Down Days, Stories, Numbers and Ponies

Oh my! Now it is not just an occasional down week or two we now have a down month for the first time in six months. We are about 3% off the all-time highs this afternoon and are experiencing one of the worst days of the year so far. The talking heads are out if force either getting ready to panic at the idea that the bull market is at long last coming to end or on the other end of the spectrum suggesting that we buy the dip big time . Both opinions are a total waste of brain power as well as breathe in my opinion.

The facts are this. We are down a little bit over the past month and I have no idea if the selling will continue or not. I hope it does, I see lots of reason it should but I have no clue what will happen in August or beyond. I do know that when I ran my screens this afternoon no new safe and cheap inventory has been created as of yet. I have lots of cash on hand so I certainly hope that it keeps going down and we have a big inventory creation event. If it does I’m ready. If it doesn’t and we turn around and continue to ride ZIRP to the moon then my small banks and cheap stocks will provide an okay return in what I think is an over extended market. The money is made by reacting to what the market does and not by trying to predict what it might do.

I have spent a lot of time this week thinking about numbers and stories. I was engaged in a conversation with an associate who has been the financial writing game for some time and the individual told that my biggest weakness was that I didn’t tell a good stock story. I know some subscribers have asked for my in-depth reviews of companies as well and I have tried to indulge in the weekly review during quiet times in the market. However I have to say that I am of the not always so humble opinion that it is my lack of storytelling that is my greatest strength.

I have been around the markets for almost three decades now and I have heard some fantastic stories over that time. I have heard tales of new paradigms, infrastructure rebuilds, reunified Germany as a boom town, technological breakthroughs, medical miracles, continual real estate growth and a host of other really exciting sexy stories. Some were even for a period of time like the ZIRP story has carried the past two years. At the end of the day however I have found that the numbers mean much more than the story. When the story reaches a fever pitch and is widely recited but the numbers are suggesting that reality is in the rear view window disaster is usually close at hand.

In fact my biggest gains over the past three years came from ugly stories where the numbers suggested massive under valuations. Defaulted and distressed electric utilities with nuclear cost over runs, airlines in bankruptcy, Post Milken Junk Bonds, the S&L Crisis, Tech stocks and bonds in 2003, internet net-nets post-crash, regional banks in 2010, REITs in 2009, Texas real Estate in the early 1990s when oil was under $15 and you could fire a cannon down the main drag in Houston at high noon without much fear of hitting anyone and more recently shipping at the start of 2013 and mining stocks right now have all bene ugly stories. However the numbers were right and I have seen large profits from some really ugly stories over my career.

Once in a blue moon the stories and the numbers line up as it has for the trade of the decade in small banks. I love the story as banks improve and the inevitable consolidation occurs but the most powerful factor is that the numbers make an even stronger case. We are buying solid banks well below book value with a reasonable assumption of being able to sell them at much higher multiples of book in the future. Such a marriage of the stories and the numbers is exceptionally rare in my experience and is one the reason I am so excited about the little banks.
Here is my idea of some great stock stories:

. This company is a silver miner that has very little long term debt, a current ratio over 4 and is generating cash flow in a difficult environment. They have three resources to survive until metal prices improve and I can buy it as half of book value.

This company is transitioning from being a finance REIT to an owner of multifamily property. They have a solid balance sheet and I can buy the stock at 70% of book value. Not eloquent as a story but the numbers are magnificent.

This company dominates the newsprint business around the world and also has a wood products division that will do well when we finally see an upturn in the economy. After bankruptcy reorganization they have a debt to equity ratio of just .21 and the current ratio is over 2. When the economy picks up this stock will soar.

This company is the commodity supply chain business and has a merchant banking operation that has been buying natural resources companies and assets. They are profitable, have a strong balance sheet, strong shareholders and pay a 3.21% dividend. It currently trades for less than 70% of book value but when we see improved demand for commodities at some point in the next five years this stock will trade at several times the current price.

Everyone loves a good story. Unfortunately the good stories have bad numbers and trade at very high levels when compared to assets and earnings power. There is a lot more money to be made in bad stories with fantastic numbers.

Cheers!

Tim

Song of the week . Rely on numbers or you are doing little more than this:

Falling Houses, Sinking Ships and Easy Money

Once again we have another up week in the market. No matter what happens in the world as long as rates are low and companies can buy back stock to push their earnings up to the magic number nobody seems to care what happens around the world. The geopolitical risk risks are off the chart right now and all of the flare-ups going on globally have specific and enormous threats to the global economy and the markets but that seems of little to concern to anyone but a small handful of folks. Of course the handful of folks concerned about surfing the liquidity wave to fame and fortune include some of the smartest and most successful investors of our time is another mild source of concern.

The bull case of a stronger economy led by housing seems to me to become weaker by the day. The new home sales numbers this morning were simply horrid with an 8% decline compared to May and the hot sales number everyone celebrated last Month was slashed downward. Sales were also down more than 6% from year ago levels. Existing home sales were up compared to May but still a few percentage points below last year’s level. Worst of all first time buyers were just 28% of total buyers which is very low on a historical basis. If we do not create enough new high paying jobs to make first time buyers comfortable with the idea of buying a home and provides them the means to qualify for a loan and make a down payment there is not going to be a sustained housing rally just yet. The economy has to bailout housing before housing can lead the economy higher and I simply do not see that happening just yet.

Of course I am not a macro guy and do not make predictions but my caution levels are rising rapidly. Fortunately for me there are just not too many cheap stocks right now. When I look for safe and cheap stock s I am not finding too many that I do not already own. I see some areas that might be getting interesting. Shipping stocks for example are slipping as the Baltic Dry Index is trading down to 18 month lows. I own a few shipping related stock but have no problem buying more is the decline continues. Private equity money has been flowing into the sector for some time now in search of opportunities and I am always delighted to follow the smart patient money into a sector. Scrappage rates of older ships has been slower than many expected but if rates continue to decline we could see that change very quickly.

The real opportunity today remains in the small banks. We had another takeover this week as Madison Bancorp (MDSN), one of my ten tiny banks picks , was taken over at a huge premium to the current quote. We are booking gains of close to 45% on that stock. It is really kind of a take under as the deal is being done at a little less than book value but we bought it so cheap we still have huge profits in our positions. We are in the top of the second inning in what will be a long trend in the little banks and there is a lot of money to be made. If the market does decline anytime soon it will simply enhance the opportunity and give us a chance to buy more banks at cheaper prices. If you aren’t in the little banks with some portion of your long term funds you are missing out on the best opportunity to make money you will ever see in the stock market.

Along those lines we rolled out a new monthly edition of Banking on Profits this week. This letter will cover what is going on in the banking industry with a focus on the small regional and community banks. I will cover earnings, dividends and being produced by these little Jimmy Stewart banks as well as look at what insiders, activist and institutions are doing in the space. I will also keep tracks of buybacks and takeover activity in the sector. There will also be a monthly reading list with links to articles about what is happening in the industry Its going to be a pretty useful publication for serious investors.

If you are already a subscriber to Banking on Profits then the monthly issue is a supplement and is free to you . You should already have access. If your aren’t, then the intro price is a whopping $47 (regular $97 after promo period). I promise you I will never sell it this cheap again. As a further enticement I am throwing in a free copy of the ten Tiny Banks-book. It is more of an 8 tiny banks that are still really cheap book as tow of the stocks are now up more than 40% and trade near book value. The remaining 8 trade for an average of less than 70% of book and are outstanding bargain issues. We have sold that book at $49 bucks so basically you get the monthly new letter while paying $2 less than we have charged for the book. That’s not as slick as the marketing kids put it but it is a good deal and get you involved in the Trade of the Decade at a low price.
Cheers

Tim
Song of the week Count Basie on small bank stocks

The Trade of the Decade. Are You In Yet?

The longer I am in and around the markets, the more confused I become by the behavior of many participants. They are so focused on what is happening right now that they miss the big picture.

The intense concentration on what a company is going to earn this quarter and where a stock price is relative to some magic line on a chart obscures the long-term opportunities to build real wealth over time. One such opportunity is here now, and although I have been shouting about it from the rooftops for a few years, no one seems to care very much.

This is an idea that Marty Whitman told Barron’s about back in 2010, and when it is done right, he said, “I’ve probably got a 30% internal rate of return.” It was an integral part of the success of Peter Lynch at the Magellan Fund, and he has mentioned it in his books. Wildly successful investors such as Michael Price and Irving Kahn buy these stocks on a regular basis to pad their profits. Several activist and specialty hedge funds and money-management firms have been using this opportunity to handily beat the market over the past few years.

I am talking of course about what I like to call the “Trade of the Decade” in smaller regional and community banks, Buying quality little banks at a discount to asset value has been a sound strategy pretty much all the time, but now there are substantial headwinds for the sector that are going to create powerful tailwinds for the stock prices.

Small banks are still cheap. They have not garnered the attention or buying interest of their larger brethren since the crisis ended and the economy started its slow, grinding recovery. Many of them are too small for the big institutions to get involved in or for the larger firms to provide research coverage, so prices have languished a bit.

You can still find many of these high-quality little banks trading at a substantial discount to book value. You can find still more that are working their way to quality status by reworking loan portfolios and selling off nonperforming assets to get their equity-to-asset ratios and other capital ratios in line with industry standards. Many have done capital raises to restore their financial condition.

The headwinds facing these banks are enormous. The first, of course, is the spiraling cost of regulatory compliance. In order to save us from ourselves, the government has issued an enormous stack of new rules and procedures that little banks have to comply with just as the large banks do. The cost is often crippling. Last week, the Independent Community Bank Association released a report of the rising cost of just one regulatory report. The group said in a press release, “This survey shows that as the call report has grown from 18 pages in 1986 to 29 pages in 2003 to nearly 80 pages of detailed financial reporting requirements today, the regulatory burden on community banks has skyrocketed along with it.”

According to the association, the total hours dedicated to preparing the call report has increased for 73% of small banks in that time. One in three bankers said the number of employees involved in call report preparation has increased. That is just one of the dozens of regulatory cost increases pressuring the bottom lines for little banks.

The second headwind comes from the economy and the competition. The big banks dominate the industry: 80% of all deposits are in the hands of the big banks. It is tough for the small guys to compete with the big banks’ marketing muscle and range of services.

The other side of this coin is that although number of banks has decreased by 50% or so over the past 20 years or so, the number of branches has risen by about the same amount. At just about every major intersection in the U.S., there is at least one bank branch on one of the corners. Combine this with a slow economy and lack of loan growth, and organic growth is just about impossible.

The tailwinds for these stocks come from a combination of the two factors. First, the little banks are going to find it difficult to generate the profits needed to stay independent. Second, the lack of growth opportunities is spread across the industry, so the path or growth is not going to be new branches and de-novo expansion but mergers and acquisitions. Little banks will buy tiny banks and in turn be bought out by medium banks, which will ultimately be acquired by larger banks.

The money made by investors in banks purchased at a discount to asset value over the next decade could easily surpass the tenfold gains in the community bank stocks after the savings-and-loan crisis in the 1990s. It really is the Trade of the Decade, in my opinion.

originally published on realmoney.com

Druckenmiller, Broken Records and the Beach

We are holding onto small gains in the S&P 500 for the week as I write this. We have shaken off a bunch of noises so far this week including Janet Yellen sector picks in the stock market but the key bit of information delivered by the Fed chair is still holding sway. As long as job and wage growth does not accelerate anytime soon interest rates will stay low for a long time. Although some talking heads think that will happen I am not sure what world they live in or what numbers they are crunching. The economy is still grinding along and there is probably as much chance of a negative reversal here as strengthening. The geopolitical risks are as high as ever and the shoot down of a passenger plane over the Ukraine today is not helping matter too terribly much. If you are placing long bets anticipating stronger economic activity and a calming world you may want to hedge those a bit. Quite a bit.

Housing bulls took a real shot to the gut this morning when the housing starts and permit numbers were released. This time we are blaming wet weather in the south for the 9% drop in starts but how do you explain the 4%+ drop in permits? It rarely rains in the courthouse even in the south. Activity is slowing and is no way strong enough to support acceleration in the recovery in my opinion. We will see how it plays out but housing is not going to lead a recovery in the economy. An economic recovery will lead to a rebound in housing and we are not there yet.

Stanley Druckenmiller has been a lot more public since he stopped running client money and some folks probably wish he would stop. He was on CNBCs Delivering Alpha yesterday and had some sharp warnings about current Fed policy. He told Joe Kernan “I don’t have great certainty how this mistake will end. In fact, I’m not even sure it’s going to end badly. No. What I am sure is they’re making a bad bet, a bad risk/reward. So you could go to the lottery and you could win the lottery, but it doesn’t mean it was a good bet. When I look at this monetary policy and I look at all the money my firm has made in the past due to improper monetary policies, yes, it looks extreme.”

Mr Druckenmiller also addressed signs that the markets are getting over heated telling viewers “So IPOs, as you probably know, we’re right on the border of where we were in ’99. In ’99, 83 percent of IPOs went public had never earned a dime. Today that’s 80 percent. It’s the only other time in history we’ve approached that. This year, corporate credit is growing as at a record rate, far faster than it grew in 2007. And S&P pointed out that 70 percent of debt issued is a B rating or worse. To put that in perspective, in the ’90s, that number was 31 percent. Do you remember all the hullabaloo in ’07 about covenant light loans? They did a 100 billion in ’07, and 38 percent of them were B rated. This year we’re going to 300 billion. We did 260 billion last year, up from 90 billion a year, and 58 percent of them are B rated.”

Okay so we add one more voice to the list of smart guys that are concerned. Does it mean sell right now? Not necessarily as everyone readily admits that there is no way of knowing when of how the disconnect between Wall Street and Main Street is resolved by the markets. If you find safe and cheap stocks you should buy them. However it is not the time to push the envelope and chase stocks on a guess or a whim. Own cheap stocks and hold lots of cash seems the right approach at this point in time. I continue to see some opportunities in cheap energy, mining and real estate stocks and of course I see huge opportunities even now in the community bank stocks.

At the risk of sounding like a broken record I have no clue what the markets will do in the near term and I never make market predictions. I know that the market is at all-time highs and has not had serious correction in almost three year. I know that Wilbur Ross recently said he is doing six times as much selling as buying with is consistent with comments from other smart patient money types like David Rubenstein and Leon Black. I know that outside of the little banks I cannot find very many safe and cheap stocks right now. It would seem that the lack of value and a healthy dose of good old common sense to be somewhat cautious at the moment. As a deep value contrarian investor with a bunch of grey in the hairline I know my day will come. It is just not today. Patience always pays in my experience and I don’t expect this time around to be any different.

Now, I am out of here for the rest of the week. My wife wants to go to the beach for her big birthday weekend so to the beach we go. We love New Smyrna Beach here in Florida and we are headed over until Monday. There is great dining and drinking as well a good beach and some pretty good fishing so it should be a fabulous weekend. I have a stack of good reads for the beach including an overlooked recent release investing book Excess Returns: A comparative study of the world’s greatest investors by Frederik Vanhaverbeke. This is highly recommended by several good friends so I am looking forward to reading it while perched n the sandbar in a lawn chair!

The markets will do what they do, the little banks are cheap and the Orioles are in first place as we start the second half of the season. Not a bad way to start a July Weekend.
Have a great weekend everyone
Cheers
Tim
Song of the week

As always the market is

High Returns, Hank the Wonder Dog and Recreational Reading

You mean stocks can actually go down? We have had so few down weeks the past few months that any actual selling is met with something akin to terror. Reading my Twitter stream (BTW if you do not follow me already its @timelvin) this week and you would think the market had full on crashed rather than retreating less than 1% off all-time highs. Some of the big mo-mo stocks like Tesla (TSLA), NetFlix (NFLX) and LinkedIn (LNKD) got popped pretty good but the loss is still in the single digits on the week. I am fascinated by the fear that sets in when we get just a little blip and wonder what will happen if we some good old fashioned panic and liquidation selling in this market. Twitter might explode.

There are some causes for mild concern out there. Some pockets of retail looked a little ugly this week and consumers who are not feeling the wealth effect of their rising stock portfolio are pulling back. Wal- Mart (WMT) probably has its finger on the pulse of Middle America than anyone so the CEOs remarks this week are a little worrisome. CEO Bill Simon told CNBC this week “I think the economic numbers, the unemployment numbers in particular, have been difficult to read with the number of people dropping out of the workforce. And I think it’s going to take a while, six months or more, for the numbers to balance out. Hopefully after six years, we’re starting to gain a little bit of traction and that traction is coming at the top end. I think the middle and down is still pretty challenged.”

Container Store (TCS) CEO Kip Tindall was a little more specific. He told investors that “We’ve come to realize it’s more than weather and calendar. Consistent with so many of our fellow retailers, we are experiencing a retail ‘funk’.”

Lumber Liquidators (LL) and Tractor Supply Stores (TSCO) released poor numbers and expectations which suggest that not only is retail week the much hoped for housing rebound many not be in play after all. In addition to US institutions buying up the housing supply, it seems a good deal of foreign money rushed into buy homes here as well. While at some level all buying is good buying but it doesn’t do anything to create the type of good paying jobs needed to bring low end buyers back into the market. Without those buyers it is going to be hard for a building boom to lift the economy onto a stronger trajectory.

I am not predicting a dire collapse of the economy or the markets because of some poor results form a few companies. It could happen. It might happen. It might not happen. I will say that those who have been buying index funds, ETF’s and high multiple stocks because they think that we are on the verge of a strong economic recovery are basically just flipping a coin and hoping their guess is correct. It strikes me as little better than betting on a horse that is projected to run well. It might happen but it is a silly way to run your portfolio.

Guessing what will happen in the stock market very little sense to me. The big fortunes on Wall Street have been made by reacting to what the market does do and stepping up to buy large declines when stocks trade at bargain valuations and sell sustained advances that lift stocks above rational valuations not be attempting to predict what may happen in the future. There is plentiful solid evidence that buying stocks when they trade below book value or at a discount to net current asset value is very profitable but almost no one actually does it in practice. I guess it takes too long or isn’t exciting enough for most folks. I do not approach the markets for excitement. I do so for profits.

I continue to be absolutely flummoxed that every investor is not buying up small community banks. I ran a quick back test of the community bank index ETF QABA this afternoon. Since 2000 the overall market has squeaked out a positive return of about 4%. The unmanaged index of little banks has returned 13.75% over the same time period. Over the past decade the market return improves to 8.02% but the little banks continue to outperform earning 13.73% over that time frame. That’s an unmanaged index with no consideration to valuation levels or asset quality. Results can only be improved by focusing on value and safety in these tiny giants of the investment world. We are in the early stages of a massive merger wave and huge changes in the banking world and lots of money will be made. Not having at least a portion of your investment funds in this space is ignoring one of the biggest profit opportunities you will see in your lifetime.

We are coming up on the All-Star break and my Orioles are hanging on to first place in the AL East. Its heating up all across the league. The Jeff Samardzija trade makes the A’s a beast but they cannot let up for a minute as the Angels are getting hot going 8-2 in their last 10 games. The feel good story of Hank the homeless dog and the Brew Crew looks to be running out of steam as they are just 2-8 in the last 10 games and some very good teams including the Cardinals are chasing them down. I am pulling for Hank but it’s a long season. There should be a lot of good baseball ahead.

We have some great new books coming out in the next week for my fellow recreational readers.. Stuart Woods has a new a Stone Barrington Book out while James Lee burke leaves the popular Dave Robicheaux for a historical novel that looks fantastic. A new W.E.B Griffin novel is due the first week of August. Ace Atkins also has a new one out later this month.

Buy some nice cheap stocks, a few little banks and head to the beach, Turn the game on the portable and kick back with a great story. The market will do what it will and we are in a fantastic position to profit from reacting to what actually happens rather than trying to predict the unknowable.
Have a great week everyone
Cheers,
Tim
Song of the week: What small banks will keep doing

Deserve More

I must confess that I love me some Fourth of July. It is a uniquely American celebration, raucous, loud and quite often tacky in the way only Americans can be. We have a huge party in the neighborhood today and there will be loud music, screaming kids, fireworks, too much food and I have sworn to do my part to make sure there is an excessive amount of delicious adult beverages as well. It will be as John Adams commanded “solemnized with pomp and parade, with shows, games, sports, guns, bells, bonfires, and illuminations, from one end of this continent to the other, from this time forward forevermore.”

From that humble beginning in 1776 what an incredible nation we have grown. Our achievements in the arts and sciences have been almost beyond measure. We have grown great businesses and great cities over our years. Often we have stood as the last bastion against oppression and evil incarnate. I have traveled the length and breadth of the lower 48 and can tell you we have grown a citizenry of incredible bravery, compassion and determination unequaled on the planet. We have sent men to the moon and solved many dread diseases that once threatened the population. We have spawned great music and great literature. It is a great country and I feel fortunate, if not blessed to have been born here. Unfortunately we have allowed much to go wrong along our journey and at times it threatens to end this great experiment in liberty that our forefathers began.

As I do every year at this time before I start tipping the Sangria and blowing stuff up I reflect upon where we are as a nation. This is still an incredible nation but I fear we are no longer the bright shining city on a hill that serves as an example of freedom and liberty. We are still the home of the brave but I do not really think we are the land of the free so much anymore. When government can tell you how large a soda you can buy, what type of oil you may cook with, who you have to fire and how much you have to pay them or who you love or marry it is not exactly what I would call a state of liberty. When government can decide how you can live your personal life and interferes in every aspect of your life it is not a free society any longer. We have allowed government to grow and consume that vision the founding fathers originally have. It is not necessarily inspired by evil but rather in the name of some greater good, quite often the children. But as Benjamin Franklin warned us at the very start of this grand experiment ““They who can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety.”

HL Mencken warned us about the spread of government and that slow slipping away of liberty when he said “The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.” For that matter Plato was probably the first to warned us about governments inevitable infringement of the rights of the people telling us so very long ago “When the tyrant has disposed of foreign enemies by conquest or treaty and there is nothing to fear from them then he is always stirring up some wary or other in order that the people may require a leader.”

I worry that the political parties have done such a fantastic job of spreading government s reach into our daily lives by sowing dogmatic discord throughout the populace. The straights hate the gays, the blacks don’t trust the whites, the Northerner dislikes those in the south, the farmer hates the city dweller. We turn gay rights, race,class, morality and family values into war cries and march off under our banner to demand our rights and more importantly privileges. The two parties rally the folks around their causes and drive a deep divide into the populace all the while strengthening their death grip on the seat of power and the public purse.

If we could all forget what it says on our voter registration card we would be better off as a nation and as a people. Keep in mind that the only real difference between the two parties is how they sway the voters. The Democrats wish to regulate everything but what goes on in your bedroom and the republican want to regulate nothing except what goes on in your bedroom. Both parties are deeply in bed with Wall Street and Corporate America and no amount of ridiculous advertising or rhetoric can change that. They go to great lengths to gerrymander voting districts and do whatever is necessary to keep the two party system entrenched in our society. One again it’s our own fault. We were warned that this would happen.

In 1870 John Adams was already concerned about the two party system at work . He wrote then that “There is nothing which I dread so much as a division of the republic into two great parties, each arranged under its leader, and concerting measures in opposition to each other. This, in my humble apprehension, is to be dreaded as the greatest political evil under our Constitution.” George Washingt5om expressed his fears on political parties in his farewell speech telling the citizens of the fledgling republic “However [political parties] may now and then answer popular ends, they are likely in the course of time and things, to become potent engines, by which cunning, ambitious, and unprincipled men will be enabled to subvert the power of the people and to usurp for themselves the reins of government, destroying afterwards the very engines which have lifted them to unjust dominion.”

I often fear that George Bernard Shaw was right when he said “Liberty means responsibility. That is why most men dread it.” It seems that many would prefer the soft comforting bosom of government to standing up on their own two feet and taking what they want from life on their own effort and merit. If a child is failing in school it must be the governments fault not our own. If we are not earnings much as we want then the generous purses of government must take from someone who is and redistribute it to us. Government should protect us from ourselves and everything around us. That old catch phrase”Why that’s outrageous, There ought to be a law” has done an enormous amount of harm over the centuries and unchecked will do more in the centuries ahead.

Shaw also once said “Democracy is a device that insures we shall be governed no better than we deserve.” The challenge then for us is to deserve more. In the opening scene of HBOs series Newsroom says that we are not the greatest nation on earth, but we could be is our challenge. We could be. We should be. Live in such a way to deserve more.

We need to quit accepting the unholy morass of crony capitalism and go back to the invisible hand of the market as described by Adam Smith so many years ago. Make corporations and government responsible for their decisions and the harm that they do. Whenever someone lectures me about how Wall Street caused the crisis and ruined many Americans and by god the government needs to something about it, I remind that in fact the government did do something about it. They bailed out the very banks that helped create the crisis. But if you are ranting about the situation but have a Bank of America or Chase credit card in your wallet because it is just so convenient you are tying the invisible hand of the market behind its back and are as big a part of the problem as the bankers and legislators. If you are upset about the Gulf Oil spill but pull into BP for gas because it is on the way to work you are as big a part of the problem as the oil company itself. We tend to look for government to punish all these violators when they are in fact in bed with most of them.

We can be the greatest nation on earth if we go back to a nation that embraces personal responsibility. We need to work, learn and strive to accomplish our dream and desires for ourselves and our families and not wait for it to be given to us. We need to each get up each today and do what we can to make our lives better and educate our children in such a manner that they can do the same when it is their turn. The outcome of your life depends on you and your effort and mine should depend on mine. The opportunities are there if we just insist the government get out of the way and allow us each as individuals to achieve our dream. By independent effort and achievement alone do we become a great society.

We need to quit worrying about everyone else does with their life or who they are to become a great a nation once again. Who is marrying who, or sleeping with who is none of your business. Who likes to smoke a little pot instead of drinking a beer is none of your business. The fact that someone’s skin tone is different than yours should have nothing to do with your opinion of them. Which version of the great granddaddy in the sky they favor is no business of yours either. As long as they harm no one and do not rely on you to support them let people live their own lives and you do the same.

We need to restore the spirit of personal generosity. As Jesus said the poor will be with us always.. Even the conservative Austrian Economist Hayek once said “There can be no doubt that some minimum of food, shelter, and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody.” But we have allowed the safety net to become a way of life for far too large a percentage of the population. We need the kind for generous spirit that helps those less fortunate on our own inclinations and not one enforced at the end of a tax collectors pistol. If life has blessed you then you should look for an opportunity to help others progress in their lives. Because you want to, not because the government makes you. We need to get the government out of the charity business and the people back in it. Our social policy should be based on educating our children and growing an economy that provides jobs for them when they graduate

We are not the greatest nation in the world right now. But imagine an America where everyone is free to live their own lives in their own way. Where we provide a safe place to educate and teachers do not teach to the test but inspire a lifelong love of science, math, literature and the arts. Where the government does not take as much as half of your income to spend on failed social programs, foreign aid to nations who despise us and illegal wars. Where every child grows up knowing they have a chance to achieve a good life and discover their own version of the pursuit of happiness. Where you can marry who you want, love who you want. Where the rights of the individual come before the desires of the masses. Where the tax code is fair, reasonable and limited. Where business are allowed to grow and create jobs. Where people take responsibility for their own needs, desires and actions. Where Freedom means free to live you own way as long as you cause no harm to others. That America will once again be the greatest nation in the world.

We can make it so. We just have to live in such a fashion as to deserve it.
Now, let the good times roll. It’s the Fourth of July and we celebrate what has been and what we can Be. God Blass America and pass me that BBQ!

Cheers
Tim

Baseball, BBQ, Cheap Stocks and Explosives

There is much celebration among market and economy bulls today. The jobs number was much better than the always spot on accurate economists had predicted. The print was not on the tap for more than ten seconds when the poo-pooers showed up pointing out the disturbing drop in full time jobs and almost 800k rise in part time jobs as well as the lack of wage increases. In a very well thought out piece online, New York Times writer Neil Irwin pointed out that the bad weather caused many teachers and other school employees to work well into June this year and many of those jobs could evaporate in July. He also points out that we have seen this before pointing to the huge print in January of 2012 when more than 300,000 jobs growth was reported. He concludes the article saying “That doesn’t completely undermine the story of more robust growth on the way. It just confirms the point that anybody hoping for a better economy should not read the l atest numbers as conclusive evidence that everything is fixed. Instead, they can be seen as one more promising but inconclusive hint that the long-awaited jobs boom could indeed be around the corner.”

Now I mention all this not so much to comment on the jobs report. More jobs are better than less jobs so it was an okay report. My point is that if you are trading on these numbers, just stop. If you can’t stop just send your money to Goldman Sachs and the CBOE. Odds are they are going to end up with it anyway. These numbers can be interpreted in so many different ways and the headline that everyone trades off rarely, if ever, contains the real story. Also consider that there is a fair amount of estimating and flat out guessing that goes into compiling these government issued numbers. It is a foolish way to trade your money. It is right up there with earnings season as one of the more frequent, and to be honest, stupid ways people find to lose their money to Wall Street.

I have spent a fair amount of time studying Wall Street and it occurs to me that he greatest fortunes and most consistent success has come to those who understand the value of doing nothing when circumstances dictate. Hetty Green only bought during crashes and panics and in her day was the richest woman in the world. Andy Beal is someone you should study closely as well. While most have never heard of the guy the Texas banker has made a fortune only buying during a crisis. He does such fun things as buying Texas real estate when oil prices were low and Houston looked like a ghost town, scooping up aircraft secured bonds post 9-11 and tons of bad loans and busted banks in 2008 and 2009. He has made a few billion dollars by buying in panics and crashes and holding until they recovered in a few years. A lot of Warren Buffett’s success comes from his willingness to buy crashes and bad markets as well.

Our almost desperate need to do something every day and focus on short term performance are two very expensive bad habits. Seth Klarman did not rack up two decades of 20% performance by worrying about day to day or even quarter to quarter. Wilbur Ross became a billionaire by buying distressed assets and then holding them for years. So did Sam Zell. They measured things in years and actual asset value and not short term price movements over a few days or weeks.

The nice thing about their approach of buying cheap assets and holding for a long time is that we can replicate the strategy in our own accounts. Most of us do not have the in depth math knowledge that Jim Simons used to build Renaissance Tech into a short term trading giant. We don’t have the major skills and insights of a Soros nor do we have a team of 50 analysts feeding us steady streams of data to formulate complex strategies. The sad truth for would be traders is that most of us, myself included, do not have the skill set and time needed to be in that 1/10 of 1% that actually become great traders

We can, however. buy cheap stuff with a margin of safety and hold on until valuations improve. That does not require twin degrees in economics and statistics. It requires basic math skills and patience. The nice part is that if you look at the folks who have stuck to the method over the decades like Walter Schloss or John Templeton their track records are as good, if not better, than most of the famous traders. Had they ever used leverage at all the patient value would have blown away all of them.

If you want to achieve long term success change your approach and mindset. Adopt the private equity mindset that buys cheap stocks and hold them for a long period of time. Strive to emulate Hetty Green and Andy Beal and quit trying to be Paul Tudor Jones or George Soros. Think more like Walter Schloss and less like Jesse Livermore. You will make more money and enjoy your life far more.

Speaking of enjoyment it is the Fourth of July here in here US and I am primed for a great weekend. I am going to chop up the fruit for the Sangria when the market closes today and to my wife’s chagrin I still have a big old bag of fireworks left from last year’s New Smyrna Beach Festivities. The Orioles are playing solid ball and are right in the thick of things and I just downloaded some hard core crime noir novels that should make for entertaining weekend reading by the pool. We have a big barbecue planned and it’s going to be a fantastic weekend here in Central Florida.

Cheap Stocks, Good Books, BBQ and explosives. What more could you possibly ask for?

Have a Great Weekend all.

Cheers

Tim

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