A few weeks ago, Ronald W. Reagan, 40th President of these United States, passed into history. We all have our memories of what President Reagan meant to us personally, but in a world of growing hostility, geopolitical chaos, hatred and enmity toward the U.S. it was hopeful to see former enemies and friends alike, from all over the world, come to pay tribute to Reagan, the man.

His partner in history Mikhail Gorbachev, former Prime Minister and leader of our great nemesis the old USSR, paused a long moment to quietly lay a hand upon his coffin in friendship. That spoke more eloquently of Reagan�s character and will be my personal picture of President Reagan�s passing, and legacy.

It was a tribute to Reagan�s optimism, and to his personal kindness, likeability and hope for the future, that even those who disagreed with him could not bring themselves to dislike him personally. He was elected at a time of darkness and doubt about America�s future. Inflation was soaring, Communism was a looming menace, and unemployment was soaring into double digits for the first time since the Great Depression.

It was into this vacuum of hope that Ronald Reagan strode with a confident, almost foolhardy optimism, telling Americans that hope was not lost, that Americans could become great again. To a people desperate for some light in their future, his candidacy and his message was the relief of a spring to a man dying of thirst in the desert. People do not gravitate towards despair, but towards hope; not towards hate, but towards love. Excerpt from a great tribute to Regan from Robert Laest, a portfolio manager.

People think of inflation as prices going up. It�s not. It�s the value of money going down. ~Ron Muhlenkamp, portfolio manager~

Inflation and Interest rates

The Fed raised interest rates .25 on June 30, the first time in four years. The largest rate hike in history came between February l978 and November 1980 when the long bond yield rose from 8.12% to 12.13%. I remember when mortgage rates were at 17%. Our last significant rise was in October l993 to November l994 when the 10 year bond rose from 5.4% to 7.9%, while the S&P 500 index stayed flat.

If the yield curve begins to flatten (currently steep), this would meet the Fed would begin to raise short term rates but the intermediate and long term rates would remain relatively stable, reflecting low expectations for inflation. The CPI rose 0.6 in May, the biggest monthly jump since January 2001. The core rate, however, was up 0.2 percent, a very modest rate. The next Fed meeting is August 10. I expect more interest rate increases before year end. Many economists are expecting the rate to rise from 1.0% to 2.25%, in several increments, from now until the end of 2005.

Focus on Earnings Growth

I continue to see positive economic improvements, both at the company level and in the macroeconomic environment. Despite strong earnings growth and the healthy investment environment, investor emotions can hamper stock prices. Investor sentiment and perceptions affect the market because current stock prices reflect future expectations.

I believe many have underestimated the extent of the operating leverage created and the corresponding resulting EPS (earnings per share) gains. Operating leverage is leading to a virtuous cycle. Companies are now more productive and more profitable. The strong earnings give CEOs confidence, which then leads to further investment and a more normalized capital spending level. Healthier spending boosts revenues and confidence again. Better profitability and growth ultimately enhance shareholder value and drive stock prices higher. Consumer confidence is currently high.

Fear over the Fed raising interest rates, current events in Iraq, the upcoming Presidential elections, or commodity prices may have a temporary effect on the markets, but the improvements in the economic environment are tangible.

When the tide goes out, we will see who has been swimming naked. Jean-Marie Eveillard, portfolio manager, First Eagle Global Funds.

The above quote was in reference to how conservatively he manages his funds. He is heavy in cash right now and says he would rather lag the market and lose half his shareholders than be aggressive and lose half of the shareholders money. He is a value manager who buys at intrinsic value, like Warren Buffett, Graham and Dodd.

In May, I attended the Advanced Planners Retreat in Colorado Springs. I was able to meet personally with Ron Muhlenkamp of Muhlenkamp Funds, Jean-Marie Eveillard of First Eagle Funds and Bill Fries of Thornberg Funds. Bill Fries and I shared a round of golf and his views of the market and coming events. He was recently named International Fund Manager of the Year for 2003 by Morningstar. When he apologized after several errant golf shots, I replied that my clients would rather have him as a good portfolio manager than a good golfer.

Climb the mountains and get their good tidings. Nature's peace will flow into you as sunshine flows into trees. The winds will blow their own freshness into you, and the storms their energy, while cares will drop way from you like the leaves of autumn.
~John Muir~

Summer is here! Get out and enjoy the season with friends, BBQs, movies, golf or a good book. I will be on vacation August 23 to September 2. in Hilton Head, So. Carolina, visiting many beautiful golf courses.

Happy 4th of July!
Sandra C. Field, CSA, MBA, CFP