Past Commentaries
          
          Current Commentary, 
            Review and Outlook
          
            October 5th, 2000
          To My Clients, 
            Friends & Observers:
          Mark Twain said, "A man who does not 
            read great books has no advantage over the man who cannot read them." 
            One of the great books is The Power Elite, written by C. Wright 
            Mills in 1956. It should be required reading for every scholar, as 
            much as Macchiavelli's The Prince. Mills was a Columbia University 
            professor, regarded as an iconoclast by his fellow faculty. His book 
            is a compelling argument that America is not as democratic as it seems. 
            It dissects the American social strata and the influence of the military, 
            corporate and political elite. The book is a masterwork of perspicuity 
            and critical thinking, as timely today as 40 years ago.
          While I don’t spend much professional 
            time on political and social analysis it is important to be critically 
            aware of current events and the economic changes wrought by military, 
            corporate or political influence. The current desperation of the power 
            elite fairly jumps out of the newspapers and television screens in 
            bas relief to the relatively mundane events that are cautiously reported 
            by the (corporate) media oligopoly. Power is the universal currency, 
            readily convertible to cash. Follow the money to find the pattern. 
            Some recent floats in the passing parade fail to dissipate from memory. 
            
          With four months left in his term, 
            our president goes to Lagos, Nigeria to deliver a sermon on aids prevention 
            and fifty million dollars. How much of that fifty million will actually 
            go to aids prevention in a shining democratic light like Nigeria is 
            speculation. It is probably more significant that Nigeria is an OPEC 
            nation, second only to Libya in oil and gas reserves on the African 
            continent. There is a quid pro quo here somewhere.
          Our local congressman has a political 
            fund-raising gala in Washington, attended with our president and Massachusetts’ 
            senior senator. The congressman raises $250,000 for his campaign. 
            While providing full and flattering coverage of our popular political 
            celebrity, not one local TV or radio station mentions that he is 
            running unopposed. 
          Then again, this is Massachusetts, 
            where our sitting governor was elected with over $800,000 of pre-existing, 
            personal credit card debt.
          Millionaire candidates that say absolutely 
            anything that anyone wants to hear to garner votes lead us to either 
            of two conclusions: if they actually believe what they’re saying 
            they are dangerous and frightening; if they don’t believe what 
            they’re saying they are unbearable cynics and liars. If this 
            is a pathology, it illustrates the greater appeal of power over money.
          Our justice department is demonstrably, 
            politically motivated. Apart from stonewalling against investigations 
            of corruption and security breaches there is no principled rationale 
            for anti-trust enforcement or lack thereof. The media industry has 
            never been more consolidated. So too for the pulp and paper industry. 
            The company that initiated anti-trust action against Microsoft is 
            now part of the AOL/Time Warner empire (Netscape). 
          Soft money corporate contributions 
            to the political parties have never been higher and there is no end 
            in sight. In Iran they call it baksheesh. Here we call it lobbying.
          Taxes as a percentage of GDP have 
            never been higher and this in a protracted period of unprecedented 
            economic growth. And yet the clamor against tax cuts is positively 
            shrill. Every economic transaction has a tax, or 3 or 4, associated 
            with it. Apart from income taxes, an additional 15% of income goes 
            to Social Security/FICA taxes, which is immediately spent from the 
            general fund by a ridiculously inefficient bureaucracy. There is no 
            "trust fund" until funded.
          Our acclaimed Fed chairman has inverted 
            the yield curve, a recessionary action. The Fed is charged with regulating 
            money supply and providing a monetary climate in the best interests 
            of the economy. His remarks most attended to are those regarding his 
            concerns about the (disintermediary) stock market, something over 
            which he has neither rightful control nor authority. He has raised 
            interest rates 6 times, further strengthening an already strong dollar.
          Oil prices have tripled. Oil prices 
            and interest rates move in the same direction.
          The Financial Accounting Standards 
            Board (FASB) will complete in the first quarter of 2001 its elimination 
            of "pooling of interests" accounting in business mergers and acquisitions. 
            There is legislation pending in congress against this FASB amendment. 
            The composition and the work of the FASB is essentially political. 
            Eliminating pooling of interests will have a dampening effect on m&a 
            activity and force significant changes in EPS reporting. 
          Unless you subscribed to international 
            news services, as we do, or watched the BBC on PBS, you would not 
            have been aware in early September that over 80% of gas stations in 
            France had no gasoline, a result of public insurrection over 
            gasoline taxation that has since spread across Europe. I shudder to 
            imagine such a situation in the USA. Astonishing that this was not 
            even reported by our media for weeks. 
          The European Union is experiencing 
            problems with its newly-minted currency, the Euro, which has not held 
            its value as well as had been hoped. Whoops! Wonderful time to shop 
            in Europe if one could find the time. The Euro will prevail, at some 
            value.
          Party lines and ideologies are immaterial. 
            The power elite is never voided. As much as nature abhors a vacuum, 
            part of human nature is relentlessly dominant and political. Technology 
            and the world economy are changing faster than governments’ 
            ability to regulate. The political aristocracy is struggling to keep 
            up. Information and travel without leaving a desktop have empowered 
            millions as never before. At the same time the internet has become 
            the greatest spying mechanism a government could ever dream of. It’s 
            no wonder that security and privacy mechanisms are not yet mandated 
            despite the plethora of devices available. 
          Political power is like hydraulic 
            pressure, neither good nor evil, just there, to be used for either. 
            
          The Markets
          While we were optimistic at the beginning 
            of the year we have been saying right along that the probability for 
            such a long string of 20% index gains continuing was low. We stated 
            in our March 3rd commentary that the NASDAQ was at an unrealistic 
            valuation and that old economy stocks had more potential to outperform 
            new economy stocks in the near term. The NASDAQ is down 32% and the 
            S&P 500 is down 7.5% from their respective highs.
          Realistically, the "exuberance" would 
            have to be "irrational" to sustain the all-time highs in the indexes 
            at the end of March. Six Fed hikes, an inverted yield curve, and $35 
            oil has to take its toll. My hopes for $25 oil by year-end are dashed 
            going into heating oil season with very little new production as yet. 
            Perhaps by spring we will see some price relief and a Fed rate cut 
            or two.
          Our attention is directed to companies 
            that are assimilating new technologies rather than producing technology. 
            New technologies and variations continue to proliferate and the impact 
            on earnings has forced a cold reassessment of many of our best performing 
            equities. Two examples: Cisco Systems, which we liquidated by half 
            in March and completely by mid-June; and EMC, the same procedure. 
            
          Both are examples of excessive valuations 
            and unrealistic earnings expectations, as well as an inflection point 
            in the quality of earnings. They also presented opportunities for 
            unexpectedly large capital gains with little likelihood of continued 
            growth in value. Further, both these companies that we sold were no 
            longer the companies we had bought. Both are besieged by other technologies 
            in an industry nobody can predict accurately. Both are morphing into 
            software companies. And both are excellent, well-managed companies 
            that we may choose to own again.
          New equity portfolios that we are 
            building are 35% in cash, have a P/E of 23, and a dividend yield of 
            1.7% compared to the S&P 500 which is 27.25 and 1.1% respectively. 
            The P/E of the S&P 500 has dropped from 36 two years ago to 26 
            two weeks ago. The P/E is creeping back up as weaker earnings are 
            reported. It will stabilize as prices fall.
          We bid a fond farewell to the great 
            J.P. Morgan & Co. which is being acquired by Chase Manhattan for 
            stock. We do not choose to own Chase and have taken the proceeds from 
            JPM and deployed them in Morgan Stanley Dean Witter (MWD), one of 
            the last great, as yet unacquired, jewels in the investment banking, 
            financial services industry. Phil Purcell, the chairman of MWD, is 
            a genius and has built a powerhouse of a money machine. The company 
            has an eight- year history of dividend increases. Earnings and income 
            exhibit high quality growth and despite the recent earnings warning 
            we believe the company is priced at a reasonable discount.
          Best regards,
           
          
          