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Dear Shareholder:
Now Where are Interest Rates Going?: On more than one occasion I have told you Will Rogers claimed investing in the stock market was easy. “You buy a stock, and when it goes up you sell it. If it doesn’t go up, you don’t buy it.” I expect Rogers would say the same about buying bonds. “Experts” have been saying “sell bonds, their price can only fall as interest rates rise”. The mantra has been, “inflation will rise, the dollar will fall, foreigners will withdraw money from our bond markets, the federal deficit will force further borrowing and, therefore, an over-supply of bonds so the course of interest rates can only be up.” This opinion has been dominating financial headlines for at least fifteen months and, on the whole, it simply has not yet happened as predicted.
So what are we to say now? Probably the first observation ought to be, “there are a thousand things that make a market”. For instance, if foreign capital is removed from our U.S. markets it will come out of stocks as well as bonds, and maybe more so. That would possibly serve to drive more domestic investments into bonds as our stock market declined, offsetting the foreign money exiting bonds. When I was a student at Yale I had an economics professor, Dr. Westerfield, who was a wise old gentleman with lots of practical experience who had been an economics advisor to the Eisenhower administration. His warning was, “Gentlemen, the economy is like a barrel of eels; you push one down and they all adjust, but nobody can predict just how”. The bond market is just one eel in the very large international economic barrel of which we are a part.
There is some breaking news to watch. Last month I mentioned Bryan Westbury and Stephen Roach, two highly respected economists who were coming at the “inflation-deflation” question from opposite directions. Now Roach sees the just completed G-7 meeting at Dubai as indicative of some possible inflation as the relative price of foreign goods goes up in the U.S. Westbury has consistently predicted inflation because of the Federal Reserve’s easy money policy. But, once again, Westbury has held that position for over a year and it hasn’t happened yet.
What should you do about investing in bonds? Having told you that I am not very sure about what to do, I would suggest you be careful with short term funds that you are going to need for some other purpose in the next couple of months, but if your money is meant for the long haul, go ahead and put it into bonds. Waiting in 1% (taxable) money market accounts may be too expensive.
Is Scandal about to Overwhelm the Mutual Fund Industry?: I don’t think so, but scandal is getting a lot of press this month. Almost every financial news magazine on airport newsstands has written about New York attorney general Eliot Spitzer’s charges against the mutual funds of Bank One, Strong, Nations Funds and Janus. It is alleged that these funds allowed a large hedge operation to buy or sell at the fund’s 4:00 PM daily closing price as late as 6:30 PM on the same day. Since most corporate announcements are made right after the 4:00PM close, this makes it possible for the late trader to buy if the news is good, or sell if the news is bad. If the news is good he gets today’s lower price when he buys, or if the news is bad he gets today’s higher price when he sells.
The broker must put a false time on the order ticket to accomplish this so it takes a crooked broker to enter the orders, but it also takes a fund willing to execute the late order when it is received.
Most funds which receive orders daily from brokers will execute them as late as 6:30 PM simply because a large brokerage firm can’t get their total buy and sell position turned in much earlier. So it is entirely possible that late trading could occur without the fund or fund family knowing a dishonest broker was doing this. Apparently Spitzer alleges the four named funds were a party to the scam in this case. I hope not.
How do we avoid this? First, we are a bond fund. There isn’t enough volatility in bonds to make this activity very interesting. Secondly, nearly all important bond information is revealed during business hours, not after four PM. And perhaps most importantly, we are a 100% no-load fund so no broker is ever going to voluntarily sell our funds to a customer. We do have some investment advisors that use our funds with their clients, but we require them to have these orders in by 3:00 PM. Perhaps, most of all, we regard this activity for what it is, criminal dishonesty, and we will have no part in it.
Dishonesty at the farm: From time to time I report on things at the farm, where I go to escape the tensions of business.
It seems there is dishonesty in paradise as well. I began to notice vegetables disappearing from my garden, fenced in with an electric shock wire on top of the wooden pales. How could this be? Well, it turns out that Kentucky raccoons are smart enough to climb the post with the electric switch, turn the switch off, cross the fence and eat my corn, then flip the switch back on the way out. Are Tennessee, North Carolina, Alabama and Mississippi raccoons that smart? (Shareholders from those states may reply.)
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