This is a special report that follows up on our weekend report. Since that warning the financial markets have experienced continuous upheaval.

            The facts for us are as follows:
 

             The breakdown of our portfolio is as follows:                            
                                     
                                     

        The stock and energy holdings are dominated by large, well capitalized, companies (In traditional terms they would be referred to as blue chip stocks). There are three main groups represented and they are all defensive in nature and, as previously stated, well capitalized.

1. Drug Companies: $24 million

• Bristol Myers
• Glaxo
• Eli Lilly
• Merck
• Pfizer
• Sanofi
• Wyeth

2.   Telephone Companies: $21 million

• AT&T
• British Telecom
• France Telecom
• New Zealand Telecom
• S. Korean Telecom
• Telecom Italia
• Telekom Indonesia
• Vodaphone
• Verizon

                    3.   Integrated Energy: $12 million

• British Petroleum
• RD Shell
• Total

    The stock portfolio as a whole has the following characteristics (this represents the 34% (net) in stocks and 11% in energy investments):

        The yield is a sturdy backdrop in this low interest environment. I pay less attention to the Price-Earnings ratio as accounting is an inexact science compared with dividends, which truly are birds in the hand. The high and low data shows us that, as recently as 12 months ago, these securities have been selling at nearly twice the current price (on average).

        I am happy with the current structure of the portfolio although, as I have often stated, it does not secure us against paper losses.

     CURRENT EVENTS
 

To summarize, this year has seen the following extraordinary events (most of them in the last two weeks):

1. The disappearance of three of the five major investment banks (storied names with long, long histories). The remaining two are under extreme pressure and it appears they will also succumb to the unrelenting pressure to merge or die.

2. The disappearance of Fannie Mae and Freddie Mac as independent corporations. A year ago it would have been inconceivable that these huge corporations would self destruct.

3. The disappearance of AIG – the world’s largest insurance company and the 19th largest company in the world as recently as last year.

4. Although less well publicized the virtual paralysis of the inter bank lending market - essentially nobody is sure who to trust and who will survive.

5. The continuing collapse in real estate in this country. It appears that nationwide prices are down about 20% in the last 12 months.

6. Stock markets all around the globe have been under extreme pressure this week. The Russian market is paralyzed, down savagely and currently closed. The Chinese market is down well over 50% in the last 12 months.

7. The Reserve Money Market Fund ($64 billion) had nasty losses on Lehman bonds and had to break the sacred $1 money market price. The actual losses will be modest, but the implications, if people stop believing in money market funds, could be significant. I am watching this carefully. We, of course, have had our money in safe Treasury money market funds for nearly a year.

WRITTEN PREVIOUSLY

      I should emphasize that nothing is occurring that we haven’t previously predicted although, as is always true, the magnitude of the disturbances can never be predicted accurately. The turbulence might be quite marked, the headlines probably quite scary, but we are calm and the portfolio is positioned to weather extreme disturbances. There will undoubtedly continue to be unrealized paper losses but, unlike many other participants, these losses will not be permanent.
 
       “I expect to see additional turmoil and uncertainty throughout the year with the continuation of the crises that have roiled the bond, housing, currency and stock markets. The outcomes are unknown, but I will continue to use all my experience and caution as I attempt to navigate these tricky waters. We still have a very conservative posture, but it is not risk free. I believe it offers the best combination of potential gain coupled with the absence of financially life threatening risk. I think most professional portfolios, as currently constituted still have unacceptably high levels of risk IF some of the more dramatic scenarios unfold.

         The key question, as yet unanswered, is whether a global recession with a weakened banking system will degenerate into something much worse. The jury is out on that one, but the risks are very real and appear to be growing.

        I am a strong believer in a  diversified and balanced portfolio. This is the approach used by the greatest investors of the twentieth century (Ben Graham, Sir John Templeton and Warren Buffett). They all followed a simple plan – to buy things when they were cheap on an absolute basis, to ignore market fluctuations and they all have/had a belief that it is impossible to “time the market”. This is also my view and my approach.

     Please don’t hesitate to call with questions. We are always available. We know times like these can be very stressful and we will endeavor to answer all your questions accurately and in full.