SCM Missive | September 12th, 2008
Tuesday, September 2nd, 2008
William Smead
Chief Executive Officer
Chief Investment Officer
Chief Executive Officer
Chief Investment Officer
Dear Clients and Prospective Clients:I went to the Evergreen State Fair yesterday in Monroe, Washington. There were kids everywhere and an amazing number of babies among them. Last year, more babies were born (4.3 million) than any year since 1957 in the U.S. I was born in 1958 which was right after the height of the post-World War II baby boom. Families with babies need homes, not apartments. Since it was a long weekend, I also found all the things about the Smead family residence which needed to be repaired or replaced. You combine the two of those and you get pent-up demand for homes and home improvement.
My weekend ended Monday evening watching the World Poker Tour on GSN channel 161 on Comcast Cable. It reminded me what a perfect circumstance looks like at the card table. The best possible situation is when I have the best hand and I’m playing against over-confident players with loads of money who think they have the best hand. In my opinion, that is where we are currently in the world of asset allocation. We primarily own U.S. large capitalization quality stocks which are trading at the lowest price-to-earnings ratios they’ve traded at in 20 years. One set of the other players own money market funds, certificates of deposit and treasuries which are paying around the lowest interest rates of the last twenty years. Another set owns foreign stocks and bonds denominated in currencies coming off their highest levels in twenty years. Another set of players own cyclical and commodity based investments like Oil, Oil Services, Basic Materials and Heavy Industrials under the premise that the growth in the emerging markets of the world won’t ever have an interruption even though the success of those investments is at a twenty-year high. The last set of players I’ll mention are the short sellers, who bet on U.S. stocks going lower. The leader of this group is the public which has been doing 70% of the short sales each week lately on the New York Stock Exchange. This is a 40-year high in public short selling. At the top of the market back in 2000 the public was only doing 6% of the short sales when it could have done them quite a bit of good. If this were poker I’d end up with all the money quickly, but it’s the stock market and could take quite a bit longer if we are proven to have the best hand.
Lastly, you’ve probably seen the shares of a major property-casualty insurance company named XL Capital show up in your portfolio and wondered where we got the idea. XL Capital is now run by CEO Mike McGavick, former CEO of Safeco and former unsuccessful candidate for the U.S. Senate. I saw Mike speak at our Rotary Club soon after he took over at Safeco and can tell you he made the tough decisions to turn it around. Under his oversight Safeco’s stock did extremely well. Mike and four other officers and directors of XL made substantial purchases of their stock recently and it trades at a big discount to its book value. You might say I’m betting on the jockey.Warmest regards,
William Smead
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