Saturday, March 14, 2009
Now that last nights ruminating and bloviating is out of my system (temporarily I assure you) let’s turn our attention and focus to more important matters. We finally got a rally in the stock market this week with 4 actual honest to god up days in a row. Hats off to Doug Kass for a brilliant bottom call. Frankly I am amazed it took so long to develop. Every indicator I have ever used was oversold, in most cases ridiculously so. I starting saying a few weeks ago we were probably due for a good little rally in the market. Day after day I watched the market fail to get a bid and just drop lower. There was a global buyers strike in equities. Now, we finally have a little bounce here, up about 10% in just the last four days. Let the rejoicing begin, the Bear is dead!
Umm.not so fast. In my mind to believe the stock market has pout in a bottom you have to believe that two things tha just do not hold up to examination. First, you have to believe that real estate has stopped going down. Plunging real estate prices and soaring foreclosure rates are the major problem in the economy. According to RealtyTrac foreclosures jumped 30% last month on a year over year basi., More than 10% of homes with a mortgage are at least one payment behind. A little basic supply and demand math tells you that all these homes being dumped on the market are going to push prices lower still in the months ahead. We still have a wave of ALT-A and Option Arm loans to reset this year. A very high percentage of these 2006-2007 loans are going to default. The buyers could not afford the reset payment rate if their life depended on it. Design all the government mortgage bail out plans you want. Short of giving these folks the house or charging 0 %interest for the life of the loan, as well extending the loan to 50 years in term, they are going to default.
Much was made of the fact that housing inventories declined a little in January and February. Except, not really. There is an estimated 700,000 homes in some stage of the foreclosure process, including other real estate owned on bank balance sheets that are not officially listed for sale yet. ZI have seen estimates as high as 3 million total foreclosures this year. That would be about a 60% increase in inventory levels if it comes to pass. The only buying we see in housing is on the courthouse steps these days. So far, there is not enough vulture activity to soak up the supply and allow prices to stabilize.
The second belief you must hold if you think the rally is an actual bottom is that earnings will get better in the second quarter. To those of you who hold such a belief I shall simply ask, “ Are you high?” Where will such earnings growth come form. Retail? Not a chance. Any sales truncations consummated these days are done to levels designed to clear inventories with little or no margin. Financials? Didn’t you just love the Citigroup memo the other day that they were profitable on an operating basis nit including speciall items. Special items like credit losses and asset write-down’s. I have to check this but I am sure that Citi was profitable without considering the gargantuan losses in every quarter since the crisis began. It’s the losses that have sucked up the $100 billion or so of private and public capital the bank has used to keep the doors open. Financials still have a lot of real estate related problems ahead of them in my opinion. Energy? Sure with falling demand and lower commodity prices their earnings should just explode this quarter. Tech? Last time I looked technology companies sold products and services to other companies and consumers, both of whom are scared to death, over levered and not spending money. We justput in the first quarterly loss ever for the companies that make up the S&P 500 and I just do not think the second quarter will be a hell of a lot better. Everyone thought I was drunk or insane when I said last year we would put a 6 handle on the S%P 500. I was right. I think I am right this time as well. We have not seen a real bottom in this market.
I would love to be proven wrong about this because I am tired of wrestling with the daily dichotomy of a poor stock market and the unbelievably cheap asset values I am seeing on a daily basis. My good friend Corban Bates, a budding value investor and recent grad of Hudson High, sent me a spreadsheet last with week with over 100 companies that trade for less then net current asset value. The last time we were anywhere close to that was the net cash bargains created in the internet blow up and the majority of those paid off handsomely over the next couple of years. You can buy stocks like ADPT, TECD, and ESIO for less than the value of the company’s liquid assets. You can literally build a portfolio of 40-50 of these that have a good credit scores, viable businesses and excellent recovery prospects. That’s enough to make me salivate at the possibilities for gains over the next several years.
DIS trade for about two thirds of my appraisal value. That is provided we give no value at all to the film library or character rights and price the parks as raw land and put a 5 multiple on after tax earnings DELL trade for less than two cash. HTH is a pile of cash in the hands of a proven investor in distressed banks and other financials. As a bonus the company landed aback door bank charter and will be able to bid on distressed assets and institutions. Southwest Airlines is stupid cheap, trading below tangible book value. Oil service companies like RDC and PTEN trade below net asset value at these levels. I like the idea of buying the Forest City senior debentures at a 30% YTM and what looks to be more than adequate asset coverage. Whitman has been a buyer and although struggled with everyone else last year, he is one of the best credit analysts and distressed guys around. Assets are cheap and normally I would be looking to go all in here.
So far I have resisted the urge. It’s worked for me as week after week the market has moved lower. We have seen a few little rallies but they sputter and fade. I am trying to play good defense whole accumulating cheap assets. It would be hard to play the traditional value game of buy and hold here as assets that look cheap drop another 505 or so, No mater how confident you are of your analytical ability that type of loss generates acidic vomitosis and takes a long for recovery to occur. Instead, I have held inverse ETFS to offset my long exposure. I have sold calls on rallies. The worst that happens is that the stock gets called away and I have to buy it back. In my former life as retail broker high commissions made this unpractical. Today, paying less per trade than the cost of an all night drink cup on ladies night in a dive bar, it’s not an issue. In the case of Southwest Airlines I bought 2001 $5 calls for $2 to create my position. Southwest, the best run airline in the country over 7 in two years? Hell, book value is almost seven. I ll take the bet every day.
For the most part I am avoiding the financials. I noted the other day that the giant distressed firm Oaktree Capital has almost no exposure to the most distressed industry on the planet. I agree with the choice. The major banks are just highly toxic piles of shit. Book values are fiction. Some of the community banks like SVBI and ANNB are stupid cheap but the on going real estate problems are going to plague them for a while yet. We have no idea what rules, regulations and restriction the banks will have to operate under going forward. Until we do, it is hard to make an educated investment in bank stocks. I love community Banks and traded them for years. I paid for one marriage and two divorces because of community bank stocks. I look forward to doing so again but not until we see the new rule book. Financials will not lead the market to a new bull. There are so many other bargains it is easy to ignore them and stay out of the minefield they created for themselves.
The values are there and I am confident that over a span of years I will get paid. I am aware however that there will be more downward pressure on prices and it will be some time yet before an economic and market recovery is affected. We have a ways to go as a nation. Before the bubble consumer debt was less than 70% of GDP according to reports I have seen. It is almost a 100% today. When we were great and growing a s a country we saved for what we bought. We used debt for large purchases and paid it off as quickly as we could. Wed id not take a credit card and spend our home equity on a trip to Barbados or a new pair of Jimmy Woos. We put money down on our homes, qualified for a mortgage and lived in the damn things. To really put things back on track we have to work our way back to that again. It takes time.
I ll buy a little here and there as things become too cheap not to own. But I m going to hedge my bets and use options as much as possible to create and protect positions. In my mind it is foolish for an investor not to do so. I have no interest in calling a bottom or executing short term directional trade right now. I have seen two many guys and girls carried out on their shield in the last two years to even think the reward could be worth the risks. Protect capital, find deep undervaluations and be damned careful.
Next time out I will cover really important shit like baseball and why the Orioles have a great team of position players but the usual collection of rag arms and no names on the hill will make it difficult to compete again this year. Maybe talk about why a happy many could make the Dodgers the best of the NL and Teixeira taking the Yankees back to the playoffs. Goes without saying that we will examine why the god damn scum sucking rat bastard Red Sox are the very definition of all that is evil and foul in the world today
Friday, March 13, 2009
There are times when one must sit around of a Friday eve and watch basketball, sip whiskey and contemplate, if not ruminate about the world and ones role within it. Such a night would seem to be upon us. Translated this means that there is not much going on around the island tonight and the ACC tournament is on. As I begin my latest epistle, Maryland is leading Wake Forest in the second half, my glass is newly filled and all would seem right in the universe for the moment. Of course, I drink faster and the Terps have blown bigger leads so we shall see how long the world stays so happy a place.
As they do so often on quiet nights my thoughts turn to the formative forces and times of my life. By any counts it has thus far been an interesting journey with twist and turns worthy of a novel, provided Hunter Thompson, SE Hinton and F. Scott Fitzgerald had collaborated on such an adventure. I would love to include Hemingway but I haven’t boxed in over 35 years and hunting and such bores me shitless. The 16 year old high school drop out I once was had no idea that life would turn out the way it has. It’s been fun, it’s been educational and quite a ride. Like all thrill rides it has had some bumps and scary times. (Although I am blessed with that special stupidity that is rarely afraid. More like curious as to just what the fuck else is going to go wrong). Somehow I have managed to have a career in an industry no one in my neighborhood had any idea existed. Hell, working on the line at GM or Sparrows Point, maybe a nice government job was the height of our ambitions. Somehow I got form there to hear and one has to wonder what the chief forces have been that drive such a life. The answer of course lies in the 3B’s of my existence. Books, Broads (yeah, yeah I know politically incorrect and all that shit but female acquaintances and companions doesn’t have the same zing does it?) and booze.
Books have been the chief driver of my intellect and what paltry accomplishments I have achieved. I cannot claim that I did anything to spur my love of reading. I was just born this way. My mother encouraged it and each week through my youth we made the trek to the Drug Fair parking lot to check out books form the bookmobile service provided by the public library. I loved that damn thing. Just a big old bus full of books free for the taking. Mom never told us what we could or could not read. Whatever struck us was fair game I could check out some Alistair McLean adventure novels , Churchill’s histories or even some racy Harold Robbins novels. I read everything and anything. I almost looked forward to being grounded when I was a teen. In the summer I would climb a tree in the yard and read for hours, hidden from the world. I was a teenager when I read Solzhenitsyn. I read damn near everything he ever wrote the summer between 7th and 8th grade. I still remember poor old Mr. Taylor calling me a liar when we did the first day of school what did we read over the summer role call. There I stood in cuffed jeans, greasy hair and Chuck Taylors talking about the Gulag Archipelago. The class ended, as did a lot the rest of the year with the hood and the teacher arguing about books while the rest of the class fucked off.
Books have been a driving force in my life. Both parents were brilliant people who were big readers. I was literally born a speed reader. To this day I read just about a book a day. I read everywhere. I have read in schools, churches and jails. I read on the beach, on planes, wherever I find myself. My apartment is a literally cluttered with books most of the time. As my son says “ya know Dad, I feel like I live in the worlds messiest library.” Without them I would probably still be that high school dropout.
Who influences me the most? I think they all did. Shakespeare who opened my eyes to the romance and excitement of words and the world they described. Hunter Thompson ,who taught me to embrace the weirdness of it all. Ayn Rand is how I finally figured out that I was responsible for my own actions. She has some fucked up ideas about relationships and has the compassion of a damn stone but she does exude a passion for life and achievement.
COMMERCIAL BREAK” Maryland did it. We beat Wake and go to the semi’s. The NCAA doesn’t put us in the dance now they should be horsewhipped like the brainless, soulless dim witted fucktards they are. We should play Duke next and I cannot with for another shot as those bastards.Books eventually set my career. As a young salesman I read all the Ziglar and Hopkins I could find. I read the Norman Vincent Peales and Napoleon Hills to discover the power of the mind. Back in the days of my door to door sales career these helped keep me focused on the next door and forget the last three slammed in my face.
A lot of value investors tell me that Ben Graham’s writings were their epiphany. For me it was when my mentor to be (reluctantly I promise you. I was a pain in the ass) gave me a copy of Marty Whitman’s Aggressive Conservative Investor. The concept of asset based investing just made an enormous amount of sense to me. From there I moved on to Graham and Ed Altman and learned equity and credit analysis. I loved Victor Neiderhoffers Education of a Speculator. His unusual and unique way of thinking about markets helped me avoid getting stuck in my ways and approach. My eventual friendship with the author after email exchanges was one of the most positive influences in my life and my career.
The lessons of history are there for the taking. Jefferson to Churchill. Thomas Paine to Ronald Reagan. He stories of the patriots, pioneers and ner do wells that birth a nation. The seriously demented authors of Mein Kampf and the Communist Manifesto who sought to destroy a world. All available for the taking merely by opening a book. Hell, you can damn near learn history by reading historical novels. WEB griffin for one has made the story of the US Military for 1940 through current time’s fun to read. Bernard Cornwells Sharpe novels make European history interesting. Patrick O’Briens Jack Aubrey books bring the life of the British navy alive and understandable.
Then there are the just for fun writers that I read just to escape. Robert parker (although truthfully one could learn to cook and fight reading the Spencer series). Randy Wayne Whites Doc Ford series has become a favorite. Travis McGee remains my hero and role model. If Christopher Moore is not the funniest son of a bitch whoever set paper to pen, he is a candidate. How can you not love a drunken lecher like Charles Bukowski? Dorothy Parker could have easily been the great love of mu life if not for that multi decade difference in birth dates. The poems of Cumming with their aggressive sensuality, Yeats with his lyrical quest for love and freedom, Baudelaire’s Be Drunk, all of these delight the mind and inflame the inner mind.
Books taught me romance. They taught me history, math, passion, and an appreciation of life.They have entertained me. My career path was shaped by them. They are easily the most dominant of the B’s.
Which of course brings us to broads. Women, the fairer sex, the delight of my soul and bane of my existence. Nothing else in life can take you as high or lay you as low as a woman. From the majesty of a first kiss to the soul crushing wine drenched break up that leaves you a blithering idiot for days on end, they are the best and worst of life. It has been my experience that it is far more the former than the latter. I have finds that have been crushed enough times in the dance of romance that they give up and avoid anything that might look like a relationship. Fuck that. There is always a chance that I find the Bacall to my Bogart and that will always be worth the risk of heartbreak (although I could do with out the lawyers and the judges when it turns out to be Sinatra and Gardner instead).
I will always be an Irish romantic. To give up on romance and the mere possibility of finding that perfect partner, she with whom I match on all levels, a partner and lover, would seem to me to take much of the meaning out of life. I confess that at 47 at times the search is a pain in the ass and I have come to loath the early stages of the dating process but sometime there is a click for however ling that continues to offer a glimpse of possibilities. If I never find it, at least I ll have a lot of fun, nights of dancing at the dock bar to blues under the stars, dinners with eyes sparkling in the candlelight,, that first anxious clumsy fingering enrobing, the comfortable sensuality of a familiar lover and all the other moments that are forever frozen in my memory.
Like everyone else my age and still single, there have been successes that did not last as well as spectacular fuckups along the way. Some were my fault. Some were not. From each of them as time passes and the scars fade I find that there are memories that I would trade for the pain of the aftermath. Quit? Not going to happen. Ill take the scars if I can have those moments that do work. A rainy Sunday morning with the coffee and New York Times, Nat King Cole on the stereo playing footsie at the breakfast table. Lying on the beach together barely touching but deeply aware of the touch. A long conversation about hopes dreams and desires over a bottle of three of wine. Goodnight kisses and passionate awakenings. Finishing each others sentences, laughing at private jokes, slow dancing with no music playing, love letters and late night phone calls. Are you telling me the me risk of getting hurt outweigh these, or the possibility they last the proverbial forever? What a chicken shit way to live.
Bringing us of course to booze. Like so many other Irishman before me I am an unabashed drinker. I really don’t give a shit what anyone thinks about it. I laugh out loud at people who tell me that drinking alone is not good for me. Shit I like MY own company. A book with a glass of wine and I m a happy fucking camper. Put a baseball game on turned down low at the same time and that about as happy as I can be with my clothes on. Bring me a bunch of friends and a long boozy dinner at the bar with lots of laughter and I consider that a great evening. Long conversations with old friends over a cigar and a good scotch are among my favorite things. Cruising down the bay with a frosty gin and tonic as the sunset paints the sky is a joyous occasion. I have toasted my weddings with champagne and endured divorce with Rumpleminz( okay so maybe that wasn’t such a good idea). I made the final decision to switch career paths last year over a glass of Famous Grouse. I have fallen in both love and lust over a bottle of wine. I have lifted a glass in a final toast after too many wakes. I miss the days when booze and cigarettes were an accepted part of life I don’t miss work because of the prior night with the exception of March 18th and the day after a jimmy Buffet concert. . I tell every first date I smoke and I drink and I have no attention of stopping. I don’t drink until I can’t work, I have never needed a drink but I do enjoy one. In the poetic words of my Celtic forefathers, fuck you I drink.
The three B’s. Now if I could just find a smart romantic sensuous woman who likes cocktail and books, life would be complete. Until then, I ll have a drink and finish my book.