March 9, 2004         Marty Zweigs’, note to shareholders of one of his managed funds.

Marty is one of my all time favorite investors. He has a sensibility about him, and always seems to operate based on logic. I always get the impression that he observes the world and investments in a manner similar to Marty Whitman. Both of the Marty’s seem to operate under the premise of ” always run scared”. Anyway, here are quotes of his report which was released this morning.

Here are some quotes I found interesting.


1. “Our bond exposure at year-end was 62% with average duration (a measure of sensitivity to interest rates) of 2.8 years. On September 30 our bond exposure was 34% with average duration of 2.9 years. If we were fully invested, we would be at 62.5% in bonds and 37.5% in stocks. “Consequently, at 62% we are at 99% of a full investment (62 divided by 62.5%).”

2. “While we generally share the prevailing cautious outlook for the bond market, we are perhaps a bit more sanguine for the near term. We believe it is unlikely that the Fed will raise rates before the November elections. As always, we will remain flexible and stick to the dictates of our research.”

3. “Right now I think we are heading into bubble number two. It’s not like bubble number one but the market is extremely overvalued and there’s an awful lot of optimism, as measured by my sentiment model. I believe many people rationalize the high price/earnings ratios because short term interest rates are so low. Rates have nowhere to go on the downside but in my opinion, there’s plenty of room on the upside and we are getting inflationary pressures. Should rates rise, it will be impossible to justify the current price to earnings ratios. However if earnings continue to be strong, then who knows? Maybe the market can continue to rise.”

4. “ Meanwhile, money is pouring into stock mutual funds. The public invested more than $150 billion in the funds since the market began to rally last March, the fastest inflow since the market peak in 2000. November’s inflow of $15 billion was the eighth consecutive month of positive inflows. Despite three years of losses, mutual fund assets are up 13% since the end of 2002. So far inflows have helped the market but at some point they will be overdone. If this is a bubble, it is very possible that the high inflows could continue for a year or two or even longer. The last bubble began in 1996 and didn’t end until 2000.”

5. “Incidentally, I still believe that many earnings are overstated. I believe we still have many of the accounting problems and, for the most part, there is no recognition of the expense of stock options.”

6. “As analysts are getting more bullish, insiders are selling more stock. During November insiders sold $43 in stock for every dollar’s worth they bought. It was the seventh consecutive month in which the sell-buy ratio topped twenty to one.* We have tested the insider numbers extensively. Because some insider sales involve the exercise of options, we just look at the amount they’re buying. We have found that their purchases, relative to market capitalization, are very, very low. It doesn’t mean that insiders are always right — they sometimes are not — but it is one of the negative signs for the market in my sentiment model.”

7. “Worse to me than the budget deficit is the massive trade deficit. Some believe that the weak dollar is great for our economy because it helps our exports. But if we buy more expensive Japanese television sets or German cars or Italian shoes, or other foreign products are we really better off economically? What’s more, if the weak dollar causes foreigners to sell their U.S. assets it could put upward pressure on bond yields and downward pressure on stocks. If we don’t do something to strengthen the dollar we could wind up with a real economic headache.”

8. “If nothing disastrous happens to the world and the Fed keeps cheap money, I could see the market going up 20% to 30% but it would be kind of a bubble period. If bad things occur in the world, I could see the market dropping 20% to 30%.”

9. “Because of the risks involved on all sides, I am currently on the fence. We are about 57% invested in U.S. common stocks. Could I go to 60%? Yes, but I don’t want to increase too much because of the downside risk. My mandate is to mitigate risk. If we are lagging the market a bit, fine. But, if there’s a sharp downturn, I would kick myself for being heavily invested because I know about all the previously mentioned important negatives.”

10. “ If everything stays comfortably stable for the next three or six months, this market could go a lot higher. However it just doesn’t have a good feel to me because I still don’t think we have touched the final bottom yet. The current situation reminds me of when the Japanese market peaked at the end of 1989. For the next thirteen years or so they had a long-term bear market.”