William Smead
Chief Executive Officer
Chief Investment Officer

Dear Clients and Prospective Clients:

Stocks

As we saw from June 30th to now in the price of Oil, price is a great regulator of price. Stocks are way down, having dropped the most in October since the crash of 1987. An abundance of selling supply coming from hedge fund liquidations, margin calls, mutual fund redemptions and individual stock owners (reaching their pain threshold) has overwhelmed the few lonely buyers. Most of the selling is being done in panic. The lonely buyers are people like corporate insiders and value-oriented, patient investors like Warren Buffett, John Neff, Marty Whitman and us at Smead Capital Management. Supply is high, demand is nil and prices are low.

Treasury Bonds

Demand is the highest since the 1930’s as investors want U.S. Government assurance of payment of principle and interest. Sellers are lonely and prices are high. Watch out though, because the Federal Reserve and Treasury are looking to massively increase supply as they trade Treasuries at high prices for preferred stock in depressed banks and out-of-favor mortgage loans.

Real Estate

Lonely buyers are coming out of the woodwork at lower prices to snatch up bargains in California, Nevada, Arizona and Florida on short sales and foreclosures in an ocean of supply. This bubble, which broke at the end of 2005, is now being bottomed as the media misses the law of supply and demand. The media rails about huge drops in housing permits, starts and sales. These are a big supply reducer and leaves buyers shopping among the existing supply.

Corporate and Municipal Bonds

Investors are so scared that they don’t trust state and municipalities. Lonely buyers are seeing the biggest spreads to treasury bonds since the 1930’s and supply is contracting fast.

Money markets/Cash/T-bills

These are the world’s most popular investments. There are hardly any lonely sellers and there is currently the world’s biggest army of buyers. Money-market prices are at record highs and interest rates at or near 70-years lows.

Commodities

This asset class was hotter than a pistol from 2003 to four months ago. However, price regulates price and that rule is no exception in the price of oil, grains, basic materials and other commodities. Supply comes out of the woodwork and alternatives become very attractive. I would expect this asset class to be dead money in the “Next Great U.S. Stock Market.”

I remember being a lonely seller of Tech stocks in late 1999 and feeling incredibly foolish as I talked to unhappy clients who were watching their rabid neighbors get wealthy overnight on the latest Initial Public Offering (IPO) of common stock. Supply was exploding and buying was frenzied. We are at the exact opposite today. Sellers are dumping the best companies with the brightest futures and there are virtually no IPO’s. As the “Motels” sang in 1982, “It’s like I told you, only the lonely can play.”

William Smead

William Smead
Chief Executive Officer
Chief Investment Officer 

Dear Clients and Prospective Clients:The stock market rallied in a powerful way yesterday and is begging everyone to take a position on up or down in the near term. I’d rather help us think straight. We own companies with very strong balance sheets, many of the most recession-resistant businesses, some of the most endearing brands and some of the most consistently profitable companies in the world. Creating and selling prescription pharmaceuticals, cable and network television (”couch potato” delight), cell phone service, women’s apparel, operating software, technology consulting, groceries, dry goods, life essentials, banking, investment management, custodianship of financial assets are all part of the mix. These are some of the most attractive companies the planet has ever seen and they were available at fire-sale prices on Friday. Even with Monday’s bounce, still are today!

We shouldn’t care where the prices go in the short run. We believe that they are highly likely to dramatically outperform other investment categories over the next 3 to 5 to 10 years and in the process meet our financial needs. If you have waited a long time to be side by side with the greatest investors of the last 20 to 40 years, start buying. You will stand out with the likes of Warren Buffett, Marty Whitman and Kenneth Heebner. Either through recent purchase actions or interviews in the media, (Google them and you’ll see) these guys are buying and holding while licking their chops toward the future when the crisis has subsided. I’ve had one client add to stocks in the last two weeks and it seems you’d have to kidnap and rob the folks sitting with cash on the sidelines to get them in. Who knows what the rest of this week will bring; just give me a long-term seat at Warren’s Buffet. 

Best Wishes,

William Smead