William Smead
Chief Executive Officer
Chief Investment Officer




Dear Clients and Prospective Clients:

At Smead Capital Management we are strong believers in owning high-quality recession-resistant common stocks and holding them for many years to create wealth and meet economic needs. Normally, the finest of the U.S. banks are a great way to make dividends and ultimately see capital appreciation. However, the current efforts on the part of the U.S. Treasury to stabilize our financial system seem to be having a detrimental affect on the common stocks of exactly those banks which the Treasury wants to build our financial system around. We are adjusting to this new reality and let me explain.

One of our eight criteria for selecting companies is shareholder friendliness. Is the company allocating capital, paying and/or raising dividends, buying back stock and making effective acquisitions in a way that is friendly to shareholders? In the case of a JP Morgan or a Wells Fargo, the answer to that question in the past has been absolutely. But in the new environment of Treasury intervention their past record appears to be breaking down. When the Treasury is giving you money to invest and wants you to loan it out, can you buy back stock when a lousy market environment drives your stock price lower? When a current negative feedback loop exists in the economy where one company’s layoffs lead to layoffs of others companies, doesn’t that put further loan write downs at the bank in position to make it hard to pay the dividends? When this all played out at Washington Federal Savings and Loan here in Seattle recently, it was a warning shot across the bow. Nobody has been more conservative about lending, credit quality and expense control than Washington Fed, but they were asked to take TARP money and cut their dividend soon after by 76%.

The problem is we are using for-profit institutions to produce goals for a non-profit institution and the companies are being run for the social good rather than for the shareholders. Investments in these great companies are being diluted and the rewards for their survival and future prosperity are being pushed out further into the future. This is because they aren’t being controlled by outstanding management people like CEO Jamie Dimon or John Stumpf, but rather have had control put in the hands of the U.S. Government. We are re-researching all of our financial companies to see if these dynamics are in force and could be detrimental to our capital over the next 12 months. With a plethora of great companies which meet our eight criteria available out there and unaffected by Treasury intervention, we think the opportunities could work in our favor until the time comes when we can understand the affect on shareholders and management friendliness of this new business model.

Best Wishes,

William Smead

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