William Smead
Chief Executive Officer
Chief Investment Officer

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Dear Fellow Investors:

From the March 9th lows to the September 17th close, the stock market has gone up more than 50% as measured by the S&P 500 Index. Everywhere we look at Smead Capital Management we have a hard time finding anyone who loves this bull market. Why is this bull market so unloved, even though it has had one of the best starting phases ever? Why could this be one of the greatest bull markets of all time?

Lazlo Birinyi is helping us understand how powerful and strong the lift-off phase is with this Bull Market. He stated in his Forbes magazine column titled “Embrace the Bull” on September 2nd, “In fact, this recovery has been the strongest of the last 45 years, gaining 44% in 100 trading days (Mar. 9 to July 29). Even the rally that kicked off the 1982–2000 bull market had gained only 38% at its 100-day mark.” I was a young stockbroker at Drexel Burnham in 1982. I lived and breathed the initial phase of the 1982-87 Bull Market. There was incredible excitement in the air. We had sat through a miserable and long Bear Market in the prior 14 months which caused already cheap stocks to become even cheaper. At that time, I had begun to wonder if stocks ever went up. Folks had been trained from late 1972 to late 1982 to lose their faith in common stocks by poor overall performance in the stock market. The Dow Jones Industrial Average peaked just north of 1000 in late 1972 and bottomed around 780 in August of 1982.

The first reason that nobody loves this Bull Market is because normal human memories don’t think back long enough to remember past Bull Markets. We believe that human memories only tend to reach back 2 years. It’s a classic “what have you done for me lately.” In the world of instant information, folks are reminded of it constantly on the internet and on television. Faith in common stocks will probably never be lower in my lifetime than on March 9th. This was exhibited by the fact that the public was trained to be over 70% of the weekly short sales on the New York Stock Exchange (NYSE) during much of 2008 and early 2009. At the top of the market in early 2000 they were 6%.

The second reason for the lack of love is that we all stared into the abyss and considered a reprise of the Great Depression. We don’t do that very often and it is most disconcerting to consider losing everything that you have worked for.

The third reason folks don’t love this Bull Market is that they have adapted their overall investments to wide asset class diversification. Why would you be excited about a 50% move up in the U.S. Equities when it only represents 12% of your investment portfolio in the first place? Institutions, endowments, advisors and wealthy individuals came into this market drastically under-invested in U.S. common stocks.

The fourth reason is the holding periods are getting shorter and shorter. The NYSE reported that holding periods dropped below a year for the first time since the late 1920’s. The logic is that since stocks have done poorly over the last ten years, folks should try to grab some quick gains and get out before the next bad market comes along.

The fifth reason for the lack of love is the reflation trade. If you really don’t like the stock market, but you believe that the government efforts to stimulate the economy will have significant effects, you go long oil, basic materials and heavy industrials. In other words, we believe investors are attempting to revive the BRIC trade from the first half of 2008. How many movie sequels are really good anyway (besides Godfather Part II)?

The sixth reason is that many investors bailed out between May 2008 and April 2009. They believed the hyper-negative talking heads on the economy last year and they have believed the Hedge Fund managers screaming “Bear Market Rally” this year. Hedging yourself could cost investors a great deal of money in an extended multi-year Bull Market as we believe was the case from 1982-1999. When investors are trapped out of the market and their pride controls their investments, they hate to see the market go up. These investors also seek out people and experts that agree with them to make them feel better.

The last, but not the least reason that nobody loves this Bull Market has to do with long-term investors like ourselves. We were tortured by “An Abusive Parent” last year, even though we executed historically right behaviors. We probably won’t love this Bull Market until we get all the money back that we lost last year.

From a long-term investor prospective, this could be the greatest Bull Market of all time because it could go on until all of our reasons for not loving it are forgotten.

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.

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