning over confidential account information by mimicking company logos and Web sites, are on the rise.  Beware of any requests to update your account or personal information and always safeguard your social security number.

  5. The National Do Not Call Registry is open for business.  To reduce those annoying, untimely telemarketing calls, sign up for free by phone (888-382-1222) or on-line (www.donotcall.gov).

Privacy of Non-Public Information
We are enclosing our annual privacy notice (see accompanying Caves & Associates Privacy Statement).  Confidentiality of client information is one of our most important company values and a very high priority.  Maintaining confidentiality is one of the many ways we seek to earn and keep your trust.

Quotes For Our Times and All Time

Old Wall Street Saying:

“A stock doesn’t know you own it.  So you shouldn’t take it personally whatever happens to the share price.”  (Corollary: never fall in love with a stock.)

Edna Ferber:

“Big doesn’t necessarily mean better.  Sunflowers aren’t better than violets.”

Francis Bacon:
“Read not to contradict nor to believe, but to weigh and consider.”
Michael Levine:
“Successful people are very lucky.  Just ask any failure.”
James Stack (investment newsletter editor):
“If you try to wait until you feel absolutely comfortable with the stock market, I can guarantee that that will be when the market is at a top.”
Mark Twain:
“Keep away from people who try to belittle your ambitions.  Small people always do that, but the really great make you feel that you, too, can become great.”

In conclusion, we are providing these materials for your information and as a means to educate and stay in touch.   We hope you find this information helpful, and we would be pleased to hear your comments and questions.  Also, you are welcome to share our views with your family and friends if you think they will benefit.  Remember, these materials are available on our website, www.cavesassociates.net.  If you prefer to receive a quarterly email announcing their availability on the website, rather than a hard copy, please let us know (we always like to “save a tree” and postage costs, as well.

Thank you for your continued support of Caves & Associates.

Very truly yours,

Preston S. Caves, CFP, MBA, CFA
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