Where Are the Customers’ Yachts? …continued

Last month we sent you our Commentary “Where Are the Customers’ Yachts?”

We have received a number of responses saying that we hit the nail on the head, as our message was that the root cause for the present state of the stock market is lack of investor confidence. What an understatement!

We have pointed out many, many times that the stock and bond markets are primarily a reflection, or lack thereof, of confidence. A share of stock is worth only what the next guy will pay for it. That was true in the past, it is true now, and it will be true in the future.

The stock markets were “democratized” in the 1990s, and now investors are voting.

They are voting NO as they see a new headline almost every day.

Even the near-perfect Martha Stewart is facing an investigation for selling a drug company stock a day before the FDA denied the company’s application for its cancer drug’s approval. The stock, ImClone, whose CEO Sam Waksal, a close friend of Stewart’s, was arrested and charged with insider trading last week. On June 21st Merrill Lynch suspended Stewart’s broker as “material contradicts media star’s statements” were reported.

Martha sold almost 4,000 shares of ImClone last December 27th around 60 the day before the FDA announcement – so did some of Sam’s family members. The stock plunged $5 after the announcement and since then has declined 85%. ImClone’s 52 week range – 75.45 to 6.55.

It seems to us that these actions aren’t much different than robbing a bank at gunpoint.

Recently we were discussing the state of the markets with a young widow. After reflecting on recent arrests and indictments of corporate bosses, accountants, lawyers, Wall Street analysts and their brokerage firms’ managements, she asked “Whom can you trust?” We smiled and politely replied: “You asked the question.”

We will continue to stay with short maturities of highest quality bonds even though their returns are abysmal as a result of the Federal Reserve’s cutting interest rates 11 times last year, and the fact that the economy continues to sputter.

Many do not realize that for the past two years cash has outperformed stocks.

We all know that a number of very large widely held stocks have turned into disasters in recent months. The stock market “Bubble,” about which we repeatedly warned so many times in the last several years, has burst. Our frequent warnings about the damage that would result as the Great Bubble burst did not make us very popular either.

Caution continues to be of paramount importance. We will continue to adhere to our belief that the best way to make money is not to lose it.

Note: Enron, the 5th largest US company, filed for bankruptcy about six months ago. Their accountants, Arthur Andersen LLP (not a public company) have been taken down with them and have been convicted of obstruction of justice in a lengthy jury trial.

A few notable casualties thus far in 2002 are Tyco, Schering-Plough, Bristol-Myers Squibb, AOL, IBM and GE as well as the Tech and Telecom stocks. And there are too many more to mention at this time.

All of these are companies that benefited as the public invested massive amounts in mutual funds in the 90s.Their share prices are suffering as investors who bid them up in the 1990s are now voting against them by selling them – in large part due to the ongoing scandals that have caused the distrust – and the results of the Bubble’s Bursting.

It is not very difficult to understand the reason for our friend’s question.

Please have another look at “Where Are the Customers’ Yachts?” If you need a copy, please let us know and we will send you one.

John W. Hamilton