William Smead
Chief Executive Officer
Chief Investment Officer

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Dear Fellow Investors:

The definition of insanity is doing the same thing again and again and expecting a different outcome. At Smead Capital Management we want to spend most of our time talking about Hall of Fame companies this year. However, we feel we need to comment on the current stock market pullback because in some ways it appears to border on insanity.

A little review is necessary. A near complete panic and financial meltdown was averted by aggressive action on the part of the U.S. Treasury and the Federal Reserve Board in the fall of 2008. The liquefying effects of the stock market sell-off, the flight to quality in Treasury Bills/CD’s/money-market funds and low Fed Fund rates set up a very favorable yield curve designed to allow the major financial institutions to earn back the capital lost in the sub-prime meltdown. Sales of discretionary items fell off a cliff in the “reset” and the economy contracted by about 6% in the fourth quarter of 2008 and the first quarter of 2009. Financial sins have been confessed by the Federal Government, State Governments, Financial Institutions, Non-Financial Corporations and on the US Household level. Out of all this came a peak in pessimism in March of 2009 that rivals any “Point of Maximum Pessimism” that we have seen in nearly 30 years in the investment business. A series of highly respected pundits, who correctly anticipated the grief and fallout three years ago, have been granted prophet status in the marketplace and have been singing doom ever since.

As is usually the case, the peak in pessimism coincided with the stock market bottom at around 670 on the S & P 500 Index. The market exploded to the upside and ran into its first minor correction in late June and early July of 2009. The conventional wisdom at that time was that we were having a “Bear Market” rally and that the economy would take years to turn. The highly respected pundits warned us that the economy and financial institutions would take years to heal and that we would do better to buy gold and Treasury bonds.

The market rallied smartly until the end of August as the news on the economy continued to improve and the worst of the problems with financial institutions seemed to be passing. Once again, doubts about the economic recovery created a sharp pullback in the stock market as the pundits expected the economic recovery to disappoint and for this to be a “Bear Market” rally. Everyone knew that September and October are supposed to be lousy months in the stock market. The pundits became more forceful, letting us know that the US economy is never going to lead the world anymore and reminding us that the Chinese economy is the place to be going forward.

Once again the “negative nabobs” were wrong and the stock market in the US rallied to 1150 on the S & P 500 Index through mid-January of 2010. Since then, many of the most popular stocks of the last year in Technology, Oil, Basic Materials and in Heavy Industry are leading another minor correction. The pundits are staring at 5.7% economic growth in the 4th quarter of 2009 (dramatically better numbers than any of the pessimists predicted) and are saying that it won’t last. They are saying that more shoes have to drop in Commercial Real Estate and that financial institutions will take many more years to heal than we expect.

Therefore, we seem to be getting another minor correction in a multi-year bull market in stocks for the same reasons as the ones we’ve already had. We believe this is true because the same logic is being used by the same people in the same way as all the other minor pullbacks. We expect this year to be favorable to owners of good quality, recession resistant US common stocks and to the US economy. Wouldn’t it be insanity to expect anything different?

Best Wishes,

William Smead

The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. Some of the securities identified and described in this missive are a sample of issuers being currently recommended for suitable clients as of the date of this missive and do not represent all of the securities purchased or recommended for our clients. It should not be assumed that investing in these securities was or will be profitable. A list of all recommendations made by Smead Capital Management with in the past twelve month period is available upon request.

U.S. Stocks Fall as Technology Concern Overshadows GDP Growth

by Nikolaj Gammeltoft and Elizabeth Stanton

For more information go to www.bloomberg.com.

The information contained in this article represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. The securities identified and described in this article do not represent all of the securities purchased or recommended for our clients. It should not be assumed that investing in these securities was or will be profitable. A list of all recommendations made by Smead Capital Management with in the past twelve month period is available upon request.

The information contained in this tv appearance represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. The securities identified and described in this tv appearance do not represent all of the securities purchased or recommended for our clients. It should not be assumed that investing in these securities was or will be profitable. A list of all recommendations made by Smead Capital Management with in the past twelve month period is available upon request.

William Smead
Chief Executive Officer
Chief Investment Officer

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Subscribe to the Missives Podcast
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Dear Fellow Investors:

Why do most people make money owning their home? Why do folks make money on company stock and ten-year options? The answer is they hold these investments for a long time. If you hold a sound investment for ten to twenty years you typically get rewarded quite well. However, most human beings never participate in an investment for twenty years in anything other than their home or a piece of investment property. Why do investors hold most investments for short time periods when all the evidence is that you get the greatest rewards for long holding periods?

Historically, homes have appreciated at around 5% in the U.S. and common stocks have gained around 10% from a combination of appreciation and dividends. Why do US households have most of their capital tied up in real estate? We believe the biggest factor is liquidity. The only investments folks hold for twenty years are relatively illiquid. The cost and hassle of buying and selling property causes people to hang on. The hassle of moving your residence and the added monthly payments of buying a new one preclude activity. The fact that the price is not printed in the newspaper every day and there isn’t a willing buyer every day causes longer holding periods. We at Smead Capital Management think people are better off for having invested in real estate for long holding periods.

This brings us to our theme for this year-Hall of Fame Companies. Hall of Fame Companies have unusual success, great consistency and long duration. Why haven’t more investors participated on an uninterrupted basis in the common stock of McDonald’s (MCD) or Disney (DIS) or Merck (MRK) the last twenty years? Why do investors put their investable assets with money managers, financial advisors or financial institutions which make no attempt to own the same good quality common stocks for a long time? We believe one of the main reasons is that these terrific companies and their common shares are liquid every business day of the year. Someone offers to buy your shares every day. The temptation to time the cycles or shorten the reward period is overwhelming.

The New York Stock Exchange reported in 2009 that the average holding period for common stocks dropped below a year for the first time since the late 1920’s. Since investors invest in their rear-view mirror and good quality common stocks have had one of their worst ten-year stretches in history, investors don’t believe that they can get a long-term reward from the very thing that they are the most likely to get it from. One of our main jobs as portfolio managers is to help these very liquid investments become illiquid. Most investors and money managers take their cue from stock market trends, economic growth expectations or views of the current political leadership. We want to shepherd folks through long holding periods with companies that fit our Eight Criteria. In the process, we believe we will be able to look back in twenty years and realize that our client’s wealth has been determined by the companies we own which end up making the Hall of Fame.

Best Wishes,

William Smead

The information contained in this missive represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. Some of the securities identified and described in this missive are a sample of issuers being currently recommended for suitable clients as of the date of this missive and do not represent all of the securities purchased or recommended for our clients. It should not be assumed that investing in these securities was or will be profitable. A list of all recommendations made by Smead Capital Management with in the past twelve month period is available upon request.

Starbucks Sees Growth in Packaged Coffees, Drinks

by Courtney Dentch and Betty Liu

For more information go to www.bloomberg.com.

The information contained in this article represents SCM’s opinions, and should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results. The securities identified and described in this article do not represent all of the securities purchased or recommended for our clients. It should not be assumed that investing in these securities was or will be profitable. A list of all recommendations made by Smead Capital Management with in the past twelve month period is available upon request.