Baldwin Investment Management, LLC

HEADLINES THAT CAUGHT MY EYE

Outsourcing Costs US Over 2 Million Jobs

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Outsourcing May Create US Jobs

The first headline is a terrific political soundbite and is often used this election year by John Kerry, the apparent Democratic nominee for President. The second headline comes from a recent study sponsored by a coalition of business groups working to combat a growing backlash on Capitol Hill and in State Houses against the loss of US jobs. There is great deal of rhetoric and to date not a lot of scholarly investigation into the subject. In the short run, losing a job is painful for anyone and possibly more so for someone who felt that their position was well protected. In the long run, the constant search by business for less expensive, more efficient and more effective ways to increase productivity is a hallmark of capitalism. The debate is far from over - but in the end the US economic system is flexible and strong enough to overcome short term dislocations.

Companies Are Raising Dividends and Buying Back Stock

Since the enactment of the tax reduction on dividends to 15%, more and more companies have quite aggressively raised or initiated dividends, much to the delight of their shareholders. Companies have also taken advantage of low interest rates and are reliquifying their balance sheets. As an example, PepsiCo announced that it was repurchasing $7 billion worth of stock and raising the dividend significantly (44%); British Petroleum announced that it will be buying $5 to $6 billion of its common stock. In conference calls with companies during this quarter, many have said that their boards were discussing the question of uses of excess cash. This is all good news for shareholders.

Oil Prices Are Up and Gasoline Prices Are At Record Levels

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Russia Is Expanding Its Export Capabilities

The second headline is very reasonable and an expected reaction to the first. Russia is one of the last frontiers in the oil business, certainly outside of the Middle East. As such, it has great potential to ramp up production and the Russians are certainly taking advantage of a very high price environment in which to do so. Oil and natural gas generate most of Russia’s hard currency reserves. Eventually, with new Russian and Iraqi oil on the market the price of oil in the marketplace will go down.

Madrid Bombing Kills 200, Socialists Surprise Conservatives In Spanish Election

The threat of terror has taken on an unfortunate permanency in our society. Immediately after the bombing the Spanish electorate turned out the previously favored conservative party of Prime Minister Aznar. Markets around the world initially dropped quite sharply as investors were reminded that terrorists are part of the investment puzzle. This was a shocking event and one that reminded investors that risk premiums will have to continue to remain higher going forward then they were in the years before 9/11.

Chinese and Indian Economies Are Growing at Blistering Speeds

As governmental regulations continue to be eased on their economies and capitalism takes firm root, these two countries with huge and hard working populations will continue to progress very strongly. The implications for world growth is that for commodity pricing (↑) and labor pricing (↓). No doubt there will be “bumps in the road” but investors would want to be well exposed, via the equity and currency markets, to both India and China.

Japan Is Feeling Better

There are sprouts of economic life in the world’s second largest economy. The banking system is still in a mess, but the mess is smaller than it used to be. As an example, the bankrupted Long Term Credit Bank of Japan, renamed Shinsei, was recently brought public and it is rumored that the American investors who took it private several years ago (in a landmark deal) stand to make a profit of $1 billion. It looks like the long awaited recovery is around the corner.

NATO Membership Expanded By Seven

Old Europe (i.e. France, Germany, Great Britain, Italy etc.) has now been joined by new Europe (i.e. Bulgaria, Estonia, Latvia, Lithuania, Romania, Slovakia and Slovenia). They are now comrades in arms, as new members of NATO, and this is another step in the integration of the euro zone.

Israel Kills Spiritual Leader Of Hamas

Like a wound that is not permitted to heal, the Israeli/Palestinian situation continues to fester. The roadmap to peace promoted by the U.S. has been balled up and is ready to be thrown in the ash can. The Saudi peace proposal cannot get a hearing before the Arab League. In fact, the Arab League is not able meet because of divisions within the body. This area of the world adds risk to investment decision making.

Iraq To Be Handed Over To Iraqis On June 30, 2004

For a whole host of domestic and international political reasons, this handoff has to be done expertly. No doubt there will continue to be attempts to disrupt the process but if the transition is accomplished, it will remove one of the major worries in many people’s minds.

Martha Stewart Is Convicted, Jeffrey Skilling Is Indicted & Tyco Hearings Continue

Some of the “big fish” are beginning to go to jail. It has been a couple of years since the first revelations of corporate malfeasance were unveiled. Some in America who clamored for immediate justice and fretted that no justice would be had are now seeing culprits punished. This will be the last stage in the ablution process and it is good that it has finally arrived.

The above seem something of a jumble. There are good headlines and there are bad ones. Reflecting this, the stock market was a bit of a jumble during the first quarter. It started the year strongly but gave up most of its gains in the month of March. We still think 2004 will be a rewarding one for investors. Again, it will not be as strong a year as 2003; but with inflation low, interest rates low, the U.S. economy growing strongly and corporate profits surprising to the upside, we still think that there is reason to be positive about the rest of 2004.

PREDICTIONS 2004

PREDICTIONS COMMENTS

1) The dollar will regain some of its former glory, trading closer to $1.15/Euro Happening

2) President George W. Bush will be re-elected to office by a landslide Still Believe

3) Economic growth in the U.S. will top 4% year over year Indicators Look Good

4) In spite of strong economic growth, inflation will remain quiescent Little Pricing Pressure, Except on Commodities

5) Interest rates will stay low at least until the 4^th quarter & will rise Still the Bet

after November 8th

6) Osama will be sold out and captured (we’re sticking with this!) The Cynic in Me Says Yes

7) Progress will be made in North Korea with difficulty A Boring Process

8) There will be additional but fewer corporate scandals than during 2003 Already an Example in Italy (Parmalat)

9) Commodity prices will be strong throughout 2004 Some are Blazing Hot

10) The Japanese economy will improve, strengthening world economic growth Sputtering, but Better

A FINAL THOUGHT

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The opinions expressed in this Commentary are those of Baldwin Investment Management, LLC. These views are subject to change at any time based on market and other conditions, and no forecasts can be guaranteed.

The reported numbers enclosed are derived from sources believed to be reliable, however, we cannot guarantee their accuracy. Past performance does not guarantee future results.

A list of our Proxy voting procedures is available upon request.

A current copy of our ADV Part II is available upon request or at www.baldwinim.com/disclosure.htm 3/31/04