Harvest Time

“April is the cruelest month” intoned T.S. Eliot in 1922, but in the modern money markets, it is no match for October, which has recorded two of the greatest stock market crashes of our time (1929 and 1987) and has become (as it is this month) one of the most volatile times of the year. Why this is so probably has deep roots in the history of Western humanity—it is traditionally a time of transition, the end of the growing season; the season for sorting out your place in the world. At the base level it was whether or not you gathered enough food and built the proper shelter to stay where you were for winter. An unnerving time to be sure, but if you think I am confining my observations to the middle ages or early American Indian civilization, reflect on this harvest time for the poor of New Orleans and Pakistan. No wonder so many pagan festivals were invented at this time; it’s pretty hard to have good thoughts when you are down on your luck with winter coming.

Eliot, like most thinking observers of his time, was still aghast at the horror and destruction of World War I; the sheer scale of it was unprecedented and it transformed Europe, the cradle of western civilization, forever. It is not surprising that he was an ardent admirer of Dante, and believed the last canto of Dante’s Divine Comedy was “the highest point poetry had ever reached or can ever reach”. Divine Comedy, of course, was the brilliant work which made Hell seem like a vast condominium development gone berserk—every bad neighbor or non-believer from the arts, the church and politics packed in those units above and below you, all with hell to pay. Indeed, with those opening lines of The Waste Land, Eliot deliberately perverted the hopeful beginnings of Chaucer’s Canterbury Tales “When the sweet showers of April have pierced the drought of March”. Despite his outward optimism, Chaucer ended up in the same place as Eliot and Dante: humans and their institutions, if given too much power, will probably mess things up.

As investors, we have no reason to change our secular view: we remain defensive and look to global and foreign companies to provide the bulk of our equity returns; we remain positive on biotech and healthcare because of demographics in developed countries; we continue to believe that energy prices will remain high because of global demand and lack of delivery infrastructure; and, we look to developed and emerging Asia to continue the transformation toward global economic leadership. We are all pulling for the U.S to get it together, particularly on foreign and disaster policy, but for the moment we are left with Schopenhauer’s comment in explaining Dante’s enduring appeal: “For where did Dante get the material for his Hell, if not from this actual world of ours?”

For the quarter, the S&P was up 3.61% and is now up for the year at 2.76%. Most of our accounts recorded gains in this quarter averaging 2.8% and are up 4.60% for the year as of September 30. We continue to be very defensive and while that that may have hurt us last quarter, consider the volatility I mentioned at the top—last week, the S&P had one of its largest weekly declines and is once again down for the year, at -2.09%. I like our mix of bonds, global stocks and commodity hedges and we will stay the course.

With respect to the latter, not a day goes by when I don’t get asked or read about the direction of oil prices. The theory many economists espouse is that prices are destined to go down because U.S. consumers and industries will cut back demand and thus oil and prices are headed lower. I say, not so fast! First, many of our investments are oil & gas, and gas is only going higher, here and abroad because of infrastructure issues. In the U.S., we transport much of our gas from the devastated Gulf areas and supplies for the winter heating season are tight. Second, don’t get side-tracked by the current cocktail party gibberish of “peak oil”, which postulates that we have found all the oil available in the world and that is why the price is high. The real truth is that whether or not there is more oil to be found, global demand is growing faster than we can supply it. Further, oil prices are subject to upward pressure by lack of refinery capacity, political instability and, yes, weather. The chart below is instructive: for the first time in history, emerging countries’ demand for oil has caught up with their developed brethren. So if the U.S. retreats from the incredible pace of 20 million barrels a day, it looks like there are bidders for that capacity.

No doubt there will be corrections in oil stocks and crude prices, but the belief here is that we are in a long term bull market for energy—we will “harvest” profits here and there but we will also be buyers in those corrections.

I plan on discussing this in more detail in the quarters ahead, but it is worth noticing Japan’s recovery—while we may be in the latter stages of a 3 year bear market rally in the U.S., it appears that we are in the early stages of a bull market in Japan. It is hard to believe that 15 years have passed since the bubble burst in Japan—there have been on-and-off attempts at recovery, but structural issues (like a bad banking system) kept equity prices depressed. But there have been some very positive developments: the banking system is reformed, companies have restructured; and, new markets in China and India beckon. Naoki Kamiyama of Morgan Stanley has set a 16,000 target for the Nikkei Index at end-2006, a 20% rise from current levels. Not a bad alternative to the range bound 4-8% that some analysts have pegged U.S. equity markets for the same period.

So how will you spend your harvest time? For me it is a time for visiting research analysts for new ideas; of frenetic school activities involving the kids; and, not the least, re-reading old friends to give me context in trying to understand and explain my little corner of the world. Both Chaucer and Dante were true originals—both wrote classic epic poems so that ordinary people could actually read them aloud—Chaucer discarded Anglo-Saxon alliteration for the “peoples” Middle English, and Dante eschewed courtly and churchly Latin for everyday Italian. And both invented brand new rhyme schemes to display their ethereal treasures—Chaucer’s genius was the rhyming pentameter (or heroic couplet) and Dante’s was terza rima—abc,bcb,cdc, and so forth. They had insights into humans, their governments and their religions that are relevant many centuries later: