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October 3, 2014
Dear Client,

       For the first nine months of 2014 our average account gained approximately +5.2%.

       In the late 1950’s John Kenneth Galbraith came up with a useful although somewhat fanciful cyclical timing
idea that he called “The Bezzel.”  The Bezzel was the theoretical dollar amount that had been embezzled from
society at any given moment.  Galbraith said we would never know to any certainty what this number was, but
we could say a lot about whether it was bigger or smaller than last year, by how much, and what that meant in
the future to our prospects.  In surveying the bond market, zero percent Treasury bill yields, covenant light loans
of every description and car loans for all, it is clear that the Bezzel is far bigger than ever before and growing
maniacally.  In as much as we thought Wall Street had been chastised for a generation by the devastating events
of the Great Recession, Levy, Harkins is admitting error in our opening paragraph.  This is a game we had not
thought would be turned back on so soon.  As the recently departed and much to be missed Ray de Voe
famously said, “More money has been lost reaching for yield than at the barrel of a gun.”  That Wall Street could
be so heedless of his wisdom today shows the toxic effects of free money on the capitalist soul.

       The last week and a half has thrown the frightening size of the bond bubble into ever starker relief.  Bill
Gross, “The Bond King”, has resigned from Pimco.  Acres of ink have been spilt in every newspaper on
whether he can produce in the future the sort of returns he has earned in the past.  This is no knock on Mr.
Gross in any way, but to ask the question is to declare yourself at war with bond market arithmetic.  Shortly
after Mr. Gross started Pimco in 1979 American Treasury yields hit 15.5%.  We know, because we started
buying those bonds too early, which is to say we were exactly wrong, at least in the short term.  Then the
decision to buy proved to be right for a generation.  But bonds cannot yield less than zero; no one will buy
them.  So asking whether he can do it again is a logical absurdity.  To put it another way, there is no great harm
in running at a mirror as fast as you can, so long as you can stop in time.  But if you

grow so infatuated with how you’ve looked over the last hundred yards that you close within the final inch,
shards, sorrow and bloodshed are certain to be your lot.  And you will not have succeeded in getting one inch
behind the mirror’s reflection.  Simply to ask whether bonds as an asset class can resemble their last 25 years’
history is to put yourself at odds with logic, and is indicative of how madcap interest rate markets are now, in
that not one article we have read about Mr. Gross reflects this simple truism.  This is what mania looks like, and
it infects bond markets the world over.
       Which brings us around to the stock market, where our money is.  Stocks cannot be said to be cheap after
a run like this, but neither can they be said to be expensive.  At about 16 times this year’s earnings they are
neither here nor there as a cheap asset class, and of course October is when a venturesome soul starts looking
forward to the new year.  If we get a pickup in economic growth shares might almost look reasonable, in as
much as top line growth has been so hard to come by, and its arrival might be much celebrated at long last.  We
write this fully aware that the famed Yale professor Robert Shiller has been much quoted saying shares are
dangerously priced off his “cyclical adjusted price earnings” ratio, or “CAPE”.  We admire Professor Shiller
greatly; he deserves all his many accolades.  But his “CAPE” calculation takes the last 10 years earnings’
experience for the S&P 500 as “normalized” earnings, and then divides the index by that number, giving us a 26
PE.  The recession of 2008-’09 was the worst in our lifetime.  If you think that another such catastrophe is
about to re-occur in the immediate future then yes, running from the room as though your hair is on fire is indeed
an appropriate response.  But as you know we think a different risk is a far more pressing worry.  The consumer
price index as it is currently constructed seems like a ripe premise for a very droll “Saturday Night Live” skit.  
We doubt whether it describes your life or that of anyone who works for you.  Professor Shiller is brilliant, but
money making in financial markets is rarely about knowing more than anyone else.  It is so often more about
knowing what to throw out.  In more common parlance, knowledge is knowing the tomato is a fruit, and wisdom
is not putting one in a fruit salad.  There is more art than academia in making money, and worrying about
keeping your wealth intact from the ravages of inflation is, to us, the bigger risk.  Still, Professor Shiller’s implicit
fears of another recession is hardly a zero probability event, and accounts for our near perfect attendance
record.  He might be right.

       Meanwhile the United States energy boom goes on apace.  We have been writing about this for four years,
we have been unfailingly exuberant, and we have been behind the curve at every moment.  American oil
producers have far outdone their most fervent admirers.  A little over a year ago we bought shares in U.S. Silica
and Baker Hughes.  Silica produces the sand that shale wells are fractured with, and Baker Hughes produces
the pressure fields to do it.  Growth has been explosive.  To give you a feel for this, the Oil and Gas Journal
reports that wells that a year or two ago might have been developed using a thousand tons of sand are today
typically using 2,500 tons, and the very newest thinking has a few consuming 8,000 tons.  These wells also tend
to have shallower decline curves, making them more valuable over their entire lives, cheaper per barrel of
production, and therefore less hostage to the immediate price of oil.  To be sure, when a barrel of oil goes from
$105 to $89 it throws a wet blanket over the animal spirits all around the oil patch.  Anticipating something like
this, we sold some Silica last month even though we love the investment theme.  We think the home grown
energy boom is American exceptionalism at its finest.  The world is made out of shale, but only the U.S. is
profiting.  But in Akamai and Qualcomm, Apple and Silica we like taking advantage of stocks that get ahead of
themselves and trade far above where they had been over the previous year.  We sell some then.  If we get to
buy them back at a lower price, as we frequently do, it’s like making “free” points.  We are doing just as much
research and monitoring as before, but earning money from the volatility in the market rather than just being
vexed by it.  Stock market volatility is the bête noire of investing, but when you can take advantage of it, it is
also sometimes fun.

                                                                                                               Sincerely yours,

                                                                                                               Edwin A. Levy

                                                                                                               Michael J. Harkins