Why do I share this? In 1979-1981 we were told by respectable experts that our economy would never again be the powerhouse of the world. In 1992, experts told us that banking would never be as profitable in the future because of the S. and L. debacle and the closing of 1000 of the 8000 banks that existed in 1988. A young governor from Arkansas argued in the 1992 election that “it was the economy, stupid.” This cleansing we are going through currently is powerful and difficult, but not new. While Merrill Lynch is no longer independent as of this morning, we are still “Bullish on America”

Call us today for reinforcement or join us tomorrow at our Roadshow Event in Seattle to review our discipline and consider which Northwest stocks deserve our affection.

William Smead

William Smead

Tony Scherrer, CFA
Senior Vice President
Portfolio Manager 

Market extremes always seem to last far longer than participants realize at the time, and this one has been no different. While this outlasting effect has caused us our share of short-term grief, we also know that it is exactly this type of thinking that causes us and our clients to benefit by what the market brings next, and that this price of admission is what gets you in the door.While we heard no audible bell ring, we believe July 15th marked a significant change in sentiment throughout the capital markets that is worth mentioning. We would not be surprised if we are now in the early stages of the next bull US stock market.

The below table shows the performance of the S&P 500, along with the top S&P 500 sectors, and their performance over two time periods: the beginning of the year until July 14th, and mid-July until mid-August. (Sorted by mid-July until mid-August price change) Notice the stark contrast: the sector performance is almost exactly inversely related over the two time periods.

Beyond the domestic stock market, since mid July, the US Dollar Index has sharply rallied, oil has cracked significantly (along with most other commodities), and international and emerging stock markets have materially underperformed the US. These are all things we have been expecting for some time now, and it seems our thesis is beginning to play itself out.

This major shift is also among the last things on the minds of your average market pundit or talking head (i.e., CNBC). Indeed, it seems consensus rhetoric remains bullish on the BRIC trade (Brazil / Russia / India / China), which includes commodities and basic materials (the fuel used to thrust those economies forward). And it seems this trade has been well played out among average investors.

The Investment Company Institute tracks mutual fund flows on a monthly basis. The 12-month ended May 2008 numbers were striking:

Type of Fund Net inflow / (outflow)

U.S. Stock ($80.4 billion)

International Stock $75.7 billion

Bond $111.1 billion

Money Market $975.7 billion

Source: ICI, Figures run from June 2007 to May 2008

Jesse Livermore, one of the world’s greatest traders, once said “the market is designed to fool most of the people most of the time.” We believe we’re on the right side of the trade, and we feel that trade is now in place. The cash buildup among investors is at historically high levels, and as the market readjusts to a new reality over time, this will be the fuel used to create what we believe will be the next great US stock market.

Thank you for your continued confidence,

Tony Scherrer, CFA

William Smead
Chief Executive Officer
Chief Investment Officer 

Dear Clients and Prospective Clients:Rarely does an article magnify the value of being a contrarian at extremes more than this August 2nd article in the New York Times. Writer, Floyd Norris, captured this sentiment indicator quite well.

Click Here to Read the Article

Could this be a sign of the “Next Great U.S. Stock Market”? If you are under-invested in U.S. Common Stocks or are not yet a client, please call us today to talk about ways you can hire us to fill this void in your investments.

Warmest regards,

William Smead

William Smead
Chief Executive Officer
Chief Investment Officer 

Investor’s Intelligence is a service founded in 1963 to measure the psychology of the U.S. stock market through the eyes of investment newsletter writers (many of whom manage money themselves). They ask the letter writers if they are bullish or bearish or looking for a short-term downward correction in prices. I have followed this survey for 28 years. Whenever it gets to extremes, it is a useful tool. Tuesday’s survey showed 50% of the newsletter writers are bearish. The last time we hit 50% bears was on January 6 of 1995 at 50.9%. A reading a few weeks ago of 27% bulls was the lowest bullish reading since July 1st of 1994 at 23.9%. There is no guarantee of a repeat, but the last time it hit 50% bearish preceded a four-year stretch (1995-1998) which was mega fun and profitable for U.S. stock investors.This is just a reminder of how powerful the “Next Great U.S. Stock Market” could be. Thank you for the patience and trust.

Warmest regards,

William Smead