Remember this guy from a few weeks/months ago? He got a lot of chuckles with his warning re: y2k on the market because he was a small-time hedgehog...Turns out he's excellent stock picker and runs a decent fund with good returns.
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From the Dow Jones Newswires.
August 11, 1999
Dow Jones Newswires
Fund Manager Makes
Y2K Computer Bug
A Personal Crusade
By Jonathan Weil
Barry Kitt doesn't look the part of a Y2K survivalist. He hasn't bought an
electric generator, nor is he stockpiling bottled water. One thing he is
hoarding: cash.
Mr. Kitt is the manager of the Pinnacle Fund, a small Plano hedge fund that
specializes in finding undiscovered small-capitalization stocks. Only you
won't find many stocks left in the fund. Since the end of March, when stocks
accounted for 85% of Pinnacle's holdings, Mr. Kitt has reduced his equities
exposure to 30%, with the rest held in cash. In the past five months, he has
sold off his positions in nine of the 17 stocks in his portfolio. He isn't
finished yet. Mr. Kitt's goal is for the fund, with assets of $36 million,
to be 80% cash by year end.
All the better to prepare himself for what he believes will be the
inevitable stock-market crash, sparked by the year 2000 computer bug, or
more specifically, people's fears of what may happen come Jan. 1. He is
betting investors soon will grow so anxious about the glitch that they'll
start pulling their money out of the market en masse. "I'm not saying
airplanes will fall out of the sky or that Russian missiles will be
launched," Mr. Kitt says. "The fear of what could happen is as important as
what will happen."
Mr. Kitt may be just another voice among the legions of Y2K doomsayers. But
what makes his case so unusual is that he is also a first-rate stock picker.
For the five years ended Aug. 5, Pinnacle has posted average annual returns
of 29.69%. If the hedge fund's performance is compared with all small-cap
mutual funds, it would rank second, according to Lipper Inc., the Summit,
N.J., fund tracker. Mr. Kitt's fund is up 42% for the year through Aug. 5.
And with stock valuations near all-time highs, interest-rate increases
appearing more likely and a solid year of returns in his fund virtually
guaranteed, Mr. Kitt says he is content to wait on the sidelines until
January.
His concern isn't so much that U.S. companies won't have fixed their
computer systems. He is worried about underdeveloped countries that don't
stand a chance of dealing with their Y2K problems in time. If that happens,
Mr. Kitt figures their economies will collapse and set off a global chain
reaction like the one that followed the collapse of Thailand's currency in
1997. He says he expects a drop of 2000-3000 points in the Dow Jones
Industrial Average by Jan. 1. In Pinnacle's second-quarter report, he warns
that "the market is not simply overvalued, but is in the process of forming
an asset bubble." The average finished yesterday at 10655, down 5.3% from
its all-time high last month.
"This is the first time in the history of the stock market that there is a
date-certain event with the potential to be a world cataclysmic event," Mr.
Kitt says. "There's no question in my mind that this market is going to tank
big time."
For Mr. Kitt, this radical bearishness is more than just an investment
thesis. It's a crusade. Every chance he gets, he is sending out some new Y2K
tidbit to friends and colleagues whose money is still tied up in the stock
market. One recent missive shows a nine-page chart summarizing dozens of
recent Y2K-related news stories -- recounting everything from a four million
gallon sewage spill in Los Angeles during a utility company's Y2K test to a
survey by The Wall Street Journal in which 10% of respondents said they'll
cash out their investments by December.
"I'd be disappointed if I didn't receive my monthly infusion of Y2K
materials from Barry," says Blair Baker, portfolio manager at Dallas-based
Precept Capital Management, which runs three hedge funds. Still, Mr. Baker
isn't among the newly converted; his funds, as part of their investment
strategy, already have large short positions that would benefit in a broad
market decline. (Investors shorting stocks borrow shares and sell them in
hopes of replacing the stock later with cheaper shares.)
But at Walker Smith Capital Management in Dallas, principal Stacy Smith says
he is following Mr. Kitt's lead. With his $50 million hedge fund up 35% year
to date through July, Mr. Smith says he has gone to about 35% cash and may
increase that percentage. In the past, his fund typically had been about 90%
invested in equities with 10% cash. He credits Mr. Kitt's lobbying over the
past six weeks for his change in strategy. "I don't think you can argue with
his track record," Mr. Smith says. "There are a lot of uncertainties out
there, and Y2K is something we can feel and touch. We've also had a very
good year, and we don't want to give a lot of that back."
Mr. Kitt's view also is shared by officers at some of the companies whose
stock Pinnacle owns. Chris Amenson, chairman and chief executive at SBS
Technologies Inc., an Albuquerque, N.M., maker of industrial computers, says
cash makes up 90% of his personal portfolio, excluding the shares and
options he holds in SBS. Two months ago, he was 60% in stocks. While he
speaks with Mr. Kitt often, he says he made his decision to raise cash on
his own. "There's more downside risk than upside potential in the short
term," he says.
Wilson Jaeggli, a Dallas hedge-fund manager and friend of Mr. Kitt's, is
also raising cash after a strong year, but for reasons other than Mr. Kitt's
lobbying. Mr. Jaeggli's Southwell Partners hedge fund was up 43% year to
date through the end of July. (Mr. Jaeggli declined to disclose his firm's
size or cash position.) He is building cash mainly because "the
overvaluations in today's market are absurd. Y2K just gives me another
reason to pull back."
There is, of course, the very distinct possibility that Mr. Kitt is dead
wrong. At Tremont Partners, a Rye, N.Y., firm that tracks hedge-fund
performances, Hunt Taylor, a senior vice president, contends that Mr. Kitt's
long recital of Y2K news stories illustrates the opposite point: Investors
already are factoring Y2K into market valuations. "This may be the most wide
ly publicized and thus the most discounted event in history," says Mr.
Taylor.
And while Mr. Taylor says many hedge-fund managers have been growing more
conservative in recent weeks, fearing the seeds of a market correction are
in place with few catalysts for a broad upturn, he says Mr. Kitt's move to
cash is among the most aggressive he has seen. For a hedge-fund manager who
typically doesn't short stocks, "he definitely has one of the more extreme
views," says Mr. Taylor.
Mr. Kitt insists that investors remain complacent. "What first got me
thinking in this line is I started asking people 'What are you going to do
in your personal portfolio to prepare yourself for Y2K?'" he says. "The
reaction was always 'Why is he even talking about this?' As soon as I knew
that people weren't thinking about it, that's when I knew I was right."
And if the market doesn't crash? "If I'm wrong, my partners will be ecstatic
anyway because of the performance this year," Mr. Kitt says. "If I'm right,
and I'm positive I am, then I want to help as many people as I can."
As for other Y2K preparations, Mr. Kitt says he'll start stocking up on
bottled water later this year. "If I was in Chicago, where I used to live, I
would buy a generator," he says. "But I live in Dallas. I don't think I'll
freeze to death."
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