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Past Commentaries

Current Commentary, Review and Outlook
June 12th, 2003

To My Clients, Friends & Observers:

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 we’d 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 don’t 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 nation’s currency. It has been tried and it has failed repeatedly for twenty years.

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 Germany’s 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 it’s the picadors who die.

To consider principal investments in any other currency is ludicrous. The Euro has no standing to be the world’s 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 to’s” to homeowners could use a few “how to’s’ 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, I’m a sucker for a great product and great service.