After reaching the midpoint of the year, it is helpful to reflect upon the market and economic environment that has unfolded since the beginning of the year. Creating a reference point for investment decision-making going forward is very important as we deal with the inevitable uncertainty presented by today's stock and bond markets. The broad stock market averages have been under pressure since the first of the year, primarily due to unfavorable commodity prices, high energy costs, and the move by the Federal Reserve to a more "normalized" interest rate environment. With that in mind, it is important to establish a framework from which to develop investment strategies as we move through the balance of the year.

Economic Environment:
The general domestic economic environment remains positive. While monthly data points tend to fluctuate, longer-term positive growth trends remain in place. Wage growth is stable and the labor markets are firm as witnessed by the continued decline in unemployment rates. Corporate profitability continues to be strong, and corporate cash balances remain high, which is indicative of financial strength. As a result, solid corporate profitability and earnings growth will likely be positive common stock investment catalysts as we move through the balance of the year.

The Federal Reserve continues to focus on signs of inflation. As we have discussed previously, labor costs are viewed by the Federal Reserve as a critical inflation variable as they craft monetary policy decisions. Unit labor costs and commodity prices continue to rise, placing upward pressures on inflation. However, the rise in unit labor costs has been tempered by continued advancements in productivity. While we envision less robust growth in the domestic economic environment this year over last, we feel that 3 to 3.5% is a healthy environment for both the stock and bond markets through the balance of the year.

Interest Rates:
Interest rates remain a key driver of the overall market environment. Over the last several quarters, the Federal Reserve initiated a series of monetary policy changes that included increasing short-term interest rates 8 times, marking a reversal of the highly accommodative monetary policy that produced the historically low interest rates over the last several years. An unusual situation has developed through the current series of rate increases. Long-term rates have not risen but actually declined modestly, which has dramatically flattened the yield curve relative to where it was 12 months ago. This suggests to us that the bond market does not believe inflation is as serious a problem as some market observers and even certain Federal Reserve Governors suggest.

Currency Issues:
The market recently turned its attention toward currency issues, specifically the positioning of the U.S. dollar relative to other global currencies. Through 2001, the dollar enjoyed a strong position versus foreign currencies. Part of the dollar weakness that began in 2002 was related to our historically low U.S. interest rates, because it became less attractive for foreign investors to hold the dollar and dollar-denominated securities relative to other currencies. The Administration exacerbated the downward pressure on the dollar by actively talking the currency down. Its objective was to ward off potential deflationary pressures. As a result, the gradual decline in the dollar's value relative to global currencies accomplished the Administration's objective and benefited the U.S. by making our exports more attractive. This in turn, strengthened international economies. Domestic production and U.S. exports increased and as a result, global trade improved and international markets strengthened. Now we must address the situation of the growing trade deficit.

Recently, the short-term currency dynamics appear to have shifted again as seen by the increase in the dollar's strength relative to other currencies over the last six to eight months. The rejection of the European Union's constitution by several of the member nations cast a negative light on the ability of the euro to effectively compete with the dollar as the standard currency benchmark. More importantly, international investors recognize the economic and political stability that stands behind a dollar-denominated investment.

Investment Strategy:
In the face of contradictory signals, we believe that remaining focused on your long-term investment goals and objectives is a critical element of investment success, especially in the face of an ever-changing market environment. Investors who develop and adhere to a comprehensive investment strategy by positioning their portfolios based on their long-term goals and objectives are more likely to achieve long-run success. Our approach toward long-term investment management involves defining rational investment strategies with each client by understanding their financial goals, risk tolerance, investment time horizons, liquidity needs, tax situations and other critical variables that impact the portfolio construction process. Furthermore, a broadly diversified portfolio across asset classes, sectors, industries, and companies serves as the platform from which to leverage the future opportunities we see on the horizon. To take advantage of future growth opportunities, sound portfolio management principles must be implemented and followed.

Asset Allocation:
Determining the appropriate asset allocation mix of stocks, bonds, and cash remains the most critical component of the investment management process. Our asset allocation tools measure the relative attractiveness of stocks as an asset class versus bond investments. At the present time, the asset allocation model spread indicates that we can continue to be positive about investing in common stocks. Bond yields are simply not as attractive given the low relative interest rates. Consequently, we are accelerating the purchase of common stocks where possible. Within our balanced strategies, our bond portfolios contain laddered, well-diversified positions, and in our common stock portfolios we maintain individual representation across a diverse economic spectrum.

Outlook:
Against the backdrop of a positive domestic economic environment, the investment community is dealing with a series of factors that inject varying degrees of uncertainty into the investment process. With all of the distractions circulating in the media, the markets and the individual participants have the additional risk of becoming short-term focused.

We recognize that short-term market volatility is a reality, but there is a fundamental difference in positioning portfolios to take advantage of a particular market environment versus merely adjusting a portfolio in reaction to specific market events. Our investment strategies are characterized by that of prudence because event risk and elements of uncertainty exist in the global markets. However, we continue to view the equity markets constructively and positively. Our long-term optimism is based on the fact that the domestic economic environment continues to strengthen and corporate profits and earnings remain positive.