Friday, January 11, 2008
So far the year has started off with a bang. A lot going on around the island and of course the market is generating its own special sort of BANG. 2007 is fading into the rearview mirror and it was quite a year. Between the island crew and the after dark specs one never lacks for adventure. The year featured the usual assortment of trips with a lot of airplanes and at least one flying boat (many thanks to the tic-tac kid. I never knew a boat could get that far out of the water without a catapult!). Chicago and Kentucky figured heavily into my travels, as they seem to do every year. Melvin B’s is gone now a casualty of urban renewal and it will be missed. We have plotted the overthrow of the financial system at the outside café bar, consoled each other over women, markets and bets gone bad and I have many great memories of the joint. It was the coldest racing weekend in Kentucky that I can remember but that little fact did d not dissuade us from our usual weekend of degenerate behavior and wild eyed gambling. We did tone it down a touch this year since Hesselsweet bought his lovely bride to be. Jason bought Wendy as well but I am pretty sure she just ignores us all. New York of course was a frequent stop and we started the year in Naples Florida enjoying the warm weather, old friends and at least one difficult damn woman. The tire guy married up- way up- at years end. There were great times with old friends and a lot of new ones found along the way. The kids both continue to do well and I haven’t threatened to kill my son in at least a month now. They are both working, going to school and thriving. The markets were horrendous for much of the year, especially in value and special situation stocks as financing for transactions died off quicker than one of my relationships. No real contender for the next incarnation of the one true love of my life but the interview process was as much fun as always. I spent time with several very attractive intelligent women but none who could fill my eyes with what I now call the Hillman Twinkle. It was one hell of a year by all counts. The local sports scene was a bit dismal with the Orioles and Ravens having terrible years, the terps going out of the tournament early and the Maryland football team average at best. As usual Navy was a bright spot, beating army and going to a bowl game and playing some very exciting football.
On to 2008. The market is just horrible right now and I don’t think it gets better real soon. The next three weeks feature a string of earnings reports from financial companies and that does not bode well. In addition to the continuing stream of mortgage and credit write downs, home prices are still falling and the yield curve is not steep enough to allow profitable lending. Its ugly. It will be interesting to see if the technology report in late January, early February will give the market any legs whatsoever, I think we may actually get to my long term oversold point down around 1275 on the S$P before this over with. That level will set up one of the best buying opportunities we have seen since 2001. The plain truth is that as difficult as this environment is, not all mortgages are going to default and real estate is not going to zero. There is going to be a stopping point to the carnage sometime in 2008 and it will bet time to buy. The small local banks that trade down below book value but have positive earnings and sound balance sheets with high capital ratios and adequate loan loss reserves will be incredible bargains. There is a life cycle to this part of the industry. The small banks proliferate during boom times and after the bust comes the shares fall to lows like we are seeing right now. The larger institutions begin to buy the smaller competitors to acquire their clean loan books and reserves. A wave of consolidation moves through the banking industry, good times return to the economy and new local banks begin to spring up again. The last time we saw this was after the banking and S&L crisis of the late 980’s and early 90’s. Many of the local banks sold below book and it was about as much fun as I have ever had in this business. We were buying stocks at or below book and 10 times earnings that were taken over at twice book and 20 times earnings. It was easy money and it was extraordinarily low risk. We are coming back to that type of market and I cannot wait. I am also looking at the trading side of some of the midsize banks such as SOV to buy one-year calls once I think the slide is slowing down. WM calls look like a buy here as well as it is inevitable that someone steps in and buys them. On a sell off At the money, or slightly in the money long term calls will be a good bet. Banking aside I think the pendulum in the market will continue to favor growth stocks that can generate cash internally. It will be a bit of time before the financing needed to fuel a value revival will come to pass. Growth stocks to me are trading and surfing instruments but the surf is roiling and boiling so it will be a good time to surf in 2008. The dollar will probably stay weak and energy will stay strong so international and energy stock will provide some trades for the year as well. I am going to play special situation and activist stocks by selling puts when the market sells off and collecting the premium. It seems to be the way to make money in that corner of the market right now. The on factor that will loom large as near the third quarter of this is the dividend tax reduction that expires in December. Should that not be renewed and a democrat is winning the race for the White House we will see what I think will be the largest sell off of my life time. It is very much a traders market right now. With the exception of the little banks I have a hard time buying stocks for the long term when I think the short term could take them much lower. Buckle up. This could be as much fun as boating with the tic-tac kid when he’s been fighting with his girl friend!
So on now to 2008. There will new adventures, new books, new ideas all through the year. The Orioles will suck (news on the wire that they are probably trading the bus ballplayer on the club to the Cubs. Think I might be a cub’s fan this year. At least they are trying to get better!) ,s always, the Ravens will get a new look, Maryland basketball will be interesting and Navy turns a new corner with a new coach. There will be sunsets and setbacks, celebrations and defeats, first kisses and sad goodbyes. Some will be born, and some will pass on. There will be fast boats and slow summer evenings, rainy nights and hot summer days. Tic Tac will hit awake sideways and fast Freddie G will hit a few stationary structures in and around the bay ( he will have a tough time topping last years sandbar adventure however), Shorty will have a few poker games, I will do something stupid involving a ditch or a woman (lets hope there are no dog stories this year), we will laugh a lot, maybe cry a little at times but is should be one hell of a good year.Life has all its up and downs as we all know and 2008 is positioned to bring with it more than its share on both a professional and personal level. I look forward to it all. It should be a year full of life, full of surprises with opportunities to live life the way it should be, greedily and with great abandon.