Deep Value Letter - Banner Ad / Email Capture

Wednesday, November 09, 2011

Diminished Circumstances

Diminished circumstances. A fine turn of a phrase that means I fucked up big. Just once I would like to get carried out of the building covered in piss and blood while long 137 car loads of S&Ps while the market crashes; or stuffed up to my ears with a short bond position on POMO day collapsing in a beaten battered heap screaming Viva la Revolucion! Something dramatic and gritty that will make the autobiography more interesting. This is not my lot in life. The markets have been good to me and I expect them to continue to be for some time to come. This type of financial market weirdness is in my wheelhouse and I am not leveraged so I get no grand and glorious ending worthy of a late night CNBC special. A huge cut in compensation from my largest free lance deal and a few nasty grams from the scum sucking bottom feeding government tit sucking bastards at the IRS and here we are. Diminished circumstances.

It has not been a lot of fun but it is really not all that bad. We moved off the island and now live in the close in Baltimore burbs so it’s more of a return to my roots than anything else. At least that’s how I am selling it. I hated leaving the Island but it may have been past due. I have contemplated leaving several times in the past but I had more palm trees and less late night sirens involved but thems the breaks. The memories and friendships developed over the past 15 years will be with me always. I am sorry for all the bartenders who will now have to struggle to pay for their kids college education and Cadillac payments but we all have our difficulties in life. I swear I heard my liver sigh in relief when I crossed the bridge for the last time.

To its dismay there are plenty of bars and liquor stores here as Baltimorons are the drunkest prayingest people in the world according to my late father. Every few blocks has a bar, a liquor store and a church. I am not much on church but the other two may come in handy. I have already talked one understanding liquor store operator close by into stocking my brands of wine and cigarettes so all in all the move is survivable. I hate taking the hit in this manner but I still have my books, my wine and people who love me. My wife has been a rock through it all and made the circumstances far less diminished than they would have been otherwise. My kids have been understanding, albeit sick of helping dad move shit between the house and storage facilities we have spread out all over Northern Anne Arundel County.

I am not going to sit here and blame the evil government or satanic bastards at the IRS for my DC (diminished Circumstance) issues. The government in its current form is evil and the IRS is indeed the devils tool but the truth is all fault lies in the mirror. If you are aggressive enough that the IRS calls you to task, you made a bet and you lost. Even if you do not want to pay them or think that you do not really owe the money they have the laws and the guns to take it. To avoid them entirely means allowing the government to take far too much of your money over your lifetime. I made what I thought was the right decision. They humbly and with all the legal tools at their disposal  disagreed. I picked a fight I couldn’t win. My bad.

I should have had a more diversified revenue base and built up the money management operations sooner to avoid reliance on one contract. I should have developed my own web presence and newsletter service some time ago. The money was coming in, waiting until manana was the easiest path. Godot may not ever show, but tomorrow always does. I can regret that but the truth is I had a grand life for years. I am paying for all the boat rides, ball games , late nights, stiff drinks and long trips at the moment but I am not sure I would not do it exactly the same again. I view it as living like Travis McGee and taking my retirement in chunks while I am young enough to enjoy it.

I do not want to down play it all. I took some good hard shots and have to do some serious rebuilding. My family has been through a tough month of downsizing our dwelling and lifestyle. As with anytime you experience DC I have lost some friends. There is probably some bitterness among some acquaintances for deals that collapsed when I could no longer afford to play the game for now. I regret it that but I sure as hell can’t change it. I have been left holding the short end when others had bumps along the road and chalked it up to the business of life. That’s the case here.

In the grand scheme of things I do not feel like my circumstances are really all that diminished. I go to sleep each night and wake up each morning next to my best friend and partner. My wife has been a rock and a joy during this past month. All the things that make life wonderful , the books, the friends, the wine, the music, my incredible children, are all still here. I will be able to regroup and rebuild rather quickly and as I do the reduced expense load will allow us to stockpile cash to take advantages of the opportunities offered by the current economy and stock market. Not one ounce of the knowledge or wisdom I have gained over the years has been lost. I have merely added to my list of stories for when I am a grouchy curmudgeon telling stories at my combination bar and book store on a southern beach.

Let’s move along. Not much to see here anyway. Looking at the stock market I see some incredible long term opportunities. Right now I am trying to focus on those areas where if they do not make me rich the world will have totally absolutely once and for all collapsed and it won’t matter very much. Banks and real estate certainly would seem to fit that definition. They trade at valuations that are fractions of what they are worth in better times. If we ever see boom times again in the next decade (and history tells us we will) many of these stocks will be minimum ten baggers. If they do not improve to more normal times at some point over the next ten years, our money would be far better off in bullets and canned food and I am still more optimistic about the future that that .

When I look at real estate I see that some of the premier operators once again fetch premium valuations. However when I look at smaller operators I see bargains. Hotel operators like Sunstone (SHO),Felcor Lodging (FCH) and Red Lion (RLH) trade are ridiculously low valuations. Quality shopping center operators like Cedar Shopping Centers (CDR) and Kite Realty (KRG) not only pay fat dividends the share price is far less than any reasonable estimate of their real value. Suburban consumers are wounded but unless the Walking Dead (GREAT TV SERIES!) becomes a true story and zombies eat up the entire customer base these REITs will see much better performance and much higher share prices over the next five to ten years. Commonwealth (CWH) has some management conflict issues and has issued too much stock in the past two years but the shift from suburban office properties to urban center high grade offices should pay off brilliantly. If the stock just trades to book value you double your money and the 10% dividend yield pays you for your time waiting. Real estate, especially among lower tier REITS and real property in your local marketplace is just cheap if you have a long term perspective and can handle some volatility.

Banks are in the same boat for all the same reasons. In reality the weakness in real estate is responsible for the weakness in smaller community and regional banks. I am starting work on a new project ot produce a book outlining all the ideas for the trade of the decade so I won’t name nay new bank names as I expect you all to pay for them when I am done. However I still like the private equity infused banks like Central Pacific (CPF) United Communities (UCBI), Sun Bancorp (SBNC), and even Hampton Roads (HMPR) . Hudson City (HCBK) is still a quality high yielding bank name that I like quite a bit. Among larger regionals Key Corp (KEY), Fifth Third (FITB) and even Huntington Bancorp (HBNK) are worth buying on declines. First Interstate (FIBK) and Renasant (RNST) are worth consideration. If you are not looking into smaller banks in your region and talking ot the community bank executives in your town you are making a huge mistake and leaving huge dollars on the table. The book will be out shortly and I will disclose all the names and possible strategies for the Trade of the Decade.

The other either works or we are all good and truly fucked investment area is infrastructure. We have delayed spending the money as municipal finances are strained and federal money disappears into bureaucratic black holes but we better figure out how to raise it and spend it soon. The electrical grid is a mess especially in the northeast. It seems a vigorous wind is all it takes to knock out power for days at a time. Water systems all over the country are years behind in repairs and updates. Roads and bridge repairs have been delayed to the point of being dangerous in many areas of the country. I favor turning most of this over to private hands and let them raise and spend the money but I am not naive enough to think any government official in the nation is that smart so we may have to wait for the economy and tax revenues to improve but if we wish to avoid slipping further towards third world infrastructure this has to be done soon.

Infrastructure stocks should be in your portfolio and on your watch list. I think you can but stocks like Muller Water (MWA), Gencor (GENC) and Pike Electric (PIKE) right now. Others like LB Foster (FSTR), Flour (FLR), Foster Wheeler (FWLT) Granite Construction (GVA) and Sterling Construction (STRL) should be on your list of stocks to buy in a broad based decline that makes valuations more attractive. This is if not when money. I think that at some point in the next decade these stocks will be a boom sector of the market and I want to own them before this happens rather than chase them.

Moving along the Orioles have hired a new GM. Peter Angelos’ deal with the devil is firmly in place as the only one who would take his offer has been out of the game for almost a decade. Still, I am an optimistic idiot when it comes to baseball and the guy did build a winner in Boston falling just short of the World Series before the trend Follower fired him and replaced him with a certified fucking genius in Theo Epstein. Epstein has moved onto the Cubs and after he finds the appropriate sacrifice (Soriano burnt at a stake at home plate?) to appease the goat I think the Cubs will head for the series sooner rather than later under the new GM. Can Dan Duquette and Buck Showalter combine to work the same sort of magic for the Orioles? We shall see but just in case I am keeping a Cubs jersey in the back of the closet if they fail and I need to find a less desperate team to call my own next year.

I keep saying I will write here more frequently and almost never follow through on the threat. I am going to have a book to promote endlessly and am keeping an eye open for new money management clients and writing opportunities so perhaps this time I will follow through. I might, although I find that I have many books to read and write, many moments to spend enjoying the company of my wife, large blocks of time scheduled to annoy my kids as well as to talk baseball, college hoops, markets and swap tall tales with friends all over the country. I shall do my best.

No comments: