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April 9, 2015
Dear Client,

       For the first quarter of 2015 our average account gained approximately +2.4%.

       It was a quarter in which the impossible became, with amazing nonchalance, routine.  Interest rates, at least at
the short end of the yield curve, are now negative in a dozen countries.  Explaining this to an intelligent twenty year old
has proven impossible.  “Why don’t they just leave their money in cash?” is the first sentence out of them, and so far
we haven’t found a way around that one to the next one.  The absurdities don’t end there.  The Irish 5.4% bonds of
2025 trade at 144 ¾, producing a yield of less than ¾ of 1%.  Three years ago they traded in the 50’s.  Have their
fortunes tripled in the interim?  Of course not.  We love the Irish, but as they would say, somebody’s gone a bit daft.  
In a world of quantitative easing people are desperate for yield, and desperate people don’t make good decisions.  This
effects all other levels of government too.  Chris Christie knows he either reaches for a whole lot more risk, or he tells
the taxpayers of New Jersey he can’t pay the states pensioners and has to levy more taxes.  He is not likely to pull a
history of the monetary policy of the United States off the shelf and start reading it, especially since it would end his
career.  He either goes out the risk curve or he hits the pavement.  And he has 49 compatriots who feel the same way.

       The irony is thick here, because the man who first noticed the correlation between inflation and unemployment
would without any doubt be appalled at what modern central bankers are doing with his observation.  Alban William
Housego Phillips had already had an amazing life before he was famous.  Born on a New Zealand sheep station, he
escaped China when the Japanese invaded, made his way across Siberia to London, joined the RAF, fought the
Japanese from Java, got captured, and survived three and a half years imprisonment by the Japanese in the hardest
conditions imaginable.  By 1958 he was at the London School of Economics.  Casting about for a doctoral dissertation
subject he saw in the official histories from 1861 to 1957 that when unemployment was low inflation trended higher,
and when unemployment rose inflation fell.  So, in what he called, “a wet weekends bit of work,” he wrote a magazine
article for “Economica” about his findings.  Then all hell broke loose.  Successive Labor governments turned an
observation about correlation into a theory of causation.  Early on, and to his great credit, Bill Phillips was against this.  
Just as wet sidewalks do not cause rain, correlation is not cause.  As Phillips was saying as early as the mid ‘60s when
you dial up inflation what you get is inflation.  Growth comes from other reasons, and high inflation is inimical to
growth.  When he died all too soon in 1975, the world was just starting to get the hang of his wisdom, as stagflation
was everywhere at hand.  40 years after his death why don’t smart central bankers know this?  Hard to say, but then
again we’re profiting from it.  In large measure it is the central bankers who are making us richer.  We just do not
intend to throw caution to the wind and thank them for it.

       We are also profiting from an observation of our own that keeps spewing dividends.  We read a new book from
Steven Johnson called, “How We Got to Now.”  It is a ripping great yarn in 300 pages about inventors that changed
our world and made modern experience ever so much better.  Mr. Johnson’s knowledge is astonishing.  He has
another marvelous story to tell every three pages and he stitches them together with explanations for why we should
care and how they relate to each other with an intelligence that delights.  What he does not seem to notice, and we did,
is that with the exception of the truly exceptional and long lasting Thomas Edison, hardly any of them make any
money.  Many of them, “took a turn or two through bankruptcy”, as he breezily puts it.  So that today when we own
a Google, a Qualcomm, an Apple, or a Cognizant, and they are amazingly profitable, we credit all the more Larry Page,
Sergey Brin, Irwin Jacobs, Steve Jobs, and Francisco D’Souza.  Getting there first is not at all the same as making
money, and Steven Johnson makes plain all the more how we ought to prize our crews’ money making
accomplishments all the more.  Even for brilliant people profits are hard to come by.

       In reading Apple’s most recent quarterly report a related thought struck us hard.  Apple had $74 billion in
revenue in the quarter and inventory of $2.2 billion.  Yes, you read that right.  We would have thought they had more
copy paper lying around than that $2.2 billion number suggests.  Who turns inventory more than 100 times a year?  
Apple does.  And their $18 billion in profit, up 38% year over year, comes on slightly lower property, plant, and
equipment.  They have virtually no manufacturing workers, and accounts receivable are an afterthought, they get paid
so quickly.  Think about all the risks Tim Cook has taken out of that income stream.  Factories are forever ill designed
and pollute, inventories are always getting wet just when they mustn’t, and workers are often stealing them when they
aren’t being mutinous in some other way.  Customers are forever reneging on bills.  But not for Apple.  All those risks
are borne by somebody else.  We have taken to calling this, “the New American Manufacturing Exceptionalism,” and
some business school professor is no doubt writing a book about it right now.  She is likely to have a hit on her hands,
because the markets are paying it absolutely no heed to this phenomenon now.  Apple sells for about 15 times this year’
s earnings, an absolutely pedestrian multiple for an exceptional company.  But the quality of the income stream is what
we are really getting at.  If you can make little things for little people, generate terrific customer loyalty, and never take
a manufacturing risk, you are in the catbird seat.  Nobody has recognized this revolution so far, but it is a big deal.

       Imagine a thought experiment of the sort Benjamin Graham was so famous for.  Imagine our smallest company
Orbcomm decided it needed another half a dozen satellites in orbit.  But before it could let out the order Loral
volunteered to build them on its own dime, Space X agreed to launch them just for the prestige of it, Boeing handed
them the rocket and threw in launch insurance as well.  We’ll stop here.  We do not intend to share this letter with
Marc Eisenberg or Robert Constantin, the Orbcomm executives.  They might cry with vexation.  Yet in Akamai and
Google, Qualcomm and Apple, Cognizant and Tupperware we have businesses that are manufacturing more and more
while incurring less and less risk.  Even Boeing has been trying to get in on this act.  We make no comment on the
social effects of this except to note that this revolution is hard on factory workers who have no place to go and no role
to play, but for investors this is a Godsend.  Levy, Harkins is determined to find more companies that do ever more
with ever less.  And we like our chances.  The markets aren’t paying any attention to profits that ought to be prized
above all others, and are not drawing a second glance as we write.

       Our final thought is about a different kind of risk.  We just returned from a Grant’s Interest Rate Observer
conference yesterday and it was rewarding.  The intelligence of the dozen speakers was guaranteed to insure that.  But
in eight hours of intense and thought provoking discourse not one speaker shared a fear of unremitting and punishing
inflation.  Every one of them noted the ahistorical nature of monetary policy worldwide.  The bond market has
astonishing risk in it and this group is much too smart not to see that.  But it was almost as though the risk of hyper-
inflation was a zero probability event.  It is anything but that, and we need to work double tides to protect ourselves if
that awful eventuality comes to pass.

                                                                                                        Sincerely yours,

                                                                                                       Edwin A. Levy

                                                                                                      Michael J. Harkins