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Saturday, December 31, 2011

Another Year Gone By

Okay let’s get it out of the way. A lot of bad shit happened this year. The IRS came calling with a vengeance, the reorg at my biggest contract cut compensation, the Orioles sucked, Gary Williams was forced out Willie Don died, Kentucky lost in the final four, the Fed continued its horses ass economic policies, the troops are still in Afghanistan since nobody in the defense department has actually ever bothered to read a history book or Kipling novel, Navy football had a losing season (even though Corban and Mr. Earle you will note that we did beat Army AGAIN), I didn’t make it to Chicago or Lexington all year, the drink tax passed in Maryland, Arab Spring became a Muslin extremist nightmare, Obama is still President, people still care about Lohan and the Khardashians, Christopher Hitchens, Joe Frazier and Al Davis died, there are no more Harry Potter movies and there is a Justine Bieber singing toothbrush going off in my house every morning. You could add all that up and say that 2011 was a less than wonderful freaking year.

Except it really wasn’t. Any year that ends with most of us still here is a good one. Truth be told viewed through the lenses of experience it was a pretty good year. For reasons unbeknownst to me my wife still loves me and has been a rock as I dealt with some of the weirder things that fell down on us this past year. My kids are all doing well and moving forward with their lives and occasionally grace us with an appearance on weekends. Both are working hard towards what they want out of life and for the most part succeeding. There was wine, there were books to enjoy throughout the year. There has been music and food to savor. There is love, family and friendship, magic moments and contented days of doing nothing. There have been setbacks and disappointments but that’s just life. It happens. You can whine or you can live.

Had enough of the syrupy stuff? Me too. Let’s now move on to some of the important stuff like sports markets, books and maybe even politics as we roll into years end. I ll start with sports and Maryland basketball . Forcing out Gary Williams was criminally stupid. The guy is justifiably a legend and belongs on the bench calling the X’s and O’s. They should have gone out and hired two or three great recruiters to offset Gary’s weakness in that area but as usual the powers that be neglected to seek my advice in the matter. What we have now is a lot of raw undisciplined talent (the kind Williams excelled into making into winners) that is struggling to beat the small schools and stands a significant chance of getting their boy parts kicked through their earlobes when ACC play starts next month. It is hard to watch so I have not so far. Thank god I picked up a liking for Kentucky basketball. I will add that to the list of favors owed to Colonel Depew. Omid and I tried to offset our sports pain by becoming Knicks fans but the early season has me questioning that decision. Go Big Blue is my motto.

The Orioles have done it again. They raised my hopes and then exceeded even the lowest expectations you could have possibly had for the team. The change in general managers does not make me much more hopeful looking forward to 2012. Our position players are not bad at all and JJ Hardy is a diamond in the rough as far as I am concerned. A decent shortstop with power is a blessing in baseball and the guy plays with heart. Weiters is the best defensive catcher in all of baseball and the bat is getting better. When his rookie contract is up the guy will become a legend in pinstripes. Jones and Markakis get the job done day after day. I love Reynolds all or nothing approach to hitting and it works for him. The team is one more big bat away from being a real team. That is if you don’t have to have pitchers. The mantra every year is that the young arms will get better. Every year the young arms sink to depths that would make Jacques Cousteau blush with envy. I will still root for them since that blood does indeed run deep but damn it can’t anybody around here throw a fucking strike that stays in the ballpark?

We will find out what we need to know about the Ravens tomorrow. They have been great at times and at times looked like they forgot what game they were playing. Much like me without a few cocktails this team just does not travel well. If they go on the road and beat a desperate Bengals team they have a real shot at the Super Bowl. If they don’t then figure they will get an ass whipping on the West Coast in the first round and head off to practice their golf game. Either way it’s an 11 win season at least and a lot of fans in other cities would kill for that.

This is of course the time of year for stock market and economic predictions. I love it when the pundits and other assorted idiots make such confident predictions about the next 12 months. These shit heads are never right but they are loathe to let a little thing like inaccuracy stop them. No one knows for certain what the market will do next year. This year is probably worse than others for making predictions. You have some serious wildcards out there in the form of Europe and the Mideast that could change the game in a blink of any eye or detonation of a really big bomb. The political and fiscal situation here at home is muddled to say the least and none of the real negatives are fixed.

The two things to focus on are jobs and real estate and both are still weak. I love those who cite the reduction in the unemployment rate as a sign it’s getting better. Unemployment has improved by about 10% or so this year. Surprisingly that’s just about the number of folks who said screw it and quit looking. Reducing your work force is not really an effective job creation tool in my opinion. Reading over the releases and the Beige book this year it looks to me like job creation is anemic with a few signs that it may get better next year providing nothing else happens to derail the economy. You can cite all the stats you want all day but the fact of the matter is that demand for food banks and other relief agencies is rising and that’s not happening because of robust job creation. Call it anecdotal if you like but I see a lot of people out there who cannot find jobs that do not involve smiley face name badges and an inquiry as to your preference for fries or not.

Real estate has pockets of strength in areas like Washington DC, Boston and New York. The financial services industry in the form of big banks and bigger government is cranking along on all cylinders and that has propped up real estate in those areas. However the most recent Case Schiller report shows that housing prices are still falling across the nation. As the robo signing and other legal issues are settled we will see a wave of previously stalled foreclosures take place early in the New Year and that is going to increase pressure on prices as well cause a spike in the supply of distressed properties. The good news is that this could finally put a bottom in place for housing prices once this new wave of properties finds a market clearing price level. On the commercial side the Moodys REAL CRE Index is bouncing along the lows as well as firmer pricing in apartments has helped commercial values. Hotel, retail and industrial property pricing is still very weak and is not going to improve much until the jobs market and economy begin to improve markedly.

The good news here is that this is great news for us vulture investors. I have ben suggesting many real estate securities over the past year and I think that these can still be bought. 10 years from now the real estate that you buy today in the form of publicly traded securities can change your life when the economy improves. I have been buying shopping center REITs like Kite Realty Group (KRG) and Cedar Real Estate (CDR). We are paying a fraction of book value of these two operators of grocery store anchored shopping plazas and enjoying decent dividend payouts while we wait for the world to improve. I like hotel REITs as well and think names like Sunstone Hotels, (SHO) , Chattem Lodging (CLDT) and Chesapeake Lodging (CHSP) are worth owning as a long term play on a recovery in the hotel industry. For office and industrial properties I am a fan of Commonwealth (CWH) as they move from suburban of urban properties in their portfolio mix and Prolodgis (PLD), a global owner and operator of industrial properties. Be smart and patient with buying real estate through the exchanges. Buy when the news is bad and the market is down to gain a long term edge.

In mortgage REITs I like the idea of owning best in class Annaly Capital (MLY) along with research driven non agency mortgage buyers like the Wilbur Ross advised Invesco realty and the hedge fund like Ellington Financial (EFC). Be double smart buying these REITs. They are seeing pressure on their spreads as fiscal policy keeps long rates artificially depressed and the headlines and short term results could pressure prices. When everyone hates em, you buy em.

Let’s move onto international banks. Either the world ends or they recover. I have no intention of buying the problem children of Italy Spain or Greece but I do like Royal Bank of Scotland (RBS) and Bank of Ireland (IRE) among European banks. I am also a fan of Aegon (AEG) the Dutch insurer. I like and own two Japanese banks that sank in the aftermath of the nuclear disaster in that country .Fears of a total write-off of Tokyo Electric bonds and a weaker economy pressures shares of Mitsubishi UFJ (MTU) and Mizohu Financial (MFG) to a point where I consider them too cheap not to own. Please keep in mind that unlike some who claim to be, I really am a long term investor in these situations. I hope to own them for a decade and only sell them at many times the current quote to fund my will be a bumpy ride and if you care about the day to day or quarter to quarter quote you may not have the stomach for these.

This bring us to US banks. The smaller regional and community banks are as cheap as I think you will ever see them If you are not friends with your local bankers and getting the low down on who survives and who doesn’t you are making a he mistake. Many of these trade at less than 75% of tangible book value and new regulations and expenses will force them to put themselves up for sale in the next few years. This will occur at a multiple of book value, not a discount as they trade at the current time. I don’t give my names away in this space (although I will happily sell them) but if you were to assemble a portfolio of banks less than $100 million in market cap trading at less than 80% of tangible book value and tangible equity to asset ratios above 10 along with Non performing loans less than 3% of total loans you will be a very, very happy camper in 5 years. Do your own work or send me a check.

Speaking of cheap I also like some net net and net cash stocks as we head into the New Year. These bunny hop stocks tend to be very boring little companies until they get taken over, reorg or management decides to unlock the value of the balance sheet as a result of family needs or activist pressure. It’s a diverse little group of companies. Envirostar (EVI) is in the laundry business. Air T is in the air delivery game with a long term contract with Fed Ex. GTSI (GTSI sells IT products to the Feds. Gencor (GENC) is in the asphalt and highway construction game. TSR (TSRI) is a computer programming outsourcing company. Lakeland Industries (LAKE) sells safety garments. These stocks will bore the hell out of you until the day they do not. They are not really long term holds either. When they pop up 50% or so its usually best to sell them and move on to the next. There are, of course exceptions to that rule but for the most part these are just okay businesses selling at really great prices.

There is going to be some other stuff to do next year as well. Microcap risk arbitrage especially in the small bank sector looks like it is going to be fun again. Eventually we will see a selloff in junk and bank loans that makes that a worthwhile activity once again. Tracking private equity moves into the banking sector should also be a profitable activity. We should see activist begin to clamor after all that lovely cash on corporate books in 2012 as well. We will talk about those when the time is right, For right now I am a cynical optimist going into the new year and only want to own the stuff that is really, really, not really cheap.

I am just going to do a drive by on politics for now. There will be lots to talk about in 2012 as the election will be hard to escape. As it looks now the republicans have blown the opportunity to unseat the current President. Rather than forming ranks behind a young(er) candidate without a long history in the inside the beltway like Huntsman, Santorum, Johnson or Jindeau they have turned into an 8 way circus. Rather than going after the president they have turned on each other and attacked like a pack of wolves in a room full of fat chicks wearing Gagaesque meat suits. Note that I am not dissecting the merits of any of these gentleman, just noting that was the way to win. They should have put Obama on his heels and kept him there. As it is now they are merely giving some very street smart Chicago Pols around the President ammunition to stuff down their throats in the fall.

In Congress I expect the partisan bullshit and bickering will get worse not better The only upside of the current mess is that it moves us ever closer to that time when Americans set don’t the Bud Can, turn off the Simpsons and recognize that we truly are going to hell in a hand basket at almost every level of American politics. I have no idea how many more gas tax increases, per drink liquor taxes, eat the rich wealth destroying measures, or dead American men and women lying in the sands of some god forsaken hell hole but it comes ever closer. Until then we can only wait and endure the foolishness that is modern American politics.

So, tomorrow marks a new year. You don’t know what will happen in the next 266 days and neither do I. There will be disappointments, there will be tears. Shit will go wrong. There will be disasters and losses. The Orioles will suck. Some trades will be losers. But there will be good times too. There will be family and friends gathered around the proverbial table with wine and laughter in equal parts. There will be romantic nights and lazy afternoons. There will be new books that entertain and educate (yes I know I didn’t cover books or music here. There was so much good stuff and new discoveries this year I will do a separate piece in the next few weeks). There will be afternoons at the ballpark with cold beer. Some of your portfolio companies will get taken over at a stunning premium.

This year , like any other year, will be what you decide it will be. You can enjoy the amazing things life has to offer and enjoy all the really great shit about being alive or spend all year bemoaning the little things you don’t like and bitching about the people you do not like. You can, as Baudelaire advised, be drunk in life, on wine, on beauty or you can be just another dumbass teetotaler shuffling towards the grave. I made my choice a long time ago deciding that I would stumble into deaths waiting room proclaiming the joy of the ride rather than bemoaning the misery of it all. You choice is up to you.

Good trading, smooth seas and Happy New Year to All.


lilienfeld1957 said...

It may be the year the country comes together and starts the process of rebuilding. The scary thought: What's going to be the event which starts that process?

On the upside: Maybe the dog learns how to talk (ask me about it sometime!)

Jeff said...

I appreciate good writing skills. Melvin you are getting better with age. I disagree with you about Obama. I don't care who the Republicans put up--they will win the White House and the Senate.

Other than that my old friend I wish you and yours a very happy, healthy and prosperous New Year.