Deep Value Letter - Banner Ad / Email Capture

Tuesday, August 14, 2007

random observations

A summer continues to wind its inevitable path to Autumn, the annual NYC trip is behind me, I find it helpful to pause and reflect about the lessons learned as we go move towards September. It has been a go summer so far, lots of boats, bars, baseball and friends to wile away the days and some interesting projects, as well of course the stock market and a growing pile of books to stimulate the mind. The following observations are totally random, likely useless with a high probability of being wrong. But what the hell..I have no intention of buying into this market just yet so this will keep me occupied in the interim.

When boating, even I who never drive due to the previously mentioned total lack of coordination and propensity for instantaneous stupidity, have observed that when running with or against the tide it is a fairly easy thing to keep the boat trimmed out and running smoothly. When, however, it is one of those lovely days when everybody and their cousin decides to go boating and the bay is full of wakes sloshing around that it gets a bit dicey. When you start taking the weaves on the side. From time to time it may even get bumpy enough to cause one to spill their cocktail. This is not fun. So it is with the stock market. Generally speaking markets tend to go along, some ups and downs but generally following the continued upward drift of mankind’s continual industrial, technological and financial progress. There will be dips. As long as they are identified and the factors are largely known and everyone is fairly rational, these dips are buying opportunities to benefit for the continual drift. Occasionally however we get a period where greed has been dominating for too long, there are questionable and unknowable factors that roil the market seas and one spills their proverbial cocktail. In periods such as this, wealth is lost not to be regained. We saw this is the 80s when the nifty fifty imploded dragging the market down to levels it didn’t recover for the better part of the decade. Recently we saw it in the 90s when there were too many tech boats and the water and the wakes crashed prices down to levels that most tech stocks still have not, and likely will never see again. Wealth was destroyed. Quotational loss can be handled as long as the business value remains intact. The real destruction of business value from overpaying relative to value cannot. I fear we may be in such a situation now. There is a lot unknowable about the current liquidity and credit crisis. No one seems to know who holds what and exactly what he or she hold is worth. One real problem is that all the pricing models, particularly in the mortgage backed market factor price appreciation in as a factor. When real estate is flat or declining the models are not accurate.

How can anyone rationally expect a credit boom of six years to end in one month?

From a moral point of view, should the Fed bail out Wall Street and the banks while allowing the consumer to fail?

With signs of inflation already present, wouldn’t an interest rate cut have consequences more serious than the current market dislocation?

Can you have a bear market and still be up for the year?

For the last year or so I have been very cautious. I have limited my buying to stocks and situations that appeared to be trading at rock solid valuations that had a large margin of safety. Silly me. As the quant funds that include these strategies in the mix have had to raise money to fund their debt and mortgage positions have puked these things out, they have gotten ludicrously cheap. Stocks that I valued at 4 now trade at a 1.40. Ones I had at seven are in the threes.

I have gone back and checked my valuations. I find them to be reasonably correct within the scope of my experience. This tells me that we are creating a get rich opportunity that will be even better than the one offered in 2001-02. Things need to shake out more than they have in my opinion but when they do we will be able to buy assets and earnings at ridiculous prices.

Back to school will be very interesting and tell us a lot about the length of this market turmoil. Consumers are being pinched by fuel costs and the newfound inability to take cash out of the family homestead. Many face real refinancing concerns soon. If most of the kids are smartly dressed, we are close to a bottom and price recovery. If we see a lot of hand me downs, buckle up.

I got the first signs of retail panic today with investors calling a little shaky with their statement being down month over month. They hadn’t seen that in a bit and they are getting worried. Not panic yet, and we have no firm wide warnings from the margin department so its not capitulation just yet.

New York is one of my favorite places to visit. Unlike Chicago however where I could see myself living, it’s always sort of a relief to leave there. Especially for my liver. Too may great bars to close together and too many interesting people to drink with.

Every time I think of moving to the Windy City, which is often, I wonder how I will deal with missing the island. It’s like living in a resort all summer long.

I think the more aggressive traders could make a case here for selling short term call credit spreads above the market on some of leading stocks and put credit spreads below on names that you like and pear cheap. If thee market goes up quickly, you end up short high PE stocks. Probably a good idea. If it continues down you ll be buying lower in stocks you like. Might be a good idea as well. If it stays in the middle, you keep the premium. Worth looking into.

As reminded by the summer boating season with all the tank tops, short skirts and bikinis, as well as the upcoming NFL season with all those lovely nearly naked cheerleaders, life is always better with scantily dressed females in attendance.

While no one does know exactly who hold what and what its worth in the mortgage market, it is worth something. This is going to make redwood trust a very interesting investment and some point. Right now their value is a moving target but once the smoke clears, these guys have liquidity and tend to make very good loans that are held rather than traded.

Exactly how did Mattel allow China to ship them toys with lead paint and potentially fatal magnets? Is there no quality control in Toyland?

Speaking of toy, it is always fun to watch someone come to the island of Misfit toys that is Kent Island that has never been there with us before. Most cannot comprehend that we really do live the way some of us do. It really is all resort all the time and we play as hard as we work. The average 2.3 children picket fence suburbanite has a hard time understanding the concept of living life like it was till fun. Our little group of business owners, successful executives and a t least one mid level stockbroker has, to our credit, figured out that life is fun, it was probably always meant to be. Bring on an orange crush and a summer sunset! It is one thing to declare enjoy life as no one gets out of here alive. Very, very few of actually live that way.

What a great time to be a sports fan! The best few months of the year are coming up. The rush for the play-offs in baseball. The Yankees are gaining on the reds ox and the orioles look pretty good under the new manager Dave Trembly. They play like they care. If Andy McPhail is smart enough to keep rising stars Markakis and Roberts, and build a staff around Bedard and Guthrie we will be one big bat away from serious contention in the division. This is the latest in the season I have still been watching and going to orioles games in awhile. Football is fast upon us. The ravens looked as good if not better than last year in last night’s preseason whomping of the Eagles. Several of the rookies looked much better than expected on both sides of the ball. Jared Gaither, the supplemental draft pick at OT looks like the steal of the century. Maryland looks awful so they can only exceed expectations, Navy looks good with a tough schedule and as goes Jimmy Clausssen so goes Notre Dame. Colleges kick off. Play-off runs. The NFL returns. The playoffs and World Series. Gonna be a good few months.

If the stock keeps falling, Charlotte Ruse needs to be bought. They are a cash flow machine with a great balance sheet. No debt. 87 million in cash. Insiders are buying. There is a buyback in place. Intelligent institutions are buying. Might be worth selling the Sep 15 puts if you can get .60 or better and are of an aggressive nature.

It’s bumpy right now. The market is taking waves and wakes on the side. Hold onto your cocktail. Keep the powder dry. This will end at some point. There is no rule that says we have to be fully invested or trade everyday. This type of sell off, where there is a snowball effect from margin calls and babies go flying with the bathwater create opportunities. When the bathwater is gone and the street is just throwing babies, it’s going to be time to make very serious money over the months and years ahead.

Like the Kent island crew and Travis McGee, don’t get so caught up in the little mundane matters of life. Get a cocktail, go watch the sunset. Markets come and go and the drift does always reassert itself. Regardless of stock market swings, there are a lot of opportunities to enjoy life. I suggest you avail yourself of them frequently and soon.

No comments: