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Dear Fellow Investors:

The Wall Street Journal reported on Nov. 2nd that non-financial publicly traded companies were holding more cash on their balance sheets than at any time in the last 40 years. The figure is 9.8% of their combined stock market capitalization. A great deal has been written lately about what officers, directors and substantial shareholders (Insiders) have been doing with holdings of their own companies. We at Smead Capital Management would like to give our take.

Since January 1st of this year there have been a number of large company buyouts. It started with Pfizer buying Wyeth and Merck buying Schering-Plough. It has accelerated last week with Stanley Works buying Black and Decker and Warren Buffett’s Berkshire Hathaway buying the rest of Burlington Northern Railroad for $100 per share in cash and stock. Why are companies so interested in buying competitors? Why is Warren Buffett spending $26 billion to buy the rest of Burlington Northern?

First, we believe they trust that the U.S. economy will make a significant comeback the next three years. Many admired experts have spent the last two years convincing us that the financial sins of the last ten years condemn us to poor economic growth for the next ten years. Here is what Warren Buffett said Tuesday morning about buying Burlington Northern Railroad:

“Our country’s future prosperity depends on its having an efficient and well-maintained rail system,” Buffett said in a press release. “Conversely, America must grow and prosper for railroads to do well.”

“It’s an all-in wager on the economic future of the United States,” he added. “I love these bets.”

Second, these companies’ financial strength allows them to gain market share while prices for common stock are depressed. Trading cash, earning almost nothing, for future corporate profits close to the bottom of the deepest recession since 1982 could look incredibly smart two or three years out. Once what Buffett sees is known to other corporate executives, you could see many buyouts as the 9.8% cash position drops to a more normal reading.

Third, James Grant called low house prices and low stock prices a “shovel-ready stimulus program” back in February. With interest rates low for conducting business and housing the most affordable in my adult lifetime, why can’t the economy do well over the next five to ten years? As we said in our missive called “Pick Your Poison”, what would we rather have, double-digit interest rates/unaffordable homes/less existing debt (1982) or low interest rates/affordable homes/large existing debts (2009)?

Warren Buffett, who we believe is the most successful insider of all time, parted with $26 billion of his company’s stock and cash to bet on future U.S. prosperity on Nov. 3rd. His company is involved in insurance, banking, railroads, food and beverages, credit cards, residential real estate, carpet, jewelry, furniture, manufactured housing, etc. At SCM, we are going to keep our view of the economic future aligned with the insider.

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.

The information contained in this tv appearance 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 tv appearance 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.

Starbucks lifts outlook on improving trends

by Matt Andrejczak

For more information go to www.marketwatch.com.

The information contained in this article 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 article 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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Dear Fellow Investors:

We’ve experienced a sharp pull back in the “Greatest Bull Market Nobody Loved”. While this market takes an intermission, we at Smead Capital Management would like to remind everyone where we’ve come from and what history might tell us about what comes next.

In the fall of 2008, the U.S. Treasury and Federal Reserve Board took massive actions designed to avert a total meltdown of our economy. At the time, bearish investors argued that the best these government actions could hope for was to keep us out of a depression. They then argued for a three to four-year recession.

By early 2009, it was obvious that the worst aspects of the Credit Crisis (huge spreads between Treasury interest rates and high grade corporate rates/frozen money markets) were healing. Bearish investors argued that this would only affect the depth of the “Great Recession” and said that increasing unemployment and continued housing foreclosure would prevent economic growth. They said this would cause stocks to decline to prices comparable to 1982 price-to-earnings ratios, even though interest rates were high back then.

By late spring and early summer, obvious signs of economic improvement (green shoots) in California housing and multiple economic statistics were evident. Bearish investors argued that unemployment was rising and the existing debt load was going to cripple consumer spending. In their eyes, the stock market’s rally from March to July would evaporate in a retest of the March lows.

Now we know that GDP grew well over 3 percent in the 3rd quarter of 2009. Bearish investors, who argued that the market couldn’t go up in the first place, now argue that it has gone up too far and too fast. They believe that without the government’s help there would be no economic improvement and a return to economic contraction is possible because of stubbornly high unemployment and continued foreclosure. Are you seeing a pattern?

As we came out of the 1981-82 recession and the stock market soared, bearish investors said the same thing and the Bull Market lasted five years. As we came out of the Savings and Loan/Credit Crisis in 1990, the bearish investors argued that a “jobless recovery” would stop a Bull Market and it lasted for three years.

The willingness of long-term investors to listen to these “broken records” and the unwillingness of equity mutual fund investors to add to their holdings is psychological proof that it is not different this time. Trust ownership of quality common stocks and don’t be surprised if this Bull Market lasts three years and breaks a number of records on the upside. We like our portfolios and the results our companies are producing.

When the people who have been wrong stop using the same argument about unemployment and existing debt levels, we are all going to have to find something new to worry about.

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.

Starbucks focuses on relevance over cool as 4Q earnings loom

by Melissa Allison

For more information go to www.seattletimes.com.

The information contained in this article 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 article 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.

Mylan 3rd-qtr results top estimates; shares rise

by Toni Clarke

For more information go to www.reuters.com.

The information contained in this article 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 article 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.

Aflac’s Profit Triples as Investment Losses Decline

by Hugh Son

For more information go to www.bloomberg.com.

The information contained in this article 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 article 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.

Franklin Resources Logs Strong Quarter

by Sam Mamudi

For more information go to www.wsj.com.

The information contained in this article 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 article 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.

» Sign up for Smead Capital Management’s Quarterly Newsletters

Marilyn Monroe was a physically beautiful woman who figured out early in her career that coloring her hair blonde would draw attention. Not only did it further her career, but it led her to make a movie called “Gentlemen Prefer Blondes”. We at Smead Capital Management are sure that women, who are intelligent and beautiful without being blonde, are dumbfounded by the attraction men have to platinum hair. It doesn’t surprise us, however, because we have been seeing the same kind of visual and emotional attraction work in the investment markets over the last 29 years. As we look out into the fourth quarter of 2009, we will look at one of those eye-catchers today because “Gentlemen Prefer Bonds”.

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Franklin profit rises as net inflows help out

by Sam Mamudi

For more information go to www.marketwatch.com.

The information contained in this article 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 article 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.

Part 1

The information contained in this tv appearance 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 tv appearance 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.

NEWSMAKER-Ballmer takes center stage with Windows 7

by Bill Rigby

For more information go to www.reuters.com.

The information contained in this article 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 article 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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Dear Fellow Investors:

As you might have guessed by now, we are voracious readers here at Smead Capital Management. We saw Robert Prechter of Elliott Wave Theory fame interviewed on Bloomberg and then read the transcript of his interview. He has been pretty negative for the 29 years I have been in the investment business. He gained his notoriety for predicting the 1987 Crash and the 2007-2009 Meltdown that bottomed in March of this year. What the interviewers never share with you is that he stayed bearish from 1987 to 2007, but as open-minded absorbers of financial market information, we read the pessimists also.

He, as you might have already guessed, is bearish on the U.S. stock market. His two main reasons are what we would like to talk about. First, he said that too many stocks were making 52-week highs on the NYSE and to him that is dangerous. Secondly, he mentioned that traders had swung from 2% bullish in March to 92% bullish in October. It is easy to refute his first point. The market went down so much between September 18th and October 10th last year that it is highly likely that you will get a large number of 52-week new highs in stocks. Therefore, trying to call this an excessive amount of enthusiasm is like telling a University of Washington football fan that beating USC is all we should expect from our new Coach, Steve Sarkisian. What has happened up to this point in the Greatest Bull Market that Nobody Loved is a good start.

We are also not afraid of his second point. Traders are very short-term in nature and we think are dominated by what we call, Closet Bears. The Closet Bears are invested in U.S. stocks through long positions in Oil and Basic Materials. They believe in a worldwide pickup in the economy led by China and India and want to own only those investments which benefit from a weak dollar. They believe that U.S. economic dominance is over and if you are going to be long in the U.S. stock market, it better be with one foot out the door and have inflation protection attached. Mr. Prechter argues for a major bottom in the U.S. dollar, which could kill the Oil and Materials play. Lastly, the traders like the volatility of the popular large cap cyclical stocks.

Prechter’s advice could be a blessing to all those BRIC traders out there long Oil and Basic Materials. However, other market participants like individual investors, endowments and pension plans are dramatically under-invested in U.S. large cap stocks (after years of diversifying away from the asset class). The American Association of Individual Investors shows that last week their naturally optimistic members are more bearish than bullish (41% Bears to 35% Bulls). During the week that ended on September 23rd, investors poured in $12.9 billion in bond mutual funds and liquidated $2 billion in U.S. equity funds. This market rally continues despite the fact that investors have continued to sell their stocks.

Our conclusion is what it almost always is. Be fearful when others are greedy and greedy when others are fearful. Investors are greedy by asking bonds and the BRIC trade to continue to be a good place to invest and are fearful of buying large cap U.S. stocks that don’t benefit from the BRIC trade. We like our portfolio and appreciate Robert Prechter’s concern, regardless of how consistently bearish he has been. “It’s the same old story. Same old song and dance, my friend.”

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.

Abbott Earnings Rise More Than Expected on Humira

by Meg Tirrell

For more information go to www.bloomberg.com.

The information contained in this article 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 article 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.

The information contained in this tv appearance 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 tv appearance 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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The information contained in this article 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 article 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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Dear Fellow Investors:

1982

The stock market bottomed in August of 1982 just below 800 on the Dow Jones Industrial Average (DJIA) during the worst recession that had occurred since the 1950’s. Unemployment exceeded 10%, smokestack industries were decimated (remember Billy Joel’s “Allentown”), housing and forest products were in a depression (foreclosures up dramatically), auto sales almost sank both Chrysler and Ford, interest rates peak at 15% on Treasury bonds and the U.S. had lost its respect around the world. The stock market had peaked in late 1972 at 1000 on the DJIA and investors could look backward and see how fruitless investing in common stocks had been for the prior decade. Business Week had called it the “Death of Equities” on a late 1979 cover.

Wise economic commentators explained in 1981 and 1982 why we could not have any meaningful economic recovery. Unemployment kept going up for months after the stock market exploded to the upside. Housing affordability was at a 38-year low. Credit needed to buy houses, cars and expand business was at such high interest rates that it seemed like nobody would want to borrow the money. Many of the home buyers and businesses who did borrow the money failed to keep up with the interest expense, damaging bank balance sheets in the process. Huge federal budget deficits were going to be exacerbated by the Reagan tax cuts. The government’s borrowing was crowding out private borrowers. Banks were competing with money market funds. The disintermediation of the banking industry forced them to pay competitive interest rates on a relatively new instrument called a Certificate of Deposit (CD). It appeared highly unlikely that a strong economy could get born in those miserable circumstances.

2009

The stock market bottomed in March of 2009 at around 6500 on the DJIA during the worst recession since 1982. Unemployment has reached 9.8%, most cyclical industries have been devastated. Auto sales dropped so low that Chrysler and General Motors went into Chapter 11 bankruptcy. Retail sales have been “reset” to markedly lower levels. The U.S. has lost its respect around the world. Homes have fallen in value more than at any time since the 1930’s. Looking back ten years, investors have suffered losses and many commentators are referring to the first decade of the 21st century as the “Lost Decade” for stocks. Numerous asset allocation experts are advising people to reduce their portfolio weightings in stocks and increase ownership in bonds. We believe this advice is being acted on. Bond mutual fund sales have run more than 20 to 1 ahead of equity fund sales since the start of the year.

Huge budget deficits exacerbated by the U.S. Treasury’s TARP program and the Federal Stimulus Bill have convinced economic experts and commentators that whatever economic recovery comes could be accompanied by much higher levels of inflation. Many economists believe that the huge debt overhang left from the prior cycle, which equals around 375% of GDP, will serve as a drag on the economy for years and mute the magnitude of an economic recovery. Banks have such large write offs from the bad loans made in 2002 to 2007 that they are pulling back from lending to even creditworthy borrowers or asking for traditional down payments and collateral levels. Compared to 2007’s levels these requests look onerous. It appears unlikely that a strong economy can get born in these miserable circumstances.

Pick Your Poison

Therefore, which is worse? An economic recovery which requires people to borrow money at ridiculously high interest rates from crippled banks, when houses are the least affordable that they’ve ever been? Or an economy where houses are the most affordable and the mortgages have the lowest rates they’ve had for 50 years from crippled banks in a society that already has seemingly unsustainable overall debt levels? Pick your poison. Did I forget to mention that the first incredibly miserable circumstance was the beginning of one of the greatest bull markets in U.S. stocks in history (1982-1999)? Did I forget to mention that the economy grew immensely and relatively consistently for 25 years? At Smead Capital Management, we don’t believe all the doomsayers out there who say, “It is different this time”. We think that a weak economy going forward is a “Well Known Fact” and is already factored into current prices.

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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Dear Fellow Investors:

We are witnessing one of the greatest battles to control the hearts and minds of investors that we at Smead Capital Management have just about ever seen. In one corner you have PIMCO and their fearless leader Bill Gross, buying longer-term Treasury bonds. They see the world as a giant game of deleveraging as the large U.S. government and household debt is worked off in a muted economic recovery. They see a “new normal” set of spending patterns and higher savings rates leading to slow growth rates and low levels of inflation or possibly deflation. It is our opinion that PIMCO and Gross have been super successful, outperforming other bond market participants for years in one of the best bond investing eras in U.S. history. The amount of money they manage has reached legendary proportions and they have huge influence in the debt markets in which they maneuver.

In the other corner are such heavyweights as Warren Buffett, James Grant and Julian Robertson. Buffett is actively buying stocks in the U.S. He fears that inflation is a natural by-product of all the efforts of the Federal Reserve Board and U.S. Government to stimulate the economy. James Grant, one of the best writers and contrary thinkers in the money world, recently shared his opinions in an op-ed piece in the New York Times. Looking back at history, Grant surmises that the deeper the recession the more explosive and powerful the two to three-year economic rebound has been. He sees the large camp of economists assuming a poor/jobless recovery as a good psychological signal. Julian Robertson, one of the deans of Hedge Fund investing, is short U.S. Treasuries across the board and sees very high interest and inflation rates coming as a consequence of quantitative easing and Federal stimulus efforts. Who should you/we believe?

First, I’d like to give you our SCM caveats. We believe that the merits of the companies we invest in based on our Eight Criteria are the most important factor in how we will do over the next ten years. Second, we don’t believe we can predict the stock market or the economy. We like the fact that our criteria has the tendency to find strong balance sheets, powerful brands, high free cash flow generators and wide moats, because they are more likely to withstand whatever environment plays out.

With caveats in hand, here is SCM’s feeling about the arguments from these titans. Bond mutual funds have been receiving $20 of inflows for every $1 received by equity funds since the beginning of March. In our 29 years, we have virtually never seen that kind of overwhelming popularity get rewarded over the next three years. Therefore, Bill Gross and PIMCO look due to have the markets they dominate become more difficult. Since 1984 we have had a huge bull market in Treasury bonds as they peaked at 14% interest rate. At 3.4% today, PIMCO has mathematics working against them. Near the end of the 1982 to 1999 era, Warren Buffett and common stocks were enormously popular. Buffett spoke in Sun Valley to a group of business owners and executives who had been made mega-wealthy by the bull market in stocks. He told them that stocks would do poorly from then to 2016, if history was any guide. He was spot on, as the next ten years proved to be one of the worst decades in U.S. history for stocks. I don’t hear PIMCO saying anything vaguely similar about bonds today.

We don’t agree with Julian Robertson, primarily because of the speed and magnitude of interest rate increases he is advertising. He looked on T.V. the other day like someone who had a big position going and wants to by-pass the normal holding period to see it succeed. There is little evidence that the over-capitalization of the banks in the U.S. is resulting in any meaningful lending and debt monetization (read “Monopoly Money”). We believe the inflation he fears appears to be years away, not months.

Last, but not least, is James Grant. We believe that he has a few powerful forces working in his favor. The economic coma we entered last year in September lasted until the end of March of 2009. Any discretionary economic activity which occurs in the next six months could cause fairly sizable economic growth numbers and possibly boost consumer confidence and hiring. Maybe as important is how unequivocally negative most market participants are about the long-term future of the U.S. economy. I was around in 1982. There was as much disbelief in the possibility of a rousing long-term comeback in the U.S. economy then as there is now. As fellow contrarians, we believe he must be taken seriously. We should harken our thoughts to some of the widespread belief on the part of investors who may be adding more smoke to the “Mythical Argument.”

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.

Starbucks debuts Via instant coffee in U.S., Canada

by Lisa Baertlein

For more information go to www.reuters.com.

The information contained in this article 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 article 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.

Accenture shares could double, bargain now-Barron’s

by Martine Geller

For more information go to www.reuters.com.

The information contained in this article 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 article 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.