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First Quarter 2005

In 2005 the economy has been strengthening; however, we perceive some risks that moderate our optimism. At the heart of the economic growth we have seen is a continually improving corporate landscape. GDP grew at 3.8% in the fourth quarter of 2004, and we expect it to grow again by 3.5 - 4% in the first quarter of this year. Growth is increasingly fueled by business investment, which is still experiencing double digit growth thanks to high corporate profit margins and cash rich balance sheets. The American Job Creation Act, passed by Congress last year, will allow U.S. companies with accumulated foreign profits to repatriate some $350 billion at an exceptionally low tax rate in 2005. We believe that this will have a positive impact on the stock market as U.S. corporations experience internal growth through capital spending or external growth through acquisitions.

Other indicators present a more complicated view. Consumer confidence remains quite high despite rising oil prices, the falling dollar, and record trade and current account deficits which widened in the fourth quarter of last year to nearly $188 billion, causing concern that the federal government’s borrowing needs in order to finance the trade deficit may not be sustainable. High oil prices (currently at XX$ per barrel) may act as a brake on the economy, while energy demand continues to outstrip supply worldwide as emerging economies experience rapid growth rates. We continue to favor the energy sector for this reason, but in the words of Treasury Secretary John Snow, "we're not an economy geared to $60 oil." Unemployment, which has been slowly receding and is currently at a level of 5.2%, presents a dilemma in that there is a risk of mounting wage pressure if unemployment continues to fall, which will likely spark inflation. Housing starts recently hit a 21-year high in January and February; until long term interest rates begin to rise significantly the housing sector will likely continue its resilience. The Federal Reserve Board has now raised the federal funds rate seven times since last year to 2.75%, and intends to raise rates further. The risk is that the Fed will begin to accelerate its pace of interest rate hikes beyond what the market expects.

For these reasons we remain cautiously optimistic on the economy. Negative factors continue to be slightly outweighed by positive business and consumer momentum. Until this pattern changes, we believe that the economy should continue on its current course of expansion.

For the first quarter of 2005 the market experienced volatility; the Dow and the S&P both lost 2.6%, and the Nasdaq fell 8.1%.
Grant Rogers Elizabeth Allen

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This report has been prepared by Metis Capital Management LLC. This report is for distribution only under such circumstances as may be permitted by applicable law. It has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the report. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Any opinions expressed in this report are subject to change without notice. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. The analyst responsible for the preparation of this report may interact with trading desk personnel, sales personnel, other analysts, journalists, and other constituencies for the purpose of gathering, synthesizing and interpreting market information. Metis Capital Management LLC is under no obligation to update or keep current the information contained herein. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Options, derivative products and futures are not suitable for all investors, and trading in these instruments is considered risky. Mortgage and asset-backed securities may involve a high degree of risk and may be highly volatile in response to fluctuations in interest rates and other market conditions. Past performance is not necessarily indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report. Metis Capital Management LLC accepts no liability for any loss or damage arising out of the use of all or any part of this report.

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