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  by Dennis M.
 •Brae Head Total
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Past Commentaries

Current Commentary, Review and Outlook
May 25th, 1999

To My Clients, Friends & Observers:

C’est plus q’un crime, c’est un faute

The French have a tradition of canny diplomacy which is reflected in their expression "It’s worse than a crime, it’s a blunder." The American diplomat who engineered the Dayton accords, Richard Holbrooke, has, unchecked, insinuated American military power into the Balkans. Our diplomacy has literally exploded. Holbrooke is not a career diplomat. He is a career investment banker. Our administration has blundered terribly and failed utterly.

It is a lot easier to create public works projects and their attendant bureaucracies than it is to eliminate them. We still have the Bureau of Alcohol, Tobacco and Firearms years after the Waco, Texas atrocity. The bombing of the Serbs occurs during the 50th anniversary of NATO, established in World War 2 as a defensive alliance and with little prima facie evidence of its need or efficacy today. A good friend of mine ventured the opinion years ago, "People don’t start wars, governments do."

On the brink of the new millennium, after a century remarkable for the technological development of warfare and massive annihilations of the innocent, it was astounding to listen to a NATO press release that a recent attack on a Belgrade building was not intended to target Milosevic personally. Destroy Serbia but immunize Milosevic? In 1991 Ross Perot said if you want to remove Saddam Hussein, you don’t send the 82nd Airborne, you send the Orkin man. After the dust settles on the rubble the Serbian people won’t know or care about NATO, Holbrooke or Clinton. I fear they will remember that Americans did this.

I mentioned in my January remarks the swelling resentment of Americans abroad. The Balkan exercise has obviously exacerbated this and the umbrage has infected diplomatic and economic ties as well, friend and foe alike. Thomas Friedman makes the case in his new book "Lexus and The Olive Tree" that it is the United States, the world’s largest debtor nation, who reaps the most benefit from the spread of capitalism and free trade. Our economic system has triumphed and more Americans than ever before are enjoying the fruits of equity participation. We are executing a war with casual, round-bottomed arrogance and it will probably take nothing less than massive popular rejection of our present posture to change the political stasis in Washington.

The military-industrial complex will always exist. What can’t be cured must be controlled. If deflation was a cloud on the economic horizon the last time we looked, the skies are clearing. Wars have a history of inflationary effect.

Brent crude, which was under $10 in February, hit $17 last week but has retraced to $15. There remains a huge glut of oversupply in crude and refined gasoline. The Saudis have reiterated their commitment to get OPEC crude to a target of $18- $20.

The increase in oil prices has been coincident with an increase in interest rates, a coincidence that has been consistent for the last 40 years at which I’ve looked. We prognosticated in our yearly outlook that long interest rates would trade between 5 ¼% and 5 ¾% this year and were looking for a Fed rate cut sometime in the first quarter of 2000. The long bond recently rose to 5.9% and has backed off to a 5 ¾% yield.

One of the lingering effects of the inflation rates of the 70’s and 80’s were the cash flows spun off from high coupon bonds. Those recalcitrant cash flows, and their stimulative (inflationary) effects are gradually ground out of the system as bonds are called or retired.

Media attention to Fed posturing is little more than filler between commercials. Not to diminish the enormous power of the FOMC, the Fed is, at least presently, following the bond market, not leading it.

The Stock Market…

Is aptly described by the Wall Street talking heads as "priced for perfection" at a P/E of 36 on the S&P 500, a dividend yield of 1.2%, and an earnings yield of 2.8%. We are headed into a seasonally weak period. New mutual fund cash flows diminish after April. We have failed to see the astonishing record cash flows of the last four years this season. With a backdrop of softening housing sales, a Fed threatening to tighten, rates already rising, a potentially inflationary war with attendant international uncertainty, rising oil prices, and frothy increases in money supply over the past year, we have conditions of something at least less than "perfection." Inflation is toxic to financial assets. Money flees uncertainty. On the other hand, as Buffett says, an investor pays a high price for certainty.

From a technical perspective, Ralph Block, senior vice president and technical analyst from Raymond James, recently passed along the following tidbits from the "Option Strategist" publication. The third week in March the DJI posted a new high at the same time the Advance-Decline Index (measuring the "breadth" of the market) scored a new low. The last time that happened was August 1928. A lot of time can elapse before the negative effects of breadth non-confirmations can be felt. Longest period was 16 months before an eventual market collapse, 1972-1973. The A-D Index peaked in April ’98.

We are not predicting an imminent collapse. We are advocating prudence, caution, and cash flow. The market historically goes up 2 days out of 3. Industry continues to deliver. Consumers continue to consume. International markets should expand.


Investors can look at one of the big positive aspects of American culture, specifically, American multinational corporate culture. The American regulatory environment of the last 30 years has done far more for internationalization than has technology. The managers of the companies you own have done whatever was needed, wherever, to return earnings per share. Those managers increasingly participate in equity via stock option/ownership plans.

I’m reminded of a passage from an H.G. Wells novel, "Joan and Peter," written in 1918 at the apex of the British Empire:

"A man…did not so much come to the conclusion that the subjugation and civilization of the world by science and the Anglican culture was the mission of the British Empire, as find that conclusion ready-made by tradition and circumstances in his mind…Everywhere the British went about the world, working often very disinterestedly and ably, quite unaware of the amazement and exasperation (of)…French, German and American minds."

If American management, ingenuity and technology amazes the rest of the world let us hope that our degenerating popular culture and incumbent political machinery doesn’t aggravate envy and covetousness. Love life. Pray for peace.

First quarter equity performance is posted at

Best regards,