BakerEllisLLC_Commentary

INVESTOR UPDATE
APRIL 2004

The stock market turned tepid in the first quarter, with investors seeking direction after last year’s big run-up. The Dow Jones Industrial Average dropped 0.9%, while the S&P 500 gained 1.3%. The Nasdaq Composite lost 0.5%. Smaller stocks continued to advance, with the Russell 2000 picking up another 6%.

Baker Ellis accounts had another strong quarter. Our composite of discretionary accounts held at Fidelity Investments gained 6.4%.* We were pleased to outperform the market while incurring less than a market level of risk as our accounts remain broadly diversified, with exposure to various asset classes.

We benefited in the quarter from buyouts involving three of our small-cap value stocks. Johnson Outdoors (JOUT), majority owned by the Johnson family, is headed for private ownership after the family offered to purchase the remaining outstanding shares. Merant (MRNT), a micro-cap software company, agreed to be acquired by Serena Software Inc. for $380 million in stock and cash. And Sterling Financial Corp. (STSA) completed its acquisition of Klamath First Bancorp (KFBI). We opted to sell JOUT and MRNT on the news while holding onto STSA, which has grown diluted earnings per share at a compound rate of 17% over the last five years.

Our international energy investments also performed well as oil prices surged. We continue to believe that companies with large reserves of oil and gas, such as Norsk Hydro (NHY) Nexen (NXY) and Encana (ECA), are well-positioned in the face of growing demand from developing countries such as China.

We remain enthusiastic about our selected foreign plays. India’s economy soared 10.4% in the final quarter of 2003, according to recently released figures. This bodes well Indian energy and telecommunications conglomerate Reliance Industries (RLNIY).

The unprecedented liquidity created by the Federal Reserve holding interest rates artificially low has created rising values in virtually all asset classes. With valuations well above their historical norms, we are lightening up on areas that are vulnerable to rising rates, such as financials and real estate, and holding some cash for future opportunities.

Sincerely,

Barnes C. Ellis, RIA
Brian C. Baker, CFA

*Performance is believed to be accurate but is not guaranteed. Results are not audited. Performance is presented net of fees. Past performance is no guarantee of future results. Performance of accounts in composite varies based on timing of investment, risk tolerance, asset allocation and other factors. Size-weighted dispersion for the quarter was 1.4%. Index data does not include dividends. Investors cannot own an index, which is always fully invested and does not include management fees.