Dear First Eagle Investors:

As we have written in the past, we have since the early 1980s had several credit crunches including the S&L crisis, the LTCM crisis, and the telecom bust earlier this decade. In each episode the authorities were successful in reflating the credit bubble but also perhaps engendering an accumulation of bad habits. But, as the Austrian School of economics teaches us, credit bubbles are eventually followed by credit busts. This bust seems especially painful because of the size of the bubble that preceded it due to continuous efforts over the past 30 years to interfere with the corrective process. At the end of this bubble we found ourselves looking at a mountain of debt supported by ever increasingly thin capital ratios in ever more unregulated areas of finance. This created a dangerous combination of unsustainable leverage and unmanageable risk.

Recently the deflating of the credit bubble has entered a new phase. The unwinding has suddenly become disorderly and has naturally spilled over into the equity markets as investors begin to consider the effects of the credit bust on the real economy and earnings prospects. The result is indiscriminate selling and outright panic. In hindsight, though we correctly anticipated this bust we obviously could have been better prepared. Though we judged it improper to participate in the earlier recapitalization of the financial services industry, thus saving our shareholders from permanent losses, we have not been able to escape the second-order effects in that many of our holdings were perhaps sources of liquidity to other funds being forced to liquidate.

We'll be clear that we are rather concerned with the unintended consequences of the actions taken by authorities so far. But we also believe firmly that such action will be taken--no matter what--to prevent either a '30s style depression or an extended Japan-style malaise. In that case we believe there is approximately zero chance of either scenario, while also conceding that we will face difficult economic times nonetheless. A credit bust is never painless. And the dollar may well lose its shine as the world’s reserve currency, hence our continuing position in gold.
With that said, though from a macro standpoint things look grim, the good news is that since we have some excess cash we are able to buy securities at somewhat peculiar prices--thus the spectacle of Shimano's shares trading at 8x cash-adjusted earnings after having fallen by half in three months, 3M's at 9x earnings, Pargesa's at close to our first purchase price 6 years ago, and Nitto Kohki's shares at 2x cash-adjusted earnings. As investors with a long-term perspective, equities are beginning to look attractive, even as corporate profits come under pressure.
We are focusing on the types of companies we always have--a combination of “cigar butts” (as
Warren Buffett called Benjamin Graham-type stocks) and some truly exceptional businesses trading at fire sale prices. Sometimes when investing seems most scary it's the best time to invest. This may be one of those times.

Thank you for your continued support.
- Jean-Marie Eveillard, Matt McLennan and Abhay Deshpande