Investment Recap Third Quarter 2011

The best thing about the 3rd quarter is that it is over. Indeed, in the first two weeks of October, markets have recovered almost half of the 14-15% three month losses. Our July letter discussed Congressional “dithering” and problems in Europe, and eluded to the fact that markets and economic growth were being held hostage by the lack of political will. In August thru September, the stock market underwent a selling panic and readers of financial publications became familiar with terms such as “risk-on, risk- off”, high frequency trading, and momentum investing.
Our view continues to be driven by the fundamentals of individual companies and valuation. We believe that the US economy is too broadly diversified and too resilient to be dragged down by the problems of contagion in the European banking sector. (We live in the “rust belt” and know something about resiliency.) We have, however, had some concern that we in the US would or could “talk ourselves into a recession.” Just this morning, the release of favorable consumer spending results for September helped confirm our positive thesis. August consumer numbers were disappointing; probably because people were watching television worrying about whether Congress and the President could reach a compromise on raising the debt ceiling. In our last letter we cited the cheapness of stocks as well as low interest rates and strong corporate balance sheets as positives. Clearly, all of these factors have become even more attractive.
Our stock performance was impacted by the underperformance of small cap stocks in the last quarter. Those valuations have now corrected to a point where we see many opportunities in small, mid and large cap stocks not unlike the opportunities presented in the spring of 2009. Finally, we think it’s appropriate to end with a quote from Winston Churchill. “America will always do the right thing, but only after exhausting all other options.”