Investor Letters


April 27, 2000

Dear Friend of Hennessee Group:

While the Hennessee Group is very pleased with our client's hedge fund portfolio performance, we are writing you to issue a word of caution about your traditional unhedged money managers.

Five Fed hikes have failed to slow the economy. Consequently, we see the possibility of three maybe four more rate hikes (including May) amounting to .75% to 1.0%. If the second quarter numbers show more inflation, we could see 1.5% to 1.75% in rate hikes (including May).

The U.S. economy expanded 5.4% in the first quarter, led by the largest rise in consumer spending in 17 years (+8.3%).

Labor costs increased 1.4% in the first quarter; the largest such gain in more than 10 years.

Inventories rose during the first quarter (especially among retailers) suggesting companies have boost production to keep up with soaring demand.

Unemployment could decline to 3.9 % the lowest since 1973.

Imports of goods in the first quarter rose 10.1% the largest post war increase.

If the market fights the Fed, as it did in 1987 when it was up over 30% in September despite creeping inflation, we could be in for some rough times. On the other hand, if the broad market and the NASDAQ stay within a trading range that precludes making new highs prior to retesting lows set in October 1999, we may achieve a soft landing with a solid base for continuation of the bull market. The second and third quarters are key and many are pointing to productivity gains as the saving grace, but 4%-5% productivity gains per quarter are not sustainable. At some point the music will stop.

We strongly recommend that you review your equity holdings, especially unhedged long only managers. Perhaps consider raising cash at this time.

Please feel free to call if you would like to discuss this further.


Charles Gradante



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