William Smead
Chief Executive Officer
Chief Investment Officer

Printable Version
Subscribe to the Missives Podcast
Click here to listen to this Missive

Dear Clients and Prospective Clients:

Economists, policy makers, regulators and investors spend most of their adult life worrying about the worst Economic calamity of their early adulthood. From 1946 to 1973, every time we had a recession it brought intense fear of the next “Great Depression” happening. Despite hyper-vigilance on the part of economists and policy makers, it took 30 years for investor’s to trust stocks thereafter. They should have been more confident as the Dow Jones Industrial Average rose from 92.92 on April 28th, 1942 to 995.15 by February 9th, 1966. This appreciation does not take into account dividends. The great run in the stock market in the 1950’s happened while we worked off the debts incurred fighting the Depression and World War II.

Inflation reared its ugly head in the 1960’s and 1970’s. Economists like Alan Greenspan and Paul Volcker have caused us to be hyper-vigilant since then to not allow inflation to find its footing. Despite the fact that inflation fell all through the 1980’s and 1990’s, investor’s did not trust stocks until the late 1990’s and by then most of the good money had been made.

Today the biggest economic calamity in the minds of economists, policy makers, regulators and investors has been the over-capitalization of real estate and high levels of debt attached to our economy. Economists like Nouriel Roubini and policy makers like Barnie Frank are leading the charge to remind us to not let the animals out of the barn, now that they are already out.

We at Smead Capital Management believe that the real estate markets will be tame for years. Working down our current debt levels the next ten years will indelibly etch better and healthier attitudes into borrowers of all kinds. We believe that rather than waiting 20 years to trust good quality stocks, we should trust them right now.

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. The securities identified and described in this missive 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

Printable Version
Subscribe to the Missives Podcast
Click here to listen to this Missive

Dear Clients and Prospective Clients:

I read an interesting book recently by Russell Napier called The Anatomy of a Bear Market. He sought to dispel myths about what happens at low points in the stock market. He examined the market based on the point in time when you would have done the best over the following twenty years. He focused on July of 1932, April of 1942 and August of 1982. His thesis wasn’t that buying at a major low point is all that mattered, but rather the best starting points produced forward success. For this reason he left out the market low in December of 1974.

Once he had identified the best points to enter the market over the last 108 years, he then researched what was going on in the economy. He wanted to dispel the myth that there wasn’t any good news at the bottom or best buying point. He found a few good clues to look at to see if the low point had forward looking merit. First, he found that commodity prices firm up around the bottom. Second, auto sales pick up. Third, major companies cut their dividends close to the bottom. For example, General Electric and AT&T cut their dividend within a month of the bottom in 1932. Lastly, overall business shows some life.

Where are we now? The decline in stocks of 53% from October of 2007 to March 9th 2009 is the worst decline since the 1930’s. Commodity prices have firmed as Oil and Copper prices have rebounded. Auto sales have not yet rebounded. General Electric, Alcoa, Wells Fargo and other major companies cut their dividend. Overall business conditions are showing signs of improvement. Durable goods orders were better than expected and retail sales were better in February than expected. Home sales were up on both new and existing homes. And the most active home sales are in California, Arizona, Nevada and Florida. We’ve had four of our clients buy a home in the Phoenix Valley in the last 60 days! Can you hear the rhyme?

We continue to believe that there has never been a better time for investors with a three to five-year outlook to buy quality common stocks. Be careful. If you wait for auto sales to improve, you could get caught in a melt up. Remember, there is more money on the sidelines than at past bottoms on both an absolute and relative basis. Did I forget to mention that the cash on the sidelines pays very little in interest?

Warmest Regards,

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. The securities identified and described in this missive 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

Printable Version
Subscribe to the Missives Podcast
Click here to listen to this Missive

Dear Clients and Prospective Clients:

Baby Boomer’s kids are coming of age. While boomers are enjoying 50th and 60th birthday party celebrations in abundance, their children are getting married and having children. What is this massive reset of our real estate markets and stock market doing in relation to these large population groups?

Boomer Kids

1. Homes are affordable again.
2. First-time homebuyer tax credit is $8000.
3. Low mortgage rates around 5%.
4. Stocks are the cheapest they’ve been in 27 years for buying in 401K’s.

Boomers

1. Don’t have to loan the kids the money to buy a house.
2. Don’t have to have the kids live with you.
3. Get to baby sit grandkids and they are more fun anyway.
4. Lower property taxes in the future.
5. Way above average stock market probabilities over the next ten years.
6. Bargain retirement homes in sunshine states.
7. Vacation deals everywhere you turn.
8. Cheap Motorhomes for sale.

Here are the thoughts of fellow portfolio manager, Jim O’Shaughnessy, in his column titled “A Generational Opportunity” on March 17th:

“I recently had dinner with a client who told me that stocks had not performed well over the last 40 years. At first I suspected that she was generalizing from the recent pummeling equity markets have experienced — after all, this is a time frame that included two of the biggest bull markets in history! Yet, when I went to the data, I found out that she was absolutely right. The 40 years ending February 2009 were the second worst 40-year period for equities since 1900, with only the 40 years ending December 1941 doing worse!

Let’s put this into perspective. The 40 years ending in 1941 included the stock market panic of 1907, which drove down the Dow Jones Industrial Average nearly 38 percent; the World War I Era, where the period between 1910 and 1919 was one of the worst ever for stocks; AND, oh yes, the Great Depression. Finally, icing on the 40-year cake, the Japanese bombed Pearl Harbor on December 7, 1941. How could these last 40 years even begin to match that? Alas, they did.”

In other words, we are getting the same kind of buying opportunity in common stocks as you had in late 1941. This is when the stock market was not only depressed, but we were losing a huge two-front World War and considering whether to learn German or Japanese to get by.

Which media outlet is covering this story?

Warmest Regards,

William Smead

The securities identified and described in this missive 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

Dear Clients and Prospective Clients:

Since the bottom of the stock market usually comes at the height of the economic or political calamity of that era I thought it would be good to review past major stock market low points. In this way we can compare our current misery with past misery since “Misery loves company”.

The bottom in July of 1932 at 41.22 on the Dow Jones Industrial average was one year shy of the end of the biggest economic contractions in U.S. history. The economy was contracting at more than 10% for its third year in a row. Unemployment skyrocketed to 20%, while 40% of U.S. banks failed. The average stock had fallen more than 80% in the prior two years and 8 months. Farm workers were thrown out of work and lost their homes because there was no other place to find work. The U.S. government was doing most of the lending through what was called the Reconstruction Finance Corporation.

The bottom of the stock market in April of 1942 came at 92.92 on the Dow Jones Industrial Average. Stocks had gone down for three years running from a 1939 peak of 155.92. We had surrendered Bataan to Japan, our U.S. Naval fleet was crippled at Pearl Harbor and the British had surrendered Singapore. The U.S. was woefully ill equipped to produce the war goods and armaments needed to fight the Germans and the Japanese all around the globe. Hitler was having his way everywhere in Continental Europe. Severe shortages of oil, rubber and other commodities made production slow and threatened us with runaway inflation. Most thought a depression would follow even if we won the war.

At the bottom on Dec. 6th, 1974 the Dow Jones Industrial Average was at 577.60 and the market had fallen 45% over two calendar years. The list of reasons to not invest in stocks sounded very familiar. Oil shortages and inflation psychology ruled the day. The banking system lacked liquidity. War was feared in the Middle East. Interest rates had soared to double digit rates. The President (Richard Nixon) had resigned in disgrace in August and the last helicopter to leave the U.S. Embassy from Vietnam in 1974 has been memorialized in the movie, “Good Morning Vietnam”.

The Dow Jones Industrial Average bottomed at 776.92 on August 12th, 1982. It was the fourth bear market since 1966 in a 16-year stretch. Unemployment was 10% and inflation had run at 10% or greater for the prior three years running. Heavy industry like timber, aluminum, steel, coal, automobiles and others were in a depression. Interest rates to “prime” borrowers peaked at 20% and mortgage rates peaked around 17%. Homebuilding was a disaster, even though millions of baby boomers were going to need homes soon. Foreclosed homes were for sale all over the Seattle area. Government deficits were expected to bankrupt us and major banks were teetering on extinction.

Here are the five-year gains coming off these prior major low points, not counting dividends:

July 1932-July 1937 — 41.22 to 182.00 Gain= 341%

April 1942-April 1947 — 92.92 to 175 Gain=88%

December 1974-December — 1979 577.6 to 830 Gain=44%

August 1982- August 1987 — 776.92 to 2500 Gain=222%

November 2008-November 2013 — Gain Unknown

Merry Christmas and Happy Holidays from all of us at Smead Capital Management!

William Smead

William Smead
Chief Executive Officer
Chief Investment Officer






Dear Clients and Prospective Clients:

Jim Collins is the author of a book that I have mentioned from time to time called “Good to Great”. He has attempted to help us understand the difference between merely good companies and the few great ones which have been demonstrating “greatness” over the years. What these “great” companies do in the most difficult business circumstances could give us some clues on what to do in this current economic and investment environment. The current environment is already establishing itself as the most difficult set of circumstances we have faced since the 1930’s.

To help us understand the approach of “great” companies in difficult circumstances, Collins retells the story of James Stockdale, a POW camp survivor from the Vietnam War. Stockdale withstood the kind of long imprisonment which Senator John McCain withstood and is still fresh in our memories. This survivor explained that it wasn’t the pessimists or the optimists which survived, but rather the realists. Pessimists died early on trying to escape, knowing that they didn’t have it in them to hold on for years. Optimists expected the very best and would say things like, “We will be out of here by Thanksgiving.” Thanksgiving would come and go and the optimist would turn to Easter as the point where it would all be better. Eventually, a number of optimistic deadlines would pass and the optimist would lose hope and turn into a pessimist. The realist said, “I will do whatever it takes to get through this regardless of how long it takes to get through it.” There is an inherent optimism in the position taken by the realist. The grim reality must be balanced against the great blessing for you on the other side of the valley.We are in the midst of a business coma and stock market liquidation that has to do with financial sins committed over the last ten years. It is holding all participants (workers, investors and companies) prisoner regardless of whether or not we or our companies were part of creating the problem. We do not know how long the “business coma” will last, how long stocks will be liquidated to find a bottom and how soon the inevitable rebound will come! However, we must survive.

At Smead Capital Management we have staked the survival of our portfolios on the balance sheet strength of our companies, the necessary nature of their products and the enduring quality and “mind control” of their brands. In other words, we have sought to own the realist companies which can get through this regardless of how long it takes. And we do this to not only survive, but also because the reward on the other side of the valley is huge from a historical point of view. If you made it all the way through the Great Depression to 1937 with your blue chip stocks, you saw a huge rebound in stock prices from the 1932 lows.

What can you do to be a realistic owner and steward of your assets? Make sure you are investing money in the stock market which can stay invested for at least three to five years. Put the money you need in the next two years in a safe financial instrument like a Certificate of Deposit or money-market fund. Reduce portfolio withdrawals until things improve. Where possible, liquidate non-liquid assets like boats, cars and non-income producing real estate or use them as a charitable donations in a substitution for cash outlays. If needed, review your portfolio with us regardless of whether or not we oversee all the assets.

What should we look for to get a sense that this storm is passing? First, look for low enough new home sales figures to put some of the weaker publicly traded homebuilders into Chapter 11 bankruptcy. Second, look for Arizona, California, Florida and Nevada unsold home inventories to decline. Thirdly, look for some highly respected, nationally recognized stock portfolio managers to give up or get fired (it happened right before the Tech bubble broke in early 2000). Lastly, look for the interest rate differential to narrow between high-grade corporate bonds and Treasury bonds.

We intend to survive these circumstances with you and are here to serve you in any realistic way we can.

Warmest regards,