October 22, 2001
Dow Jones Average: 9,377
S&P 500 Index: 1,090
Shared Values
Flags are flying across America as an expression of unity, support,
and shared values. In spite of political, religious, economic, and
ethnic differences, there is much that unites Americans with each
other and most of humankind. At the most fundamental level people
share a desire for life, a devotion to family, and a compassion for
others. One of the most chilling aspects of the September 11th massacre
was the realization that the terrorists do not share these basic human
aspirations. According to Bin Laden many young Arab men look forward
to death as much as Americans look forward to life. The terrorists
appear to be loners, distant or estranged from immediate family. And
rather than showing compassion for others, they devoted years of their
lives to the meticulous planning of mass death, terror, and suffering.
We have no common basis for dealing with such people. They do not
even fit the stereotype of terrorists who make threats or hold hostages
in exchange for some demand being met. There was no warning, no specific
threats made, no negotiation offered.
In a display of unprecedented unity, almost all countries in the
world have joined in the fight against terrorism. While most people
believe that counter attacks will alienate more people in the Muslim
countries, the power of the terrorist organizations must be diminished.
Such groups have already acquired and are unleashing biological weapons
such as Anthrax. We can only be thankful that they have apparently
not acquired a nuclear device. After September 11th few have any doubt
that they would kill millions with a bomb if they could. The proliferation
of nuclear weapons is the single greatest threat facing the world
and should be addressed immediately by the large coalition of countries
fighting terrorism.
The war on terrorism will be exceedingly difficult because it is
not defined by national boundaries. Some of those who would do us
harm are located in our own country, others are in Europe, and many
live in countries allied with us in the Middle East. The Egyptian
Islamic Jihad is one of America's largest and most determined adversaries.
Most of the suicide pilots, including the infamous Mohammed Atta,
came from Egypt, Saudi Arabia, and our other allies in the Gulf Region.
We can scarcely attack these countries to root out such terrorists.
The attack on Afghanistan follows the nationalistic definition that
military strategists are comfortable with, but leaves most of the
terrorist network untouched.
While trying to protect our country from further devastating attacks,
U.S. policy makers must develop a strategy to deal with the changes
that are inevitable in the Middle East. The region is currently dominated
by repressive military dictatorships and monarchies that appease the
religious extremists and terrorists in a bargain to hold onto power.
Moderate Arabs who wish for democracy and liberalization of society
have been pushed aside. Choosing any side in such a situation will
undoubtedly create enemies for our country. If the U.S. intends to
remain involved in Mideast politics it should support the moderates
who share our principles and values.
Current Strategy
The attack on September 11th further weakened an economy that was
already sinking. Corporate profits for the quarter ended September
30th 2001 were awful and are likely to get much worse before they
get better. In an effort to prevent losses most companies are either
laying people off or cutting back on hours worked. While such action
may appear necessary for each individual company it has a cumulative,
negative effect on the economy that further hurts the prospects for
all companies.
Once the economic snowball starts going downhill it is difficult
to stop. Faced with record levels of personal debt, uncertain job
prospects, a falling stock market, and minimal savings, most American
consumers have decided that it is time to retrench. Ten interest rate
cuts by the Federal Reserve Board have not produced much growth in
consumer demand. The very low interest rates are a double edged sword.
While helping those who need to borrow, the rate cuts have reduced
the income of many Americans who live partially on interest income.
We do not see any near term catalyst that is likely to spark a resurgence
of consumer spending.
Some investors have decided that this is the time to buy, while others
are taking a more guarded position. We count ourselves in the latter
group. The financial markets are being driven by speculation and emotion
rather than hard headed investment analysis. The buyers are speculating
on a strong economic recovery starting by early 2002. This prediction
is not supported by larger economic factors or specific company guidance.
In our opinion stock prices are staying at stubbornly high levels
given current business trends. Preserving capital for more attractive
opportunities in the future is still our prime objective.
