The second quarter earnings reports from many companies were stellar, in some cases, and good in others. Rarely were they poor; at least in companies we follow or own in our portfolios. The number of companies in our portfolios reporting favorably, as far as actual second quarter earnings, were plentiful. However, when referring to guidance for the third quarter, expectations were running very high for many companies and any sign of "delays" or "transitions" in business activity caused violent reactions in a number of the best-performing businesses in the market. Even in companies whose guidance was positive, the old "buy on rumor, sell on fact" phenomenon kicked in and many of those stock prices were met with healthy declines. A sure sign, in our view, that we are in a correction.
In our recent Investment Climate we pondered the likelihood of a correction in the market and even suggested it would be healthy. Given that we have seen some really significant moves up in prices, it does not surprise us that we are seeing this correction, even if it is somewhat "stealth" at this point. It may well be that it is not fully complete since it has not been clearly evident in the major stock market indices. It should be emphasized that these are normal and healthy actions, and while there are often "hiccups" in business activity over the course of any company's life span, we are quite encouraged by the underlying business trends we are seeing with respect to most companies in our portfolios.
We stand ready to take advantage and become more aggressive as prices "back and fill" and recommend that investors do the same over the coming weeks as we move through this correction, recognizing one rarely chooses bottoms.
Lastly, returning to geopolitical circumstances, North Korea has been a disaster for over 25 years and four different U.S. presidential administrations, from both political parties, have failed to adequately handle the situation. While we have no way to accurately predict how this will play out, we are extremely confident that the U.S. will prevail should it be necessary to take military action in order to neutralize the North Korean regime. We believe that military action remains remote at this point and serious diplomatic efforts are underway to address the situation, involving South Korea, Japan and most notably, China. We would consider any further weakness that develops in stock prices as a result of this situation another buying opportunity.
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