Freedom & Technology - Inextricably Linked

Monness, Crespi, Hardt & Co., Inc.

767 Third Avenue

New York, NY 10017

212 838 7575

                                                                                                                                                                  Sydney M. Williams
                                                                                                                                                                  November 9, 2009

Market Note

Freedom and Technology – Inextricably Linked

“A society of sheep must in time beget a government of wolves”

                                                                                                                                    Bertrand de Jouvenal (1903-1987)
                                                                                                                                    French philosopher

“When computers (people) are net worked, their power multiplies

geometrically. Not only can people share all the information

inside their machines, but they can reach out and instantly tap the power of

other machines (people), essentially making the entire network their computer.”

                                                                                                                                    Scott McNealy (1954 - )
                                                                                                                                    Former Chairman
                                                                                                                                    Sun Microsystems

The tearing down of the Berlin Wall twenty years ago today came to symbolize the victory of freedom over oppression. More countries have become democratic in the last thirty years than at any other time in history. In the past decade, the internet has enhanced the ability of people in all societies to communicate easily and freely, and has helped spread the cause of capitalism and democracy. It brings new meaning to the words of a song written in 1918 by Joe Young and Sam Lewis: “How you gonna’ keep ‘em down on the farm after they’ve seen Paree?”

So, it comes as a disappointment that a dispiriting aspect of the Obama Presidency is their instinct and inclination to avoid siding with brave, democratic dissidents in their battle against totalitarian leadership. This fact has been very visible in Iran and Honduras, in the decision not to meet with the Dalai Lama and in the absence of the President from ceremonies marking the removal of the Berlin Wall. The dissidents have, at great personal expense, challenged their authoritarian leaders and, while the excuse may be that it is none of our affair - it is an internal matter, it is argued, and dictatorships provide stability – the truth is that the world is less safe with people like President Mahmoud Ahmadinejad of Iran, Kim Jong-Il of North Korea, Hugo Chavez of Venezuela, or even Manuel Zelaya Roslaes of Honduras.

Contrast, if you will, Iraq under Prime Minister al Maliki today versus Iraq under the tyrant, Saddam Hussein. The desire to be free is inherent among all people. The world is an ever-changing place and democracies are far more flexible in adjusting to dynamic change than dictatorships. This gut instinct of people to rise up should be supported, not suppressed, and was, in fact, better understood by the previous Administration than the current one. This reminds me of a point I have made in the past – a problem with liberals is that they are not liberal; they are often intolerant of those with whom they disagree and they believe that personal responsibility should be subsumed to the State.

For the past few years, global economic growth has been driven by countries like China, Brazil and India. The financial problems which brought this growth to a halt in 2007 were not caused by them. And it was not caused by hedge funds, the scourge of the Press and the Beltway. It was caused by leverage incurred by consumers who bid up asset prices, encouraged to do so by big, regulated, banks (both commercial and investment) and nourished by Washington politicians who wanted a house at the end of every driveway.

The United States is now at a turning point. The old “West” is decaying in a miasma of socialism, aging and declining populations. Throughout history much of the United States has been tied to the West. It is the foundation of our culture and our laws. That culture and those laws have served us well for two hundred years, but Western Europe has been turning its back on the very fundamentals which brought enlightenment and made it strong and successful. The Twentieth Century, with its two world wars killing 100,000,000 people, has taken its toll. After the Second World War, the United States stood ready to defend Europe against the encroachment of a nuclear-armed Soviet Union, so Europeans put away their weapons and hid behind our skirts, while focusing on a “Nanny State” style of socialism. In recent years, Germany and then France picked leaders more capitalist than their predecessors, but not strong enough to alter the course followed for six decades. The only Western European leader who truly proved revolutionary was England’s Margaret Thatcher, now disparaged by so many; her ideas forsaken in a “politically correct” world.

It is difficult to view old Europe with much optimism; aging populations and declining birth rates suggest they are not optimistic either.

But in their place, arising like the phoenix of Greek myth, are China, Brazil, India and the newly democratized nations in Eastern Europe.

At the same time, people everywhere are becoming electronically connected. Growth, when not experienced, will be seen (virtually); competitive, aggressive, intelligent people of all nationalities want their share. Government can do two things to quell this surge: they can become more dictatorial and so suppress the internet, or, more subtlety, they can increase the dependency of their citizens on a “benevolent” government, thereby making people less willing to take risks. It is into this latter camp that “Old Europe” risks falling, and so does the United States, as socialism is substituted for capitalism.

A world that for forty-four years was divided between the West and the East, between the U. S. and the USSR, will soon be divided between capitalists and socialists, and the irony is that “old Europe”, the source of much of our heritage, looks to become the losers in this new world. And we risk following suit.

Human nature does not change; the use of force to compel one nation to submit to another will be a constant threat. Thieves will operate, as will terrorists and fear mongers. In this world, relativism has little value. It certainly does not among those who would do us harm. A belief in and a willingness to stand up for, universal moralities will be essential to achieve success. As political columnist, Charles Krauthammer has said, political correctness is a political abomination and a danger.” A “wild west” world is vulnerable to anarchy. So sheriffs are necessary, and the United States, at present, is the only one in town. But we won’t be for long and that, in and of itself, is not bad. China’s army is bigger than ours. Their navy is becoming stronger by the day. Its enormous surplus of dollars will permit them to one day match ours. Does that portend another arms race? Perhaps. Is that something to worry about? No, as long as we understand the stakes.

It has become almost universally accepted that the United States is in decline. I am not sure. We are, however, at a turning point. Issues such as universal health care, cap-and-trade, global warming dominate our Press and the thinking of liberal elites. I do not dismiss the importance of any one of those problems, but they pale in comparison to fixing the financial system and restoring economic growth.

Unlike Europe, which has made the bed in which they must sleep, options remain for us. But it will take daring and courage, and at times we may be accused of acting alone, but our system of creative, responsible capitalism must prevail. Otherwise we fail.

A student of Dr. Hans Rosling, a Swedish professor of international health, when once asked to describe the difference between developed and undeveloped nations, responded: developed nations have small families and long lives; undeveloped nations have large families and short lives. Think about that statement – small families and long lives, absent an engine for growth, lead to declining birthrates and aging populations, a recipe for ultimate decline.

We are different from “Old Europe”. Our immigrant-based population is unique in the annals of nations. They provide the “promise of America”. To ensure our future growth and maintain our pre-eminent place in the world, we must align ourselves with the developing world and with the change and hope that technology and democracy are bringing to a billion and more people. It is more important to embrace this change than be everybody’s friend. Those marchers for freedom in places like Iran and Honduras are far more likely to be our partners in a revitalized world than dictatorial leaders, intent on pillaging their people and denuding their resources in order to sate their personal desires.

We should never forget the fear and misery experienced by East Germans during the forty-four years of Soviet occupation, nor the hope provided them when on June 12, 1987, President Reagan spoke out, “Mr. Gorbachev, tear down this wall!”, nor the elation experienced when, on November 9, 1989, the wall was first breached. No more should we forget or ignore current cries for freedom emanating from Burma, Iran, or Honduras.

The internet has hastened the path toward democracy. The two are inextricably linked; we benefit from their union; we ignore them at our peril.

Monness, Crespi, Hardt & Co., Inc.

767 Third Avenue

New York, NY 10017

212 838 7575

                                                                                                                                                                Sydney M. Williams
                                                                                                                                                                December 29, 2009

Market Note

Year End 2009

“The future is an opaque mirror. Anyone who tries to look into it

sees nothing but the dim outline of an old and worried face.”

                                                                                                                                                               Jim Bishop (1907-1987)

                                                                                                                                                               New York Journal-American
                                                                                                                                                               March 14, 1959

“The future ain’t what it used to be.”

Yogi Berra (1925-)

Man has always yearned to know what lies ahead. Odysseus consulted Tiresias, the blind prophet of Thebes. Cassandra was granted the gift of prophecy by Apollo. The Biblical period had its prophets, including men like Barnabas and Hosea. Shakespeare’s Macbeth opens with the three witches and their forecast of tragedy:

“Fair is fowl and fowl is fair

Hover through the fog and filthy air.”

Charles Dickens, in a Christmas Carol, has the third spirit, the ghost of Christmas yet to come, lead him through harrowing visions of what’s in store unless he mends his ways.

Today, with soothsayers in disrepute, we have invented analysts, technicians and economists to guide us toward the unknowable future. We know only that they are human and that their vision is not much better than that of my nine-year-old granddaughter; so we view with skepticism their forecasts, as though a yellow sign accompanies each prediction, “Caution: unknown road hazards ahead!” Extrapolation of one’s most recent experience tends to be the light that guides most. Often expert opinion proves wrong. In 1927, Harry M. Warner, one of four brothers who founded Warner Brothers, was quoted as saying, “Who the hell wants to hear actors talk.”

One year ago the credit crisis had already passed its nadir and was showing flickering signs of life. The TED spread, for example, had peaked at 465 basis points in early October 2008 and ended the year at 131 basis points. The VIX, at 40, was still high, but the decline from 85 was an indicator that confidence was waxing, not waning. While credit markets were off their worst levels, the economy, already in recession for four quarters, was on its way toward its lowest point. World stock markets, commodities (excluding gold) and corporate bonds (especially High Yield) were in decline. Gold, the U.S. Dollar and U.S. Treasuries, reflecting a flight to safety, were the lone assets to show strength in 2008.

A year ago we were concluding a period in which year-over-year losses in equity valuations were the greatest in forty years, with the S&P 500 down 38.5%. Ten year returns to the same index were negative 26.5%. Despite a 24.8% gain in the S&P 500 this year, ten year returns remain a negative 23.3%. In fact, should the market be up 16% in 2010 (higher than virtually all strategists’ predictions) the ten year return to the S&P 500 will have been negative for the third year in a row – worst than any period since the 1930s. And, yet, we now have an article in the current issue of Barron’s, entitled, “A Flat Dow for Ten Years? Why it Could Happen.” Where was Gary Gorton, a liquidity expert at Yale, in 1998, or 1999, or 2000? Extrapolation is the inference of an unknown from something that is known, so it is not surprising that quantitatively schooled analysts make use of mathematical models in an attempt to understand and forecast events, events which are more often driven by psychology or behavior rather than rationality.

As I look back over the past three Year-End Market Notes, I am struck by how far we have travelled. At the end of 2006, I started my note: “Complacency has settled over the financial markets like a soft coating of December snow.” I went on: “Within this environment, the consumer blithely skips ahead, borrowing to ensure he lives as well as the next man, while ignoring rumblings from the housing sector.” By the end of 2007 things had changed. I wrote: “Today we are in the midst of rapids and the din is all about us. We do not know how far the rapids extend or what the descent will be…” While I expected a lower market, the din became much greater and the extent and descent was far worse than anything I foresaw. And a year ago, I began my note: “This has been a year whose conclusion has been eagerly awaited.” I added: “Arguing the bull case at a time like this is difficult, even though common sense tells us that it is from ashes of such destruction that fortunes are created.”

As we peer through the haze that will ultimately dissipate to disclose the year 2010, it is, as always, difficult to see. Early in the New Year, in his State of the Union Address, the President is likely to take a victory lap on health care, regardless as to whether he has signed legislation into law and no matter what the Bill entails. With an eye on the mid-term elections, he will have to get his Homeland Security Secretary to admit, yes, there are terrorists out there, and they are at war with us, even if we are not at war with them! He may not admit it, but it is becoming increasingly obvious that reaching out to regimes such as Iran, Venezuela and Cuba has failed, and that support for dissidents is a better reflection on our democratic values. In short, we will see President Obama move closer, in this regard, to the positions held by his predecessor.

The winter Olympics will provide a few days respite before the press of the November elections begin in earnest. The President’s poll numbers have declined. He emerged from the radical left and campaigned in repudiation of everything Bush. He spoke of restoring a favorable view of our Country by the rest of the world (by which he really meant Western Europe), and of reconciliation; he promised an end to partisan politics and vowed to clamp down on K Street lobbyists. Nevertheless, partisanship has intensified and the lucrative business of lobbying has never been so bountiful. The reality of actually running a large and diverse country has caused him, verbally at least, to moderate his rhetoric and to tone down expectations.

The Christmas day near-disastrous attempted bombing of Northwest flight 253 by the young Nigerian, Umar Farouk Abdulmutalllab was a reminder of the war many seem to have forgotten. The young man was trained in Yemen by former Guantanamo-held prisoners – the Country to which President Obama has seen fit to receive additional detainees. Despite having won a Nobel for Peace, the New Year is likely to see the President take a tougher stance on terrorists and rogue regimes. The Middle East will remain very much in the news, as Iran continues its not-so-stealthy march toward nuclear armaments and Yemen risks becoming the third battle ground in the war against Muslim extremists.

While I believe the economy is on track for recovery, the market has anticipated such an eventuality. The consensus suggests growth will be modest, which seems likely, but exports to consumers in emerging nations may provide surprise to the upside. Corporate earnings, given unusual productivity gains during the downturn and a reluctance to rehire quickly, should be very strong, especially for the manufacturing sector and particularly in the first half. Unless analysts are greatly underestimating earnings for the S&P 500 (a very real possibility, in my opinion), the multiple of earnings suggests stocks are selling (at 15X 2010 earnings) close to fair value – indicating neither unusual weakness nor strength in stocks over the next year. It does seem likely to me, however, that rates are likely to move higher during the course of the year, with the Federal Government having to sell about $1.4 trillion in securities. They have indicated an interest in extending maturities (a smart move, in my opinion, given current rates), which will add upward pressure to long term rates. At the same time, the free-riding banks have enjoyed over the past year – borrowing at virtually no cost and investing with no risk in longer dated Treasuries – is likely to come to an end with an increase of the Discount Rate coming earlier than generally expected and demands that assets be concentrated in corporate loans. Rising interest rates will put downward pressure on stock multiples. So, earnings may be better than estimated, but multiples may be lower. Previewing higher interest rates, over the past month, rates on Three-Month Treasury Bills have risen from ten basis points to fifty-five basis points. Rates on the Five-Year Note, in the same time, have risen from 2.03 basis points to 2.60 basis points.

With all the volatility we have experienced over the past ten to twelve years – from the irrational exuberance of the late 1990s to the outright fear of September/October 2008 – businesses have marched along. Google went public in August 2004 and has since soared eight fold. A re-vitalized Apple is up ten fold in the same period of time. Intractable and unbreakable chains to the past have claimed union-driven businesses, like the auto and auto parts companies, unable and/or unwilling to adapt to a changing and flatter world. Corruption and greed have buried companies such as Enron and WorldCom. Over time we are likely to bear witness to the vaporization of financial wizards who used shareholder’s and the public’s money to garner unfathomable bonuses without creating one iota of GDP. It is the way capitalism works.

Despite my “old and worried face,” mounted with white hair, I have no memory of the 1930s, but the situation does remind me of the 1970s. Following the absolute low reached in October-December 1974 and the subsequent 73% rally, it was generally a period of meandering markets – up one year, down the next. But it was a time when stock picking worked. Panic and volatility morphed into malaise; inflation picked up dramatically and growth was slow, giving credence to the theory that Keynesian economics was flawed. It was not until Paul Volcker, as Fed Chairman, killed inflation by raising interest rates in 1982, creating a short but severe recession but building a foundation for two decades of economic growth. George Melloan, late of the Wall Street Journal, warns of creeping socialism today and lays out the case for supply side economics in a new book, The Great Money Binge: Spending Our Way to Socialism. It is a book worth reading. However, my guess is that we are a few years away from the next Paul Volcker. In the meantime, with expectations ratcheted down, subdued volatility should provide an environment favorable to stock picking.

May the New Year bring health, happiness and prosperity!

Market Note

March 29, 2000

George Santayana, the Harvard Professor and Philosopher once wrote that “….those who cannot remember the past are condemned to repeat it.”* What he did not write was that those who do remember the past, and its pitfalls, can also become opportunity’s orphans.


Certainly, those that invested in “new economy” stocks over the past few years have done well, while those that stuck to a disciplined, rational value approach have suffered. But perhaps Professor Santayana was correct. History does repeat. What we who search for value at a reasonable price may have overlooked was the glorious, upward ride provided by the momentum stocks of the past – conglomerates and leasing companies in the sixties, oil service stocks in the seventies, savings and loan and the LBO’s of the eighties and biotech stocks in the early nineties. Many of us who lived and invested throughout this period have tended to focus, most recently, on the downside risk. We “know” that this “mania” shall, too, pass. We don’t know when, but our caution has penalized our returns.

We recognize that the Internet and the changes it is creating in business and in our every day lives are truly revolutionary, but think for a moment as to who benefits. New products and services are being provided by a myriad of new companies, and there is intense competition among those companies. It is the consumer of those services that will be the big winner. Individual consumers can purchase continually enhanced computer hardware for increasingly less money. They can purchase everything from books to automobiles for less money and less hassle. Their homes will be more efficient, and they will be able to stay in closer communication with their children. More importantly, business consumers can purchase parts, services and supplies less expensively and faster than ever before. Plants can be operated more efficiently. Closer contact with customers can be maintained. In short business consumers of these products and services of the “new economy” are doing everything that should enhance their own profitability. Certainly there will be pressure points. Some businesses will adapt more readily to the changing environment than others. There will be losers as well as winners; however the point is there will be winners among the companies that operate within the “old economy”.

A number of industries and companies have taken advantage of the Internet and new technologies within communications to grow and expand their businesses. Examples can be found in industries as diverse as autos and utilities, entertainment and truckers, media and financial services. Despite these opportunities, many stocks within these industries are selling at, historically, reasonably prices.

If we harken back to another era, the late 1960’s and the early 1970’s, there are lessons that can, perhaps, lend some perspective to today’s environment. At that time the foremost growth stock in the U.S. was IBM. By 1973 IBM was selling at 50 times earnings, and had ( or would soon ) earned the distinction ( so far unmatched ) of being the only public company to grow its earnings at a rate of 20% or higher for 15 consecutive years. The company continued at the forefront of technology, yet the price of the stock from 1970 to 1994 was unchanged. Since 1994 IBM stock has appreciated ten fold, but that still has provided an annual compounded return of only 8% over that thirty year period, certainly disappointing for a company that was considered, in 1970, the premier growth company in America – a sobering thought in today’s environment of stocks selling at many multiples of revenues, let alone earnings. Stocks are not companies. Professor Santayana was a wise man. It may be worthwhile to remember his words of caution.

Sydney Williams

George Santayana, Life of Reason, “Flux and Constancy in Human Nature”, Vol. 1, Chap.11, 1905-06.

Market Note

March 6, 2000

The new mantra on Wall Street is “the new economy” versus “the old economy”. The new economy is good, while the old economy is bad. Certainly the new economy represents everything that is new, exciting and technologically correct. The old economy, by contrast, seems tired, dusty and stodgy. None of this has gone unnoticed in the market. Last year internet stocks sizzled with many showing gains of multiple hundreds of percent. So far this year chip companies, wireless and bio-tech stocks have captured the lead. In the meantime, through February, the Dow Jones has had its worse start in years, down 11.9%. In the same time frame the NASDAQ Composite is up 15.4% and , the real surprise, the Russell 2000 is up 14.5%. How long this divergence can go on is unknown. Investors who have attempted to predict the end of this schizophrenic market have lost a lot of money. Money flows suggest that this trend will continue, at least for the time being.


However, in the real world there are signs of shifting sands. Old economy companies seem to be entering the realm of the new economies. And it increasingly is apparent that the two economies have a mutual interest in one another’s success. The C.E.O. of a trucking company [Celadon Group, NASD:CLDN] visited our office recently. They have established a company called Truckers Co-op.com. The company has a web site that will permit independent truckers to participate in cost benefit programs for the purchase of items such as fuel, tires, insurance, credit cards, motels etc. There partners include companies such as G.E. Capital, Qualcomm and Comdata. We recently received a fax from American Aircarriers Support [NASD : AIRS, a maintenance, repair and service provider to the aerospace industry. They recently invested in a new company, SupplyAccess, a spin off from En Pointe Technologies [NASD:ENPT]. American Aircarriers, along with En Pointe, will develop and market a business to business e-procurement solution for the aerospace industry. Last week the three big auto companies Ford, GM and Daimler Chrysler, announced that they were forming a new company that will allow for the electronic purchasing of parts and supplies. They will be utilizing the services of companies such as Commerce One and Oracle, but the new venture will be owned and operated by the three auto companies. Newspaper reports have suggested that , should this new company go public, this new company would command a market capitalization between 30 and 40 billion dollars, not far below the 45-50 billion dollar market capitalization now carried by Ford and General Motors.

These three isolated situations suggest that older companies are looking at the “new economy companies”, and they are actively considering ways in which to employ their products and services to enhance their own returns. Certainly the “ new economy companies” need the “old economy companies” to buy their products and services. Theirs is a symbiotic relationship. There is no question that, to survive, old economy companies” must adapt or die. Most will adapt. The world will continue to need aircraft, autos and a myriad of other products. These products, and the companies that will produce them, will not disappear. Many, in fact, will operate more efficiently and more profitably because of the tools and services they will buy and employ from the “new economy companies”.

The market, at some point, will begin to recognize that it is not only the providers of such services that should do well, but also the companies that employ those products and services for the benefit of their shareholders.