As expected, the Federal Reserve raised interest rates 25 basis points on February 2nd and guess what? The bond market simply yawned and went on about its business as the 10 year and 30 year actually improved 7 and 14 basis points respectively. This was the sixth rate hike by the FOMC since last June, and although widely anticipated, left investors scratching their heads. Perhaps the Fed worries more about the prospects for speeding inflation than bond traders, but the fact remains: the Fed controls the switch. We are of the opinion that this last boost in the funds rate to 2.5% is more symbolic than substantive. However, it does set the stage for several more of these 25 basis point increases throughout 2005, absent any real inflation concerns. Also, for the record, the next FOMC meeting is not until March 22nd which gives all of us time to take stock, review data, and make predictions.

Good news! The economy added 146,000 new workers in January, and while not as robust as expected, not bad. The employment rate fell to a three year low of 5.2% as fewer people looked for work. We have now recouped all the jobs lost since the start of the 2001 recession. The rise in January, plus the revisions covering the last five years, puts us squarely back to where we were at the beginning of 2001.

As for stocks: January was a very long month with only three trading days in the plus column, and while February is shaping up to be better, there are still a lot of negative cries about the sky falling. We started the year with the Dow at 10,783, the S&P at 1,211, and the NASDAQ at 2,175 versus the close on February 7th at 1,427, 1,171, and 2,035 respectively.

What confuses us is that the majority of companies that have reported earnings have either matched or beat Wall Street expectations and most of the news has been upbeat. Perhaps we are seeing the classic case where the "Bulls" are running the public out of the market before turning north to new highs. All in all, the stock market is going to have to run itself out of this bearish downward pattern but good corporate earnings, a healthy economy, a strong banking environment and robust M&A activity will eventually send stock prices higher.

So, here we are with the U.S. economy growing at 4.4% for all of 2004 which was the best year since 1999 when the economy came in at plus 4.5%. However, like Rodney Dangerfield the powerful U.S. economy continues to get No Respect. Many of the forecasters are quick to point out that while the overall year was good the 4th quarter came in at only 3.1%. But, hold on: the 4th quarter number will be revised 2 times, and if it follows consensus thinking, it could be revised upward to something closer to 4%. Enough about 2004. What about 2005? We believe that 2005 will look very similar to 2004 provided the stock market picks up momentum, corporate earnings remain positive, interest rates don't soar and the dollar continues to improve.

The dollar in a very quiet way had a good January as we now stand at 1.28 versus the Euro which is much better than the 1.35 at the beginning of the year. Plus, you add in all the 1.50 talk, coupled with both Warren Buffet and Bill Gates shorting the greenback to buy Euros, and we get the feeling that too many folks are on the wrong side of this trade. Sounds an awful lot like the energy pundits from last fall. With German 10 year bonds at 3.5% versus the U.S. 10 year at 4.07%, and if the dollar continues to do better, we could have a pretty powerful currency move with money buying our stocks and bonds.

We believe that the Fed will raise interest rates another notch or two going forward but we are equally convinced that inflation will not be a problem. We remain optimistic about the outlook for 2005 and look for the stock market to rebound from current levels.