Wolf! Wolf! Wolf!.
New Year Greetings:
February 1, 2001
Happily we write to you with overall account values having improved
markedly since year-end 2000. For the record the Model Portfolio
staggered to the finish of the year 2000 with a gain of 1% which
was much better thatn the popular averages. The NASDAQ finished
the year down 40%, the S & P 500 was down 9%, and the DJIA was
down 7%. Most accounts finished the year up or down 5% although
there were a few accounts down 10%.
On a much more positive note, the rally in early January allowed
us to raise cash with a vengeance while still seeing overall improvement
in all account values. Last letter we remarked that we wanted to
soon have a large cash position because we wre nervous about the
markets. We remain very concerned about the markets, both stock
and bond and so we acted on our gut feeling and sold into the rate
cut rally to raise our cash/bond levels in all accounts.
A new year offers a new beginning and we are thankful for the rally
in our stocks. As we write most accounts are up 10% to 20% from
their year-end values and are 70% cash or short term bonds. Some
more aggressive accounts are trading some big cap stocks (SBC, Bellsouth,
Disney, McDonalds, and UAL) but we have reduced our basic stocks
holdings to four. Those stocks are Wild Oats, Ohio Casualty, Urban
Outfitters, and Excite@Home. We also still own Midwest Express for
a trade, and have a small position in some aggressive accounts in
Cott Corp. We used the rally to eliminate other positions including
overly large positions in Abercrombie & Fitch, Williams Sonoma,
A T & T, and Lucent. We've had good luck trading Abercrombie
and Williams Sonoma over the last eight months, and terrible luck
with A T & & and Lucent. We sold the A T & Tbecause
we don't agree with the plan to split the company up. While we have
no doubt about the value of the various parts, we think management
is letting Wall Street run the company. We sold Lucent because we
think it will reach single digits before the tech wreck collapse
is over. Lucent and A T & T were both relative value purchases.
Bu that we mean that we bought Telephone and Lucent because both
stocks were relatively cheaper than other stocks doint the same
kind of business. Such an approach usually works in rising markets
as investors look for undervalued securities as a way to participate;
but in falling markets such an investment approach causes pain as
all stocks drop, with the relatively undervalued ones dropping fastest.
Luckily, we had some nice winners to offset our losses and we just
decided to clear the boards of all our "relative value"
investments when we went to cash.
During December, when our account values reached their lows we happened
to remark to a client that we felt like the boy who cried wolf.
As the market dropped in December we kept adding positions in the
hopes of a January rally. At the same time we couldn't help but
think that maybe the market downturn we had been predicting for
the past few years was upon us, and rather than being largely in
cash we were fully invested. 1999 had been good to our accounts
and until November 2000 we had weather the NASDAQ crash with relatively
positive results. We hoped for a year end rally. There was a small
up tick the last few days of the year 2000, and when the Fed dropped
the discount rate by one half per cent on January 3, 2001 we gladly
reduced our market exposure as quickly as we could. In doing so
we left some money on the table in some stocks. But our overall
approach to investing has always been bottom line guided and when
we saw that accounts that had been down 10% for the year 2000 were
now up 5% on a one year and five day basis, we were positive our
sell strategy was sound.
As we write, many accounts are up 5% to 15% on a thirteen month
basis while all the market averages remain negative over the same
time period. We and most of our account have well outperformed over
the past two years and we don't want to give our gains back. Moreover,
with our very substantial cash hoard, we can again cry "Wolf!".
The reason we have raised so much cash is that in the past when
we have gone to a 50% cash/bond position we still have not avoided
suffering greatly in substantial downturns. We are very negative
because we do not believe that interest rate cuts from present levels
will have the effect predicted. When interest rates were cut in
the mid 1990s, the markets were a half their present level, in the
early 1990s the markets were one third the present level. The speculative
building in the big cities and even small towns has been going on
for years now and lower rates may mitigate carrying costs, but the
rash of layoffs and bonus cuts will have on the projected surplus,
long bond prices will collapse. Interest rates in Japan are near
zero, but those low rates haven't rescued the Japanese economy from
the excesses of the late 1980s. So too for our economy and stock
We think the market may continue to rally for a month or two, but
we expect a serious sell-off later in the year and we don't want
to try and catch the last run. Hopefully even the stocks we still
hold will give us 50% returns in the coming rally and will allow
us to reduce our exposure to the stock market even more. We are
thinking 1973-1974 type action, not 1987 or any of the 1990s corrections.
Thus our caution.
We've owned Wild Oats sporadically over the past few years at much
higher prices. Luckily we sold most shares before the collapse last
year. The company owns and oeprates natural foods stores throughout
the country and has grown rapidly by purchasing locations. This
strategy led to severe integration problems and resulted in lower
operating earnings and special charges in the year 2000. With a
big write-off to be announced in the next month, hopefully OATS
will begin showing better same store sales results and earnings
in 2001. At its present price with sales of almost $900 million,
the company is being valued in the stock market at under $200 million
including debt. Insiders were big sellers at $19 per share in March
2000, and big buyers at $5 per share in December 2000.We had the
same pattern. At $6 per share we like the risk reward ratio and
consider this an investment for turnaround.
Ohio Casualty is an auto and casualty insurer that earns $2 per
share from its investment portfolio. The problem is that OCAS has
been losing $2 per share on its underwriting. New management promises
changes. Book value is $17. Another good turnaround situation.
We've also owned Urban Outfitters over the years but never at this
low a share price. URBN locates its stores in college towns like
Evanston and Ann Arbor and markets to the college market. Also runs
stores called Anthropologies and has catalogues and web sits. Insiders
own a good chunk of stocks and have run the store since inception.
Missed the armet this year but will still earn money and has no
Excite@Home provides internet hookup through cable wires. Company
is now controlled by A T & T. A T & T just paid $4 billion
dollars for a 40% interest in the company by buying out partners
Comcast and Cox. At the time A T & T paid 4 billion for a 40%
interest - the whole company was being valued in the marketplace
at $3 billion. One reason we don't own A T & T anymore. Also
one reason we own ATHM. We presume that A T & T will buy the
rest of the public shareholders out of make a special effort for
this company to succeed. It's a relatively small position in most
accounts except small accounts. ATHM has 3 million subscribers now
and is adding paying subscribers at a nice clip.
Cott Corp. bottles soft drinks for private label users. Having owned
before we own in small amounts in large accounts and could easily
be out of the stock on any more. Same goes for Midwest Express which
we bought for a trade at year end.
Thanks to all who contributed to our Sri Lanka kids.