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.

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.

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.

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.

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.

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.

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.

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.