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August 11, 2002

 

 

Holdings

 

 

Aug-02

1

PFE

2

NBG

3

YHOO

4

NKE

5

BA

6

VRSN

7

JDSU

8

CAT

9

JNJ

10

NSM

11

CA

12

FNF

13

MSFT

14

TKC

15

HMC

16

WMT

17

X

18

AAPL

19

P

20

WB

 

 

Performance of Individual Stocks For last 3 months:

 

Aug-02

 

FNF

7.24%

P

-13.08%

CAT

-14.93%

NKE

-16.81%

BA

-5.69%

VRSN

-43.60%

JDSU

-38.10%

YHOO

-22.64%

JNJ

-11.56%

NSM

-39.61%

CA

-46.70%

PFE

-9.93%

MSFT

-3.85%

BRK-A

-6.21%

HMC

-7.14%

WMT

-8.19%

X

-17.01%

AAPL

-35.68%

UN

-6.43%

WB

-2.81%

 

 

 

Total Increase (Decrease) since last quarter: -17.4

Additions:  NBG, TKC

Subtractions: BRK-A, UN

Commentary:  Well, I’m calling it right now – the market has hit the bottom (Well, not THE bottom, but it’s low enough.  The odds of me picking THE exact date of the market low are extremely low, especially since today is a Sunday).  I’m no fortune teller, but of the 20 stocks in the portfolio, 19 of them have gone down, and the only one to go up was an insurance stock.  So…..even if I am wrong, one thing that is for certain is that money is leaving the US markets en masse, and this seems to be somewhat irrational for the following 3 reasons:

 

First, the Fed’s policy of cutting rates is going to take effect one of these days.  The following chart shows what has happened to the Federal Funds rate since I started this index back in February of 2000.  As the chart demonstrates, there just isn’t much lower interest rates can go.  Also, if we accept the fact that there is a lag effect between when interest rates hit bottom and when the stimulus shows up in the general economy, then sometime right about now things should start to turn around in the economy.  Of course, we could see a scenario in the USA similar to what is happening in Japan – lots of cheap money and no corresponding growth.  But I am hoping that history will show the Japanese example to be anomalous, and that at least in this case, traditional monetary stimuli will work its magic.

 

 

Second, the economy itself is actually in pretty good shape.  Sure, things have slowed down a bit, but I don’t think we are going to see negative GDP growth this year, just as we didn’t see negative growth last year.  This is partially because the housing sector has remained strong, unlike in other periods of ‘recession.1’  With a strong housing sector, people are still going to spend, and I think we will see consumer spending and confidence rise faster out of this recession than out of previous recessions.

 

Third, valuation levels are becoming attractive.  The S&P 500 is just above 900, and even if it goes down a bit more, I just don’t see it going down all that much more. 

 

Having said this, although I consider now to be an excellent time to buy US equities, I am also coming to realize that the rest of the world also presents great opportunities.  Up until now, the only two international equities in the portfolio were HMC and UN.  I feel it is a prudent move to increase the percentage of international equities in the portfolio because, as this past quarter has shown, the US market can move as a block, and so from a diversification standpoint, owing equities that will lower the overall variance of the portfolio is a good thing. 

 

NBG is a good buy for the following five reasons:

·         As a new entrant to the EU, Greece has gotten a monetary blessing by moving from the Drachma to the Euro.  Sure, there is some debate about the stability and the wisdom of the Euro right now, but if I were a Greek, I would much rather have the stability of a currency linked to the major European markets such as Germany and France than to have a volatile national currency.  By moving to the Euro, interest rates have plummeted in Greece.  This should spur the development of retail banking and consumer lending, and also some commercial and investment banking as well.

·         NBG is an old established bank, and is the market leader in Greece.  It is not going anywhere.

·         NBG is cheap right now.

·         The Euro is going to rise against the dollar in the next few years.  Therefore, any asset with Euro-dependent cash flows should see the value of those cash flows rise accordingly.

·         NBG is well positioned to benefit from growth in the Balkans, which should be a red hot area for banking, given the lack of development of the sector under communist rule.  The Balkans will also see high GDP growth rates as they close the gap with their western neighbors.

 

TKC is a good buy for the following three reasons:

  • Like NBG, Turckcell is a leading firm in a growing region.  Sure, Turkey is not the most stable place from a financial perspective, but sooner or later the country is going to grow, and people are going to talk on cell phones.
  • Like NBG, Turkcell is really cheap right now.
  • Turkcell will benefit from expansion into its growing neighbors.

 

Well, so, for better or for worse, 10 percent of the portfolio now depends on the performance of the Balkans. 

 

1I don’t consider this to be a mature recession but only a baby recession.

 

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