Excerpt from 2009 Third Quarter Letter to Clients
"The prospects for earnings growth in the S&P 500 have never been better, literally. There is a non trivial chance that earnings grow 22% in 2010 and 22% in 2011. We know that earnings for the S&P 500 have never grown by more than 20% in the last twenty two years, and estimate that to be true since the index was created in 1957. Furthermore, such unprecedented earnings growth would still fall short of the peak earnings reached in 2007.
Trillions of dollars were taken out of stocks as people 'panicked out' during the recent financial catastrophy. Over the course of the second half of 2009, 2010, and 2011 with solid or even unprecedented earnings growth it is hard to imagine people would not 'panic in'. The stage is set for a potential bull market, though there is a legion of wrench wielding monkeys that may interrupt the process."
Excerpt from 2009 Second Quarter Letter to Clients
"Confidence grows as fast as a palm tree and falls as fast as a coconut. In terms of the simile, our economy is at the point where the coconuts are on the ground. It will take time for confidence to recover, and most people will not feel especially good for some time to come. However, I believe the worst is behind us.
In May, factories were making cars at the rate of 4 million/year, people bought cars at a rate of 7 million/year, and old cars were being turned into scrap metal at a rate of 10 million/year. Auto production must double or triple to satisfy even low levels of demand and this will positively affect the entire economy. It will not happen overnight, but as the economy rebounds, confidence will slowly be restored.
The major theme in your portfolio is an emphasis on companies that can do well without a major economic recovery and may well benefit from inflation. Such companies would fit the broad category of distributors. Well run industry leading distributors may benefit most from a sluggish recovery as many lesser quality competitors go out of business. Inflation is the biggest wild card over the next five years. Bernanke et. al. have done an admirable job of steering the economy away from a depression. But it is unclear if the economy has been steered toward inflation, and since this is uncharted territory it will be a year or more before we know. Distributors should see the value of their inventory rise and sales increase if inflationary effects take hold. They are usually one step ahead of higher prices by the nature of the business model."
Excerpt from 2009 First Quarter Letter to Clients
"Everyone seems to be wondering if the lows of the stock market have been reached. In early March a headline indicated that the Dow Jones Industrial Average was at the lowest levels seen in twelve years. Twelve year lows have only been witnessed two other times. One occurrence marked the exact bottom of the 1974 bear market and the other occurrence came about three months before the bottom during the Great Depression. In both instances, unemployment continued to rise and the economy continued to decline after the Dow Jones Industrial Average bottomed. It can be argued that the economy was different after both crises but that American ingenuity found opportunities for growth. These occurrences do not prove that it is over, but it does provide perspective as to how severe the decline has been.
In the insightful expression of Yogi Berra, “It ain’t over ‘til its over.” And since it might take six months to distinguish between a bear market rally and the start of a new bull market, we will remain invested in what we consider to be great companies.
The financial and economic devastation from this crisis will eventually provide fertile ground for expansion of certain surviving companies. Now more than ever it is important to know what you own and why you own it."
