A: Exactly, we’ve got to become more competitive. We cannot let our manufacturing go to zero. Unfortunately we let Things get to extreme points before turning them around. That will take some time, which is why the short end of the curve will persist and will be the sweet spot of the market. The other choice is inflation, which is insidious and very difficult to get rid of.

Q:  How this macro view translates into an investment strategy and process?

A: We have about 75% of our assets in duration under a year and we see no reason to extend maturities as we believe that the Fed will continue to rise. As the Fed raises rates, the market will come into some tough sledding and will end up down 15% to 20% at some point by December.

And there will be some opportunities in the high yield market, which is about 20% of our portfolio. We've taken advantage of Ford, GM, GMAC, and Ford Credit; we bought those positions in December. These are the only highyield bonds that we have in the portfolio; the rest is in paper within a year.

That is related to our risk/ reward philosophy, which is if we can’t get paid, why should we extend maturities. If we can’t get paid for a credit, we’re not buying it. For example, you can get 7% on American Airlines through 2012, which, a triple C piece of paper. That’s not enough. I bought the same piece of paper during Katrina and got 17%. There are many examples of below investment grade paper for 5% to 5.5%, you’re just not getting paid for the risk.

In the high-yield market we find some great value and we control risk by buying it right. For example, in foreign positions we can really add significant value. It’s about patience, and being opportunistic in the sense that price is very important to us. GM’s bankrupt would mean 60-65 cents on the dollar across the board and if you’re in at 67, you control your risk. We bought this paper at 67 during the tax loss selling in December and that's opportunistically added value.

Normally, there aren’t opportunities in high yield in the first two or three downgrades, as There’s more to come because once you knock the companies below investment grade, then it costs them more to borrow, becoming a vicious cycle. So we were always patient.

Q:  Would you give us some specific examples that highlight your investing process?

A: Our investing process is simple; we look at sales and operating cash flow. A company in trouble like GM would be a good example. They are on the border line, cutting prices to keep their sales up so that they can keep their market share. On the short end, we’re comfortable buying some of that paper because they have enough cash to pay their bills and their sales are adequate. So GM sales are up, they’ve got a lot of cash in the bank, tremendous cash flow, plus a lot of assets they can sell.

Unfortunately, I don’t know if that’s sustainable, as they can't keep cutting prices. GM may be doing well overseas, but 85% of their market is in North America. Part of GM’s problem is they diversified into lending and finance. Diversification has been a real distraction; they need to concentrate on one or the other. Going forward, the challenge will be if they can get their finances in order and sustain sales over the long term. That’s why we’re keeping it really short but we’re getting 12% to 17% on that paper with duration of less than three years.

Q:  How do you approach portfolio construction?

A: Our portfolio construct is built on our macro view on interest rates. Obviously, we gravitate to the short end of the curve and duration of under a year because we’re not getting paid to extend maturities and because we think rates are going higher. So the portfolio construction depends to a large degree on the macro view and the risk/reward.

Q:  Would you explain your research process? How do you come up with your macro view and the potential candidates for the portfolio?

A: I do all of my own research. I’ve farmed it out in the past but I’m not satisfied with that. I don’t want it secondhand and I don’t want opinions. I want the facts filtered away from all the noise that’s out there. We've boiled it down to the point that's its all about the dollar and once you get to that point, then your thinking gets clear and decisions are focused.

We use quantitative analysis too, so we do look at the underlying equities to make our decisions. For example GM at $22 on the equity doesn’t look like a bankrupt situation in the near term. That can evaporate in a hurry, but it’s been pretty solid. So we do look at the underlying equities, the technicials, the trending indicators, the oscillators.