Third Avenue's Marty Whitman Speaks Out

"Ninety-eight percent of it is utter bull****."

That was Marty Whitman's take on technical analysis, rendered in his usual blunt fashion at the Third Avenue Funds conference in New York on Nov. 6. Unlike therecent Baron get-together, no pop stars were present, but Whitman and others had plenty to say. It's well worth hearing them out. Whitman is one of the most experienced money managers in the business and has built a great record at Third Avenue Value (TAVFX). He has also focused on sturdy balance sheets and cheap share prices for many years--long before it became fashionable to do so.

In addition to Third Avenue managers and analysts, the CEOs of Third Avenue holdings AVX , Catellus Development , Arch Capital Group  (ACGL), Tellabs , and American Commercial Lines also weighed in. And Robert Morgenthau, the district attorney for Manhattan and a grizzled veteran of securities litigation, addressed the recent spate of fraud on Wall Street and the subject of offshore tax havens.

Eradicating Entrenchment
Whitman started off by weighing in against the use of past performance to rate mutual funds, arguing that the quality of a fund's current portfolio should carry more weight. He has a point, but as he himself noted, judging the quality of a portfolio is a subjective exercise at best.

The real meat of Whitman's discussion came in his take on cleaning up Wall Street. He argued forcefully that many of the problems surrounding corporate governance stem from management entrenchment.

"We've gone through 40, maybe 50 years where there has been an abdication of shareholder rights to boards of directors, and boards are just tools of management," he said. "I don't know what you expected when you set up an environment where people can rob and steal. If you're relying on boards, good luck."

Whitman singled out so-called poison-pill takeover defenses as a factor contributing to management entrenchment, and argued that it was time to get rid of them.

Drawing a Bead on Offshore Jurisdictions
Morgenthau also sounded a somber message. The Manhattan district attorney, who recently charged Dennis Kozlowski with tax evasion and used New York'sMartin Act to go after a series of brokerages in the 1990s, was clearly unhappy with the current state of affairs. Companies that maintain nominal headquarters offshore to reduce their taxes came under particular fire.

"It's important to New York and the country that people not be permitted to use offshore jurisdictions illegally," Morgenthau said. "Everyone should pay the same taxes. My bottom line is that you've got to have a level playing field."

Morgenthau did note that the USA Patriot Act and tax treaties being negotiated with offshore tax havens could help alleviate some of the problems, but that was about as upbeat as he got. Although fraud is nothing new on Wall Street, Morgenthau said he thought the scope of wrongdoing was different this time around: "The whole system of checks and balances appears to have broken down. It used to be, you'd have someone stealing money, but they didn't have a whole team working for them. Now, everyone has a piece of the pie--that's the most troubling aspect of this whole thing."

Value in Tech?
Whitman and his crew have long tried to avoid such minefields by focusing on companies with ironclad balance sheets trading at cheap prices. Recently, that has led him into cyclical technology stocks such as telecom-equipment maker Tellabs.

Tellabs CEO Michael Birck spoke at the conference, deadpanning that this was the first time he'd ever come to New York to address a value conference. While he said there were "no signs yet that we are near the end" of the telecom meltdown, he argued that the industry must eventually turn around because communications are so vital to the modern world. More significantly, Birck has made a point of hoarding cash to help Tellabs weather the current downturn: The company has more than $1 billion in cash and investments on its books.

Birck pointed to several factors in the downturn, including weak demand, lack of consolidation among service providers, and what he termed a "regulatory standstill." "The FCC seems addicted to competition between disparate entities," Birck said, "even if it is between winners and companies headed for bankruptcy." He noted that in addition to hoarding cash, Tellabs was focusing on staying close to its customers, maintaining or growing its market share, and developing new products. In all, he said Tellabs was still spending 26% to 28% of its revenues on research and development.

John Gilbertson, CEO of passive-components maker AVX also spoke. He noted that his firm had more than $700 million in cash on its books, no long-term debt to speak of, and had cut its inventory by 27%. Gilbertson also outlined cost-cutting initiatives at AVX, including a 40% headcount reduction, the closure of four facilities, and reduced capital expenditures. But he said his company was still committed to developing new technologies, and held out the firm's new facility for thin-film capacitors as an example of its innovation. He seemed somewhat more optimistic than Birck, saying that AVX's quarterly revenues were stabilizing and that he thought the bottom of the inventory correction had been reached.

The most encouraging statement we heard all day came from Morgenthau. When asked whom he'd pick to take Harvey Pitt's just-resigned post at the SEC, he thought for a moment, smiled, and said "Marty Whitman." He was joking (we think), but anyone familiar with Whitman's no-nonsense approach to investing and past remarks on Wall Street should find the idea appealing.