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Friday, January 14, 2011

My country tis of thee, what the fuck have you done? I sit here day by day watching the news scroll across the screens and I often cannot believe what I see. Mr. Bernanke tells us he is not printing money but not to worry anyway because whatever you call it is working. His evidence of this is that the stock market is higher. Now I work around the edges of Wall Street and I love it when the market is higher. In spite of my cautious view of things I own quite a lot of stock and the market rising is very good for me. The merger activity created by the lack of real economic growth makes my inner arbitrageur want to sing sally sunshine songs. However when I look at the real world I see a problem. Unemployment is still bad and real estate is not getting better by any stretch. We had over 1 million foreclosures last year and more than 2 million folks got at least one foreclosure notice. Now the foreclosure process is bottlenecking in the courts and there is still a large shadow inventory of homes out there. Unemployment claims are consistently high and the terminally unemployed number is growing. When I talk to friends who own businesses I find that business is better but still a long way from great. All this means is they are no longer draining their bank account to stay afloat. It does not mean they are anywhere close to adding jobs.

On top of it the price of the stuff we use every day is going higher. All that lovely money we did not print but nonetheless put into circulation is driving the prices of the commodities higher. In a really jarring nte around Chez Melvin coffee is up over 60% and that’s just a hardship. If I still drank scotch the rise in grain prices would just be insulting. Crude oil is up 15% and gas is back over $3 a gallon. Cotton alone is up almost 100% in the last year and this is driving apparel costs higher. While all Americans may not own stocks we all do eat, use energy and with the exception of certain celebrities we like to go about fully dresses. The cost of all this is adding up at a time when many are still looking for jobs and trying to hang onto their house. The gap between those inside the beltway or between the rivers and the rest of the country is growing and that really is not good for the future. A large disparity between Main Street and Wall Street simply is not good for the country and may spark enough discontent that people put down their remote and take action.

Or not. Illinois just passed a whopping 70% tax increase without cutting any government expenses. Here in Maryland they are talking about raising the gas tax and adding a drink tax on alcoholic drinks. California is a just a hot mess and even peace and love space trooper Jerry Brown says that costs must be cut. The states are such a mess as sales and real estate tax revenues decline and across the board are suggesting cuts in service and higher taxes. Yet, nobody seems to give a shit. At both the state and federal level the mantra seems to be that those with more should pay more. Here’s a news flash dumbass, we already do. Someone told me yesterday that is was fair that I paid more since I made more than they did. Um NO! Fair is we both pay the same percentage. I ll still pay more but it will be fair. A-Rod hits better than most. Should we tie one arm behind his back to make it fair? Right now my total tax bills add to more than half what I make. How the fuck is that fair?

Enough of all this. It’s a 1970s style mess and I do not at this time see a Reagan rising to turn the tide. However at heart I am optimistic about the US and think we will muddle through and find our way out of the morass. It may just take a while longer than I like. In the meantime there is still stuff to do to make a few bucks. Cheap stocks are thin on the ground but there are some around and hopefully they will continue to keep me afloat until the world gets better.

Avatar Holdings (AVTR) is trading at half of a book value and as long as people prefer Sunshine over snow land value in Florida and Arizona will eventually recover. In the meantime management seems to be doing a great job of managing the balance sheet and adding properties at distressed values. The grocery business sucks with tight margins and gladiator like competition but Winn-Dixie’s (WINN) stock price more than reflects the state of the industry. At less than 60% of book and no debt they have to be on the takeover radar screen. I am in total agreement with Mike Milkens position on education. We have to focus on this area to remain great and this should provide favorable trends for LeapFrog (LF) eventually. Presidential Life (PLFE) and Kimball International (KBALB) are stupid cheap at less than half of book value. As a bonus they are profitable and are seeing insider buying.

The thrift conversion trade is going to be exciting. As mutual thrifts are forced to convert to stock ownership we will see some incredible bargain in solid smaller banks. I have already bought Fox Chase (FXCB) and Capital Financial (CFFND) and there will be more. It’s the closest thing to free money on Wall Street. I also still own Shore Bancshares (SHBI) here on the Eastern Shore and think I will be well rewarded for doing so over the next few years. The small bank trade could easily be a get rich investment over the next decade and I continue to track the sector for additional bargain issues.

With real estate so depressed I think you have to have some presence in that market. I like Commonwealth REIT at yields over 8%. They own high quality properties and you can buy them at half of tangible book value. I also continue to like the fractured mortgage back securities market. I like Invesco real estate since Wilbur Ross’s research team advises the REIT. At today’s price it yields 17.50%. You can also buy Chimera (CIM) yielding over 16%.Start small with these and add on sell offs.

I am staying short treasuries as well. In addition opt the commodity inflation I see the simple fact is that on the long end we are not a good enough credit risk to pay less than 5%. Our budget and balance sheet are a mess and getting worse. I own TLT puts and intend to for some time to come. I am also looking to buy puts on the various high yield ETFs. Junk spreads are stupid low and that market will implode sometime this year in my opinion. A small position in the puts could have a large pay off.

Okay enough business. Onto to things that really matter like baseball. The orioles have added some power on the corners and that has been desperately needed. Slowly but surely the lineup gets better. If mark Reynolds can strike out less than 200 times and take advantage of the short porches in the yard he could be a home run and RBI machine. Derek Lee is a steady presence at first and again the short fences could allow him to rebuild his power numbers. The youngsters on the pitching staff will hopefully get better. Kevin Gregg improves the bullpen one of our glaring weak spots. The club played a lot better under Buck Showalter late in the season they could be fun to watch next year.

It is January so I am an optimist. The realist in me looks at what the Red Sox added and my heart sinks. That is a very good baseball team right now. Speaking of the Red Sox I have been forced to deal with a dilemma regarding this team. I have long hated the Beantown Boys. I am not a fan of their trend following owner John Henry. He sucked enough money out of unsuspecting retail investors with fee laden commodity partnerships over the years that its impossible for me to cheer for his team (in addition to 49 years of other reason to hate the damn Red Sox). Now Seth Klarman has bought part of the team. Klarman is a man I admire and respect. He is one of the greatest value investors of this or any other generation. After some soul searching I came to the conclusion that I will always root for Seth in life and in the markets. In the American league East however we shall be enemies.

The Ravens so far are doing what the Ravens always do. They make it more interesting than they should but they win. If they play every game like the KC beat down last weekend they can get to the big one. However the Steelers are in the way this Saturday and that is a formidable obstacle. Any fan of old school football has to love a Ravens-Steelers game. They don’t track touchdowns as much as they do causalities when these teams meet. It should be a great game and with a little luck and blocking on the long haired freak we will hopefully win the game and move on. I find I have to root for the Jets this weekend as well so we can get a home playoff game and avenge 1969.

The world moves on and changes abound. If you felt the planet shift on its axis on September 10th 2010 the answer is simple. I got married. His time last year I had pretty much given up on the idea of finding love and any sort of marital bliss. Once I determined to move on in a flurry of books and scotch it found me. I knew by the second date that something special was happening and by the end of the third I knew Erin was the “One”. Describing the way I feel when we are together is impossible even for a wordy bastard like me. Suffice it to sat I am incredibly happy. A year ago I could not imagine not being by myself. Today I cannot imagine not having Erin at the center of my life.

This will of course mean less tales of alcohol fueled rampages on Second Avenue and Rush Street in this space. Darryl’s ditch is probably safe from future damage as well. Trust me dear reader this is a good thing. I am sure I will slip in one or two over the years but full throat stupidity will no longer be an every weekend addition to the story. Once the stiches came out and the ribs healed it was a lot of fun most of the time and some of the stories were hysterical. This is better. I am far happier (to say nothing of safer) on the couch with my wife with a glass of wine than I can remember being.

And so on we go. There is a lot wrong with the world but there is a lot right as well. If we have learned anything from history is that the forward march of man finds a way to work through problems and that the US has too many entrepreneurs, innovators and economic heroes to not overcome the current stupidity. In the meantime we have friends and loved one to keep us inspired and mentally healthy; we have laughter, music and book to keep us from drowning in insanity. There so many special moments that make up a life, rather they be quite nights with the one you love or nights of well-fed friends and family enjoying too much wine and each other’s company to ever take it all too seriously. After all not one of us gets out alive so we might as well enjoy the ride. Like quickly, love deeply and drink up my friends. The adventure as always continues.

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