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Dear Shareholder:
A Short Quarter: This letter accompanies your quarter-end statement and some of you will notice that your dividend will seem to be a little less than you had expected. This is because February is two days shorter and since March 31st is on Sunday, we are closing the quarter on Thursday the 28th. (The markets are closed Good Friday.) We do that to make it possible for your check or statement to arrive as soon as possible after the end of the month as possible. Five days of interest off of a ninety day normal cycle reduces an expected dollar of quarterly dividends to about 94.4 cents and an expected dollar of monthly dividends to about 90 cents. The three lost March days will be added to your next dividend.
Market Watch:Most stock market "experts" now predict there will be no double dip to the economy's recovery and the stock market is therefore expected to start a slow but sure climb toward record new levels. Before long these folks expect the Federal Reserve to begin raising rates in response to a heating economy. That means, stocks up; bonds down; right? Well, perhaps it's my contrarian's blood at work, but I'm a little doubtful that either event will happen anytime soon. On December 31, 2000 our Kentucky Income Series share price was $7.43. On December 31, 2001 the price was again $7.43 but in the meantime there had been eleven Federal Reserve rate cuts. The long term bond market had not followed rates down and, as a result, I doubt that bonds have a major downside risk now.
And, what about stocks? In my last letter I called it a popcorn market and I still have those feelings, only more so. The S&P 500 trailing 12 months price/earnings ratio is now 63.1 times, and even the Dow Industrial index, with a much smaller "tech" component, has a p/e ratio of 29.96x. So even if the economy does recover, the two indexes seem way out in front.
But all of this is said without the slightest reference to the biggest uncertainty of all. That uncertainty is terrorism. There are still plenty of those guys out there, with money and highly intelligent, who are going to want to strike at the USA again. Recently, there was a television documentary on the subject of sea containers. They pointed out that over six million enter our seaports every year and that they are the perfect media for importing a timed device. If one of those containers goes off in a major seaport, international trade would be severely curtailed and the economy, even in the US, would falter.
I know bonds are boring to folks who have done well in stocks, but bonds might get very exciting if we have another major terrorist attack. Meanwhile, is the 5.03% totally tax-free return on our Kentucky Income Fund for the year ended December 31, 2001 really boring? It amounts to a 9.10% return for folks in the top tax bracket. Our commitment is to continue to work hard to be boring!
Stock Analysts and Landing Gear: What's the connection? Well, when I was in the Navy, my last duty station was at the Naval Air Station in Millington, TN. The Commander was a Captain with the nickname "wheels down". Let's call him "Wheels Down" Dixon to protect his identity. When Captain Dixon was a young pilot during WWII he flew Catalina Amphibious seaplanes out in San Diego. The Catalina has wheels that retracted into the boat fuselage when the pilot wanted to land on water. You had to crank these wheels up and down by hand.
One day, Dixon, who was used to taking off and landing on land, landed for practice in San Diego Bay. All went well on that landing. So, when he took off from the bay, (following land procedures), he cranked his wheels "up"! (Really "down") He then flew the short distance to Coronado Naval Air Station, got on his downwind leg to the field and dutifully cranked his wheels "down" ("up"). He straightened the airplane out on "final" and landed with a horrendous screeching of metal, flying sparks and smoke. Somehow he managed to hold the airplane straight until it slid off the end of the runway into soft sand, where its nose dug in and the plane turned straight up and over to land on its back.
As the ambulances and fire engines rushed to his aid they noticed the wheels on the upside-down airplane slowly cranking down. Really "up" since the airplane was on its back.
The connection? Somehow, Enron analysts who didn't take the stock off their "buy" list until the company was only a few days from bankruptcy reminded me of Captain "Wheels Down" Dixon.
On getting older: Bos Todd in Louisville has a daily aphorism in a newsletter he mails out. One that caught my eye recently, said, "The best thing about getting old is that all those things you couldn't have when you were young, you no longer want." Maybe that is true but it doesn't seem to account for the travel habits of long married seniors.
Some psychologist has said that after 65 years of age and past, the average husband wants to go home, pull up the drawbridge and stay put in his castle. The wife, however, has been in her home for years and, suddenly, she has a roaring desire to get out and see the world. This may not be everybody's experience but it is happening to me. If it's happening to you, let me give you a secret that works. It helps to have a substantial portfolio of high quality bonds no-matter which partner prevails.
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