15.0% in the S&P500 and was down 19.7% YTD
versus a decline YTD of 20.7%
in the S&P 500.
The biggest risk immediately following the attack was an indiscriminate US
response attacking Afghanistan, pitting Muslims against Westerners in World
War III (we believe that triggering a broad, regional war was the goal of
the attackers.) Instead, the US appears to be pursuing a careful policy of
diplomacy, separating moderate from extremist Muslims. Neighboring
countries including Pakistan, Iran, Uzbekistan and Tajikistan fear the
Taliban for inciting extremists within their own territories. The Taliban
itself is divided on whether to give up Bin Laden; for the time being he
still appears to have the Taliban's protection. Bin Laden has no where to
go from Afghanistan, and although there are many places he can hide in that
mountainous land, further attacks on US interests cannot be organized while
he is on the run. It appears that US and British commandos are already on
the ground in Afghanistan getting the lay of the land.
There are possibly 20-40,000 extremists worldwide who have both the will and
the means to inflict surprise attacks on the American interests, either at
home or abroad. Since it would be impossible to track them all down, we
believe a "war of containment" similar to the "Cold War" will remain in
place for a decade or two. We also believe that the US will be more
forceful in mediating peace in the region between, for example, the Israelis
and Palestinians and between the Pakistanis and Indians over Kashmir. These
conflicts simply create more martyrs for the extremist cause. We also
believe that the US needs to be more explicit in documenting to the Muslim
world how the West is working to protect Muslim societies. The United
States lead NATO against Serbian Christians who waged an ethnic war against
Bosnian Muslims. Western nations provided $100 million in food aid to
Afghanistan last year. Without this aid 25% of Afghans may starve to death
this winter.
We have always said that two events kill stocks markets 1.) the Fed raising
rates and 2.) the outbreak of war. In the latter case, increased
uncertainty leaves investors less willing to hold equities. The first week
of trading, with the averages falling sharply appears to have discounted the
worst case scenarios regarding this war. In other wars of the last 100
years including both World Wars, the Korean, Vietnam and Gulf Wars, equities
always fell hard on outbreak, but recovered to new levels by the war's end.
If the US enters a decade long "war of containment" as we have described
above, the US economy can continue to grow and with it, the stock market.
In the period 1945-1989 during the Cold War, US Gross Domestic Product
increased 350%, the S&P 500 increased 1800%.
funds is running at about 17% of last year. Many blue chip stocks,
particularly in the technology sector, fell 50% on the quarter after falling
50% from previous peaks. The investors which wanted these stocks at extreme
valuations won't touch them now even at the best valuations of the past 5
years.
Earnings for 2002, previously forecast to rebound from 2001's depressed
levels, are now being revised downward.
The major averages fell 10% below the lows set last April - we had
previously regarded those levels as the low for the year.
accommodative, albeit with the risk of higher inflation in a year or two.
Interest rates are at generational lows; mortgage re-financings are running
at record rates. Every homeowner who can save a few hundred a month on
their mortgages costs has freed up funds for higher saving or spending.
Two models of overall stock valuation, the Fed model, which compares the
forward earnings yield of the S&P 500 to 10 year treasury rates, and the
ratio of stock market capitalization to Gross Domestic Product, indicate
that the S&P 500 is currently undervalued.
Price of energy falling as worldwide consumption slows - this trend will
show up in reduced inflation rates in upcoming PPI and CPI reports.
universe, search for additional companies to add to our portfolios in this
changed environment.
Adjust our clients' cash, fixed income and equity allocations in light of
personal requirements.
Yours sincerely,
David Edwards, President
Heron Capital Management, Inc.
(800) 99-HERON
http://www.HeronCapital.com
Last updated on October 1st, 2001
The biggest risk immediately following the attack was an indiscriminate US
response attacking Afghanistan, pitting Muslims against Westerners in World
War III (we believe that triggering a broad, regional war was the goal of
the attackers.) Instead, the US appears to be pursuing a careful policy of
diplomacy, separating moderate from extremist Muslims. Neighboring
countries including Pakistan, Iran, Uzbekistan and Tajikistan fear the
Taliban for inciting extremists within their own territories. The Taliban
itself is divided on whether to give up Bin Laden; for the time being he
still appears to have the Taliban's protection. Bin Laden has no where to
go from Afghanistan, and although there are many places he can hide in that
mountainous land, further attacks on US interests cannot be organized while
he is on the run. It appears that US and British commandos are already on
the ground in Afghanistan getting the lay of the land.
There are possibly 20-40,000 extremists worldwide who have both the will and
the means to inflict surprise attacks on the American interests, either at
home or abroad. Since it would be impossible to track them all down, we
believe a "war of containment" similar to the "Cold War" will remain in
place for a decade or two. We also believe that the US will be more
forceful in mediating peace in the region between, for example, the Israelis
and Palestinians and between the Pakistanis and Indians over Kashmir. These
conflicts simply create more martyrs for the extremist cause. We also
believe that the US needs to be more explicit in documenting to the Muslim
world how the West is working to protect Muslim societies. The United
States lead NATO against Serbian Christians who waged an ethnic war against
Bosnian Muslims. Western nations provided $100 million in food aid to
Afghanistan last year. Without this aid 25% of Afghans may starve to death
this winter.
We have always said that two events kill stocks markets 1.) the Fed raising
rates and 2.) the outbreak of war. In the latter case, increased
uncertainty leaves investors less willing to hold equities. The first week
of trading, with the averages falling sharply appears to have discounted the
worst case scenarios regarding this war. In other wars of the last 100
years including both World Wars, the Korean, Vietnam and Gulf Wars, equities
always fell hard on outbreak, but recovered to new levels by the war's end.
If the US enters a decade long "war of containment" as we have described
above, the US economy can continue to grow and with it, the stock market.
In the period 1945-1989 during the Cold War, US Gross Domestic Product
increased 350%, the S&P 500 increased 1800%.
Bearish factors for this quarter:
Investor psychology is deeply depressed. YTD net investment into equityfunds is running at about 17% of last year. Many blue chip stocks,
particularly in the technology sector, fell 50% on the quarter after falling
50% from previous peaks. The investors which wanted these stocks at extreme
valuations won't touch them now even at the best valuations of the past 5
years.
Earnings for 2002, previously forecast to rebound from 2001's depressed
levels, are now being revised downward.
The major averages fell 10% below the lows set last April - we had
previously regarded those levels as the low for the year.
Bullish factors for this quarter:
Fed likely to cut rates another 50BP on October third. Monetary policy isaccommodative, albeit with the risk of higher inflation in a year or two.
Interest rates are at generational lows; mortgage re-financings are running
at record rates. Every homeowner who can save a few hundred a month on
their mortgages costs has freed up funds for higher saving or spending.
Two models of overall stock valuation, the Fed model, which compares the
forward earnings yield of the S&P 500 to 10 year treasury rates, and the
ratio of stock market capitalization to Gross Domestic Product, indicate
that the S&P 500 is currently undervalued.
Price of energy falling as worldwide consumption slows - this trend will
show up in reduced inflation rates in upcoming PPI and CPI reports.
Our strategy is as follows:
Conduct a sector by sector, industry by industry review of our stockuniverse, search for additional companies to add to our portfolios in this
changed environment.
Adjust our clients' cash, fixed income and equity allocations in light of
personal requirements.
Yours sincerely,
David Edwards, President
Heron Capital Management, Inc.
(800) 99-HERON
http://www.HeronCapital.com