The Russell 3000, pretty much the total US stock market, was up 0.84% for the quarter.

Contrary to all market prognosticators, mid and small caps continued to outperform large cap companies. Energy and foreign markets also continued to do better than the US of A.

The economic signals during the quarter were less than consistent, but generally continued to signal a slowing economy.

Housing and Autos, two key engines of domestic growth are both in a slump. They are inter-related since they both rely on a buoyant consumer for growth. The sub-prime mortgage market has imploded and the next layer to be hit will most likely be the variable rate market.

Last year we wrote about the large number of variable rate mortgages that were written in 2003 and 2004. Many of these carried “ teaser “ initial rates that were very low, many in the 3.5 % range. As these mortgages re-set to today’s interest rates, monthly payments can be double and triple over what they were. This can only lead to a jump in the default rate and/or an effective brake on consumer spending as more of a homeowner’s open-to-spend is eaten up by principal and interest.

Corporate profits are still positive…but the rate of growth is diving from a mid-teen growth pattern to solidly single digit type forecasts for 2007. With a price/earnings ratio in the high teens, stock prices cannot hold up at current levels unless investors are willing to take on added risk by accepting even higher p/e ratios going forward.

Worldwide demand for energy products continues with the Asian and Indian markets leading the way. A slowing of demand in the US will be more than offset by the overseas markets.

Geopolitical stresses, Iran is this months flavor ( you can throw in North Korea or Iraq for next month’s choice ), keep the war risk premium built into the price of oil. The under $ 60 per barrel days seem to be gone again as we enter the summer driving season.

The Fed has continued their theme of placing a higher concern on inflation worries. I believe that the factions looking for the Fed to lower interest rates to “ bail out “ the stressed housing market by early summer will be disappointed. Right or wrong, the Fed appears to be convinced that the fallout from the sub-prime/variable rate mortgage problems will not spread and impact the overall economy.

The February “ mini “ correction in stock prices was minor in scope and largely offset by quarter end. With the seasonally weakest months for the stock market ahead of us ( May through October ), the catalysts for a change in equity pricing appear to be weighted to the downside at this time.

Our defensive posture, which hurt performance in the fourth quarter, helped our portfolios out perform the markets year to date.  We continue to look for dividend producing opportunities to be a key ingredient in total performance through the balance of the year.

Best wishes for the coming of spring weather sometime soon.