Exerpt From 2010 First Quarter Letter To Clients

Coming out of a severe economic recession we think it is “normal” to have a swelling of popularity around an outlook akin to today’s “new normal” (sluggish economic growth with persistently high levels of unemployment). We suspect the “new normal” is rooted in the mantra of “this time it is different,” and that is “normally” wrong. The Chief Economist for DuPont recently spoke at the Richmond Association of Business Economics and commented that the strength of an economic recovery is directly related to the magnitude of the downturn and that the current pace of economic recovery is right in line with what one could project using prior economic cycles. Such a projection yields an expected initial economic growth rate above 8.0%, yet we surmise the “new normal” view only expects economic growth between 2% and just over 3%. It is also interesting how some pundits have stated that the decline in economic activity from inventory destocking was normal, but increase in economic activity from inventory restocking is to be discounted as a temporary event. Either way, we expect 2010 economic growth to be well above the average forecast, though economic forecasts do not affect the long term value we see in your holdings.

It is also interesting to look at the movies that lead box office sales, as an indication of the state of mind of the US population. The top three movies of 2000, presumably with a genesis in 1999 which was preceded by a decade of stellar economic growth and a massive bull market, fit the broad category of “amazing feats of the common man” (Mission Impossible 2, Gladiator, and Cast Away). Yet three of the top five movies of 2009, presumably with a genesis in 2008, fit the broad category of “the innocent suddenly facing the possibility of the end of the world” (Avatar, 2012, and Transformers). As an aside, Planet of the Apes hit theaters at the height of the Vietnam Conflict and was re-released in 2001. Being weary of crowds at extremes, this would normally make for a fine opportunity to identify stocks which inappropriately reflect an end of the world scenario.

The present phases of the psychological market cycle seem to be progressing nicely. Our estimation is that most people have moved past despondency and depression. The next phase is one of hope. I can share that I have had conversations with a handful of clients each of whom estimated their portfolio values to be nearly twenty percent below where they actually were. A great many people were concerned about an “end of the world scenario” as GE’s stock price declined from $40 to $18, and not as many are relieved to see GE’s stock price rise from $6 to $18. But once everyone is relieved, we think the stocks of GE’s and many others will be higher.