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January 1, 2002

Alternative Investment Guru

By Kathryn M. Welling

Also in this article

Martin D. Sass is the fellow at the helm of Manhattan's M.D. Sass Investor Services, and major domo at a raft of related if diverse investment vehicles, all of which can be broadly lumped into the alternative investment' category.

In the aggregate, he's responsible for shepherding upwards of $7 billion. A seasoned and savvy long-term investor with a penchant for reinvigorating values others have left for dead, Marty is also a tireless analyst of neglected niches, with a keen and cunning knack for consistently making a buck. Without risking his, or his investors' necks. -KMW

Marty, you were pretty decidedly in the bear camp when I spoke with you pre-Sept. 11, but you've recently written a piece for clients that anticipates a V-shaped recovery.

Well, it still seems trivial to discuss the markets and the economy in the wake of those horrific attacks, but they are the backbone of the U.S. What the terrorists did was make a weak economy, credit and stock markets weaker. While that probably means a steeper drop in GDP in the fourth quarter, and a delayed recovery, it also means a stronger recovery next year.

What makes you so sure?

I'm not. There are obviously risks. The war on terrorism isn't going to end quickly. The huge imponderable out there is what happens to consumer and investor confidence if there's another terrorist attack, which certainly is not priced into the markets. So post-Sept. 11, I've been encouraging clients to do the same things I was pushing before then, only more so: Stepping up their exposure to alternative investments that are not correlated to the U.S. market; that can provide attractive absolute returns - as a diversification tool and as a way of cushioning risk while keeping returns at an attractive level. In any event, I'm not betting the ranch on the V. I like to make conservative assumptions, and what's right obviously varies from client to client. But you do need some sort of scenario to be grounded in. And right now, for us, it's the V.

Yet you're not wildly enthusiastic about stocks here-

There's a huge risk in stocks. What concerns me, just generally, is that valuations are full. Nonetheless, while I'm not ready to say that Sept. 21's panic lows were the bottom for this cycle, I suspect one is likely to arrive within three to six months, and given normal lead times, that would mean that we'll see an upturn in corporate profits in the first or second quarter of 2002. At the same time our equity valuation model, even given fairly generous growth and interest rate assumptions, still shows the market at best only fairly valued, not cheap. P/Es remain too high. And we expect interest rates to rise sharply when the recovery becomes visible next year. That's the message we see, in fact, in the dramatic steepening of the yield curve, post-Sept. 11th: a forecast that an economic recovery and a more inflationary environment are coming, just as the inverted yield curve last year correctly forecast the ensuing recession.

Do you ever look at the bright side?