William Smead
Chief Executive Officer
Chief Investment Officer

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Dear Clients and Prospective Clients:

We at Smead Capital Management are not afraid to admire people who disagree with us. If someone sincerely believes that the stock market is going to do poorly over the next two years, puts their money where their mouth is and sticks to their guns, we have nothing against them. We don’t agree with them, but we can accept their position. They are Bears on the market and they most likely believe that price earnings ratios didn’t get low enough in March to justify a bottom or they believe that the debt accumulated in the last ten years will stifle economic growth and retard the financial system. They go by names like Roubini, Faber, Tice and Rogers. We have no problem with them and we think that the way they have scared everyone is going to make long-term buy and hold investors like us a ton of money.

However, there is a second kind of Bear in the marketplace and we consider them to be dishonest Bears. They are the hedge fund managers, mutual fund managers and individual investors who temporarily own some stocks, but own them with one foot out the door the entire time. This is the “Fast Money” crowd and they are looking for something to own for six weeks to three months. Jim Cramer is there poster child and the discount brokers and stock exchanges are their sponsors. They are the worst kind of momentum investors. We consider them bears because the way they are organized and postured makes for very little likelihood that they or their clients would gain the benefits from holding common stocks for many years. After all, over long stretches of time a significant part of what you make from owning common stocks comes from dividends. In affect they rent stocks rather than own them. They whip around ETFs, are attracted to momentum markets like Gold and Oil and love high levels of volatility. Included in this category are the hyper-inflation folks who are invested in commodity oriented common stocks and think they are going to make a great deal of money from an economic comeback that ruins everything with high levels of inflation like in the late 1970’s and early 1980’s.

We normally wouldn’t really care about these “Closet Bears”. Unfortunately, in this market cycle, they have ended up with way more of the existing capital than normal. It makes sense because after the decline from October of 2007 to March of 2009 most humans who have the courage to participate want to get out of the way quickly if things turn sour again. So you have the “Real Bears” who are in cash and short stocks, mortified from what happened this year. Then you have the “Closet Bears” long stocks for two months at a time with one foot out the door all along.

To be a “Real Bull” you have to be fully invested in quality stocks which are selected based on how well they might do over the long term. Peter Lynch is our poster child. He was asked in early March about the stock market and he said, “I’m the wrong guy to ask because I’m always bullish.” Watch on T.V. and in what you read. If you see a hedge fund or mutual fund manager say that they are bullish on the market and then explain that they are long Oil, Gold and Basic Materials, you are staring a bear in the face!

Warm 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

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Dear Clients and Prospective Clients:

Peter Lynch, the great investor, ran the Fidelity Magellan Fund from 1979 to 1992 and had a spectacular track record of success. One of his favorite concepts was investing in what you see going on around you. By doing follow up research, you would then invest in companies to take advantage of what you are observing. I went to New York on business last week and entered into the laboratory of America.

Upon entering the plane for my flight, I got to watch the stewardesses and steward demand that people shut off their cellular phones. For some of these people I thought it was going to take physical force. Seeing the pain of shutting them down wasn’t enough. When the plane landed in New York, you would have thought that these were children waiting to open gifts on Christmas morning. The moment that the Captain gave the go ahead there was a mad rush to turn on the phones and make up for the time spent incommunicado. You might wonder why this is so important from an investment standpoint!

Last week a major research firm on Wall Street downgraded Verizon and AT&T from buy to neutral. Their reasoning went like this. As of last quarter there are more cell phone-only households in the U.S. than landline-only homes. In their mind this represented the decline in the very profitable landline business. However, my observation of these cellular addicted flyers tells us that as landlines disappear and everyone ultimately goes cellular that the two dominate companies will have amazing price raising flexibility. While you have a landline you have a choice, but when you only have a cell phone you won’t cancel your service no matter what the price goes up to. Price flexibility is a major profit opportunity as are all the new services that we will pay for as our phones get more functional and sophisticated.

A second laboratory is the two homes we own. One is in North Scottsdale, AZ and the other is in Shoreline, WA. Both are soon to be a bonanza for Home Depot and other companies which are involved in the home improvement and home remodel worlds. In Scottsdale, we need to paint the inside of the house and hang paintings. Our pool has a crack on the outside that needs fixed. In Shoreline, we need new windows and carpet upstairs. We need to stain the deck and landscape and bark the yard. Our kitchen could use a remodel. We have been postponing this work as much as possible. We at Smead Capital Management think that most Americans have been postponing the work that needs done at their homes also. When the pent up demand cuts loose, business could be quite strong!

We are very confident investors in the cellular phone industry and the home improvement market.

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.