With July and August behind us and the work force returning from the long Labor Day weekend, financial markets are poised to kick off the last four months of 2004 with a bang. After two months of higher energy prices, soft employment gains, a weaker dollar, and a decline in consumer confidence, the news is getting better.

Oil has dropped rapidly from its August high of $49.10, the August payroll report was excellent, the dollar is improving against both the Euro and yen, and consumer spending is back on track. While concerns in regard to future Federal Reserve policy play a key role in investor optimism, the consensus maintains that small doses of higher rates are positive and very necessary for sustainable growth.

OK, we now have the employment numbers for August behind us with 144,000 jobs added, June and July revised upward by 60,000, and the overall rate down to 5.40%. (The unemployment rate is the lowest rate going back to October 2001.) So much for job stuff.

Just a short note on Germany and the ECU that we need to keep in mind before it all gets lost in the payroll conversation and political commentaries. It is important to us that in order to forecast accurately, that we understand the international flow of money. Global investors are constantly looking for the safest place to invest with the potential for income and gains. With that said, what we have today is Germany with almost no growth, an unemployment rate above 10%, and a slowing economy. Also, Germany and other ECU nations currently have bond yields less than corresponding maturities in the U.S. So, our point is Germany and the ECU are stuck with either having to cut their rates or hope that a slowing U.S. economy pulls them out of the mud. Now you can begin to see why the currency issue is important as our economy does better and better. We can see a wave of money coming into our markets over the next several quarters as investors sell Euros, buy dollars, and invest in U.S. stocks and bonds.

About oil: it is hard to believe in only 5 trading days oil has dropped from $49+ to $43-. This has taken place with a lot of $50 and $60 a barrel expectations several weeks ago. What is going on is that the hedge funds are playing the momentum game as they just buy more as the price goes up. These wise investors are now long 84,000 contracts on oil futures which calculate to about 3.4 billion dollars in oil. Understand that these folks will never take delivery, so plain and simple, they will have to liquidate in the weeks ahead. The real support for oil is down around $40 and in all likelihood in the $35 range next year. Getting oil back down will be another positive boost for the economy.

Final thoughts on the economy: we have had 3 different companies come out with good earnings (Applied Materials, Boeing and John Deere) and they have all stated that business is excellent and feels strong going forward. This covers about all aspects of the economy. Also, a recent quote by FedEx CFO Alan Graf: "we have strong momentum in our business and believe the economy continues on a sustainable expansion path." FedEx stock is at 3 year high of $81 up from $30 on post 9/11 which suggests to us that these folks have a good handle on the economy. Keep in mind that two thirds of the economy is the consumer as they are delivered a lot of their purchases by people like FedEx.

While bond prices have slipped recently in anticipation of another Fed rate increase, we believe yields are historically attractive. The 2 year at 2.6% and the 5 year at 3.5% are spread 85 and 175 respectively to the anticipated 1.75% funds rate, which is right in line with market expectation. If the economy does continue to expand, as we expect, then it is likely that we will see funds at 2% by year end. For this reason it makes great sense to keep bond purchases in the 2 year range unless rates ratchet upwards by more than 50 basis points.

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