Pennsylvania Investment Observer
Nestlerode & Co., Inc.'s
Investment Update
by Daniel J. Nestlerode
October 22, 2000
The Quarterly Report on the Investment Markets and Your Investment
Advisor
Market Commentary
The stock market decline ended in May and has begun a slow and tedious
recovery. The ease with which we made money last fall and winter
has been replaced with an investment landscape loaded with potholes
and land mines. The slightest earning disappointment from otherwise
highly credible companies has sent many a share price plunging to
new lows. Yet other companies are seemingly taking up the leadership
of the markets and providing solid ground on which to invest. In
caution we have lightened up on positions in Oracle, Applied Materials
and Sun Microsystems, taking profits and building cash reserves.
We have shifted from Knight Trimark (NITE) to federated Investors
(FII) and made a modest profit. Federated has split three for two
since we bought our position in the low thirties. Other stocks we
have held (Qualcomm - QCOM and Safeguard - SFE) perhaps longer than
was prudent. Yet in the long-term these volatile issues promise
to reclaim new highs as the high tech communications centered economy
unfolds.
Central to the performance of the stock market was the steady
increases in interest rates by the Federal Reserve under Alan Greenspan.
Stock prices generally decline as interest rates are increased.
Then, after the May increase of one half of one percent, the markets
sensed that the rates increases were over for now and that stock
prices hence forth would be more determined by earnings releases.
Indeed, investors appear to be correct. Companies reporting good
outlooks and above expected earning numbers are being rewarded in
the markets while those disappointing the Street with below expected
results and warnings about growth for the balance of the year are
being punished. Agilent (A), the spin off from Hewlett Packard (HWP)
reported disappointing earnings and was crucified in the market
despite announcing innovative technology to switch optical light
waves using inkjet technology. Lucent (LU) disappointed the Street
as did Microsoft (MSFT) and others. On the other had Corning Glass
reported results way above expectations and has moved up substantially
in price. We have nibbled around establishing a position in corning
but I am reluctant to buy a lot of a stock at $250 per share. More
recently we have nibbled at a few regional banks in the Silicon
Valley area, disposing of stocks like Mellon and PNC, which we view
as slow growth giants of the banking industry. Among the large financial
conglomerates, the only stock we like is Citigroup (C).
So, for the balance of the summer, I will be making minor adjustments
to portfolios to clean out minor positions and offset the capital
gains that we have realized so far this year. I don't expect to
take any major positions in the stock market until the rally is
on much wider and firmer ground. I caution each of you to be very
selective in any other investment you make in this market as the
direction of interest rates is not yet settled. Furthermore, stocks
in general will not head higher until the fed begins lowering interest
rates sometime in the future. We are in a stock pickers market and
caution is the watchword.
Education
Volatility. Stock prices are by their very nature volatile. And
they are also very easily converted into cash, a real benefit. Depending
on your financial circumstances, volatility is not to be confused
with risk. Stocks are not inherently risky, even though they are
volatile. While volatility can be measured and dealt with as a statistical
phenomenon, risk is of a different set. Risk is an interpretation
or assessment that a person makes about a given set of circumstances.
Most of us believe that circumstances about which we know little
are risky, i.e. we have difficulty accurately predicting the outcome
of a set of actions. Yet the same set of circumstances are not risky
at all to a professional who is familiar with the circumstances
and possible outcomes of his/her actions.
A number of studies of financial instruments (stocks, mutual funds,
bonds, certificates of deposit and the like) have determined that
stocks and stock mutual funds are volatile in the short-run but
have less volatile outcomes in the long run. Bonds and other fixed
investments are less volatile in the short-run but have more volatile
results in the long run. While this might seem counterintuitive,
please note that fixed investments in the long run have always under
performed a well-diversified portfolio of common stocks.
Our aim is to satisfy your short and long term goals with a portfolio
of common stocks and money market funds, a strategy we believe is
the optimum for achieving and maintain financial independence despite
the volatility of such a strategy in the short-run. By the way,
sometimes the short-run can be three years long before meaningful
long-term results are achieved in your portfolio.
Advisor update
We have successfully become re-registered with the Securities and
Exchange Commission as a nationally significant investment advisor.
Of course, registering with the SEC does not mean they have approved
of our operation or investment strategy. We are complying with Federal
law as we have assets under management of over $30 million. We will
be sending you a copy of our ADV Part II in the near future as part
of our registration and annual audit process as required by law.
The National Association of Securities Dealers, Inc, recently
audited the broker deal part of our business. The NASDR is the organization
that nearly all broker dealers must belong to and allow auditing
there operations. The NASDR is essentially the enforcement arm of
the SEC with regard to broker deal operations in the United States.
Nestlerode & Co., Inc., has been audited for several decades
by the NASDR without a finding of major rules infractions, a record
of which we are very proud. Investors seeking further information
about any broker dealer can investigate NASDR records by going to
their web site at www.NASDR.com.
We invite you to check out the NASDR web site and their Public Disclosure
Program for any broker or salesperson that is soliciting your investment
business.
Advertising
For many years we relied solely on referrals from our customers,
clients and friends as our method of obtaining new customers. As
in any business, new customers are the lifeblood of our enterprise.
In recent years we have done limited print media advertising, in
the Centre Daily Times for our Discount Brokerage of Pennsylvania
operation and in State College the Magazine, Pennsylvania Business
Central and Town & Gown. More recently we have done limited
advertising on radio station WRSC (1390 AM in State College) and
now we provide educational investment tips and the evening business
brief on "The Bus", FM station 93.7 in state College. In a new effort
for us, we have contracted with ABC channel 23 in State College
to run 24 thirty-second advertisements on their pre game Penn State
Football show. We hope you will catch our ads and tell us what you
think of them.
Giving Back to the Community
Nestlerode & Co., Inc., has been involved in recent years with
assisting in managing and soliciting funds for the Centre County
community Foundation. We also contribute part of our management
fee to help cover the cost of the production and printing of their
annual report to the community. We believe that the community has
been good and we have been fortunate to be a part of State College
and the central Pennsylvania area. We believe it is important to
return some of our gains back into the community through the foundation
as a company in addition to the individual efforts a number of our
staff make in donating time, money and energy to good causes. If
you would like a copy of the foundations latest report, please contact
Steff or me. Furthermore, if you are paying taxes on capital gains,
then I recommend that you consider charitable giving as a way to
save taxes and promote the causes in your community that you deem
worthy of your good fortune. We have considerable information on
charitable giving and its tax benefits which we will provide to
you upon request.
Computerization We continue to upgrade our computers and our connections
to various data sources and the Internet. If you have email and
Internet capabilities, please send your email address to us. We
will include you on our corporate update list and eventually hope
to be able to provide you with your quarterly statements via the
Internet.
Fall Schedule
Mary Jo and I will be setting up our tailgate with the Cooperative
Extension people at the Ag Arena again this year. ABC Channel 23
has promised to get us a banner to hang on our tent to show you
where we are gathering before and after the Penn State home football
games. I invite you to drop in and socialize with us at your convenience.
There is always extra water, soft drinks and snacks available as
well as plenty of football talk. In mid October, before my next
report to you, I will be attending the Local Firms Conference in
Chicago sponsored by the Securities Industry Association. Please
see their web site at www.sia.com.
I will be a panelist at this national conference, discussing our
business strategy over the past seven years. I have been working
with the SIA's Local Firms Committee for several years. I was recently
appointed to the SIA task force on industry regulation. I believe
the honest and ethical practices of the industry are essential for
a healthy capital market and for the safety and confidence of the
investing public. I will be representing the views of hundreds of
local brokerage firms across the nation.
Thank You
As I sit and ponder the investment management business and the trust
and faith you have put in my company and me, I want you to know
that I appreciate you and thank you for helping make this all possible.
If you have problems or questions, please call us. If we can be
of assistance in any way with your finances, let us be a resource
for you.
Warm regards,
Dan Nestlerode
Steff Chicko
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