Dear Clients and Prospective Clients:
In the movie, “Sixth Sense”, the little boy could see dead people. Unbeknownst to the movie viewers, the dead people included the character played by Bruce Willis who was counseling him. On one hand, Willis’s Character helped calm this child’s fears surrounding the haunting episodes he had with dead people. At the moment we see dead investors/consumers and the U.S. Government is playing the role Bruce Willis played. Much like receiving counseling from a dead person, the U.S. Government’s Rescue and Stimulus plans can serve to make the patient (investors and consumers) more nervous.
SCM Portfolio Manager Tony Scherrer has come up with a great analogy to explain the current circumstances which we have described as an “Economic or Business Coma”. He reminded us that some people who have come out of comas tell loved ones that visited them that they heard them speaking while they were comatose! At Smead Capital Management we are speaking and writing to many folks out there who are in an investment coma. They are listening and hearing us, but they are immobilized by what they see around them. We know the news has been horrible on the job front and in the stock market (worst January in history) and here in Seattle we are just now getting hit by the layoffs and business closures that most of the country has been going through for over a year.
Many of those who are listening to us will call us when they and everyone else come out of this business coma. Unfortunately, they are likely to pay dramatically more to buy shares of the best U.S. companies at that time. The primary reason for not buying into our portfolios now is the worry that the coma will last longer than expected and we will look foolish in six to twelve months. There is $8 Trillion dollars sitting in T-bills, money-market funds, short-term CD’s, checking and savings accounts and those amounts represent incredibly high levels versus Total U.S. Stock Market Capitalization. The offset to the fear of looking foolish is the fear of avoiding a possible rampage of buyers. Imagine what it will look like if most of these people come out of the business coma at the same time and all try to reestablish their investments simultaneously.
On top of individual investors being in a coma, institutional investors like pension plans and endowment funds have spent the last three years chasing performance under the guise of wide asset-class diversification. Their emerging market, hedge fund, private equity, energy and commodity investments not only didn’t protect them, but also turned out to be illiquid in many cases. We see massive capital employed in dead investment strategies which will haunt them for years in the “Next Great U.S. Stock Market.” To get back on track for retirees and organizations, these institutional investors could ultimately come back to U.S. Large Cap Stocks and take advantage of their long-term historical success and constant liquidity. These institutional investors could be part of the rampage as well as they give up on the popular strategies of the last three years.
We have no idea when this business/economic coma ends, but we unequivocally believe it will end as all the previous ones did! We believe that those of us who act while we are surrounded by dead investors and consumers could be proven to have a “Sixth Sense”.