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Looking Forward

September 2001

What matters most is what happens next. As we have said before, the long term is nothing more than a series of short terms linked together.

We are in awe at the power and responsiveness of the United States and its financial system. During the week of crisis, the Federal Reserve lent various banks $100 Billion while computers and communication systems were being restored. The Fed has since been fully reimbursed and the equity markets have resumed their orderly, albeit negative, response to the current short-term issues facing us. Not surprisingly, high-quality bonds have either increased or held their value.

From our standpoint, the smart thing to do is look beyond this crisis. Obviously, we have had to change our economic forecast. Prior to the events, we predicted that consumer spending would perk along sufficiently to allow excess inventories to bottom;
eventually resulting in a return to growth. Now we see a sharp but short-lived drop in consumer confidence and spending which will be largely offset by massive government spending and altered business spending. Our specific take on the three economic constituents to growth is as follows:

Consumer – There is no question that anything considered frivolous is “out” right now, including travel and group events, which have come to a screeching halt. However, we feel the consumer soon will be back. More time will be spent at home and consumers will alter their spending accordingly.

We expect that people will eventually become more optimistic when they recognize the fairly low risk they truly face. Now that we are on the alert, we have 260 million American “informers” anxious to avert another attack. We are by no means giving short shrift to the chances of renewed terrorist activity, but we think it is natural for consumers to find ways to comfort themselves and go forward with their lives.

Business – Corporations are “hunkering down”. This will hurt employment, travel, advertising, etc. However, spending on wireless surveillance technology, database management and redundant back office computer systems will grow.

Government – The government spending impact will probably be in the $100-$150 billion range and include rebuilding New York, saving the airlines, fighting the War on Terrorism and setting up better surveillance and data controls in the United States. These expenditures will stimulate the economy, just as lower interest rates will. We see a decline in economic activity while the world identifies and eliminates terrorists and their financial means. This period of uncertainty will be followed by a resumption in global economic growth. We have adjusted our portfolios accordingly and have reduced insurance holdings and stocks in companies serving the travel and aerospace industries. We have increased exposure to wireless and military holdings, as well as database management providers. We have also added companies with domestic strengths in home entertainment and healthcare retailing.

We believe that the economic impacts of lower energy prices, government stimuli and the simple fact that $2.0 trillion now sits in “cash on the sidelines” will produce solid stock returns over the long run. When cash returns to the market, we believe that it will be invested in the type of stocks on our diversified equity Buy List which are among the strongest of the Blue Chip companies. In fact, the volatile and negative returns in the market since early 2000 have served to justify and solidify our commitment to a diversified and high-quality approach to investing.

No one can predict the short-term impact of the War on Terrorism. It stands to reason though, that there are billions of people on earth who despise terrorism compared to thousands who embrace it. The odds seem to favor the concentrated global effort, which will ultimately make the world safer.

Thank goodness this crisis is not one of World Power versus World Power (i.e., Cuban Missile Crisis) or one which threatens America’s confidence (i .e. Kennedy, Nixon or Kent State). Quite to the contrary, this conflict represents World Powers (plural) versus bent zealots … and Americans have never had more confidence in America.


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