Galleria Financial Center 5075 Westheimer, - Suite 1177 Houston, TX 77024
October 7th, 2002
To: Friends and Clients of MLK Capital Management, Inc.
From: Lane Kerns
Re: It’s 1996 All Over Again.
Our Current Positions.
Our Current view of the Stock Market.
Do you know where your money is? I hear over and over from people that they have gone through periods of not opening their brokerage statements. They just couldn’t stand the bad news. If you don’t watch it, are you sure that your broker is? If we manage your
account, I can assure you that we are watching it. Since 1997, MLK Capital Aggressive accounts are up almost 50%! While many advisors have lost money over this difficult period, MLKCM has grown steadily through the referrals of satisfied clients.
IT’S 1996 ALL OVER AGAIN
The last time the NASDAQ saw these levels, it was April of 1996. The last time the S&P 500 was this low it was March of 1997. Is that bad or good? Well, it’s bad if you have been in the market - riding it down to these lows. It’s good if you have been able to conserve some of your gains – as we have – because there will be a strong upsurge from this bottom.
There will be some easy money to be made.
The Nasdaq is down 41.6% year-to-date. That means that in order for it to break even with where it was on 12/31/01 it will have to go up 71%! Our Aggressive account is down, but less than 3.5% year–to-date. In order for us to break even with 12/31/01 values we only need to gain 3.6%. If the market does rally 71% over the next couple of years you would have a 67% gain in our Aggressive model – verses just breaking even in the typical
NASDAQ fund or stock. All our other models have done even better YTD than our Aggressive model but it should snap back the most when the market turns.
The moral to this story is “If you hold onto your money during the bad times, and be alert and ready to take advantage when good times return, you will retire well”!
OUR CURRENT HOLDINGS thAfter the July 25 bottom there was a nice rally and we reentered the market with 25-50% of the money in our equity models. We had a few days of gain toward the end of that rally. Since that time the market has retested the July bottom and it failed to provide support. The market plunged through its July lows and is still searching for a firm footing. Rather than sell all of the positions we purchased in August (thereby incurring trading fees) we hedged our positions. Our hedge was profitable but did not completely offset small losses on our other holdings.
We are now no more than 25% invested in equities in our personal managed accounts and 0% in equities in retirement plans. We may be 100% in money market soon if our remaining equity holdings do not show strength.
Our Models have all performed well. For the year-to-date ending 10/04/02, our Aggressive
Model has out-performed the S&P 500 by 26.8%. Our Moderate Model was ahead by
29.3%. Our Stable, Conservative, Moderate and Aggressive models have all outperformed the S&P for the last 1, 3 and 5 years.
Our Current View of the Stock Market
ndAs we said in our August 22, 2002 newsletter, “we suspect there will be another test of ththe July 25 bottom during September and this so-called double bottom” will terrify many
who have returned to the market. Boy did we get that right! We also said that we “think that there may be a significant up-trend following the September pullback. We still think that will be the case but it probably will not be until after Bush’s war. The markets do not
like uncertainty and war is the most uncertain of all.
When the war is over, don’t get caught in bonds! There is currently a “bond bubble” due to the weak market and the flight to safety because of war jitters. I said last letter that “The
only thing that will turn the market from a Bear into a Bull is Earnings”. We have started seeing those earnings improvements but they are coming slower than hoped for. Slow earnings growth plus war jitters may put the recovery into next year.
thHowever, there is strong seasonality in our favor for a 4 quarter rally. Since 1920, the thmarket has rallied during the 4 quarter 71% of the time. The Dow has had a positive
quarter 12 out of the last 14 years.
This letter will be published periodically with my views on the market, investing and things that seem important to me at the time. Remember, all of this is filtered through over 40 years of experience including a fair amount of both “Good Judgment” and “Bad Judgment”. Or, as a friend of mine says, we may not be right but this is our opinion. Please feel free to share this with anyone you think might be interested. If someone would like to be put on the list just send me an email with his or her email address. You can reach me at:
MLK Capital Management, Inc.
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