GDP, Vomit Bags and Frank Zappa


If anything about todays muted GDP report is a surprise to you then you simply are not paying attention. If I could get my hands on some of these folks telling us how robust and wonderful the US economy is in 2015 I would cheerfully and with great delight smack the gas out of them. It is not wonderful. It is not awful but it is certainly not wonderful. Its better but not good and I do not see anything that will change that picture any time soon.

I keep hearing about the wonderful job market but let’s consider this from the national Employment Law Project. They recently released a study that shows that “Private sector employment has expanded steadily, and the jobless rate has continued to fall. Yet, underlying weaknesses persist, as evidenced by the historically low employment rate of prime-age workers and the stubbornly high number of individuals unemployed for longer than six months. The “real” unemployment rate, which includes those working part time who want full-time work, and those who have stopped searching but if offered a job would take it, remains in excess of 10 percent. Moreover, most workers have failed to see improvements in their paychecks. In fact, taking into account cost-of-living increases since the recession officially ended in 2009, wages have actually declined for most U.S. workers. Inflation-adjusted or “real” wages reflect workers’ true purchasing power; as real wages decline, so too does the amount of goods and services workers can buy with those wages.” Nor robust. Mediocre. Better but not good.

The consumer is starting to lose some confidence in the economy just as close in on the Holiday selling season. Today Bloomberg reported that” The Bloomberg Consumer Comfort Index declined to 42.8 in the period ended Oct. 25 from 43.5. After climbing 5 points from mid-September low to reach a six-month high on Oct. 11, the gauge has given up half the advance in the past two weeks. The measure is holding just below its average for the year.” Hopefully that gets a lot stronger between now and the Black Friday kickoff of Holiday Selling season.

Not that the overall stock market really cares very much. We keep chugging along with the Month of October showing the largest point decline in history. The time between now and the next Fed meeting is going to be torturous for those of us who do not think the focus on a 25 basis point rate hike is the grand end all and be all for the market. It is going to be debated and discussed with each and every data point released and could lead to the office TV going onto a steady diet of the MLB and History channels during the business day.

Tech is helping the earnings season be less than a total disaster so far. Reuters said this week that S&P 500 earnings are forecast to have declined 2.8 percent in the quarter, based on actual results from about 35 percent of the S&P 500 companies and estimates for the rest, compared with a 4.2 percent decline forecast at the start of the month.

European oil companies reported today and it was awful. Shell (RDS), Total (TOT) and Eni (E) had ugly earnings as a result of lower oil prices. Conoco Phillips (COP) also had an ugly report with the largest loss in 6 years. Tomorrow we will see Chevron (CVX) and Exxon (XOM) report and I will not be shocked to see the same result. Although the fact that I do have a great record of predicting oil prices as demonstrated by my 2014 purchased of energy stocks the one observation I have for energy is that while it may be ugly, it will probably be painful in the long run, those who can stand the volatility and occasional vomiting session stand to make a fortune over the next decade or so. If we get any geopolitical event that roils the cure markets the price spike could be epic in nature. Looking longer term, although somewhat distraught by the fact that Central bankers and politicians have too much control over the global economy, I do think we eventually see people’s desire for a better life overcome that stupidity of governments and the economy and oil will eventual rally. I could be wrong but if I am right an enormous amount of money can be made so I will just stay buckled in with the oil stocks I own and take the ride. I can’t time it so I just have to hold on and keep the vomit bag close at hand.

The pain of oil and resources stock has been more than overcome by the opiate effect of community bank stocks. In addition to three takeovers at big premiums in October earnings have been fantastic. We are seeing decent growth in loans, continued credit improvements, increased dividends and buyback announcement. These little banks are the vast majority of my portfolio right now and will be until we get some sort of broad market inventory creation event.

It is probably worth buying a little First Niagara (FNFG) here if a deal is not announced pre-open tomorrow and the stock trades around current levels. The deal should be between $12.50-13 in my opinion. It’s a good fit with Keycorp and a stock deal could back you into a very strong regional bank at a good price. Analyst Laurie Havener Hunsicker at Compass Point Research & Trading wrote just last week that the bank should fetch $13 a share.

We have a big weekend ahead as the youngest looks forward to he last year of tricking or treating with her fancy Doctor Who costume. Hopefully people develop a sense f style and give her lots of Jujyfruits that the old man can steal. We have folks coming in from out of town so big dinners at the steakhouse with lots of wine is on tap and I am hoping to get some serious reading and World Series time.
Have a great week everyone
Don’t forget that Banking on Profits Monthly price goes up to $199 on November 15- Lock in $99 a year for life here
I think oil will makes us a lot money over the long run but some days it feels like

The Trade of the Decade -Are You In?



When I get together with friends to watch a football game at the sports bar to watch a game we spend more than on beer, burgers and wings.

It is less than my cable bill every month

It is way less than my smart phone bill every month.

You spend more for one ticket for a decent seat at an NFL game. And that before the $9 hotdog and $12 beer.

That same $99 dollar can get you a full year of Banking on Profits Monthly and change the way you invest and improve the results you get form putting your money to work in the stock market. Consider this:

BOP Monthly 7-15-2014- I mentioned 9 stocks with insider buying or 13d filings. 8 of 9 are positive and the average gain of all 4 is 13%

In 8-15-14 BOP monthly I highlighted 6 13d filings. All 6 are higher. 2 have been taken over already and the average gain of 29.83%

In the 9-15-14 editions I covered 3 13d filings. All 3 are up and the average gains is 31.38%

In 10/15/14 BOP monthly we covered 7 bank 13d filings. All 7 are up and average gain is 33.69%.

I could go on but you get the point.

I have been investing in community banks for over 20 years with a great deal of success. Each month I will provide you with my current thought and observations about the community bank sector. I will cover 13d activist filings in community banks and track insider buying in the group as well. I will cover two focus stocks each month that I think might be good long tem ricks as well as provide you with guest commentary from other bank stocks specialists, hedge fund mangers, analysts and bank CEOs. There will be special screens to help you find banks with high yields, exceptional ROEs, high earnings growth or whatever other criteria struck my fancy that month. I cover everything oyu need ot knwo to be a succesful investor in what I call The Trade of the Decade.
Every quarter we will cover the 13F filings of the very best community bank stock activists and specialist investors. You will be able to see what these pros are buying. We learned in last years study from Sterne Agee that community banks with activist buyers outperformed the bank stock indexes by more than 25% during the period of time the activists owned the stock so this is important and profitable information.

Every week, except for the one or two times around the holidays when all my kids are in town you get a reading list of articles related to community banks and investing in general that I found interesting as well as articles and videos I put out during the week. Here is the one from this past week:

Reading List

Oct. 17, 2015, 1:29 p.m.

Bank Stock Activism

Fintech and Millennials
Agility and commitment
Crushing community banks

C0-exisiting with non bank lenders
TSBK a likely target
Age and M&A

Secrets for M&A approval

Hamilton- a slight pause
Not spending more
Social media pitfalls and opportunities

Cutting the red tape

Keeping quiet on sale rumors
Facilitating necessary M&A

Activism building in banks

Cyber risk and bank M&A
Mississippi showdown
Time for US to get smart about sports gambling

Fall Graham and Doddsville

Zweig on luck

Some of mine this week

Private equity like investing

Sessa on AHP
Thrift conversions for your portfolio
Wal Mart Activists and the Cubs

Big bank day, consolidation and book ideas
You get a lot for $99. You can also email with questions and I am happy to answer them and help you understand the community bank stock opportunity. Community banks are the trade of the decade and I can help you make the most of it for less than you spend on a single night out.

Click here to get Banking on Profits for the full year. You will be glad you did and the profits from just one activist drive takeover will pay for the subscription for the rest of your life with enough left over to have the gang over to watch the game with steaks and top shelf drinks.

I look forward to having you as a Banking on Profits Monthly Member.



Wal-Mart, Activists and the Cubs


Once again the only surprise is that anyone is surprised. Wal-mart (WMT) is dealing with wage stagnation, higher wages and intense price competition from Amazon and other on line retailers. They are being hit on all fronts right now and they have a tough road ahead of them. Wal-Mart serves lower end consumers and they do not shop online. You may recall that Wal-mart went into banking once upon a time specifically because so many of their customers were underbanked. It is doubtful that folks without basic checking accounts will be scooping up prepaid cards to shop online. They are also being hit by the millennials habit of eating out more often as pointed out by Steve Goldstein over at Marketwatch this week. I can tell you that for my adult kids its easier- and less expensive much of the time – to stop for dinner on the way home than to cook for 1 or 2 and then do all the associated clean up. For decades demographic and economic trends have favored Wal-mart. Now they don’t. It will be interesting to see how the company responds.

The worst part is that those most hurt will be the very low end consumers who depended on the company for decent goods at a low price. The company said yesterday that “Fiscal year 2017 will represent our heaviest investment period. Operating income is expected to be impacted by approximately $1.5 billion from the second phase of our previously announced investments in wages and training as well as our commitment to further developing a seamless customer experience. As a result of these investments, we expect earnings per share to decline between 6 and 12 percent in fiscal year 2017, however by fiscal year 2019 we would expect earnings per share to increase by approximately 5 to 10 percent compared to the prior year.” These costs are a result off going to $9 and then $10 an hour as their minimum wage. Those well-meaning souls who want $15 an hour would destroy the company and cause higher prices for the consumers who need the store the most.

It has been hard for me to take the broad market seriously the past few weeks. We have had three bank takeovers in the past three weeks, all for healthy gains. It has gotten so bad that some subscribers were not happy that one deal only made us 25%! The biggest question is how long will this continue? The answer is a long time. We have a group of banks that need to sell and there is some concern that since everyone knows it why would they pay a premium? The simple answer is that for every bank that needs to sell there are three that need to buy in order to grow assets and earnings.

I am starting to see a great deal of value and increasing activist activity in small REITs. The tape is up on the week and the month so I am not rushing to throw buy orders in just yet but next good down session I am ready to pull the trigger on several undervalued names in this space. The large REITs are ridiculously overpriced but the smaller ones outside the indexes and ETFs are cheap. Considering that most REITs are trading for less than the value of the properties that they own they might be considered to be double cheap t current levels.

I am still seeing some interesting 13d filings in discounted closed end funds recently. We have our first forced open ending of a fund after riding an activists coattails and I will not be shocked to see more on the months ahead. I expect this to be a very lucrative area for deep value investors for the next few years. Last week Barrns wrte about the sector saying” With interest rates likely to stay low for the foreseeable future, income investors can’t be blamed for looking for unorthodox ways to boost their returns. Here’s one to consider: Buy a closed-end fund that’s trading at a discount but set to liquidate in a few years at net asset value. Barrons commented on the sector last week saying”Closed-end funds are actively managed mutual funds that have a fixed number of shares, unlike open-end funds that issue as many new shares as there are buyers for them. Closed-end funds trade on a stock exchange, often at a lower price than the sum total of assets should warrant, especially when those securities are out of favor. Right now, discounts are especially wide—about 10% on average.” Take an undervalued asset class, add activists and good things usually happen.

There will be no Thursday Email next week. By son-in-law has moved way up my list of favorite people in the world by scoring us some playoff tickets. So next Wednesday I will be heading here :
For the Cubs game and then spending Thursday evening with my daughter wining and dining our way around here:

Have a great week everyone!

I will be back with the Thursday commentary in two weeks. Subscribers will get regular weekend updates sometime Friday provided my flight is on time!

In the meantime I an off to

1776, Preparing for Battle and Financial Engineering

Whenever the conversation turns to stock sooner or later I am going to talk about community bank stocks. There are other small pockets of opportunity in the stock market like small REITs, some oil stocks and special situations but the most compelling opportunity in the market is the community bank stocks. The bigger ones need to buy to grow assets and earnings. The smaller ones cannot survive independently because of regulatory and technology costs. We all know it is going to happen over the next few years so now we are just haggling about price. In the meantime book values are growing by round 6-7% as credit conditions improve and banks can use excess capital to buyback stock at the current low levels. Deal multiples are creeping higher and are currently running right around 135% of tangible book value. Since we can buy a decent portfolio of small banks with sound loan portfolios, plenty of capital and at least one activist investor involved at 90% of book or less I question why more people aren’t doing this?

I am usually shouted down by the chart guys, the tech fans, the biotech buyers and the unknowing financial suicides known as retail options traders. The more I talk about the little banks the more I feel like John Adams in the musical 1776 with the crowd shouting for him to sit down as he argues the same point over and over. Of course John Adams was eventually proven right and so far so have I. I expect that to continue.

When not crusading for the small bank I spend a lot of time looking for bargain issues in the broader market. We are not finding many but I run a lot screens getting ready for the next inventory creation event. I try to channel my inner Munger by yelling at the neighborhood kids to get off my damn lawn and then looking for those industries and sectors where I can practice sitting on my ass investing for many years with large compounded returns. I keep lists of stocks in the cybersecurity and warfare, drone and robot technology infrastructure, alternative energy, pollution control, REIT, and agricultural sectors that will benefit from what I see as emerging social demographic and economic trends over the next ten and even twenty years. I also have on the list the price I would be willing to pay for them. I keep this updated every quarter or so and although the buy prices may look ridiculous now they won’t if we get a major market event. I had similar list pinned to the corkboard by my desk in 2008 and 2009 and it served me very well. The time to load your weapons is well before the battle starts.

I have no idea when we will see a market event but I can tell you that after reading the recent Saint Louis Fed banker survey the disconnect between Main Street and Wall Street is getting worse not better. Just look at some of the state by state Town Hall Meeting comments:

While borrowers are still cautious and real estate lending has rebounded, the North Carolina market has not reached prerecession levels.

Community bankers in New Mexico are not optimistic about their ability to attract new business in the current economic and regulatory environment

In northern New Hampshire, the real estate market has a high inventory of available properties. Unemployment is relatively high, with hospitality personnel and the self-employed struggling the most to find work. Many have lost jobs. For those who do have jobs, hours have been cut and many are working part time. Bankers feel there is still considerable “slack” in the North’s labor market that remains unaccounted for.

While growth remains relatively flat, opportunities for business expansion and formation do exist. For example, Missouri has a large number of empty buildings available for commercial, retail and warehouse purposes. However, bankers noted that there is minimal new commercial business formation which, of course, causes these buildings to go unused. Overall, community bankers in Mississippi believe that the economy is improving, but they are not confident that positive growth will continue.

In Massachusetts economic decline in certain areas, as well as unemployment, is forcing many loan modifications. Most delinquencies are from owner occupied loans, making these types of loans risky for many banks.

Kansas is experiencing limited business development in major metropolitan areas. The population of areas like Topeka has grown slowly, resulting in similarly slow growth in business activity, capital expenditures and acquisitions.

Iowa is seeing slow-to-no growth throughout the state, with the rural areas having the most difficulty developing economically.

Business development in Indiana is not robust, but modest improvement is noted.

In general, bankers perceive that new business formation in Illinois is very limited.

It is not pretty once you get outside the beltways and bypasses of our nations major urban areas It certainly is not consistent with a booming stock market that is trading at 20 times trailing earnings with a forecast for a second quarter in a row of declining profits

Smarter people than I have noticed the growing disconnect. Sam Zell said Wednesday on CNBC that there was a disconnect between the reality and the stock market. He told the network that “”The best example I can give you was last Monday when the stock market was schmissed (great word) down 300 and everything was horrific. I looked at the screen and said I don’t think there’s anything that I want to buy. I didn’t see anything that jumped up and said that’s value. We subsequently had a recovery that I don’t think fits any economic judgment. There’s a significant missing of demand, not only in the United States but worldwide.” He pointed out the difference between equity compensation and revenue employment and said that the pockets of strength in the economy are fueled by equity gains not revenue improvement.

Stanley Druckenmiller was a little emo repointed in his remarks recently. He said that “We’ve had a tremendous amount of debt growth, particularly in the corporate sector. There is good debt growth, and bad debt growth. Good debt growth is when you borrow money, and it goes into capital spending. But almost 98 percent of the current debt growth has gone into M&A, corporate buybacks, leverage buyouts, i.e., into financial engineering. One trillion of buybacks and 4 trillion of M&A is a job reducer. I don’t know exactly what the Fed thinks they are getting out of ZIRP. What you are getting is just a bunch of financial engineering, and you are setting up the possibility of another asset bubble bust.”

So what do we do in the meantime? We buy small banks, hold lots of cash and wait. It worked out pretty well for Charlie Munger, Mr. Womack, Andy Beal and Hetty Green so I am pretty confident it will work for us as well.

Hitting the Long Ball

home run swing

I am just about finished reading “100 to 1 in the Stock Market” by Thomas Phelps. Phelps passed away back in 1992 after spending decades working as a broker, advisor and investor. He wrote the book in 1972 and it should be on your “must read” list.

Phelps talks about finding those stocks that can grow and reinvesting earnings over decades and multiplying your investment by 100 times or more. He cites numerous examples of companies that did exactly that for those with the patience and fortitude to hold stocks for decades, instead of a few months.

The book focuses more on growth then a deep-value approach, but there are many lessons for any type of investor. I like that he focuses on growth in book value as the best measure of growth. I have always maintained that everything that happens ends up being reflected in book value. If you find a company is growing reported earnings at a much higher rate than book value, there is a lot of cash disappearing between the top and bottom line. If management is successfully reinvesting profits then book value should be growing at around the same rate as earnings. It is a huge red flag if it is not.

Additionally, I really like that Phelps stresses owning stocks for decades. He suggests that most investors would be better off concentrating on finding and owning decent companies and letting time and compounding do all the heavy lifting. He talks about earning 100 to 1 returns over decades rather than trying to trade in and out of the hot stocks of the day. The key is to focus on the business results and not the current quote.

In the book, Phelps tells the story of a businessman who sold his companies and put the proceeds in the stock market. He found it incredibly stressful. Owning stocks was keeping him awake at night. Phelps asked how he tracked his holdings when he owned several operating companies. The businessman said that he didn’t. As long as business was good and cost controls were sufficient to protect his margins he didn’t worry about them at all. Phelps suggested he start viewing his stocks the same way and focus only on the operating conditions of the companies and not the price in the Wall Street Journal every day.

But Phelps is not purely a growth investor either. He notes several times in the book that the easiest way to achieve outsized gains is to benefit from both long-term earnings growth and earnings multiple expansion. He counsels buying stocks at lower multiples of earnings and then holding on, calling this “buy right and hold tight.”

If you are lucky enough to find a company that can grow by 15% a year on average over a long period of time and the multiple stays the same you will do OK.. Let’s say you pay 10x earnings for the stock and three decades later it trades at the same multiple. With earnings of $1 in year one your money will go from $10 per share to about $660. That’s not too bad, but if the multiple expands because of investors paying up for the sustained growth rate then you do even better. If the P/E expands to 20x then your stake is now worth $1,320. Multiple expansion is as big a part of the equation as earnings growth.

Phelps also mentions in the book that one of the other ways to find 100 to 1 winners is to be a buyer of quality stocks at major market bottoms. This is a sound suggestion that is very hard for most of us to put into practice. As Charlie Munger has noted, while it takes a lot of character to sit around with lots of cash while waiting for an extraordinary opportunity, the ability to do so is why he is so rich. The older I get the more convinced I am that while holding some portion of your portfolio in cash may be a short-term drag on performance in rising markets the ability to buy great companies on the cheap in severe corrections will make a significant improvement in long-term performance.

This is a fantastic book that belongs with “The Intelligent Investor,” “The Aggressive Conservative Investor,” “Quantitative Value,” “Where Are All the Customers’ Yachts?” and other classics. Having said that, finding stocks that are capable of the sustained long-term growth needed to produce 100 to 1 returns is not an easy or simple task.

The past few days, I have spent some time talking with friends with substantial market and business experience about where we might look for potential 100 to 1 returns.I confess that Thomas Phelps’ book, 100 to 1 in the Stock Market, had a profound effect on me. I have always taken a long view of stocks and have a much longer holding period than anyone else I know. However the idea of building multigenerational wealth by holding stocks basically forever is not something I have spent a lot of time thinking about. The book really reinforces the potential wealth impact of buying right and sitting tight for decades at a time. After some thought and discussion, here are the areas that I consider the best hunting grounds for 100 to 1 winners over your lifetime.

The first will come as no surprise to you. It’s the small banks. Before you dismiss this as Melvin forcing a square rod into a round hole, let’s consider the fact that Wells Fargo (WFC), M&T Bank (MTB) and Bank of the Ozarks (OZRK) have all been huge winners over the last 40 years. They became so through acquisition — and those owners of the little banks that the big guys bought that held onto their shares have built an incredible amount of wealth. It took a lot of fortitude to hold the stocks all these years, but those that did have been rewarded.

Focusing on smaller banks in states that are projected to grow over the next several decades, like California, Florida and North Carolina, is a solid plan for investors hoping to participate in a multi-decade rollup of banks. The community banks will catch the eye of smaller regionals, who will then become the target of a larger regional — and on up the ladder. The hard part will be holding the acquiring bank’s shares all the way through the process. Banks like ASB Bancorp (ASBB), Banc of California (BANC) and Atlantic Coast Financial (ACFC) strike me a good way to get started on the journey.

Cybersecurity would seem to me to be a no brainer, given the valuation of most of the stocks in the sector. Stocks like Check Point Software (CHKP), Palo Alto Networks (PANW) and Fortinet (FTNT) all trade at healthy multiples right now. Since buying right is a huge part of the equation, you may have to wait for a bear market environment to buy these stocks. Life will continue to move online and into the cloud, and attacks from criminals and our global adversaries will become more frequent in the future, so a ton of money will be spent in this area — and it will be permanent spending. I do like Kratos Defense & Security Solutions (KTOS) in this area, as they have a division that works in cyber defense and warfare. Unisys (UIS) is a pick, here, as well. They have a cybersecurity product that is well reviewed, and will be marketed to banks with what I think will be a great deal of success.

Alternative energy has to be on the list, as that’s the way the world is moving. But I have a tough time coming up with companies that I think will make the whole 40-year ride. I tend to agree with Bill Gates that we need a breakthrough technology before alternative energy becomes cost effective. I watch the space carefully, but until we get a breakthrough in storage and transmission I do not see a long-term play in the space. Some of the companies that make the carbon fiber used in windmills are a possible consideration, like Hexcel (HXL), but they are not cheap enough to buy right at the moment. I am not convinced that the 100-to-1 stocks in this space have been founded yet.

Pollution control is another industry that I think will be a growth leader over the next 3 to 4 decades. Global population is growing, and I see no reason it will not continue to do so. More people means mean trash, more carbon emissions and more water pollution. CECO Environmental (CECE) stands out as a company that is growing book value at a rate that can produce huge long-term winners.

Growing populations will also increase the demand for clean water. Companies that can help find, produce and deliver clean water should see the type of long-term growth that can produce 100-to-1 winners. Companies like Layne Christensen (LAYN), Northwest Pipe (NWPX) and Consolidated Water Company (CWCO) would seem to be likely candidates for a multi-decade portfolio of water-related stocks.

Thomas Phelps’ book is one of the more thought provoking books I have read in years. Sitting down and thinking in terms of investing for decades in companies that should reap the benefits of social and demographic trends capable of producing these types of gains is intellectually — and perhaps ultimately, financially — very rewarding. I highly recommend that you read the book and conduct the thought exercise.

Orginally published on RealMoney.Com

Carl, Caution and Small Banks


Most of my week has been taken up with travel time and the FIG bank conference. It was not until today that I had a chance to sit down and spend any time with the rest of the news. I finally got around to checking out Carl Icahns video that everyone has apparently been talking about. Mr. Icahn has made negative comments about the market for some time and joins that chorus of Klarman, Tepper, Zeel, Montier and others that have expressed concerns about the valuation of the stock market. At 20 times earnings I do not think you can call the market cheap and the lack of bargains has me as concerned as all the other old guys. I have seen some folks poke fun and write for clicks talking about how silly Carl Icahn’s remarks are but I note some key differences between him and his critics. Carl Icahn has been doing this a lot longer than they have and he is one hell of a lot richer.

Mr. Icahn said in the video that” “I see real tremendous problems ahead and I don’t think we are handling it right and nobody really wants to talk out. We are headed toward a strong correction and possibly a complete meltdown but not systemic like 2008. It won’t threaten the system, it’s just going to threaten your livelihood and net worth.” He said that short term thinking in corporate boardrooms and Washington have pushed up to the edge of a market cliff and said that he had seen it before in years like 1969, 1974, 1979, 1987, and 2000. I find it very hard to disagree with that remark and we will see short term thinking come into all its glory next week when we get into earnings season and all the just plain dumb trading we will see based on the traders guess that his guess about three month earnings will be better or worse than the analysts guess and how the market will react to this combination of guesses. Even worse shareholder cash will be spent to buyback enough stock, even at high valuations, to manage results above the magic number and in some cases people will lose their jobs to make the three month numbers in line or above Wall Street estimates.

Mr. Icahn urged the Fed to get off zero rates as cheap money was making bad decisions possible, He told investors that “”Those guys who run these companies are borrowing money very cheaply, leveraging up their companies, using it to do two things … They are going in and they are buying back stock or even worse, making stupid takeovers,” said Icahn, adding some recent acquisitions have been done at a too high a price. We’ve been on the boards of a lot of companies in a minority position to convince the boards to stop doing these takeovers and stop purchasing these companies. This is not to say that mergers shouldn’t be done.”

In a follow up interview with CNBC Mr. Icahn said that he thinks that markets are at dangerous levels and earnings are overstated. He thinks investors have out themselves in a dangerous positions and is particularly worried about income seeking investor’s exposure to junk bonds. That is a concern of mine as well as having lived through two junk bond crashes this market can go no bid quicker than you can blink. He quite correctly pointed out that “If and when there is a real problem in the economy, there’s going to be a rush for the exits and people want to sell those bonds and think they can sell them. “ That is exactly what happens when junk bonds collapse. I have seen several folks talk about junk closed end funds in recent weeks because to the double digit discounts. The last two times we had a full on collapse in junk those discounts were way over 20% and that’s when I may get interested in discounted junk but I have no interest right now.

The two best asset classes right now remain small banks and cash. My trip to the FIG Bank Conference this week just increased my confidence in this sector tremendously. M&A is going to pick up and money is going to be made in a fairly low risk manner. Buying small banks with sound balnce sheets and loan portfolios is like shooting fish in a barrel. When you add an activist investors in an activist shareholder it becomes more like the fish shooting themselves and jumping into the frying pan.

Outside of these little gems I favor cash. We have some cheap stocks and we are holding these but new bargains are hard to find There simply are not enough cheap stocks to justify a full on commitment to the stock market. We have high cash levels in both Deep Value and International Dep Value and that’s not going to change until we see a lot more inventory created by a significant market event.

Have a great week


When it comes to markets today we might be well advised to invest like Bob Marley and exercise a little