Past Commentaries
          
          
          Current Commentary, 
            Review and Outlook
            September 13th, 2001
          
          To My Clients, Friends & Observers:
          Following are two commentaries, 
            the first written on Monday morning and the second written on Wednesday 
            after America was attacked. I decided to deliver them both to illustrate 
            what a profound difference Tuesday has made to the course of events. 
            It also illustrates a type of risk, ever present, to which we have 
            rarely been exposed: "event risk" or "catastrophic risk."
          9/10/01
          Economic reporting has become consistently unreliable 
            over the last ten years, either because of the enormity of the collection 
            and processing of data or, perish the thought, the deliberate manipulation 
            of data. Two or even three revisions of government reported data are 
            not uncommon. It forces greater reliance on technical analysis of 
            the markets and, in the economy, on fairly secure data including interest 
            rates, money supply and commodity prices. The official definition 
            of a recession is two successive quarters of negative GDP. It’s 
            not too much of a stretch to volunteer that are we are in one now, 
            to be announced late spring 2002, post facto.
          It is as impossible to level the waves in the ocean 
            as it is to stop the waves of economic effects of lower earnings, 
            lower growth, lower sales, lower prices, lower wealth, and slower 
            activity. It culminates in a crashing wave of negative sentiment and 
            investor psychology, the confluence of time and tides.
          One of the last evidences of unrealized wealth, paper 
            value, is real estate. While the longer term demographic for real 
            estate looks positive, nearer term we are already starting to see 
            bubbles pop. There should be good opportunities in real estate purchasing 
            in six months to a year.
          The price of oil, which greases everything, is recalcitrant 
            at $27 and is threatening $30 again, depending on what you read and 
            whom you believe.
          The strength of the dollar is a problem without a 
            solution. There is no satisfactory alternative to the dollar as the 
            reserve currency. A strong dollar is not a bad thing and a stable 
            dollar is a good thing, but a drop in valuation of 10% would be sanguine. 
            It would raise longer lending rates, a positive for the yield curve, 
            and help our exports. It would delay a subsequent stock market rally 
            but build a better base for it. If the dollar does not slide or fall 
            we already have a positive yield curve and relatively low rates across 
            the board. Fixed income strategy: barbell overweighted at 2 to 3 year 
            maturities, underweighted at 8 to 10 years. 
          Sometimes it’s worth stating the obvious: with 
            a cheaper dollar America gets sold cheaper.
          Only one economy in the world is growing right now, 
            China, with an estimated GDP growth of 5%. China now manufactures 
            practically everything. Therefore, practically everything would be 
            more expensive to a cheaper dollar.
          Valuations
          Things that once looked cheap now look expensive at 
            discounts of 15, 30 and 70%. The S&P 500 Index has a P/E of 30, 
            according to Standard & Poors as of September 5th. Unfortunately 
            the very definition of "E" as in "earnings" is now being debated by 
            the accountants, the regulators and the corporations. Did anyone ever 
            finally determine what the definition of "is" is? 
          If we accept the given P/E of 30 and consider that 
            the historical average is around 15 what kind of growth in earnings 
            do we need for how long to get back to that? I refuse to countenance 
            that and would argue that low inflation and interest rates make an 
            S&P P/E of 20 quite rational, in fact, good value. Earnings growth 
            of 5% a year would get us to a 20 P/E in 9 years.
          Then what price level would help us get that 20 P/E? 
            740. Today’s close was 1092.
          Pick your poison? I think not. Last weeks increase 
            in volume was redolent of a climax and new NYSE lows were far fewer 
            than in April. Most likely is a protracted period of retrenchment, 
            inventory liquidations, industrial rationalization, and base building 
            for accelerating earnings.
          It has been attributed to Sir John Templeton that 
            a classic bear market retraces the prior bull by 50% and lasts half 
            as long. We do have the latitude of defining the last bull market 
            and whether or not it was "classic" I suppose.
          Notes
          GE hit our "watch list" six weeks ago and we determined 
            to sell it if it broke under $40. It did and we did.
          Principal support for Coca Cola’s $49 price 
            tag is Warren Buffet’s 8% stake. We don’t own it.
          One of our few acquisitions over the last quarter 
            has been a small-cap, Connecticut Water Services, which surpassed 
            all Brae Head screens with flying colors.
          The ARMS Index gave two very bullish signals over 
            the last three weeks, strongly suggesting an upward trading rally. 
            I’d welcome it in the face of very weak fundamentals. Short 
            interest recently hit record highs for NASDAQ, again potentially bullish.
          The clues we will look for to indicate revival are: 
            insider buying, increased corporate share-buybacks, upside earnings 
            surprises, and low or falling long term rates. We may already have 
            the latter. If we are in fact entering two quarters of negative GDP 
            the market historically discounts the recovery about six months in 
            advance.
          9/12/01 Additional Comments After The Attacks
          I am shell-shocked as I write this. These television 
            images will scar my memory to my dying day. I worry about my children 
            and their fears. Three of them called me from their schools Tuesday 
            afternoon. Many emails and phone calls yesterday confirmed that my 
            personal friends in New York are OK, if badly shaken. Work is the 
            antidote to helplessness. There is work to be done and responsibility 
            to exercise. 
          I’ve reviewed the list of tenants affected in 
            and around the World Trade Center. I’ve spoken with friends 
            and professionals in the industry. I’ve reviewed all positions 
            in portfolios that will be impacted by the attacks and constructed 
            strategies to deal with them.
          U.S. markets may reopen tomorrow although I would 
            rather they did not until Monday. The exchanges will maintain orderly 
            markets though there will likely be some volatility for a short time. 
            Some of the financial and insurance firms exposed to the World Trade 
            Center will doubtless take earnings hits. I would expect institutional 
            traders to close ranks and support the markets and our economic system 
            from this despicable, psychotic, evil attack on innocent civilians. 
            I am getting a positive sense of solidarity at other institutions 
            I’ve talked to. It is improbable that we will see much panic 
            selling.
          The U.S. is entering a war economy. The Federal Reserve 
            will pump liquidity into the system creating cheap money for money 
            center banks to lend for the monumental rebuilding task and the war 
            effort. The "surplus" should rightly evaporate. All the petty politics 
            about the budget is on hold. Long bond rates will rise. The Fed will 
            lower short rates. The yield curve will be very positive. A war effort 
            will pump orders into the manufacturing base. 
          I’ve reviewed market behavior at the time of 
            Pearl Harbor, the Cuban Missile Crisis, the JFK Assassination and 
            the Gulf War. Market drops immediately following the events were followed 
            in six months to a year by significant advances. 
          The worst type of protracted recession would have 
            been preferable to us all in lieu of the slaughter Tuesday. It may 
            have the perverse effect of eliminating any potential for recession, 
            a consequence unintended by these terrorist murderers.
          Join me if you will in prayer for the dead and injured, 
            their loved ones, and the nation. Consider with profound appreciation 
            the heroic, selfless acts of countless civilians and civil servants 
            responding to this horror. This is the very best of America and we 
            are common Americans all. May we all have such character when it is 
            our turn to sacrifice.
           PS To Brae Head Clients: Tuesday’s email 
            bulletin stated that Morgan Stanley Dean Witter (MDW) was "headquartered" 
            in the south tower of the WTC. In fact their corporate offices had 
            been moved to Morgan Stanley’s offices in midtown. There were 
            about 3,500 employees at the WTC. I was told they evacuated immediately 
            after the first explosion.
          Best regards,
           
          
          