More by the Same Author
2015-03-31 00:00:00 Common Stocks: A Garden of Wealth Creation by Bill Smead of Smead Capital Management
We think the reason most investors do not gain the benefit of common stock ownership stems from the blight which comes along about once every five years on average in the stock market. We call this blight a bear market and it usually consists of a decline of greater than 20% in price from the prior stock market peak. There have been nine declines of that magnitude since 1950 in the S&P 500 Index. Three of those declines exceeded 40% and two of them were in the last 15 years.
2014-01-23 00:00:00 Dreman and Lorde: We Will Never Be Royals by Bill Smead of Smead Capital Management
In his 1980 book, Contrarian Investment Strategy, David Dreman opens with an analogy comparing the stock market to a casino with two distinct sides. The "red" room has lots of action and an occasional player striking it rich quickly. In effect, you become royal. Unfortunately, most of the players leave without the money with which they entered, because the house has the odds stacked heavily in its favor.
2014-01-08 00:00:00 David (Active Management) vs. Goliath (Passive Indexes) by Bill Smead of Smead Capital Management
Malcolm Gladwell is a fantastic writer and his new book, David and Goliath, got us thinking about his current thesis: David as a poster child for underdogs is a mistake. Gladwell contends that David had significant advantages over Goliath. In true Gladwellian form, he incorporates a myriad of disciplines to defend his thesis. And in true Smeadwellian fashion, we would like to add stock picking to the list of disciplines that strengthen Gladwells argument.
2014-01-02 00:00:00 The Enduring Nature of Saving Mr. Banks by Bill Smead of Smead Capital Management
Warren Buffett has admitted that selling Disney in 1966 was the biggest mistake of his entire career.
2013-12-18 00:00:00 The Milken Rule and Wide/Sustainable Moats by Bill Smead of Smead Capital Management
This is my 34th year in the investment business. You might not be aware that I trained and worked at Drexel Burnham my first nine years in the business. Michael Milken was the driving force behind the success and profitability of my original firm. What happened to Drexel and Mike Milken in the late 1980s is a study in how to have a brilliant vision and how to handle a business with a very wide moat. Its demise has created what I call the Michael Milken rule and we believe it should be used in present day analysis, in particular when it comes to evaluating moats.
2013-12-10 00:00:00 Macro Factors Distract Wealth Creation by Bill Smead of Smead Capital Management
What do Obamacare, Federal Government debt/budget deals, Quantitative Easing and jobs data have in common? To us they are all types of macroeconomic factors on which most investors focus. We believe the reason most investors focus on these types of news stories is because they can influence the US stock market over the next six to twelve months instead of the next 10 to 20 years. In this missive, we would like to challenge everyones thinking about their ultimate goal for investing in the stock market and the behaviors which lead to wealth creation.
2013-12-03 00:00:00 High Quality and Time-Horizon Arbitrage by Bill Smead of Smead Capital Management
At Smead Capital Management, we love to acknowledge financial journalists who really demonstrate an understanding of the underlying truths associated with high-quality and long-duration common stock investing.
2013-11-21 00:00:00 US Stocks for a Baby Boom by Bill Smead of Smead Capital Management
As contrarians, we at Smead Capital Management frequently get questions about stocks like Gannett (GCI), Bank of America (BAC) and eBay (EBAY). To understand how excited we are to own these common stocks you need to understand how a long-duration common stock portfolio would benefit from the coming baby boom in the developed world. Thanks to wonderful research from The Bank Credit Analyst (BCA), we can understand the demographics of developed nations like the US. BCA concluded that a "baby boom" is coming in the US and in other developed nations.
2013-11-12 00:00:00 Dream to Outperform the Market by Bill Smead of Smead Capital Management
If you dream about investment market outcomes which are already popular in the marketplace, your dreams can turn into nightmares. The Everly Brothers 1958 hit song, All I have to do is Dream tells us a great deal about the long-term posture of investors in late 2013 and how dreams can turn to nightmares. On the other hand, if you dream about an outcome which most experts arent expecting, the rewards can be explosive.
2013-11-05 00:00:00 Even Economists Get Stuck Looking in the Rearview Mirror by Bill Smead of Smead Capital Management
Will the US economy grow in an above-average way in the next ten to twenty years or do we need to resign ourselves to an era of anemic economic growth? Two pieces of information came out this week, adding to existing information on the subject and speak to this core debate in the US stock market. The first piece was called Slowing to a Crawl by Jonathan Laing from Barrons.
2013-10-30 00:00:00 The Thermometer of the Stock Market by Bill Smead of Smead Capital Management
As long-duration owners of common stock, we believe it is the wealth created by the businesses which causes the owners to prosper. We have also been participants in the US stock market since 1980 and are very aware of big swings in enthusiasm for owning common stocks. So we thought it would be helpful to share our opinion on the current temperature of the market. To take the temperature of the market we need to examine the thermometer readings.
2013-10-10 00:00:00 Frustrating the Most People by Bill Smead of Smead Capital Management
A venerable sage once said, "The markets do whatever they have to do to frustrate the most people." For the long-duration investor, this means that you need to look at what people are invested in to determine where the frustration will come from. Thanks to the Associated Press, we know what the masses have done with their investments in the last five years.
2013-10-02 00:00:00 The Death Knell of Global Synchronized Trade by Bill Smead of Smead Capital Management
At Smead Capital Management, we believe the interest on September 18th in emerging markets, oil and gold are the last gasps of a dying trend. Our discipline demands that you must avoid popular investments and completely avoid investments attached to a perceived new era. We argue that the international investment markets reaction to Bernankes reprieve on September 18th is proof of a vision we have of the future.
2013-09-25 00:00:00 Bernanke's Temporary Reprieve by Bill Smead of Smead Capital Management
There is no nice way to state this opinion: the end of Quantitative Easing and the ultimate allowance of the open market to set interest rates will create a grueling multi-decade bear market in US bond investments. Higher rates mean the re-pricing of existing bond instruments to lower prices and the principle risk of longer-dated maturities getting exposed. In 1983, I remember people losing approximately 15% of their market value in one year as Treasury interest rates rose from 11% to 14%, temporarily crushing owners of 25-year tax-free unit trusts.
2013-09-18 00:00:00 Dow Changes as a Contrary Indicator by Bill Smead of Smead Capital Management
The folks who select the companies in the Dow Jones Industrial Average (DJIA) came out with their latest changes on Monday, September 9, 2013. They removed Bank of America (BAC), Hewlett Packard (HPQ) and Alcoa (AA) from the DJIA. Added to the index were Visa (V), Nike (NKE) and Goldman Sachs (GS). At Smead Capital Management, we are always looking for important psychological clues to human behavior as it pertains to the popularity of common stocks.
2013-09-10 00:00:00 Oil Has Too Many Plumbers by Bill Smead of Smead Capital Management
Weve never quite understood why most sensible people dont apply the same economic logic to investing that they do to any other business. Take plumbing for example. If your town has 10 main plumbing companies and 10 more move into town, your economic mind tells you that the added competition will drive down profits. On the other hand, if five of the plumbing companies go out of business, profits should rise over time.
2013-09-05 00:00:00 Exponential Business Success by Bill Smead of Smead Capital Management
At a major conference in November of 2012, the futurist, Peter Diamandis, shared the concept behind his book, Abundance: The Future Is Better Than You Think. Diamandis, a graduate of MIT and Harvard Medical School, has been a thought leader in everything from space travel (International Space University and X Prize Foundation) to the Internet. His concept is simple. He believes that participants in the US economy and US stock market are drastically underestimating the exponential success which comes from the unlimited impact of the Internet and technology.
2013-08-28 00:00:00 Forrest Gump Stock Market by Bill Smead of Smead Capital Management
After watching "Forrest Gump" for about the thirtieth time recently, I realized that the US economy and US stock market share a great deal in common with Forrest. In this missive, we will be reminded of the journey of a true American folk hero and of the journey back from the abyss the US economy and stock market have made since early in 2009.
2013-08-21 00:00:00 Trickle-Up Economics by Bill Smead of Smead Capital Management
Major magazines have a history of putting a topic on their cover at the end of a long-term trend. For example, The Death of Equities was a Business Week cover in late 1979, near the end of a miserable stretch in the US stock market. Times recent cover story, The Childfree Life, got us wondering about the economics of childbearing in the US? Does Times cover mark the end of a trend? Can the US economy succeed without homegrown population increases? Will economic success driven by the current demographics in the US trickle down to unemployed blue collar
2013-08-13 00:00:00 China's Government Can't Stop the Bust by Bill Smead of Smead Capital Management
On a recent trip to Europe we participated in a forum in Milan of five stock picking organizations. Two were from Brazil, one was from Malaysia and one was picking stocks inside China via the Shanghai Stock Exchange. We believe what they said was an enticement to investors for the purpose of getting them excited about stocks in their country. To us, this reveals a great deal about where prices in emerging stock markets and commodities are headed over the next five to seven years.
2013-08-07 00:00:00 Fear Capital Misallocation Not Market Cycles by Bill Smead of Smead Capital Management
A great deal of time and energy is spent trying to determine when the current bull market in stocks will end. We at Smead Capital Management make no effort to time the stock market because after 33 years in the investment business Ive never found anyone who did it successfully. We do try to avoid capital misallocation and thought you might want to look at the history of the investment asset classes to see how periods of popularity lead to misery and periods of misery lead to above-average returns.
2013-07-30 00:00:00 Royal Babies and Economic Growth by Bill Smead of Smead Capital Management
On a recent business trip to Europe, we noticedanecdotallya lack of hope in the economic future of Europe. There is a good reason for the lack of hope. Hope, we believe, comes in the form of new life. When all of the austerity being practiced in developed nations around the world is pretty much done, something else needs to happen for economic growth to take hold. At Smead Capital Management, we believe developed economies need rebirth and the birth last week of a son to the Royal family is a watershed event.
2013-07-23 00:00:00 Will Buffett Be Right on Wells Fargo? by Bill Smead of Smead Capital Management
A long time friend once said, "Bill, on the stocks that worked it didnt make any difference what you paid!" What he was referring to were the stocks which rose to many times your original purchase price and the investors who participated over the long run in the shares ended up happy and wealthier. Is Wells Fargo (WFC) one of those companies and will Warren Buffetts recent purchases get vindicated? As we enter the second half of 2013, this is a great discussion point for long-duration common stock investors in a market which has been strong since September of 2011.
2013-07-17 00:00:00 Hopelessly Devoted To You by Bill Smead of Smead Capital Management
A journalist from Fortune magazine once asked Andy Grove, the former CEO of Intel, for the best business advice hed ever been given. Grove provided a simple quote from a former professor at City College of New York: When everybody knows that something is so, it means that nobody knows nothin.
2013-07-10 00:00:00 Employer Mandate: A Pharma Bump in the Road by Bill Smead of Smead Capital Management
As long-duration value investors, we at Smead Capital Management have been very attracted to the conservative accounting, shareholder friendly dividends/buybacks and bright pipeline futures of major pharmaceutical/biotech companies like Merck (MRK), Pfizer (PFE) and Amgen (AMGN). Lately, there has been weakness in these shares and we’d like to review our best theory for recent fears and price weakness, while reviewing the merit of these high quality shares.
2013-06-26 00:00:00 Win Ben's Money by Bill Smead of Smead Capital Management
From 1997 to 2003 a show called, Win Ben Steins Money ran on the Comedy Central Network. The last five years, investors in the US have been playing a very similar game we are calling, Win Bens Money. The new game stars Federal Reserve Board Chairman, Ben Bernanke. The object is to win the money the Fed creates via Quantitative Easing (QE) through macroeconomic analysis. In this missive, we will look at how these investors chased Bens Money and consider what to do going forward.
2013-06-19 00:00:00 The Art of Low Turnover by Bill Smead of Smead Capital Management
We have argued vociferously that active managers have given up their preferred position in the investing marketplace to passive indexes because of high turnover. A recent Wall Street Journal article referenced 78% turnover as being the average among large-cap US equity funds. Studies have shown that as much as 144 basis points each year in return is chewed up by trading costs. Explaining turnover and its impact is one thing, but it is more important to ask a question. How do you practice low turnover while seeking maximal long-term performance?
2013-06-07 00:00:00 Portfolio Comfort in Stock Splits by Bill Smead of Smead Capital Management
We have noticed that there has been a dearth of stock splits among the S&P 500 index companies in the last 5 years. Our observation is that the natural habitat for stock splits is normally a multiple-year market upswing and numerous stocks trading over $60 per share. What does the history of stock splits tell us about where we are in the long-term stock market cycle for the S&P 500 index? Who will the marginal buyer of common stocks be in the near term and what do stock splits teach us about who the marginal buyer is?
2013-05-30 00:00:00 Cyclical Securities: Too Early? by Bill Smead of Smead Capital Management
We have been making a number of arguments about various asset classes over the last three years and we would like to keep our readers very aware of the progress being made in these markets. We have argued that a secular bear market is in place for commodities and US company shares which are attached to the commodity cycle. Additionally, we maintain that there is a secular bear market operating under the surface in emerging equity markets. We believe that July of 2011 was the beginning of the secular bear market involving a number of asset classes beyond just commodities and emerging markets.
2013-05-22 00:00:00 Is There Value in Today's Stock Market by Bill Smead of Smead Capital Management
Due to the recent strength in the US stock market, we thought it would be helpful to followers of Smead Capital Management to understand the history of our core investment beliefs and where our portfolio is in relation to those core beliefs. A review of the ongoing tension between valuation mattering dearly and the enormous benefits of long-term business ownership is especially interesting after a significant upward move in the stock market. How do you keep turnover and trading expense low, while maintaining a meaningful margin of safety?
2013-05-15 00:00:00 Yen Weakness: Buffett's "Shot Heard Round the World'" by Bill Smead of Smead Capital Management
We returned recently from the Berkshire Hathaway Annual Shareholder Conference. The most exciting and profound comment to us was what Warren Buffett said about the unprecedented actions the last three years by the Federal Reserve Board. Buffett was asked about the risks of the Federal Reserves current plan to buy Treasuries to keep interest rates very low.
2013-05-08 00:00:00 Screaming Bear Market Rally" by Bill Smead of Smead Capital Management
In the summer of 2009, I was a regular guest on CNBC shows like Larry Kudlow. We believe we were invited to participate in those panel discussions because we were the token bull in the conversation and I am obnoxious enough to state my piece against significant mental and verbal opposition. The US stock market had bottomed in March of 2009 and rallied explosively into the late spring and early summer. What reminded me of this is the news coverage and expert reaction to the recent collapse in commodity prices, especially gold and corn.
2013-05-01 00:00:00 The Road to Omaha: Volatility or Wealth Creation by Bill Smead of Smead Capital Management
This is the last installment in our five part series called The Road to Omaha. In this series of missives we have looked at the keys to the investing success of Warren Buffett leading up to the 2012 annual meeting.
2013-04-24 00:00:00 The Road To Omaha by Bill Smead of Smead Capital Management
We have been discussing keys to the investment success of Warren Buffett and Berkshire Hathaway as we approach the 2013 annual meeting. In this week’s edition, we are considering a company which might make a good “elephant” for Berkshire to buy.
2013-04-18 00:00:00 The Road to Omaha: Own High Quality Businesses by Bill Smead of Smead Capital Management
We are spending the five weeks leading up to the Berkshire Hathaway Annual Meeting focusing on investment keys which are important to both Warren Buffett and Smead Capital Management. This week our focus is on owning high quality businesses.
2013-04-10 00:00:00 The Road To Omaha: Being a Business Owner by Bill Smead of Smead Capital Management
In this five-part series leading up to the Berkshire Hathaway Annual Meeting, we discuss the keys to Warren Buffetts investment success. We believe these keys are available to all of us and are a part of the discipline of stock-picking at Smead Capital Management.
2013-04-04 00:00:00 The Road To Omaha: Valuation Matters Dearly by Bill Smead of Smead Capital Management
Valuation is the topic that will begin a month-long series were calling, The Road to Omaha. In the next five weeks as we build to the Berkshire Hathaway annual shareholder meeting, we will present a picture of Mr. Warren Buffet and his investments through the Smead Capital Management lens. There is one central fact on which Warren Buffett, efficient market theorists, and Smead Capital Management agreevaluation matters dearly.
2013-03-27 00:00:00 Mark Hulbert: Our Kindred Spirit by Bill Smead of Smead Capital Management
Mark Hulbert and I started in the investment business in 1980. He chose to create a business out of analyzing the results and psychological implications of investment newsletter writers. At Smead Capital Management, we formed a business to analyze publicly-traded US common stocks through the prism of our eight proprietary criteria. We enjoy his unbiased third-party opinions on current circumstances and his consistently good historical perspective.
2013-03-21 00:00:00 The Constancy of Dividends by Bill Smead of Smead Capital Management
The payout ratio on the S&P 500 Index currently hovers around 30% of the after-tax profits of companies in the indexat the low end of the last 100 years. In comparison, the capital appreciation portfolio here at Smead Capital Management has a payout ratio of 27%. This is important because most studies show that over 40% of the returns provided by common stocks come from dividends over long stretches of time. With those figures in mind, we reasoned that this is a good juncture to remind everyone about our vision of the next ten years as it pertains to dividends.
2013-03-13 00:00:00 What's Your Advantage? by Bill Smead of Smead Capital Management
In the March 9, 2013 issue of Barrons, writer Jonathon Laing wrote an excellent piece about Howard Marks. This article provides the base from which we can discuss the main components of investment portfolio composition. These components are information, analysis of information, and decisions made from information and analysis. In doing so, we will bring to light why we believe todays best opportunity is in long-duration common stock investing.
2013-03-06 00:00:00 Smooth Returns by Bill Smead of Smead Capital Management
Harry Markopolos was working for a hedge fund of funds and attempting to put a portfolio together that would "smooth" long-term returns. In the process of marketing what his company was doing, he ran into a client who already had a money manager doing that for him. The money manager the client used was Bernie Madoff. When Markopolous looked at the long-term track record of Madoff's client, he instantly knew that it was mathematically impossible to have a return that high with as little year-to-year variance in the return. We at Smead Capital Management would like to ask a few questions.
2013-02-26 00:00:00 2013, Losing the Bid by Bill Smead of Smead Capital Management
Many times in my 32-year career people ask me to comment on whether an established trend for a popular investment will stay intact. My answer is always the same. We don't know when the hot streak will end for the popular investment and we don't feel comfortable with popular securities. In our view, there is a dramatic difference in what you do with popular investments based on whether they areto use terms borrowed from Warren Buffett currency assets, unproductive assets, or productive assets. It has to do with the ability to sell and the liquidity you have when the popularity disappears.
2013-02-22 00:00:00 Muscle Memory or Muscle Training by Bill Smead of Smead Capital Management
Interest rates have gone down on US Treasury bonds off and on for 31 years. This means that the coupon you are being paid has been joined by significant capital gains. Jim Grant argues that the only thing going for bonds is how well handlers of money have done on them; Warren Buffett calls it "rear-view mirror investing".
2013-02-13 00:00:00 Our Job: Whether; Market's Job: When by Bill Smead of Smead Capital Management
Warren Buffett describes the stock market's purpose as being "a wonderfully efficient mechanism for transferring wealth from the impatient to the patient". We are reminded of this by a series of news reports and commentaries on subjects greatly influenced by basic economics. In today's missive, we consider what the law of supply and demand says about China, oil, and housing in the USA.
2013-02-06 00:00:00 Too Active, Too Passive: Too Little Understanding by Bill Smead of Smead Capital Management
The wealth management and institutional consulting communities have allowed indexing to be called "passive" investing and stock-picking disciplines to be called active management. This implies a mindless approach to indexing and a great deal of busyness to stock picking. We at Smead Capital Management believe these labels are at the heart of a great deal of confusion about what works and what doesn't work in both equity mutual funds and separately managed accounts.
2013-01-24 00:00:00 10-Year Shiller P/E Exposes Cyclical Overvaluation and Undervaluation by Bill Smead of Smead Capital Management
Last week we spoke to the Washington Hay Growers Convention in Kennewick, Washington. Those who grow hay have enjoyed a very similar boom in the last twelve years that wheat and corn growers have enjoyed. The parking lot was full of nearly new heavy duty trucks and the convention floor was packed with $400,000 to $700,000 farm implements from major manufacturers. These farmers have been feasting in the boom and it got me thinking about how to correctly value cyclical businesses, because at Smead Capital Management valuation matters dearly.
2013-01-15 00:00:00 It's Not What Happens That Matters by Bill Smead of Smead Capital Management
Late in 2008 and in early 2009, a group of what we like to call "brilliant pessimists" hit the airwaves with their economic theories. The prognosticators' vision of the future was and is predicated on the history of similar situations and the mathematical realities of the huge debt overhang from the prior ten years of profligate economic behavior. They put very effective names on their visions like "new normal" and "seven lean years". They marketed their visions incredibly well to the point of shaming anyone who might disagree with their theories.
2013-01-10 00:00:00 Things Can Only Get Better by Bill Smead of Smead Capital Management
As long-duration common stock owners, we at Smead Capital Management don't put much emphasis on predicting the year-to-year movements in the stock market. We expect at least a 10 percent or greater decline during each year and a greater than 20 percent decline at least once every five years. With that caveat in place, we will throw our two cents into the debate about what the US stock market will do in 2013.
2012-12-21 00:00:00 How to Screen for Wonderfully Boring Stocks by Bill Smead of Smead Capital Management
In a December 7, 2012 piece for Barrons.com, Mark Hulbert shared the research from a study called "Low Risk Stocks Outperform within All Observable Markets of the World." The study, written by Nardin Baker and Robert Haugen, convincingly made the argument that boring stocks are wonderful for superior compounded returns regardless of which country you measure.
2012-12-12 00:00:00 Does China Pass the Smell Test? by Bill Smead of Smead Capital Management
We at Smead Capital Management believe that prolonged faith in China's economy and the belief that emerging market growth will be an elixir for developed market multi-national companies is the erroneous gift that just keeps giving. If China's economy has been successfully soft landed from its boom, why is the internal Shanghai Composite index making new lows as recently as last week (November 29th, 2012)?
2012-12-04 00:00:00 Economics 101: Little Return without Risk by Bill Smead of Smead Capital Management
A tremendous amount of energy and effort has been expended in the US on behalf of wealthy investors to secure returns while reducing risk. Like any useful endeavor, it started out as a wise thing and reached its stride in the late 1990s as a way to deal with a massive asset misallocation. As Warren Buffett always says, What the wise man does at the beginning, the fool does at the end. It appears to us that the efforts to eliminate risk in the US capital markets have reached the foolish point.
2012-11-13 00:00:00 Argo and Ethel: America Has Never Been a "Rose Garden" by Bill Smead of Smead Capital Management
We recently had the pleasure of seeing a movie, Argo, and a documentary on HBO, Ethel. Argo is the story of the rescue of the six Americans from the Canadian Ambassador's residence at the time of the Iranian takeover of the US Embassy in Teheran. Ethel is a documentary which tells the story of Ethel Kennedy, the wife of Senator Robert Kennedy. It was produced, directed and narrated by Ethel Kennedy's youngest daughter, Rory. I rate both of these films highly and believe they tell US investors something they need to be reminded of.
2012-11-07 00:00:00 US Olympic Swim Team and Warren Buffett: Buy and Hold by Bill Smead of Smead Capital Management
The US swim team has their own criteria for developing young athletes. We assume in every ten-year stretch that they support the swimming efforts of 25 to 30 young athletes in hopes of finding an occasional Mark Spitz or Michael Phelps. Most of them share the characteristics we described about Michael Phelps. The US Olympic team is the most successful swim team portfolio manager in the world. What can we learn from them as portfolio managers?
2012-10-24 00:00:00 Voluntary Exile by Bill Smead of Smead Capital Management
We at Smead Capital Management (SCM) believe that institutional and individual investors have moved their asset allocation away from large cap US stocks. Institutions are in exile in private equity, hedge funds and all things commodity and BRIC-trade related.
2012-10-17 00:00:00 Great US Companies: Tomorrow's Foundation by Bill Smead of Smead Capital Management
Fears of a collapse in European economies and of a US recession subsided. Residential real estate appears headed for a comeback (Surprise?) in the US and nothing gives American consumers more confidence than knowing that their house is becoming more valuable.
2012-10-03 00:00:00 Circle the Wagons on GLD by Bill Smead of Smead Capital Management
We spoke to two small groups in Spokane on September 21st, 2012. For better or worse, when I think of Spokane I think of my cousin Gary. It was 1981 and yours truly was a young stockbroker at Drexel Burnham Lambert. Gold had been in a wonderful bull market ride in the prior five to ten years. Gary was interested in participating in gold through a gold-mining stock traded on the Spokane Stock Exchange. Spokanes proximity to the Northern Idaho mining towns and closeness to the Canadian border made it a natural place for commodity traders and mining enthusiasts to gather to transact business.
2012-09-26 00:00:00 The Predictive Power of Dividends by Bill Smead of Smead Capital Management
In an article published by Marketwatch.com on September 21, 2012, Mark Hulbert asks the question, "Where do you think the stock market will be ten years from now?" It was as a lead into the results of a predictive model from Rob Arnott, founder of Research Affiliates. His model argues that current dividend yields go a long way to predicting ten-year forward returns. Other than a big glitch in the 1990's, it appears to have some value.
2012-09-11 00:00:00 US Stock Market Sentiment in a World of Wide Asset Allocation by Bill Smead of Smead Capital Management
Our long-time readers are aware that we are stingy when it comes to trading and big believers of keeping trading costs low at Smead Capital Management. Despite these natural inclinations, we do try to keep the pulse of sentiment in the US stock market.
2012-09-04 00:00:00 Risk Mitigation by Bill Smead of Smead Capital Management
How did the job of an asset allocator move from seeking out undervalued asset classes and securities to one of seeking to mitigate risk? Is risk mitigation a worthy goal or even possible without abandoning real return goals? When and why did wealth creation become wealth management? What opportunities exist today for those who seek wealth creation through intelligent risk taking?
2012-08-22 00:00:00 Relative Value by Bill Smead of Smead Capital Management
Everyone wants to wait for the perfect time to buy into the stock market or into any major investment market. They want to enter at historically cheap prices or at "absolute values". We at Smead Capital Management believe that these people are kidding themselves and everybody else. At the time of historical lows and "absolute value" those same folks are too mortified to pull the trigger and always come up with the reason that "it's different this time". Inertia rules the day.
2012-08-14 00:00:00 Oil: Does Supply and Demand Matter? by Bill Smead of Smead Capital Management
We believe the long-term demand for oil will be greatly influenced by where the world gets its best future growth. As the chart below shows, the US has cut by 50% the amount of energy which is required to generate each dollar of Real Gross Domestic Product (GDP).
2012-08-08 00:00:00 Stock Pickers: "Somebody I Used to Know" by Bill Smead of Smead Capital Management
Art has a tendency to express culture. One of today's catchiest songs does a great job of explaining the relationship between institutional/individual investors and US common stock picking. The song captures what has happened since the summer of 1999, when Warren Buffett warned investors about forward stock market returns because of a love affair that institutional and individual investors were having with US large cap stocks.
2012-07-31 00:00:00 The Price of Glamour by Bill Smead of Smead Capital Management
The list of glamorous growth stocks getting hit by what we call "minefield" price declines is getting fairly long. Some of the more influential names which have suffered sharp, swift declines include Nike (NKE), Chipotle (CMG ), Facebook (FB), Coinstar (CSTR), Starbucks (SBUX) and the King of the Glam stocks, Apple (AAPL). Is there a pattern here that matters? If earnings growth is hard to come by, what are the most important themes for long-duration common stock investors?
2012-07-25 00:00:00 Caterpillars aQuantive by Bill Smead of Smead Capital Management
One of our eight proprietary criteria for stock selection is shareholder friendliness. Buying another company whose industry has enjoyed unusual prosperity is not shareholder friendly. Recently, as an example, Microsoft (MSFT) admitted what most of us already knew. Microsofts online business is a massive destroyer of capital and shareholder value. They wrote down the value of their acquisition of aQuantive by $6.2 billion.
2012-07-12 00:00:00 Math, History and Psychology - Part 3 by Bill Smead of Smead Capital Management
Over the years, we have heard Charlie Munger state that Psychology is the most underrated and underutilized of the major academic disciplines in business and investing. Andy Grove backed this up in a Fortune magazine interview by telling about the best business advice he had ever received. His City College of New York professor told him, When everybody knows that something is so, it means nobody knows nothin.
2012-07-10 00:00:00 Only the Lonely Can Play by Bill Smead of Smead Capital Management
Human beings prefer to buy shares of a common stock which have gone up in price recently. They prefer to participate in styles and sectors which have done better in the most recent five to seven years. Lastly, human beings prefer to make money sooner, rather than later. Fortunately for us, THE MOTELS wrote and performed a song back in the early 1980s (Only the Lonely), which explains what we need to do in the marketplace as we look out into the second half of 2012.
2012-07-05 00:00:00 Math, History and Psychology - Part 2 by Bill Smead of Smead Capital Management
Last week we wrote about the math of common stock investing and the effectiveness of mathematical discipline to portfolio management. This week we will focus on history and the importance of that academic discipline to us as common stock portfolio managers here at Smead Capital Management (SCM).
2012-06-26 00:00:00 Math, History and Psychology by Bill Smead of Smead Capital Management
In my 32 years in the investment business, success in common stock investing seems to come down to math, history and psychology. At Smead Capital Management (SCM), we have built our investment discipline and our eight proprietary criteria around these academic subjects. With the stock markets gyrating wildly the last few weeks, we thought it would be helpful to see where we are today in each of these disciplines. We will start this week with our view on the math section.
2012-06-19 00:00:00 Down and Out in Wenzhou by Bill Smead of Smead Capital Management
Much like in the US in 2006, the Chinese government officials and the worldwide media need to believe that what is going on in Wenzhou is not the first domino in a series of dominos which fall over the next two years. The Chinese economy and its miracle of the last 30 years were originally driven by the competitive advantage of cheap labor.
2012-06-05 00:00:00 Rational Despair and Analogous Situations by Bill Smead of Smead Capital Management
Randall Forsyth of Barrons wrote a piece on May 31st, 2012 called, Irrational Exuberances Flip Side Seen in Low Bond Yields. It reminded me of the following and wise joke. A younger person asks an older person, How do you succeed in business? The older person says, Good Decisions. The younger person says, How do you make good decisions? The older person answers, Through experience. The younger person asks, How do you get experience? The older person answers, Bad decisions.
2012-05-30 00:00:00 Gannett: Where Buffett Meets Zillow by Bill Smead of Smead Capital Management
You will be surprised to hear that I am somewhat addicted to keeping track of the value of the home we have in the Seattle area and the one in Scottsdale, Arizona. It seems that Zillow uses comparisons to recent sales as the primary vehicle to come up with their Zestimates. We believe at Smead Capital Management (SCM) that comps are a useful tool in valuing common stocks. They are even more useful if the transactions are recent and spectacularly useful if the comps come from a savvy buyer. We would like to run our version of a Zillow estimate on Gannett (GCI).
2012-05-22 00:00:00 Were Off to See the Wizard by Bill Smead of Smead Capital Management
In October of 2010 we explained in a missive called The Wizard of Oz that investors had put too much confidence in the ability of a group of Chinese National, US-educated economists to manage the China economy. Thanks to the writing of Ambrose Evans-Pritchard in The Telegraph on May 13th of 2012, we can see just how successful the Wizard has been in perpetuating the myth that China can be the first major world economy to defy business cycles.
2012-05-16 00:00:00 The Vision Thing II by Bill Smead of Smead Capital Management
In May of 2010 we wrote about how important it was for the companies which meet our eight criteria to have a strong vision and clear agenda for their business. We believe that every five to ten years those who manage money need to "cast a vision" of where they want to take investors and then backtrack from there to put a portfolio together to best take advantage of the vision cast. We believe there are three main roadblocks to the casting of a vision for the execution of a portfolio plan. In the absence of more attractive titles, we will call these roadblocks fog, bog and smog.
2012-05-02 00:00:00 One Up on Wall Street by Bill Smead of Smead Capital Management
Peter Lynch went to the mall with his wife back in the days when he ran Fidelity Magellan. The purpose was to see what stores were getting good traffic and creating a buzz. Peter felt this was an advantage the average individual investor had over the professionals on Wall Street. We like to buy companies in the Warren Buffett-Charlie Munger tradition. We like to buy most during periods of pessimism ala John Templeton. We use our proprietary eight criteria for selecting. Finally, we get excited when the current evidence hints that we are onto something, getting good traffic and creating a buzz.
2012-04-24 00:00:00 Real Career Risk by Bill Smead of Smead Capital Management
Real career risk is too many people doing what you do for a living. Granthams problem is that every day three million brilliant people get up and spend most of their waking hours trying to practice wide asset allocation. Most of those three million brilliant people have strong backgrounds in economics and lean on their ability to make macroeconomic predictions. Too many people are doing the same thing at the same time for a living. Therefore, they need to either move to another town or wait patiently for most of the other bright people to take up another profession.
2012-04-18 00:00:00 Stock Picking in a World of Profit Margin Mean Reversion by Bill Smead of Smead Capital Management
We feel investors should avoid capital intensive companies which are tied to commodities or emerging markets. As interest rates rise and capital becomes dear, those who eat capital lose and those with strong balance sheets and who generate high and consistent free cash flow, should win. As Buffet, Grantham, Hutchinson and Stein pointed out, someone loses in the reversion to the mean of profit margins when compared to GDP. Lastly, dont be fooled by those who are bearish on the stock market because of their belief in profit margin reversion.
2012-04-10 00:00:00 Which Stocks Win on Main Streets Comeback? by Bill Smead of Smead Capital Management
We are very excited about the next three to five years because we believe it is likely that Main Street will start to compete with Wall Street for capital and economic growth will accelerate. Unemployment rates would fall in that scenario and pent-up demand for goods and services could come out of the woodwork among average American households. What we mean by saying this is that capital will begin being demanded for business activities. As capital gets demanded for business activities ranging from housing to business expansion, the cost of capital will rise and bond prices would fall.
2012-04-03 00:00:00 The Value of Sentiment Polls by Bill Smead of Smead Capital Management
In our opinion, those who are very bearish about the US stock market need a substantial price increase to trigger historically extreme newsletter writer sentiment. Those who are optimistic should prefer a temporary correction or sideways movement to reinforce fear on the part of the crowd. This would cause the bullish and bearish readings to gravitate to toward each other and remove the risk of having some temporary hell to pay for those of us who seek to practice long-duration common stock investing.
2012-03-27 00:00:00 Buy Commodities, Sell Brands by Bill Smead of Smead Capital Management
Warren Buffett was quoted the other day saying, We like companies which buy a commodity and sell a brand. We thought it would be very helpful to unpack his thought and put it into the context of today. We believe these current circumstances are framed by the historical over-pricing of commodities, the coming economic contraction of China, the successful cleansing of the income statements of US households and the inevitable rebound in housing in the US. We will look at the makeup of our portfolio companies which buy a commodity and sell a brand to consider their upside in this environment.
2012-03-20 00:00:00 Has Anybody Seen My Old Friend Doomsday? by Bill Smead of Smead Capital Management
Commodities have never been more popular or seen wider participation in my 32 years in the investment markets. The idea that more people existing is justification for higher commodity prices has constantly been refuted over the last 100 years. For example, we feel that if more people means perpetually rising commodity prices, they would have gone up all the time. In our opinion, China's hard landing is already happening. When China's debacle is obvious to everyone, commodities and stocks related to them will be the lepers of the investment world.
2012-03-15 00:00:00 Mr. BRIC Trade is on Our Side by Bill Smead of Smead Capital Management
A recent article in "The National" quoted Jim O'Neil as saying that current supply and demand for oil indicates that $80 to $100 per barrel for Brent Crude would be a fair price. O'Neil is a very savvy economist for Goldman Sachs, who coined the phrase BRIC trade back in 2001. Since that qualified him as an investment "Wayne Gretsky", we believe his thoughts are worthwhile. O'Neil argues that there are no winners in a war over Iran's nuclear capability. Therefore, he argues that the $25-35 premium in the price per barrel, would disappear by summer. We agree wholeheartedly.
2012-03-06 00:00:00 Defining Risk: Warren Buffetts Three Kinds of Investments by Bill Smead of Smead Capital Management
In his 2011 letter, Warren Buffett explained the purpose behind investing, the real definition of risk, and the three types of investments which congregate the marketplace. We believe Mr. Buffett struck at the core of the problem that most investors are having. They are defining risk primarily by what happens in the next twelve months, while the Oracle of Omaha is thinking in five to ten-year time frames, at a minimum. These short time frames are combined with eyes locked on the rearview mirror, inhibiting investors from participating in wealth creation as we look out into the future.
2012-03-05 00:00:00 Is Popularity Ruining Indexing? by Bill Smead of Smead Capital Management
Scarcity creates value in economics. In our view, what is scarce today is an equity manager doing long-term/long duration equity analysis and institutions/individual investors willing to employ them. Since 33% of the stock market is indexed and most of the other 67% works in very short analytic time frames, we believe the market must be as inefficient as it has ever been. Time is the ally of the long-duration common stock investor and we believe more so now, because indexing is getting too popular and investing in short durations is at epidemic levels.
2012-02-15 00:00:00 Not in My Lifetime by Bill Smead of Smead Capital Management
The weak dollar and international economic fears have sparked multi-year bull markets in gold, oil and most major commodities. This has forced asset allocators at the largest institutions, consulting firms, registered advisory firms and financial advisor networks to over-emphasize all aspects of the capital eaters and the longer-term Treasury bonds which compete for these dollars. In effect, the Federal Reserve Board caused the last of the unbelievers to give up in early February because it does not appear that rates will rise in our lifetime.
2012-02-01 00:00:00 What is a Moat? by Bill Smead of Smead Capital Management
Our investment committee talks about the moat of a business a great deal. We believe that a wide moat is provided by the aspects of the company and their business which prevent competition from damaging highly sustainable profitability. Wide moat is one of our eight proprietary criteria for selecting common stocks. We have seen a number of organizations begin to include logic associated with moats into their equity research formats. Unfortunately, we believe many market participants confuse the by-products of a moat with the actual moat itself. We think this spells opportunity.
2012-01-19 00:00:00 Mission Impossible: Why Chinas Soft Landing Will Look like the One We had in the US in 2007-2009 by Bill Smead of Smead Capital Management
Last week the Federal Reserve Board released the minutes of its meetings in 2006. There were discussions of the current economy, numerous credit tightening moves and a consistent belief in the idea that the US and its policy makers could engineer a soft landing from our real estate bubble. The landing that we had from our real estate bubble was the hardest landing since the Great Depression. Now we believe all the pieces are in place for a hard landing in the China real estate markets.
2012-01-12 00:00:00 Nero (Iran) Fiddles While Rome (China) Burns by Bill Smead of Smead Capital Management
What is required for a whopper of a secular bear market is for most market participants to believe the positive side of the story all the way down. We believe that all the pieces are in place for commodities to suffer a multi-year bear market which will wipe out up to 70% of peak prices on most major commodities. We want to make sure everyone sees the potential for a massive reversion to the mean. In our opinion, the recession coming in Chinas economy will break the back of oil prices for decades. Lower oil prices could strip the economic relevance of Iran, Saudi Arabia, Syria and Yemen.
2012-01-04 00:00:00 Ebay and Amgen: Dividends Do Matter by Bill Smead of Smead Capital Management
We are owners of both EBay and Amgen. We believe the dividend policy and price action in the shares of these two companies can teach us about stock price performance over the next three to five years. History shows that for a few decades after terrible stock price performance investors demand more of their return from cash dividends. Historical payout ratio over the last 50 years is 52.6% and over the last 20 years it was 46%. We believe that the companies which raise their dividend payout ratio will enjoy the kind of outsized price gains that Amgen has seen in the second half of 2011.
2011-12-16 00:00:00 The Great Scarcity: Stockpicking by Bill Smead of Smead Capital Management
Correlations among the S&P 500 Index companies was the highest on October 10th of 2011 as it has been for 25 years. In the opinion of Smead Capital Management, this means that more investors are participating in market directional strategies, macro-economic strategies and tactical portfolio strategies than at any time in US history. As large-cap value managers and stock pickers, we are very excited about the next three to five years as all the chips have moved to the other side of the table and stock picking has become a scarce resource.
2011-12-08 00:00:00 Buying Cyclical Stocks: Wisdom or Inexperience? by Bill Smead of Smead Capital Management
Buying cyclical stocks and emerging markets under the assumption that secular forces in emerging markets will nullify the cyclical nature of sectors like energy; mining and heavy machinery exposes investors to a great deal of risk and shows a lack of understanding. It would be better to wait for 3-5 years of poor performance in these stocks and until earnings have declined quite a bit before you buy. It is just the first monetary easing move after a year of tightening in China. Besides, China could be starting its first real contraction as a quasi-capitalist country.
2011-09-29 00:00:00 Grease (Greece) is the Word by Bill Smead of Smead Capital Management
You might think that the countries in Europe like Portugal, Ireland, Greece and Spain are the source of the current consternation in the US stock market. We believe that Europe is peripheral to the core issue. American investors have spent the last ten years falling in love with the BRIC trade and feeding an infatuation with the global synchronized economy and the emerging consensus surrounding global stocks/bonds. In our opinion, it is time to go back to conventionality and leave the BRIC trade before its time is gone and investors put their capital back in motion.
2011-09-27 00:00:00 Darkest Before the Dawn by Bill Smead of Smead Capital Management
Even though we are not traders or short-term oriented, we would like to throw out a few opinions which cause us to be very positive about the stock market over the next one to two years. While market participants look to the US government and the Fed for answers, US Households are doing remarkable and historical work of getting their finances in order. Insiders have been as aggressive in their purchases of their own companys stock as they were in early in 2009.We believe many of our stocks have held up quite well in this environment, but some of them look especially attractive at this point.
2011-09-15 00:00:00 Chinese Banks are Imitating Washington Mutual by Bill Smead of Smead Capital Management
Washington Mutual is only in existence in the world of litigation. For those of you out there who like to avoid these kinds of risks, we at Smead Capital Management recommend you avoid China, avoid the commodities which are used most heavily in construction, avoid the makers of construction and mining equipment, avoid the countries which have benefitted the most from Chinas uninterrupted growth, and avoid the vehicles used for financing all of this growth. The inevitable economic recession in China which we expect to follow will turn the asset allocation world upside down.
2011-09-01 00:00:00 The Blessing of Hitting the Skids First by Bill Smead of Smead Capital Management
We believe that the first country to hit bottom, the first to confess its mistakes the way Frank Blake and Howard Schultz did for their companies, and the first to cleanse the banks, corporations and households will lead to lasting prosperity long before any other country in the world does. We also believe that the investment rewards of US non-cyclical large cap common stock investing has rarely looked more attractive because of the willingness of investors to underestimate the benefit of hitting the skids before everyone else does.
2011-08-16 00:00:00 Money Manager Pride Goeth Before Destruction by Bill Smead of Smead Capital Management
All great money managers reach a point in their career where adulation and self confidence detracts from their better judgment. This interruption in judgment usually coincides with the discipline in use becoming the most popular discipline in the marketplace or the investing style being overdue for a three to five-year correction. Studies of the equity managers with the best long term records show that the best underperform the S&P 500 Index 35% of the time. The pride associated with multi-decade success and an army of folks enjoying your work is probably the most dangerous thing.
2011-08-12 00:00:00 As Investors Panic: Calculating Intrinsic Value with a High Margin of Safety by Bill Smead of Smead Capital Management
When markets get super difficult it is great to be able to lean on valuation methods with a high margin of safety. Ben Graham had a simple and beautiful formula for computing intrinsic value. There are two simple ways to get a high margin of safety when using Grahams simple intrinsic value calculation. First, you can use a much lower ten-year growth expectation than other stock market participants. Second, you could use a much higher interest rate than the current ten-year AAA corporate bond. We would like to look at a few of our current holdings through the prism of intrinsic value.
2011-08-03 00:00:00 Training Wreck Waiting to Happen by Bill Smead of Smead Capital Management
Someday soon, as the charade of uninterrupted GDP growth catches up with the Totalitarian Communist Government, we believe the entire Chinese banking system will have to be recapitalized to the tune of over $1.5 trillion. At that point, there wont be enough money to lend for new projects to even maintain existing GDP. In our opinion, there will be an economic contraction in China lasting three to four years. Whether China is to become a truly great economy will be determined by what they do in the aftermath of the coming economic train wreck.
2011-07-27 00:00:00 From Asset Allocation Nirvana to Asset Allocation Nightmare by Bill Smead of Smead Capital Management
We believe the next 10 years will be about money moving back into non-cyclical US large cap stocks and domestic companies which enjoy lower commodity prices and the repatriation of money from highly risky asset classes with poor odds. Being widely asset allocated today prepares folks for an under-performance nightmare In our opinion, bonds are expensive, commodities are outlandish, small caps trade at a huge premium and as Chinas economic contraction occurs, the crowd will flee emerging markets.
2011-07-15 00:00:00 Low P/E Quintile Courage by Bill Smead of Smead Capital Management
What most of the academic studies don?t tell people is that the companies which make it into the lowest PE quintiles have had some big problems or challenges which got them there in the first place. We use our eight proprietary criteria to find the ones which we think are the most likely to move their way back up through the quintiles and, possibly, be long-duration holdings for our discipline.
2011-06-30 00:00:00 The Biggest Bear Market Rally of All? by Bill Smead of Smead Capital Management
Most stock market participants screamed ?bear market rally? in the summer of 2009 as the US market exploded to the upside from the March 2009 low. They were referring to the phenomena whereby a major rally follows a bear market, retraces some of the prior decline and attempts to suck most investors back into the market. These ?sucker? rallies are debilitating because they heap agony those who end up getting caught twice in the same secular decline. We believe the rally in oil to $115 is possibly the biggest ?bear market? rally ever and we advise folks to protect their capital.
2011-06-22 00:00:00 Summer Bargains Galore by Bill Smead of Smead Capital Management
While China?s economy is hitting the wall and investors are beginning to deal with what we believe is a major bear market in commodities, it is time to stop and examine some of the bargains created by the recent correction. We have said many times that valuation matters. We believe one of the biggest bargains currently is Aflac (AFL). They are the largest seller of supplemental health insurance in Japan and the US. Japan and the US are probably the two countries which would benefit more from a decline in commodity prices than any others in the world.
2011-06-17 00:00:00 The Exodus by Bill Smead of Smead Capital Management
Prices of residential real estate in Vancouver have skyrocketed. Over 70% of these purchases were from Chinese Nationals driving prices high. Compared to average household income, Vancouver is nearly twice as expensive as New York. Gordon Chang of Forbes wrote an article titled ?Chinese Entrepreneurs Are Leaving China?. Here is how Gordon began to explain the phenomena:?China?s rich, driven by a sense of insecurity, are taking money out of their country. Many are actually preparing to move elsewhere" There is an exodus of the best and brightest business people coming out of the country.
2011-06-02 00:00:00 Cash Hoards by Bill Smead of Smead Capital Management
In Saturday?s WSJ, Jason Zweig asked the question, ?What will it take for companies to unlock their cash hoards?? Here we expound on his thoughts and examine our own portfolioin this light. First, companies with large cash balances are adding to them. Second, payouts are historically low. Third, the point has probably come where the best interests of corporate management and the shareholders are at odds. Zweig zeroed in on Ben Graham?s thoughts in regards to why big companies that generate high levels of free-cash flow are hesitant to return cash to shareholders.
2011-05-25 00:00:00 Bull Case Nobody Makes by Bill Smead of Smead Capital Management
We feel compelled to make a US stock market bullish case which feels as good to this writer as avoiding tech stocks did in late 1999. It is so lonely that it is divine. Andy Grove, former Intel CEO, college prof John Maynard Keynes said, ?When everyone knows that something is so, it means that nobody knows nothin?.? We believe the majority has put their assets into investments that will provide defeat, insecurity and failure. Out of this comes a very optimistic bull case which is available to those who have courage to look foolish in the short run and avoid today?s popular asset allocation.
2011-05-20 00:00:00 More People by Bill Smead of Smead Capital Management
As value managers, we are interested in secular trends. We seek company characteristics which lead us to non-cyclical businesses which are not capital or labor intensive. For this reason, we love businesses which need more people (as customers) to become more profitable. Unfortunately, from time to time, markets massively over-capitalize industries which they believe will benefit from having more people. Historical examples: The 1929 stock market peak was built around the idea that there would be more people to listen to radio, drive cars and fly on planes. The concept was over-capitalized.
2011-05-11 00:00:00 Supreme Moment by Bill Smead of Smead Capital Management
Kairos- is an ancient Greek word meaning the right or opportune moment (the supreme moment). The world of value investing and portfolio management includes mean reversion and patience. Speculative episodes typically go on for much longer than expected. This fact forces us to take a stand by avoiding overvalued common stocks and owning undervalued shares. Everyone would love to make their adjustments at the ?Kairos?. We believe that the greatest existing misallocation of capital in the world today is based on over-confidence in the uninterrupted growth of emerging markets.
2011-02-11 00:00:00 True Grit by Bill Smead of Smead Capital Management
We believe a whopper of a recession is coming in China. In our mind, it is only a question of when. Until then we will practice True Grit in our portfolio management and wait for history to repeat in the way we believe is inevitable.
2011-02-10 00:00:00 Outlook 2011 by Bill Smead of Smead Capital Management
The year 2010 took us on quite a ride and ultimately delivered acceptable returns in both the US stock and bond markets. Our returns were commensurate with the index, but did so without exposing our clients to what we consider the primary long term risks that exist today. Those two primary risks we see in 2011 involve bonds and China.