March 24, 2004

March 24, 2004


Perhaps some of you might be saying “Hey what is Monty doing writing us again. Didn’t he just email us a couple of days ago? Give us a break! We can only take so much of your drivel Monty.”

Those readers who disagree with my opinions probably are thinking this as they receive this communication. I certainly hope so. Taking the less popular road and bucking conventional wisdom has been the way we have managed portfolios and put up investment performance numbers that we are proud of for the last 32 years. Now, we are once again at a time and place where taking the less popular investment road may provide substantial returns.


Investors in the US and some foreign markets are panicky. They see terrorism in Spain. They hear that US jobs are going abroad. They see nightly news forecasts talking of greater global terrorism and increased competition for U.S. companies, and they extrapolate this to mean lower U.S. stock prices. I disagree.

US stocks are (and will continue to be) volatile, but this does not mean they cannot and will not appreciate nicely throughout the remainder of 2004. As I write this, the U.S. market is down slightly on the year. This has caused investors to be afraid. I love to see the swings of fear and greed that periodically dominate market psychology. The swings create opportunities to buy cheaply, at low valuations, and also to sell at high, unsustainable prices.


U.S. corporate profits are rising, and should rise substantially in 2004. At the same time, fear is sapping the resolve of investors, and they are selling when the fundamentals for investment are improving. Emotions and market volatility may run high until after the Democratic convention in late July. If the Democrats continue to push the foreign trade rhetoric, it could cause the shares in foreign exporters and domestic exporters to underperform. While export related stocks may be unattractive, other areas will demonstrate that corporate profits are rising. You might be thinking ‘Yes, but the stock market is a discounting mechanism. Currently, it is discounting profits, not for 2004, but for 2005 and beyond.’ I would agree.

So, how do profits for 2005 look? I believe that they will be higher than 2004. Inflation may return in 2005, and this could give corporate profits of well managed, fast growing companies an extra bump upwards. In general, price/earnings ratios of U.S. stocks are high on historical earnings, but not so high on discounted earnings. There are plenty of fast growing, innovative, technology, consumer-related stocks (as well as in other growth areas we like) that are selling at low P/E’s relative to their growth rates who also have highly visible growth prospects.

Let me be clear. We are not wildly bullish about U.S. stocks in general. We much prefer Japanese small companies, Indian and Russian stocks. There are however, some very interesting opportunities and some specific sectors of the U.S. market which are attractive that we plan to focus on.


The Russian market is up in 2004 as political stability and the strength of the economy under Putin is replacing the wild volatility and thievery of the oligarch period. Although many in Russia are being left behind, the average Russian is enjoying more economic prosperity. Russians are able to afford more consumer goods. Cell phones and cosmetics are two of the areas where Russians are spending freely. Russian women are buying cosmetics in department stores, in open-air markets and through direct marketing similar to the Avon Products model. In addition to a number of Russian companies, there are two major foreign companies involved in the direct marketing of cosmetics in Russia, and we are looking carefully at these companies.


Japan has enjoyed more attention from foreign investors as economic news has gradually improved. Recently, it was announced that the decline in real estate prices throughout Japan had stopped, this led to hopes that deflation may be ending in Japan. We continue to believe that Japanese small companies are more undervalued than large companies. Further, we believe that small companies are less export-oriented and thus less vulnerable to the debilitating effects of a rising yen. We are only investing in Japanese small companies and not the large well known names.


India’s election is a few weeks away and the period of huge government divestitures is drawing to a temporary close. Indian stocks have been hurt both by U.S. rhetoric against foreign trade, and by the liquidation of Indian shares by Indians who wished to participate in the new privatizations. A result of the large privatizations is that the Indian stock market has grown in size versus the world indices, so India should be allocated new funds by global investors. We continue to think that India is an attractive market and we are looking for opportunities in energy and technology companies.


Today, something big happened in China. The Chinese authorities, in order to reign in increasing inflation, raised interest rates. If this trend continues it will eventually be negative for Chinese growth and for the stocks of the base metals and manufacturing companies who export to China. We have not been active in China except for a small position in Chinese energy stocks. We are in the process of selling these energy stocks. We are also selling our positions in the base metals companies as their fundamentals have largely been driven by rapidly expanding demand from China. The Chinese tech stocks that we owned a few months ago continue to decline, and we do not think that the time has come to recommit to those. The China story continues to be very important to world economic growth and we will monitor it closely.


While some investors are scared and afraid to put money to work, we are not. We are buying positions in Russian, Indian, Japanese and U.S. stocks. We continue to watch our gold stocks closely and we may take some profits if they continue to rise. We think gold could rally through the spring and possibly going into a small seasonally customary correction in the summer.