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Tuesday, March 27, 2007

warm weather,fractured livers and stock markets

It’s a good day here. The first 80-degree day of the summer and life is good. I drive out to lunch today with the windows down and the ramones cranked on the stereo and could taste summer in the air. Somewhere off in the distance I can hear boat engines firing off and catch a trace of the familiar smell of an island summer, high-octane fuel mixed with the smoke billowing off the grill at Red Eyes. One’s mind turns to rock and roll nights at the dock bars, LD getting us all tossed out just as the band starts and all the other things that makes summer so special on Kent Island. There are other signs that Spring is here and summer not far behind. Saint Patrick’s day has come and gone with all the usual bacchanalia and I have survived. True, my liver did successfully sue for a restraining order following all day watching the NCAA tournament and then the nights festivities, but its not like I fell asleep in the hallway at Annie’s Steakhouse while waiting for the cab, or cartwheel through a restaurant. That would be ridiculous! All in all it was a quite Saint Paddys on the Melvin scale (using a normal scale would make me look bad, nit that I do not do a fine job of that anyway). No bar top singing. No secretary kissing. No bagpipe stealing. There’s always next year. It is less than one week until opening day and the Orioles head north with an improved lineup and actual pitchers in the bullpen giving a sense of hope that will doubtlessly be crushed by Mid-June. At which point I will invoke the Anybody But The Red Sox clause and begin rooting for the Yankees. Only two weeks away is the traditional first warm weather trip of the year as the after dark crew heads to Lexington for the Horse races at Keeneland with all the attendant bourbon, gambling and female arm wrestling that marks the event. It is almost summer. I can taste it in the air and I cannot wait.

Other reasons for an all around good day abound. Randy Wayne Whites newest Doc ford book is out today, always an important occasion around Chez Melvin. The package tracker tells me that Amazon has delivered a stack of research material for my latest project idea and it looks like I ll be able to get in a shirt sleeve Happy hour at Big Als Dock bar, formerly known as the shanty. It’s still just a shack on the end of a pier but a great place for warm weather after work gatherings. And the stock market has finally begun to slip off as I have suggested it would to much criticism for the upward drift bunch. True, there is an upward bias to the market but it’s not linear and the concerns over housing and the current geopolitical situation needed to be reflected in prices after 9 months of pretty much straight up. Volatility spiked up this month as well and although it has come back down since I think that going forward we will have a little more recognition of the price of risk in the stock market. With the SP 500 showing only marginal gains for the year, and the Dow actually negative, I feel somewhat vindicated for my bearish forecasts.

I think we have more work to do on the downside ahead. The impact of sub prime defaults is still not known, nor is the impact of any more carry trade unwinding in the weeks ahead. Iran has raised the stakes in the Mid East, not realizing that fro all the stiff upper lip bad food persona the Brits show, they are actually much less politically correct than the US in response to threats. The SAS, unlike Delta or Seals is allowed to go do the job when called upon. This has negative implications for the stability of the region, oil prices and ultimately stock prices. As far as portfolio moves, I really have not made any. I remain long and rite puts on the Canadian Royalty trust. They are all down over 50 percent from their highs, have dividend yields in excess of 10% and trade very low when measured against assets and earnings. I still have positions in the 3 liquidations that are ongoing. Tripos has moved up over the 70- mark once the deal was approved by shareholder vote and I think we get close to .90 payout over the next year. Remiss trades at 1.55 but has jumped around a bit of late. As the absolute end of the world worst case here is 1.35 and the best-case well in excess of two bucks, I think any chance under a buck and half should be taken. Of course I got waxed, whacked and badly beaten by the ECR Capital position. All that remains here is an interest in the securitization of a package of sub prime mortgages, the main mortgage business having been sold to Bear Stearns last month. Management’s original projection was a total payout of 1.60 per share but they have withdrawn that when sub prime went boom. They are looking now to sell the interest rather than let them run off. The exact number is hard to nail down but I do not thin 160 of value went to .40 however and think any further weakness is a chance to double up. I continue to think the activist game is the best in town and so far the results are holding true. I have used down days to buy stock and sell puts in stocks where activists such as Chapman capital, Barrington and Steel partners are active. I have had some huge winners using this approach and think it makes a lot of sense. Favorite names here include GY, GFF, BGP,IPAS,FINL,NSHA, OPMR. (For more on activist investing read near term puts one strike down on bad days in the market is my favorite way to play this game as it generates cash flow and gives lower priced entry to the stocks. Until the market in general moves lower I am not implementing either the value line low priced or book value approach but it remains in the arsenal as a tremendous source of profits over time. For now I think it is still time to be reasonably cautious and trade special situation and sell puts in our favorite names on days when the market wants to pay us.

Two books forthcoming on the business front that I think are worth mentioning. One is the Way of the turtle in which one of Richard Dennis’ turtle traders reveals all. I have seen most of the so called turtle rules over the years and think they only work in those rare times like the 1970s when all markets are rapidly trending but it should be an interesting read anyway. I am really looking forward to the release of the The Dhando Investor by Monish Pabrai in the first week of April. I heard Monish speak last year in New York and he is one of the most Ben Graham I have met (outside of myself of course) I have seen in a long time. His returns run at the 30% annualized area and I am anxious to see what he has to teach us. His central idea is to make a lot when you are right and lose small when you are wrong. That’s very close to own focus of margin of safety investing and it should be a good read.

We have Final Four weekend coming up, although it is hard to care after North Carolina blew a double-digit lead to the monstrous thugs from Georgetown and took me from fist to last in the big pool. Having watched the way the Hoyas just wear down and beat up teams in the paint I could see them as the surprise winner this year. I think that whoever wins the battle of teams I really love to hate; the Hoyas versus the miserable ill begotten corn fed pea brained Buckeyes of Ohio state will end up as national champion this year. I no longer have a financial stake but will nonetheless probably catch the games.
So there we have it. There is a warn breeze blowing, the tents going up at red Eyes and there are string in the boat yards as folks begin to scrape paint, caulk, sand and de-winterize their cruisers, go fasts and even their blow boats. All the signs of Spring are popping up around the island, stock prices are acting in the manner and which I need them and good reading material abounds. It has been a decent winter, we had a great football season here in Maryland, the Terps regained some dignity, there were a lot of great dinners and (unfortunate) keno sessions with great friends but it is time for some summer. Put away the raven’s gear; break out the Orioles (until June), no more scotch and soda, time for white pants and gin and tonics is upon us. Put away the sneakers and break out the boat shoes and sandals. Sell puts on sell offs, sell stocks outright on rallies and bide our time. Summer time is coming.

Nothing on Earth that'll get me humming
Like a heat wave coming and I'll come runningW
ith her makin' that tan in the broad daylight
And every night is a Saturday night
And everything's right with the summer coming
I'm the first one standing in line
For my day in the sun I've been working til the sun don't shine