Last quarter we wrote about the “Choppy Waters” that occur when large hurricanes are in the vicinity. While we have largely been correct in anticipating the size and location of the current financial storm, we have been surprised at how choppy the financial markets have been – even in areas far removed from the storm. We have been surprised by an 18% peak to trough pull back in the broad market (as measured by the S&P500 Index) from October’s high to March’s low.

The storm has grown in size such that Standard & Poor’s recently estimated that the ultimate financial sector losses could approach $1 trillion including $285 billion in Residential Mortgage Backed Security and Collateralized Debt Obligation write-offs. Residential housing, where the storm began, has experienced falling prices and accelerating foreclosures due to an inventory of unsold homes at a 17 year high. Job growth has turned negative and consumer credit has tightened. All of this has happened at a point in time when the US dollar is weak, causing the trade deficit to rise to over $700 billion per year (half of which is due to oil).

Understandably, the stocks of financial companies have been under significant pressure as many have taken write-downs and earnings expectations have been revised lower. Some companies with heavy debt loads or financial guarantees have been thrown into distress in trying to refinance their obligations. We have begun to selectively re-enter financial stocks as these companies write-off their problem assets and we find what we feel are attractive entry points.

Earnings revisions have also been negative for many consumer discretionary stocks. Yet, these stocks which performed poorly in 2007, have outperformed the broader market in 1Q2008 due to investor perception that these stocks may be the first to experience an economic recovery that many believe should begin to emerge by year end. We have begun to selectively add to our retail holdings as well.

Earnings revisions for industrial stocks, on the other hand, have generally been positive as operating margins have expanded and backlogs have increased. Despite this good news, many industrial stocks have been under pressure as investors fear that sooner or later, these late cyclical stocks may be forced to succumb to the broader economic weakness.

Healthcare stocks performed worse than the broader market despite their perceived economic insensitivity. A variety of setbacks to new product pipelines occurred and investors are anxious regarding political change later this year.

For some months now, we have been asking ourselves if the traditional view of global economic coupling is still valid. Specifically, when the US economy sneezes, does the rest of the world still catch a cold?

Our view is that the global economy no longer seems as tightly coupled as it once was to the US economy. While US consumers continued to be a major force in global demand, those emerging economies based on petroleum, metals, mining, and outsourced manufacturing have shown significant growth. The growth in many of these emerging economies is likely to slow, but these economies are not likely to suffer the boom and bust of past cycles due to the diversity of global demand beyond the US. Said differently, we believe that while US consumers are still a powerful force, they are no longer the “only” consumers.

We continue to have the portfolio positioned with large exposure in industrials, aerospace/defense, technology, pharmaceutical/biotech and medical technology companies. In each sector, we have favored those companies with significant international exposure.

In closing, while we are disappointed with our performance during the difficult market of Q1 2008 where we modestly underperformed our benchmark, we are encouraged by how the portfolio performed since the market bottomed in late February. As we have said before, “America is For Sale” and believe that we have only just begun to see foreign investment into the United States driven by the enormous wealth that has been created outside the US and by the attractive valuations present here. Corporate and investor cash levels are high and leverage ratios are low. We believe the portfolio is in a strong position for strong absolute and relative performance in the months ahead.

Thank you for the confidence you have placed in us.