November 17, 2008
SouthernSun Interim Commentary
Many of our portfolio businesses have now reported 3Q08 results and, by-and-large, the results have been reasonably strong. As we suggested in our third quarter commentary, most of our companies were careful to lower expectations due to the macro environment. However, when addressing a number of the specific niche markets in which they operate, the tone was quite confident. We believe that most of our businesses are making excellent progress and have an environment conducive to growing organically and through acquisition. A number of our businesses have successfully renegotiated more favorable credit terms and have even expanded their availability to resource opportunities, whether by business additions or expansion to gain market share. This is of course not true of all of our businesses. We are aggressively addressing many issues that may result in our revaluing a business or determining their future competitiveness with the management of these businesses.
We do not believe that the month of October and the first few weeks of November have provided us with any meaningful new data. Yes, there have been some things settled, while others have only become more confusing (e.g. the election and the TARP intentions). Our focus remains on the ground with our portfolio businesses. We continue to spend time with the management of our businesses around the world. We believe our first priority is to make certain we are clear about what is going on with the companies we own, and then tend to the many new opportunities that have emerged during this downturn. We have previously suggested that circumstances may indeed become more serious than it currently appears and yet we firmly believe that, from the rubble, opportunity will arise. As Jill Carattini so beautifully writes in A Slice of Infinity,
“Chicken Little is afraid. The sky is falling and she needs to tell the king. She dashes off as fast as she can, running into friends along the way with whom she shares her fear. “The sky is falling!” she yells, and her worried friends join the race to find the king.
The well-known misadventures of Chicken Little and her friends tell a tale of fear and its infectious grasp. Chicken Little had been minding her own business when out of nowhere an acorn fell on her head. Her assumption and subsequent proclamation of the absolute worst case scenario caused hysteria wherever she went. The moral of the story is usually something about the dangers of jumping to conclusions or believing everything you hear. But the message we seem most to have identified with is one pertaining to fear. Chicken Little’s mantra, “The sky is falling,” has become a phrase used to indicate the belief that disaster is imminent, however reasonably or unreasonably surmised. It seems like we have been hearing it a lot this year.
From reports of wide-reaching economic devastation, unanswered corruption in Africa, the dangers of tainted drinking-water, or even the black atmospheric cloud looming over Asia, the sound of alarm is uninterrupted. The current worldwide tenor is one fear and uncertainty. The sky indeed seems to be falling, and depending on the knock these stories make on our heads we may even join in the commotion. Broader cultural anxieties add to this sense of fearful doom. If we are not consumed by soaring costs of living, increasing cancer rates, and declining education scores, we are fearful of the multiple ways in which our children face dangers that we did not, within a world where uncertainty now seems the only certainty.
Playing on these anxieties, politicians, marketers, and media producers know well that fear is a compelling motivator, and a profitable one at that. Like the music man in the Broadway musical, if they can convince us that “There’s trouble right here in River City,” we will hear what they have to say and open our minds (or wallets) to do something about it. Just this week a news blurb about “the dangers of teeth whitening” commanded my fearful attention and convinced me to stay tuned.
While the worry and unrest that is ever being stirred into the worldwide caldron may indeed be based on real concerns, the combined ingredients in this pressure-cooker are at best a recipe for misperception. I read the “terrifying true story” of the Ebola virus in high school and became far more terrified that I would die of a super-virus than I have ever been impressed with the eradication of serious illnesses like polio, measles, or smallpox. Focusing on our fears, ever-reacting to our worries, and accepting this culture of fear as a given, not only affects our subsequent reasoning, living, and faithfulness, our fears in fact become us. Our fears tell us how to spend our money, raise our children, vote in an election, and participate in (or isolate ourselves from) society. We become no different than Chicken Little… There is indeed an alternative, but it is neither safe nor easy…”
For SouthernSun, this means the important task of proceeding with open eyes and attentive ears, applying discipline and logic while avoiding endless chatter. Our research team will continue to travel broadly in the fourth quarter. I will be heading, along with Mike Cross, to Delhi, India, the first of December to meet with coal executives and energy ministers from around the world. Phillip and Elliot are off to the U.S. northwest to visit several of our portfolio businesses. Peter is in Georgia with Mike this week visiting with both current and prospective holdings. Patience and perseverance will prevail, but not without cost. We are committed to applying the same principles that have gotten us through other difficult times and appreciate the fact that our clients continue to show their support both verbally as well as through new allocations of cash to our strategies.
We look forward to providing a more detailed review in January, and thank you for your support.
Best wishes,
Michael W. Cook, Sr.
CEO & Chief Investment Officer
SouthernSun Asset Management
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