Puking, Wishing and Seeking Shelter

storm

I get it. The world is ending. North Korea has a bomb. None knows what kind of a bomb but apparently a damn big one. China is slowing and they dropped the yuan again this week. The middle east is one camel hair away from birthing World War III. The always highly reliable and accurate forward PE of the S&P 500is at the highest level since 2005 according to Factset. Factset is also predicting that “For Q4 2015, the estimated earnings decline is -4.7%. If the index reports a decline in earnings for Q4, it will mark the first time the index has seen three consecutive quarters of year over-year declines in earnings since Q1 2009 through Q3 2009.” Right now the stock market appears to have all the attraction of a warmed over pile of puppy poop.

There are very legitimate concerns. Frankly the situation in the Mid-East is the most disconcerting to me. We have a major sectarian religious conflict that could verge into a huge conflict now added to the ongoing attempt to build a caliphate and outlaw every belief set that is not exactly in line with sick perversions of religion that that ISIS follows. Of major concern is that you have the Russians, The French and the US conducting major military operation in the area. If you are not worried about this you are not paying attention.

Oil and China are two of the biggest concerns facing the market so I guess we should talk about those. Some folks think oil will go down below $20. Other think we are near a bottom and prices will soon turn higher. T. Boone Pickens remains unabashedly bullish and cite Mid East region and a lack of spare capacity as reasons for prices to reach $70 or more by year end. While I am a little surprised there is not more a war premium on oil based on recent developments in the region it is not first or last time I have been surprised by market reaction. I have no idea where oil will go this year but I like the energy companies we currently own and will happily buy more if the decline continues. If prices go higher out stocks will rack up impressive gains and I will be happy about that as well.

As for China if you base any decision on reports, either government of corporate, out of China you deserve whatever happens. They release news to paint the picture they want the world to see. Right now a lower currency and an expectation for slower growth and lower markets fits their narrative so that’s what we see. I don’t want to say they lie ,but they lie as they see fit. While China may be the story of the century as Jim Rodgers predicted but the way to invest in it is going to be in US companies that sell to China bit direct ownership of Chinese companies. There is something to be said for uniform securities laws and accounting standards that are actually upheld.

Having said all that we still are not even 8% below the highs. We may go further but we have not yet. I ran my screens this morning and we are not seeing a lot of new safe and cheap inventory created just yet. I di buy a stock today but it was a repeat buy of a stock we sold at a profit in December that had fallen back out of bed and was now even cheaper than our original cost. I see a lot of stocks getting closer but they are not there yet.
One thing I observed is that the home builders have been getting bit hard recently and we are finally starting to see some of them below book value. My concern here is that when I drive around central Florida is very clear that we are over building again. There are something like 5000 new homes being built just in my immediate area and even more than that in the rest of the region. Its crazy. Who is going to buy all these houses? It’s not going to be the 20-30 somethings. Almost all of the young adults I talk to- and I talk to a bunch of them thanks to my kids- are not interested in buying a house. They want to keep their options open and mobility is highly valued. Being in Florida I am aware than we have a reputation for being the first to go stone cold crazy in every real estate cycle but I am hearing similar reports from other coastal regions. I want to own the builders at the right price as I think that the recovery will be a long slow process lasting a lot longer than the V-Bottom Boys were looking for but we need a little better pricing to get deeply involved. I have done well with builders when they had no earnings and traded at massive discounts to book and we are not there just yet.

While the big puke out of the gate this year is a little scary , unless you are retiring tomorrow you be cheering a collapse with the same passion I root for the Orioles and Midshipman. Lowe process create fantastic opportunities. If you have been following the map I have been drawing you own a lot of community banks and have a lot of cash to deploy in a falling market. A 20% or more drop in stock prices would be the greatest thing that could happen to us early in the year. There are a lot good companies that trade just above bargain levels and a big drop would allow us to add these high quality stocks are bargain prices.

We are not there yet but given the age of the bull market and the developing economic and political problems around the world make it a not unlikely development. Now is not the time to lose out heads and panic and it is not yet time to be an aggressive buyer. It is a time to wait, watch and build our wish list of stocks.
Have a great week!
Tim
Will the markets reverse or should we seek