APRIL 6, 2001

The Market This Week
The market was down again this week, with all major indexes falling. The market staged a significant rally on Thursday with the NASDAQ composite having its third biggest percentage increase ever, although Friday's action took back part of this gain.

The action on Thursday was significant because the market moved dramatically on a relatively small amount of news. Specifically, Dell Computer announced they were not going to further decrease their earnings guidance and that with one month left in their quarter, things were basically tracking to the revised plan. The same day Alcoa reported earnings which were stronger than expected. With cash rising in money market accounts, the market is ready to pounce on any scrap of good news. Additionally short sellers, who have been profiting from the long stock slide, are equally ready to cover their positions and lock in gains. The lesson to be gained is that once a clear recovery does take hold, all indications are for a speedy rebound in the market.

In economic statistics this week, unemployment edged up to 4.3% from 4.2%, the highest rate since July 1999. Payrolls fell 86,000, the biggest loss since November 1991. The report was a factor indicating the economy is still vulnerable and that the Federal Reserve will again cut interest rates. However, there is debate as to whether it will act before or at their May meeting, particularly since other indications seem to point to a reasonably stable economy.

On the positive side, March automobile sales were at a 17 million vehicle per year rate, putting 2001 as the third or fourth best year for the industry if the sales keep up for the rest of the year. Similarly the housing market still appears reasonably strong. The NAPM (National Association of Purchasing Managers index) rose from 41.9 to 43.1 for March, its third straight monthly increase.

The Portfolio This Week
While we experienced crushing performance this week, particularly on Monday and Tuesday, it is interesting to note that when the market recovered on Thursday, we outperformed substantially and retreated no worse than the S&P 500 on Friday. In fact, this action reinforces our strong belief that the investment characteristics of the portfolio in terms of earnings momentum and valuation are compelling enough to allow the portfolio to outperform the market significantly when the overall market improves.

Exodus was our worst performer (i2 Technology our best at +16.8%). The Internet service provider group was generally very weak, in addition to the competitive exchange companies with Windstar announcing extreme financial difficulties. Analysts are worried that Exodus will not meet their near term guidance and seem to be ignoring almost completely their longer term potential.

Portfolio Activity
We sold out our positions in Broadvision and Commerce One. While we knew the internet applications market was weak, we were surprised by the order of magnitude in Broadvision's earnings pre-release, particularly in relation to others in the internet software applications market. The sharper reduction we believe reflects somewhat deeper problems than others in the area, and perhaps also reflects a longer time to recover.

The revised outlook from Commerce One, plus the notion that e-commerce exchanges where Commerce One dominates, will have to evolve more and take longer to make their impact then previously thought, caused us to sell.

We took part of the cash from these transactions to increase our position in i2 Technologies to 2.5%. While i2 has also lowered its estimates somewhat, the order of magnitude was far less than Broadvision's and Commerce One's, giving us the sense that i2 will weather the current slowdown in better shape and be faster to recover. i2's valuation, while not as low as Broadvision, is very compelling at current levels.