Investment Recap Second Quarter 2003

The second quarter witnessed a robust rally in stocks and marked the best quarterly performance in several years. A confluence of positive factors lifted investors’ spirits and caused some of the $5 trillion of cash on the sidelines to get committed to common stocks. Investors are certainly influenced by the less than one percent return on money market funds, the massive monetary stimulus including another Federal Reserve rate cut and the $350 billion tax relief package. Another important development worth mentioning is the recent increase in announced takeovers (illustrating the presumed low valuation of target companies’ stocks, at least to their acquirers). Also, several major companies, including Citibank (C), Cendant (CD) and General Electric (GE), have announced significant dividend increases.
 
The breath of the market is surprisingly strong with small stocks performing better than large cap stocks, and virtually all sectors participating in the rally. One statistical note of caution: The stocks of companies with no earnings are up 50% year-to-date, significantly outperforming the bulk of all stocks.
 
Investors are left to ponder whether these last few weeks mark the beginning of a new bull market or merely a pleasant interruption of the three year bear market. Certainly the emotional selling that took place last summer and fall amounted to a bear market climax based on extreme pessimism. The evidence is building that an economic recovery is at hand. Valuations had gotten unduly depressed and monetary and fiscal policy are now moving in the right direction.
 
As successful stock pickers, we have craved this environment for the last three years. Financial information has become more transparent, and, as we said in our last quarterly letter, we are able “to go back to doing what we are trained to do.”