- Equity Portfolios
- Balanced Portfolios
- Mutual Funds
by Dennis M.
Brae Head Total
Tel: (413) 746-3700
Fax: (413) 746-3419
Copyright © 1998 - 2016
Brae Head, Inc.
Review and Outlook
My Clients, Friends & Observers:
June 12th, 2003
When I was in my twenties,
unmarried and unobligated, I used to fly small planes over northern
California. On a couple of occasions my instructor took me up in stunt
planes where wed perform outside loops and full barrel rolls.
Aerobatic stunts, which appear so free and easy from the ground, are
precise, systematic maneuvers. The worst situation in flying is the
tailspin wherein the plane starts falling tail first and then spins
chaotically to the ground. There is no systematic escape from a tail
spin, which is why it is so terrifying. Recovery is completely by
chance. You have to hope the plane finds an attitude at random that
will allow you to regain control.
This is analogous to deflation which is falling prices, values in
a tail spin, including everything you own, e.g. stocks and real estate.
It is the black hole of economics. There is no known systematic recovery
from deflation. There is no incentive to spend or invest because your
purchasing power increases as prices fall. Disinvestment is rewarded.
Cash is king. Presently prices are falling in almost all manufactured
goods, exacerbated by overcapacity here and cheap labor abroad. Prices
are rising in almost all services however. Services account for over
60% of U.S. GDP.
On the monetary side, the Federal Reserve has broadcast its concerns
about deflation and is flooding the system with inflationary cash.
M1 and M3 are up over 6% year over year, M2 up over 8%. Money supply
increases that are better than triple expected GDP should increase
longer term interest rates from the historically low levels they are
at now. But with short rates unchanged we will still enjoy a very
positive yield curve and in fact it is anticipated the Fed will cut
rates one more time the end of June. I dont think an increase
in the Fed Funds rate is likely until late 2004.
On the fiscal side we finally have a meaningful tax cut, political
wrangling notwithstanding. There has never been a tax cut that failed
to stimulate economic activity. The impact of cuts to dividends and
capital gains is truly significant and will immediately add liquidity
to the capital markets, add real cash (earnings if you will) to the
investor, prop up a still-expensive market, and contribute to the
wealth effect of improved household balance sheets. This will lead
to improved psychology. There are boatloads of cash still looking
to drop anchor and dividend-growth stocks of companies with stable
or growing earnings have become havens. Witness the run-up the last
three weeks. We are right back to overbought levels. The NASDAQ has
already surpassed by 100 points my year-end target, the S&P 500
is 20 points away, and the DJIA is within 600 points of my 9706 target.
S&P 500 earnings have improved about 15% so far this year.
Investors Intelligence figures yesterday were: Bulls 58.7%; Bears
16.3%; Correction 25%. According to Ralph Bloch, chief technical analyst
at Raymond James, this is the lowest bearish figure since April 10,
1987 and these figures tend to peak before the market. We are heading
into a seasonally weak period and I am wary of a blow off and correction.
Any bottoming close above 7500 would at least establish a pattern
of higher lows since last October (7200) and March (7400). What we
need are a series of higher highs from 9200 to 9500 to over 10,000
which we may well get within the next 8 months.
The U.S. dollar has given up a bit of its starch, actually
over 15%, and that is constructive for U.S. exporters. It also makes
oil cheaper for our trading partners. It is the inevitable result
of money supply growth and the fiscal swing from surplus to deficit.
And there may be a little bit of concerted, politically motivated
dollar selling abroad. That would be a pitiable exercise in futility.
Regardless of what Treasury Secretary Snow may say, or what any other
central bank may do, in the free world it is impossible to control
the supply and demand, and hence the valuation, of another nations
currency. It has been tried and it has failed repeatedly for twenty
Though the weaker dollar is sanguine for our exports there is little
demand abroad, particularly in Europe, because of sluggish economies
globally. French GDP will grow slightly over 1% this year and Germanys
will decline for the third year in a row to perhaps .2%. Unemployment
in both nations is greater than 10%. Neither nation, nor the entire
Euro Union for that matter, is a global power in any way. The aggregate
European economy is large, but as somebody once said of Philadelphia,
there is no there there.
For the last year or so, and particularly last March, I had begun
to fear that our enemies perceived our nation like a bull in the ring.
It is the picadors, delivering series of stabs with their short spears,
which weaken and wear down the bull, until the bleeding animal staggers
to its death under the final ceremonial sword of the matador. Although
I was not in favor of a war in Iraq, and I pray we do not get bogged
down any further in the Middle East, in an historical context the
U.S. projected itself like a great global power. It has forced some
radical realignments. The lessons of that war are not lost on the
region or the globe. Mess with the bull and you get the horn. In this
ring its the picadors who die.
To consider principal investments in any other currency is ludicrous.
The Euro has no standing to be the worlds reserve currency.
Bottom line, the world prefers dollars.
The problem with Martha is conduct unbecoming an officer of
a public company. For a quarter-million dollar trade and a profit
of $47,000 she risked a whole mess of entanglements. She knew that
the SEC and the exchanges regularly investigate trades like hers.
Without judging her in any way, there are mechanisms for hedging a
position. The woman who gives how tos to homeowners
could use a few how tos for stockowners. Better
to have avoided the situation entirely and a better CEO would have.
Recent acquisitions since January, in suitable portfolios,
include initial or additional positions in: Federal Signal; Sicor
Inc.; Trex Company; Ford preferred S; Glatfelter; Network Appliance;
Medtronic and Boston Scientific, among others. Our taxable fixed income
strategy presently has our average portfolio duration at 4 years.
We continue to position munis in maturities 10 to 20 years. The new
tax law will have no impact on the muni market in my opinion.
A personal acquisition I made about eight months ago is a cellphone,
PDA, web browser, emailer, camera and arcade called a Sidekick.
It was developed by some former Apple techies who formed a (private)
company called Danger, Inc. It is distributed by T-Mobile
which is owned by Deutsche Telekom. The Sidekick was
on a recent Architectural Digest cover featuring excellence in design
and deservedly so. This is a great product. It has everything I need
to be comfortable away from the office. It has a good size, readable
screen and a QWERTY keyboard which is surprisingly easy to manipulate.
Service is excellent, coast to coast, and cheap at $39 a month which
includes unlimited email and browsing. A couple of weeks ago I dropped
it and broke the microphone. I brought it to a T-Mobile store for
nearly immediate service. The next day I had a new phone delivered
to my office, complete with a pre-posted return package for the broken
phone. I simply moved my smart card into the new Sidekick and dropped
the old one in a mail box. Silly me, Im a sucker for a great
product and great service.