The following is from Kornitzer Capital Management's Second Quarter Newsletter:

       There were few places in the world to make money in the second quarter. According to Dow Jones only 8 of 66 countries saw positive stock market returns. Some 2/3 of world markets experienced double-digit declines, including the U.S. where the S&P 500 fell 11.5%. The worst performing market was Greece, down nearly 40% for the quarter. Within the U.S. market, only two sectors made investors money, gold and precious gems.

       What should an investor take away from such a disappointing quarter? We believe not much.  The rally in stocks from the March 2009 bottom was in excess of 60% through late April.  Some degree of correction should not have been a big surprise.  Since World War II there have been nine quarterly corrections of 10% or more (including this one) during economic recoveries.  In most cases the correction ended the next quarter, and the bull market resumed.  In only two cases, 1962 and 2002 did the correction get severe (>25%).  As always, there are lots of things to worry about.  The economic recovery is slow with little job growth thus far.  The U.S. budget deficit is large and could become worrisome if not addressed in the medium term.  Government regulation is increasing and income taxes appear to be as well.  Recent articles in the media talk about the exodus of small investors from stocks, possibly on a “permanent” basis.  In support of these stories, U.S. equity mutual funds have entered their third consecutive year of net outflows.  Fortunately, this does not include the Buffalo Funds which have been getting consistent inflows for well over a year. 

       For the long-term investor, fear and worry create attractive buying opportunities.  In November 2008 and March 2009 we were able to purchase some of America’s greatest growth stocks at bargain prices for our funds and private clients. The same held true for corporate bonds as well. As a result, the majority of our funds performed very well during the stock market recovery. During this correction, we are adding to some of these positions and looking for new bargains as well.   Why do we remain so confident?  Our confidence stems from our deep knowledge of our companies and our willingness to take a long-term and global perspective of their growth opportunities in relation to their current valuations.  Yes, the U.S.economic recovery is likely to remain slow for some time.  However, a meaningful and growing proportion of our holdings are tied to global growth and for them the world market is very, very large and untapped.  Emerging markets now exceed the U.S. as a % of global consumer spending. This will not likely reverse itself in our lifetimes.  

       Even with interest rates near all-time lows, the U.S. budget deficit has begun to climb on investors’ lists of things to worry about.  Are we concerned?  Yes.  Greece just gave the world a wake-up call of what can happen to borrowing costs when a country loses the confidence of bond investors.  Are we deeply worried?  Not yet.  This country has historically run higher than average deficits during periods of war and recession.  Over time our war costs should fall, our economic stimulus costs should fall and our tax receipts should rise.  It is at that point that we will need presidential and congressional leadership to slow government spending.  Will it be possible to get government action without a scare in the U.S. bond market to act as a facilitator?  While it would seem unlikely given the current partisan divide, we should remember the last budget surplus years were actually under President Clinton!  The great thing about our country is that we hold our representatives accountable.  The threat of being booted out of office can often lead to a sharp change in direction and thinking.  We will soon hear the voice of the nation with the November congressional elections.  Some degree of change will likely follow. 

       News stories theorizing a possible permanent exodus of small investors from the stock market sells well today, but will likely prove very wrong.  All major asset classes (U.S. stocks, Non-U.S. stocks, U.S. bonds, commodities, U.S. T-bills, Gold) have suffered through 10 year rolling periods of sub-par returns over time.  The current 10 year rolling return from stocks is near the worst ever, while the returns from bonds have been above average.  We expect those performances to flip-flop over the next 10 years.  Interest rates linger near their lowest levels in history.  If you have not already refinanced your home mortgage, we recommend that you do so very soon.

       In summary, we would repeat some of the many positives for U.S. equities as stated in our last quarterly letter.  Mountains of cash continue to earn no return.  Investors will eventually shun bonds and make their way back into the stock market.  We would expect to see a meaningful uptick in merger and acquisitions activity, and U.S. corporate earnings growth prospects are better than perceived if one takes a global perspective.  You should know that we are traveling extensively in 2010 to visit our companies and to research new stock and bond ideas.  We find there is no substitute for our one-on-one visits with CEO’s and top management.  As stated earlier, our longterm confidence stems from our deep knowledge of our companies and our close relationships with management.  This investment philosophy and process will not change and we will continue to work diligently with the best interests of our clients and shareholders in mind.  As always, we appreciate your trust and your investments.