March 12, 2009
SouthernSun Interim Commentary
The past few days have indeed been more encouraging than six of the past seven months. We would like to make several observations ahead of quarter’s end:
First, the idea of some mechanistic change in the marketplace, floating a proposal to re-establishing the up-tick rule, for example, may result in a meaningful move to the upside as short positions are covered and market participants attempt to access both the possibility of such a change and its implications.
Second, we have mentioned before and would take this opportunity to do so again—we, too, are not totally immune from the sense that the past seven months “feel” like seven years. It is only natural given the magnitude and frequency of daily price swings. However, there will and must be some stimulus from the massive money printing effort of the United States Treasury, particularly as globally similar efforts are quasi-coordinated to induce confidence near term. That said, we continue to see emerging economies recovering sooner and believe that should be beneficial for our portfolio businesses, if we happen to be correct.
Third, it is not unimportant to remind ourselves and our clients that we invest in businesses for the long run. Over the past twenty years we have tried to be careful to balance our understanding of individual businesses with our conviction concerning their potential intermediate and long-term impact on our entire portfolio. Further, we have historically eliminated businesses, whether we have gains or losses, when we no longer believe they meet our original objectives. With the dearth of legislative and regulatory clarity, many of our businesses have been substantially, and in many cases we believe undeservedly, re-priced by a rather schizophrenic marketplace – which leads us to suggest that…
Four, we see excellent long-term potential in most of our current portfolio businesses, as well as a number of companies we have been evaluating for the past several months. In fact, long term, we believe that we have identified businesses that should provide excellent results both fundamentally and in the marketplace. We would caution, however, that…
Five, the actions being taken on a federal policy level will likely create headwinds in the future – it is not our job to determine what those will be or when but rather how a range of outcomes might impact our portfolio companies and mix. We do believe that some of our operational diversification outside the United States, when combined with management teams committed to generating discretionary cash over the long haul by making decisions that equally weigh near, intermediate, and long-term cost/benefit rather than crumbling to expediency, may well sustain our portfolio businesses, if in fact the most difficult days lie ahead. If not, we believe these same characteristics and others should give them a meaningful advantage as the environment improves.
Six, straight talk - we have no crystal ball. We believe that the fiber of this country is strong. As with every radical swing up, there is one down. Thus we should not be surprised by its fact, only by its magnitude. There are signs of life, from the countries we visit to the companies in our portfolio. Prices may go lower, but the ones we see now are compelling enough to put some capital to work with our historic time horizon of three to five years in mind. Expectations have been too high, driving much of the ‘product’ development in the financial industry, and are now being adjusted. In practice one may rightly argue that assets on balance sheets are currently being priced in virtually all businesses – rightly or wrongly – as if they should be theoretically worthless.
Many of you have already been sent off to sleep by my analogy about trying to sell the building you own next door. But for you who have not, here is how it goes. Eighteen months ago you had ten offers from a varied mix of people, all bidding in nice range, some needing financing, others not. You did not “need” to sell and the market seemed stable so you waited. Now eight months ago you were nervous and “wanted” to sell before things fell to pieces. Unfortunately, you then had five prospective buyers, two with cash and three who had no chance of financing. More importantly, the range of bids was wider but clearly lower. January rolls around and you now “need” to sell. You have the same two people with cash, but they believe that if they wait until tomorrow, the price will be lower – thus far their strategy has worked – so, because there is no ‘deal’, it is as if your building were worthless.
Finally, I have been reading “Shutting Out the Sun – How Japan Created Its Own Lost Generation” by Michael Zielenziger and have again been reminded that we easily but carelessly draw lines that parallel - to infer is in our nature, and necessary. However, it is also clear that not every element in every similar situation is the same. We must recall that the battle is never easy and we may be wise to draw from a larger framework. As the great lion replied to Lucy’s question of why he hadn’t come in Lewis’s “Caspien”, “…things never happen the same way twice dear one…” Our times are different from the Great Depression, the early 70’s or 80’s or the 90’s in Japan – but, then again, there may be much that is the same. We should thus remain watchful and cautious - yet not shaken - in our approach and its value in a much larger and longer context.
Our hope is that this will help you understand some of our thinking these past few months and the actions that follow. We look forward to reporting good progress on multiple fronts next month as we review the first quarter of 2009.
Michael W. Cook, Sr.
CEO & Chief Investment Officer
SouthernSun Asset Management
This publication and any recommendation contained herein speak only as of the date hereof and are subject to change without notice. SouthernSun Asset Management (“the Firm”) and employees shall have no obligation to update or amend any information or opinion contained herein, and the frequency of subsequent publications, if any; remain in the discretion of the author and the Firm.
This publication does not constitute an offer or solicitation of any transaction in any securities referred to herein. Any recommendation contained herein may not be suitable for all investors. Although the information contained in the subject report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This publication and any recommendation contained herein speak only as of the date hereof and are subject to change without notice.
This publication is being furnished to you for informational purposes only and on the condition that it will not form the sole basis for any investment decision. Each investor must make their own determination of the appropriateness of any investment based on the tax, or other considerations applicable to such investor and its own investment strategy. This report may not be reproduced, distributed, or published without the prior consent of SouthernSun Asset Management. All rights reserved by SouthernSun Asset Management.
This report may discuss numerous securities, some of which may not be qualified for sale in certain states and may therefore not be offered to investors in such states. This document should not be construed as providing investment services. Investing in non-U.S. securities including ADRs involves significant risks such as fluctuation of exchange rates that may have adverse effects on the value or price of income derived from the security. Securities of some foreign companies may be less liquid and prices more volatile than securities of U.S. companies. Securities of non-U.S. issuers may not be registered with or subject to Securities and Exchange Commission reporting requirements; therefore, information regarding such issuers may be limited.