Investor Note

Since my last update, the markets have continued to be volatile and there have been some rumblings that the U.S. financial services and housing contagion would spread into other, healthier sectors such as the non-financial services sector and export manufacturing. This is possible, but in our view the big risk is not here, but in Europe and parts of Asia. We believe that the combination of the U.S. central bank easing as well as the efforts to pump equity into banks and insurers will stave off a crisis reminiscent of the 1990 financial debacle featuring S &L’s.

Thus while the U.S. market continues to sell off on rallies, the selling pressure is finally easing and we have been picking up exposure in U.S. exporters, agriculture, water, infrastructure and, yes, financials that have been beaten up in the recent sell-off. The former group of sectors represents our view that there is solid growth ahead for material and industrial names that serve the global economy and that financials, particularly the large U.S. ones, are very cheap.

As noted above, we have also continued to lighten up in Europe and parts of Asia, as we believe that many of the problems that have been admitted to by U.S. financials will surface with a vengeance elsewhere. Having said that, we are also interested in revisiting some of our favorite countries and sectors in Asia when the sell-off there is at a peak. We made a lot of money investing in Singapore, Taiwan, Korea and Malaysia in 2004-05 and the long term growth in technology, industrial exports and financing is intact. From a timing perspective, we began selling tactically in some of our favorite ideas in early ’07 that (in our view) had gotten ahead of themselves. We have recently done some of the same in Germany, which we still believe will provide more promise after Europe takes its medicine.

For the record, the S &P was off 6.90%, the All Country World Index (ACWI) was down 7.1 % and the NASDAQ finished the month down 10%, the worst January in the 37-year history of the exchange. To repeat the thought from my last note, this sell off looks like a correction in a long cycle of growth and the market is presenting us with one of those rare opportunities to find new opportunities in our secular themes. 

Past Returns are no guarantee of future performance