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Dear Shareholder:
Here we are at another year end. For the first time in I don’t know how long, we have completed three back to back years of a down market for stocks. There have been year end prognostications from large investment houses (such as Morgan Stanley) suggesting that 2003 will not be any better. So it is not out of line to ask “has something fundamentally changed?”
Economics remains more an art than a science (even a “dismal” one) and there are no completely reliable answers about the future. But I would not be afraid to state that some fundamentals have changed indeed, and perhaps some older ones have come back into vogue.
It’s not a Brave New World: The belief that the internet and related “dot com” business was going to grow exponentially for an indefinite period of years has largely been debunked. The belief that the stocks will trade at Price/Earnings ratios of 40, 50 and even 100, and that these levels will be considered “normal”, now clearly seems as fatuous as it really always was. If we return to traditional P/E’s of 15 or 20 on trailing earnings, stocks could decline another 30% on average. (If this happens it should happen slowly and may be mitigated by some earnings increases.) The positive side of returning to these levels is investors will be able to buy values that are real, and volatility of the market might decrease.
Disinflation is a New Force in the Economy: I know that you can point to many things you buy which are a little more expensive. But, I am here to tell you that a lot of things are cheaper if you do some price shopping. If you watch TV ads you will notice that even hamburgers are cheaper. Almost everybody I know who makes things has discovered there is a man in Taiwan, or China, or Korea who can make your gizmo much cheaper. All you have to do is design and sell it. This, along with better use of computers means many manufactured items are going to be cheaper while maintaining quality. The positive side of disinflation is that productivity increases along with everybody’s living standard.
Terrorism will be a Continuing Threat: If you think about it, terrorism has always been a threat in every generation somewhere in the world. What’s different is modern transportation, communication and other technologies are making this all just one big world in which clever terrorists can reach almost any target in a devastating way. Responsible intelligence officials tell us there are almost certainly going to be successful attacks on the U.S.A. and Western Europe in the future. This expectation will probably dampen any irrational exuberance that is waiting in the wings to rise again. But that shouldn’t be overly discouraging. The threat of terrorism has a positive side as well. It will make us reexamine our national purpose and our personal faith. In a mysterious way, difficult times lead to real growth for people, and I believe this is probably true for nations as well.
What about the Bond Market? I suppose I take a contrary position to the most widely accepted belief bopping around the marketplace which might be described as “just you wait until the Fed raises rates!” Then, we are warned, bonds will fall and stocks will rise; foreign money will leave the U/S. market in one great swoop and bond investors will be sorry. You hear this on CNBC at least once a day. I would suggest that disillusionment with the “Brave New World” theory, the effect of disinflation on corporate earnings, as well as the threat of terrorism will all put a damper on a great rush out of the safety of bonds. Sure, there will one day be a return to stocks, and there should be, but I suspect it will be an orderly return. And I can’t imagine an international exodus from the U.S. bond market in this unstable world. The U.S. is still the safest place in the world, and what are bond buyers looking for if not safety? So my guess (and it is a guess) is the bond market will remain at current levels, or even go a little higher for at least the first half of 2003.
“Bond funds Don’t Have a Maturity”?? That is simply not true. Bond funds have a maturity that is the average of all the bonds in its portfolio. We can elect to hold every bond we own to maturity and collect par value. That is exactly what we will do if it is in the best interest of shareholders. The statement that “bond funds don’t have a maturity” is a myth that seems to arise when somebody wants to convince you to buy bonds directly; bonds in which they have a sales charge. In this situation there are several things that seem always to be overlooked when comparing individual bonds to a fund:
A good bond fund can buy bonds cheaper and sell bonds higher than most individuals can. Often the cost of trading individual bonds is ignored.
Usually, there is an attempt to sell you a longer maturity than the funds maturity. This makes the bond’s yield look better than the fund’s yield.
If You Want Honest Answers You Can Call Us: In certain instances a direct bond purchase might be in your interest. If you are a shareholder in the Dupree family of funds we have fully registered brokers who are willing to explore your options on this and on stocks as well. Our brokers are paid a salary, not a commission or any other form of “production” incentive. We want to serve our shareholders. That’s how we keep them. Thanks, and have a great New Year!
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