Well, to state the obvious, we are down to the last few weeks of 2004 and a little reflection might be in order. As the saying goes, "if you don't know where you have been then you have no idea where you are going." That said, let's look back as we look forward.

The bond market started the year with federal funds at 1.00%, the two year note at 1.93%, the ten year note at 4.37%, and the thirty year bond at 5.00% versus today at 2%, 2.90%, 4.30%, and 5.00% respectively. So, the yield curve was plus 415 basis points to start the year, and while it has come down to plus 300 basis points today, it is still considered to be quite steep by past standards. What this would suggest is that the economy is still growing at a nice pace with little or no real threat of inflation. The third quarter GDP was revised upward to 3.9% which gives us an average for the past 5 quarters, starting with the 3rd quarter of 2003, of 4.66%. With the holiday driven 4th quarter, we will likely come in at something better than 4% without a hitch.

Think of all the uncertainty the financial markets faced at the beginning of 2004. Elections, Iraq and terrorism, conventions, games in Greece and a lot of conversation about no job growth ever again. Wow, somebody forgot to tell the American consumer about all this negative stuff and uncertainties as he has kept right on spending and feeling pretty good. Many U.S. companies have been restocking and hiring more folks in an effort to stay ahead of the consumer spending curve. This will persist in 2005.

The stock market is about where we started the year with the Dow at 10,500. Going forward, the question is: do stocks lead the economy or is it the other way around? We believe we are in a unique period where both stocks and the economy are in lock step to better times and higher prices. Three examples of companies doing well and doing well for the economy in general are: (1) Microsoft just paid $32.6 billion in a one time dividend to its shareholders. Now, it is hard to know what went back into Microsoft shares, but we would bet that something like $ 10 billion is going to be spent or enjoyed over the holiday season which will add further to the robust 4th quarter. (2) Deere & Co. came in with the best quarter they have had since 1996 as the world economy continues to expand. (3) Intel hit the cover off the ball with 4th quarter projections which is great news for the entire Tech sector.

OK, a few words about jobs, energy and the dollar. The jobs report for November, released on December 3rd, was much less robust than expected. Although the unemployment rate dropped from 5.5% to 5.4%, employers only added 112,000 new workers. Also, the prior 2 months was revised downward by 54,000. Increased fuel costs and raw materials have made companies a little skeptical about hiring but we believe that the employment picture will brighten next year. The key number to focus on is the 1.98 million new jobs this year as this dovetails with our thoughts that the stock market and the economy are in lock step to better times. The price of oil has sunk to $ 43 per barrel leaving the energy bears looking pretty foolish. And finally, the weak dollar has left all of us scratching our heads. Bottom line is that this is a Euro/Yen problem as they need to lower interest rates and increase their money supply in an effort to move their economies forward or they will fall further behind us as well as China and India. With our expanding economy, coupled with some budget responsibility, we think we will grow our way out of this problem. Keep in mind that 4% GDP growth will solve many concerns such as big budget deficits and a weak dollar while the rest of the world will envy us as their economies are struggling to grow at a rate less than 1%.

We wish all a happy holiday season and a very healthy and prosperous 2005. We have enjoyed sharing our thoughts in 2004 and look forward to doing the same in 2005.

See you in January.