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Monday, December 31, 2012

New years Ramblings on baseball , Markets and Life its Ownself

So another year is coming to a close. It has been a mildly eventful year with the move to a more southerly location. We had the great truck caper of 2012 and all the attendant adventure of having everything you own stolen along with your moving fan. That resolved with the miraculous recovery by the praiseworthy North Carolina State Police and is now just another story to tell. As a side note I love the State of South Carolina. The low country area is one of the prettiest in the country but I hope I never have to drive it end to end three times in one day in a car with no air conditioning in July ever again. We have pretty much settled in here in Windermere with the gators and Mickey Mouse. As I write this it is approaching 70 degrees at mid-morning and I have little to complain about.

Moving here was the latest stage in a transition phase of my life that began at about three years ago. The years between 38 and 48 were a high speed romp through life with fast boats, horse tracks, Rush Street reviling, Manhattan misadventures and just a scotch fueled extravaganza. There are a lot of memories in there that I would not trade for anything and friendships I will have for the rest of my life but after a decade of it I was starting to lose a step. More Saturdays found me on the couch with a ball game and a cocktail than in the dock bars or hanging onto the side rails of Tic Tacs boat as he once again misjudged a wake. Like an aging fighter I could still go when the occasion called for it but it hurt more the day after.

Then I met Erin and the process moved along at a rapid clip. It is hard to justify going out when the person you most want to be with is at home. There is still plenty of adventuring and excitement but it is of a more personal nature. She is my best friend and partner and hanging out with her is my favorite activity of all. The move to Orlando has seen us settle into a pattern of life that is slower but even more rewarding on so many levels.

I do not want anyone to get the idea that I have grown up or anything silly like that. I have not gotten religion or fallen down the twelve steps. I may not have the Grouse distillery working a third shift anymore but there are several vineyards that have no doubt seen an uptick in their bottom line. We have sniffed out some of the cool funky little bars here in Florida including some dock joints and beach bars. Most evenings can find me on my little lanai with a wineglass and a cigarette in hand enjoying my palm trees. This is merely the latest and best chapter of the adventure I call life. If the kids would move to Florida sometime soon I would have everything a man could want out of life. Good wine, lots of laughter, good music, good books and someone to share it all with. Perfection.

Now onto other items of various levels of importance. It has been a strong sports year. The Orioles made the playoffs for the first time in 15 years. Navy had a winning season and took home the CIC trophy once again and Beat Army once again. The Ravens have some serious choices to make as the offseason looms but for the 5th straight year are in the playoffs and should be able to handle Indy and move to the next round. My newly adopted Florida Gators are in the Sugar Bowl and will be in the top 5 if they snuff Louisville on Tuesday. I still don’t give a shit about the NBA and the hockey strike means pretty much nothing to me. All in all a good year.

Baseball has had an interesting off season so far. As if life in the AL East is not bad enough the Blue Jays decided to out Yankee the Yankees and made some monster signings. They now have a savage lineup and strong pitching staff. This is going to be on exciting team to watch and a very tough one to beat. The Yankees look old, Boston got a little better with some key signings. Tampa Bay remains a consistently good team with an ignorant and absent fan base. So far Baltimore remains pretty much the same.

Although many are concerned about the lack of moves by the form office it may be the right thing to do. If Nolan Reimold can come back and play like he did before getting hurt we will have an awesome outfield.  He hit for average and power and along with Jones and Markakis would form a solid outfield. Machado looks good at third and in addition to being occasionally Brooks like at the bag the kid can it and he is fast. Chris Davis needs to work on his position play but he is a solid bat. If JJ Hardy can get those 30 points back on his batting average we have a solid infield along with Weiters behind the plate. The hole is at second base. Brian Roberts is a mystery at this point . If there is any question about B-Rob we need to go get a second baseman with either power or speed to solidify the infield and improve the offense.

The pitching staff looks good to me. If we can bring back the same guys and the younger guys continue to improve the staff will be just fine. Dylan Bundy could break into the bigs full time this year and that would be another welcome young talented arm. I think we can ride this staff into the playoffs again.

We could use one big bat at DH. If we could get a 30+ homerun 100 RBI guy in the middle of the lineup we will be a tough team to face. The problem is that I really do not see anyone in the free agent ranks that looks like a decent fit. We will have to count on Buck to find a way to get some additional pop in the lineup. It’s a tough division and a tough league. On paper it’s the Angels and Blue jays but I like our chances of hanging around until the end of the year and maybe surprising someone.

 I suppose I have to tackle politics before moving on and that means it is time for the children and overly sensitive types to leave the room.  Dear Government: Please just do your job as defined. Provide a level playing field for commerce, provide for the common defense and leave me the fuck alone. The rest of this shit is simply not your job. I do not need you to regulate my behavior and provide me with some asinine safety net or somehow try to make an unfair world magically fair. Dear ignorant liberal: Please quit trying to have the government solve the words problems.  They cannot. Further I do not want your help or advice on living my life, raising my children or handling my financial affairs. I did not sign a social contract and you owe me nothing and I sure as shit do not think I owe you or anyone else one fucking thing as a result of your birth. You take care of you and yours and I will do the same thing. Dear Ignorant intolerant social conservative: really? Shut the fuck up. I do not care what you think of my sex life, what I do or do not do with my body or my religious views. Just shut you ignorant backwater mouth and keep your shit to yourself. If you want to sit there and believe all that ignorant shit about people do so quietly. And quit blaming it on Jesus. If Jesus came back today he would most likely beat the ever loving shit out of your close minded hate filled selves.  Above all please quit trying to legislate morality or perhaps best of all just quit fucking voting.

It boils down to this. Quit looking for the government to solve your problems. Take personal responsibility and act as the invisible hand of the market to change society. Practice the golden rule and take care of those you love. Help where you can and don’t hurt if you can help it. Work hard, be thrifty and responsible and quit asking me to bail you out. I don’t care if you are a third generation welfare queen or large bank who made fucked investments. You do not have a claim on my money so please just quit buying politicians with money or votes and leave me the fuck alone. Please just leave me the fuck alone and I promise I will do the same for you. Quit ruining my world and my country in the name of fairness, for the children, to save the financial system or any other bullshit reason you can come up with.

Now onto markets. First off I have no idea what will happen in the stock market next year. Neither does anyone else. If anyone tells you they know what the stock market is going to do and asks you to invest based on their beliefs, stop, think and then beat the living fuck out of the charlatan. I know some super smart guys who use higher math and super computers and they can predict the market with a high degree of success. That is for the next few hours or maybe a day or two at most. Beyond that it’s all guessing and mental masturbation. Why so many people waste so much time and energy trying to predict the market direction remains one of the great mysteries of our time.

The truth is that if you look for safe and cheap stocks and buy during down moves you should just fine over time in the stock market. Quit chasing the popular names and focus on businesses that can be purchased at an attractive price. Prices will fluctuate daily but business and asset values more slowly.  Read Graham, Whitman and Klarman and then act accordingly.

My list for the end of 2011 has done pretty well this year with an average return above 30%. I’ll take that. That doesn’t include the suggestion to buy small banks which was also a winning strategy for the past year with several takeovers and positive surprises. Lets hope we do as well with the suggestions for 2013.

Going into the year I find I am bullish on energy stocks. I am not oil expert but I see a few things. First to achieve energy independence and get the economy growing the administration is going to have to allow drilling, digging and fracking. They can pay lip service to the premature exploitation of renewables but the truth is we need oil gas and coal. Some doomsday types see oil going to $40. The Saudi oil minister is the most accurate indicator of oil prices I have found and he is pretty comfortable with the current price. I do not see prices going much lower for very long.

There my bullshit macro case for oil, gas and coal. The real reason I like the space is because so many of the stocks are cheap. Arch Coal (ACI) is trading at 60% of tangible book value. Nabors is at 70% of TBV. Swift Energy (SFY) is at 60%. Penn Virginia (PVA) is at 30%. Rowan is at 80%. Tesco (TESO) trades for TBV and has enormous upside in the oil services sector. I like the energy sector because it is cheap.

I like staffing as well. I have done okay with Kelly Services (KELYA) so far but its still at 90% of tangible book value. One of my favorite picks in Volt Information Sciences (VISI), a provider of technical staffing to many fortune 500 companies. I do not have time to get into the nuts and bolts of this special situation but it is an uber cheap stock with several catalysts. I don’t like these stocks because I think jobs and the economy will come roaring back. I like them because they are cheap.

I like the banks again this year. I even like some foreign banks again. I have a good profit in Bank of Ireland (IRE) but I still like the stock. Its at 40% of TBV and Wilbur Ross is on the board. The stock goes a lot higher over the next decade. I am looking at Latin American banks, especially Brazil but haven’t pulled any triggers there yet. The closest I have so far are Popular (BPOP) and First Bancorp (FBR) out of Puerto Rico. They are longshots but could easily rise many multiples of the current quote over the next few years.

I am not giving up the little banks I like as I see no need to create competition for myself in these thinly traded gems. If you really want to know make cash offer and I may discuss them with you. Of the larger community and regionals I like KEY, BERK, WFD,AF, CBF,CFNB, ESSA, ASBB, CPF,FFNW, and several others I will mention from time to time during 2013. Watch this space.

A few things to keep in mind. I do not buy up tapes. You improve your odds of success dramatically by buying fear and selling greed. Markets Fluctuate. Make that work for you. I stay small, move slow and scale in and out of stocks most of the time. Insider buying is hugely predictive. I have done a lot of work on this during the past year and found it be a powerful addition to the arsenal. I own stocks for a long time so if you are looking for three month holding you are probably best following someone else.

So 2012 is coming to a close. In 2013 I hope to move ahead with a few projects, increase my money management practice, maybe introduce a newsletter or web based project, and perhaps write a book. On the business side of things my goals are modest as I do not have any wish to be the biggest or the famous but to succeed and prosper enough to have a good life for me and mine.

There are far more important things to focus on in this life. In 2013 I will kiss my wife often and tell her I love her every day. I will try not to give her too many reasons to kill me in my sleep during the year. I will talk to my adult kids often and agitate the living shot out of them until they move to Florida. I will continue to restrict my little ones access to electronic crap and make her do unpleasant stuff like homework and reading books. I will make sure she continues to love art and explores her talents in that area. I will do all the things she hates now so she can have all the things she loves later.

I will read a lot of books. I will drink a lot of wine. I will go to the beach more often. I will laugh a lot. I will make new friends where ever and whenever I can.  I will avoid ignorant people. I will look for alligators every day. I will watch a lot of baseball games. I will go to more minor league games (I think there is a team called the Pelicans right down the road and I simply have to become a fan).I will listen to a lot of music. I will spend a lot of time on my lanai. I will find a swamp bar to go with the beach bars we have found. I will take a lot of naps. I will walk the dog a lot. I will do all the things I like with the people I love and together we will ride out any storms that my come our way during the year. I will try to emulate Ben Graham and do something generous, something creative and something foolish every day.

It’s a new year. A new chance to embrace life, to live, to learn, to grow, to love. Let’s make the most of it.

Monday, December 17, 2012

To Be Good, Be Different

During the course of my day to day activities I spend a lot of time talking to other folks involved in the markets. I am equal opportunity chatter and talk to investors, traders, growth guys, momentum guys, risk arbs, and even the futures and options folks.  On occasion I will troll around the web and read some of the various trading and investing websites and chat boards to get a feel form sentiment and activity. The more I read the more I have a question for all the retail and individual traders out there. Why do you do this to yourself? Individual traders seem to be determined to give away any edge they may have and become donors to the large funds and Wall Street profit machine.

Everyone seems to be trading the same stuff. Almost every individual trader I run across has the same stocks on their screen. They are all trading Apple (AAPL), Google (GOOG), Gold ETFs, Salesforce.Com (CRM) and other so called hot stocks and ETFs. All of you are poring over each day’s edition of a certain daily business paper looking for high ranked stocks with the same technical patterns. A huge percentage of traders are trading the same stuff in almost the exact same way and wondering why they are not more successful.
Think about what you are doing for second. You are trading the same highly liquid popular stocks that all the black boxes and leading quant funds are trading every day. You are competing against guys like Jim Simons who has so much computing power they have to install special air conditioners. The guy on the other side of the trade is likely to be Steve Cohen and his guys at SAC who are masters of short term trading or three guys with PhDs in computer science and Quantum Physics two blocks from the exchange. When you choose to trade what everybody else is trading you are getting into the shark pool wearing a meat suit.

I spent a good deal of time this week talking about the powerful market anomalies provided by insider trading information. Although I use it in my activities as an investor I am just befuddled as to why a trader would not use such a powerful edge. You have an easily assembled list of stocks that have a strong statistical probability of moving in a certain direction. Companies where insiders have been selling stock in clusters have a tendency to go lower. Those with CEO and CFO buying or cluster buying by insiders have a very pronounced expectation to go a lot higher over the next three to six months. Why aren’t you running your patterns and statistics on these lists where you have a huge edge and no competition from other traders?

Everybody and their brother it seems trade of the new high and top performing stocks lists. In the past year I have been doing a fair amount of work on establishing hedged portfolios using stocks trading at new lows. 
What we have found is a marked tendency for the stock that are down more than 50% in the past year to stage enormous rebounds. When we ran the data in the first week of November we had four stocks that made the list. All four are up today with the top two performers, Abercrombie and Fitch (ANF) and First Solar (FSLR) up by more than 30% in less than 60 days. Why are you trading the same stocks everyone else is, and the ones where large quant funds are gaming against you in highly liquid stocks?

I have had traders tell me they have to be in the same stuff as everybody else because that’s where the action is in the market. That’s the same reason guys go to the craps table as well and they usually lose. If you want to gamble, go to Vegas. At least they have free cocktails in the casino. To succeed in the markets you have to approach it as a business. Most individual traders do not have the same liquidity concerns of the big funds and don’t need to worry about getting off a million shares at a clip during the day. You have the advantage of being able to trade where and what they cannot.  You are not here for action you are here to make money. At least I hope so because action junkies go broke.

There are several very exploitable market anomalies you can use as an edge and find opportunities way from the competition. Traders tend to want to be in high volatility stocks to take advantage of price swings. Sounds good but did you know that according to several academic studies low volatility stocks tend to outperform the higher volatility stocks? I ran a screen of low beta liquid stocks and looked back over 2012. I found any number of successful technical patterns that would have offered huge trading opportunities.  I have done studies of S&P 500 stocks trading below book value and found extreme out-performance.  I looked at my list of candidates from January and found  a plethora of tradable patterns that my TA oriented friends tell me work pretty well.

If you are trying to day trade the same stocks all the other day traders are you are picking up dimes in front of bulldozers. It is highly likely that a bigger faster trader will eventually push you under the dozer and scoop up all your dimes. Change your time frame and your universe. If your methods and tools are valid you will make more money that you can doing what everyone else does.

Originally published on real Money

Wednesday, December 12, 2012

Having the Inside track

Those that know me well know that I am something of a geek. I spend significant parts of my day reading, testing and reviewing information on everything from markets to baseball. I have also been known to sit down and read academic research on anomalies in the stock market that might help me make money for myself, clients and readers. One of my areas of interest has been insider buying as an indicator or catalyst in deep value situations. I have done a lot of work this year on top executive buying with very positive results. In a recent discussion with some friends I was reminded of the concept of cluster buying.

Cluster buying is several different insiders buying within a very short period of time. The earliest study on this was done by two of the legends of our business and academic research. Victor Niederhoffer and Jim Lorie (if you are not familiar with these gentleman break out your search engine and get busy reading) did a study back in 1968 titled Predictive and Statistical Properties of Insider trading that found that stocks with 3 or more insider buys in a short period of time outperformed the overall stock market by a wide margin. Further research by Jeffrey Jaffe of Wharton, Nejat Seyhun of the University of Michigan and others has confirmed the effectiveness of insider cluster buying.

Looking at the list I find that it confirms my view of the world right now. Real estate is probably the single cheapest asset on the planet right now and insiders seem to feel the same way. Inland real estate owns shopping centers in the Midwest and has seen strong buying by officers and directors in the past month. Seven different insiders, including the CEO and CFO, have made open market purchases of the stock in the past month. Their centers are usually anchored by national retail chains such as drug stores and supermarkets. The company has been aggressively renewing leases in the past year and their strong presence in their key markets of Minnesota and Illinois to do so at very attractive rates. Management has also been working to restructure and reduce the cost of debt used to finance their properties. At the current quote the REIT yield a very attractive 7.2%.

Mortgage REITs have much maligned in the financial press of late for what appear to be good reasons. The continual buying of mortgage backed securities by the Fed is pressuring spreads for these REITs and forcing many to lower dividends. Refinancing is also a risk as older high yield bonds are paid off and the proceeds have to be reinvested at lower yields. In spite of this insiders in the sector seem quite bullish over the past few months.

 ARMOUR  Residential (ARR) is at the higher end of the risk and leverage spectrum with a debt to equity ratio of more than 8. Because of the high leverage the current yield on shares of the REIT is an eye popping 15.410%. In the past month 5 insiders including the CEO and CFO have been buyers of the stocks. Hatteras Financial yields “only” 12% after the recent dividend cut has seen 3 insiders step and buy shares in the open market. The insider buying in this sector flies in the face of many Wall Street downgrades and negative press attention in this sector so it bears watching for contrarian opportunities.

The logical step from real estate is to those who finance all the properties.  It is no secret that I love bank stocks for the next several years and it appears insiders at many of these institutions are in agreement.   Many of the banks are too small to mention here but a few are larger community banks worth considering. MidSouth Bank (MSL) is a bank that I have mentioned in the past and the stock is still a buy. The Louisiana based bank has 40 branches in their home stat as well as neighboring Texas. Right now the shares trade at about 90% of book value and insiders like the price. Three different insiders including the Vice Chairman have purchased shares in the open market in the past month. Chemical Financial (CHFC) of Michigan has seen buying by 4 insider’s right around book value in the past four weeks.

The ground breaking work of Lorie and Niederhoffer has been followed up many academics and investment practitioners and it still works today. Cluster buying can help us identify undervalued stocks with the potential for outsized gains. Sometimes rather than reinvent the wheel it is good to stand on the shoulders of the giants who came before us.

Before we move on from the subject of insider buying I decided to run one last screen for insider activity. One of my favorite screens to run is the search for what I call perfect stocks. A perfect stock in my world trades below tangible book value, profitable and pays a dividend. This has been a fantastic screen over the years producing some wildly profitable stocks. The final criterion is usually a high level of insider ownership but I decided to replace that with insider buying in the past couple of months and see what we found.

The first observation is that there is a serious struggle between Wall Street and insiders over the fate of Mortgage REITS right now. The conventional wisdom on mortgage REITS is that the run is over and the sector is too risky. The bear argument is that low mortgage rates are compressing spreads and making it very difficult for the MREITS to maintain their dividend. The housing market is stabilizing somewhat and we are seeing refinance activity that pays off higher yielding binds earlier than expected. At the same time home sales are still sluggish so not much new paper is being purchased. As a final bear blow they Fed is now a major competitor for what paper is issued as they are buying $40 billion a month of mortgage paper.

The argument seems to make sense and we have seen several mortgage REITs cut their dividend. Why then are the folks running these firms such enthusiastic buyers of their own stock? 3 of the ten largest insider buys by dollar volume on my list are Mortgage REITs. Officers and directors at ARMOUR Residential (ARR), Hatteras Financial (HTS) and Two Harbors (TWO) have all been sizable buyers in the open market. The CEO of one of my favorite long term MREIT holdings Invesco Capital Mortgage (IVR) has been an enthusiastic buyer of his own stock in the past month. Someone is very wrong in this sector and although they may be early I do not think it is the insiders.

The second thing that is apparent form the list is that the executives and board members of small regional and community banks share my belief in the Trade of the Decade. The vast majority of the bank stocks on the list are too small to talk about here but a few names standout. Westfield Financial (WFD) is one my favorite post thrift conversion bank stocks and one of their executive purchased 30,000 shares in the open market recently. A director recently picked up 25,000 shares of New York based Astoria Financial (AF), another stock I have owned for some time now. First Bancorp (FBNC) is growing though acquisition and FDIC assisted purchases of failed banks. The credit picture is improving and the CEO seems to believe better days are ahead for the North Carolina based bank. He recently went into the market and increased his personal stock holdings by 10%.

Positive news about strong sales of Gorilla Glass recently led to a nice pop is shares of Corning (GLW).  I still like the stock and so do as least one insider. One of the directors recently opened his checkbook and bought 170,000 shares of the stock. This company is in all the right industries for the next several years as their glass products are used in smart phones, flat screens, tablet computers, biotech research and clean air technology. The stock is cheap and the company is poised to be a growth leader over the next five to ten years. I am happy to see that the folks running the company agree with my positive outlook for the company going forward.

Two insiders including the CEO have been buying shares of leading grains processor and transporter Archer Daniels Midland (ADM). The shares have been trading right around book value and some insiders seem to think that is cheap enough to be attractive as a long term investment. Rising global demand for food will eventually drive earnings and the stock price of this company much higher and it is one my buy list for a substantial market decline. If I could get the stock at less than 80% of tangible book value in a protracted market decline I would be a wildly enthusiastic buyer.

The exercise of combining perfect stocks and insider buying didn’t provide much in the way of new information or opportunities but it did confirm that we are on the right track with many of our investments. The people running our many of our portfolio companies like them as much as we do.

The use of insider data to find profitable buying opportunities is pretty well documented. It is one of the stock market anomalies like price to book value and momentum that has stood the test of time. The Niederhoffer and Lori study came out almost 45 years and the data is as relevant today as it was then. Many anomalies are arbitraged away almost as quickly as they appear but these last. I suspect this is because they have to do with corporate valuation levels and human behaviors which are two constants of the market arena.

Another anomaly that has lasted is the flip side of insider buying. Individual insider sales of stock are almost random in nature. The fact that a director for officer sold a block of stock tells almost nothing about the future of the company or the stock price. The fact that an officer needs to raise cash to pay for a dream wedding for his daughter or to diversify his holding is not in and of itself predictive. However the same studies that confirm the predictive nature of insider buying tell us that when several insiders sell in a short period of time the stock is probably going lower. It is highly unlikely that a group of insiders all decide to diversify at the same time or are all building dream houses for their wives in the same short time span. It is an indication they are aware of declining business trends or an overvaluation of their companies stock price.

When I sat down and looked for stocks with insider selling some interesting names appeared on the list. Storm Ruger (RGR) has seen it stock surge as gun sales have strengthened in the past several years. Fear mongering about the administration’s anti-gun policies have helped to lift revenues and profits at the company. After years of stagnant sales and earnings the rush to buy a gun the past few years have seen sales and profits sky rocket and the stock is up more than 12 fold from the 2008 low. Insiders seem to think the stock may be ahead of itself as 4 insiders have sold stock in the open market in the past month. The sales were significant with some insiders reducing their holding by 30% or more. That is not diversification it is profit taking. Investors would be wise to do the same at these levels.

Another interesting name on the list is asset management and mutual fund provider Eaton Vance (EV). The company has done very well in the past year as their strong lineup of fixed income funds have attracted positive flows form investors. They have made some bolt on acquisitions to give them greater equity exposure but the firm is known as a faced income shop. The flagship equity product Large Cap Value Fund has been a laggard and is showing equity outflows of late. The stock is trading at 52 week high right now and insiders seem to feel it is fully valued at this level. Six officers and directors have taken profits in the past month by selling stock into the open market.

The most selling in the past six months has been in shares of orthotic and prosthetic patient care provider Hanger Corporation. 7 insiders including the CFO have sold shares in recent weeks. The company reported rising sales in the third quarter but fell short of the always highly accurate analysts’ estimates. In spite of that the stock is still closer to 52 week highs than lowers and insiders are cashing out. The President and chief Operating Officer reduced his holdings by 20% and one of the directors sold about half his shares.

Insider selling is not a guarantee that a stock will go lower right away. However there is a strong statistical tendency for stocks with clusters of selling by officers and directors to decline. It just does not make sense to me to be a buyer of something the people running the company are selling. No matter how good an analyst or observer I may be, there is no way I can know as much as those on the inside of day to day operations.

Originally published as a series on Real Money.Com

Friday, December 07, 2012

Biggest Game Of The Year

Tomorrow afternoon around 3:00 they will tee it up and kick it off for a college football game. There is no conference title on the line, few if any of the guys on the field will ever play a down in the National Football League, and the outcome will not factor in any of the polls. It is the biggest game of the year. For the 113th time Army will face Navy in the annual clash of our two oldest military service academies.

I grew up in Annapolis near the Academy. It was a different time and we all had pretty much free access to Academy Grounds as long as we didn’t do something too stupid. We played football on the proactive fields, boxed in the basement gyms using their equipment, swam in their pools and just generally ran amuck on the grounds. I can still recall the painted Tecumseh statue and the other pageantry that exploded across the Academy as this game approached every year. As a little guy I would go to the bell ringing ceremony at Bancroft Hall when they won and the team arrived back at Bancroft Hall to ring the bell. Sneaking into Navy football games was as much a part of local life as fighting with the Middies over the local girls. I have been to countless games and to this day carry a scar over my left eye from a well-aimed class ring reopening a childhood injury.  The Academy and the Midshipman were a huge part of life in Annapolis and we had pretty much the same townie-college relationship that exists in every college town.

The kids that opt to go to a service academy make a huge choice. These are intelligent kids at the top of their class. They have a choice of where to go to school because if you can cut the mustard at Annapolis or West Point you likely would have excelled at Stanford and Harvard as well. They chose instead to undergo a rigorous military education and lifestyle and commit to term in the armed forces of the United States of America. This is not four years of beer blasts and cramming for exams. This is four years of yes, Sir, no Sir, high and tight and a difficult curriculum. This doesn’t end in an entry level Wall Street slot or grunt work at a Big Three accounting firm. This ends in a uniform as Junior Officer in the military of a nation that has been at war for years and probably will be for years to come.

It hit me back in 2006 or so when a bunch of us went to a Navy game in Annapolis. As I watched the march on of the Brigade of Midshipman it struck ne that ever man and woman in that impressive cadre had signed up post 9-11 and knew that there was pretty good chance combat was in their future. This was especially true of the Hoo-Rah Heads that opted to serve in the Marine Corps. They were not forced to do this. They were not drafted or impelled by circumstances to join the military. They chose this service to their nation over other opportunities.

Needless to say this hurts recruiting for the top players. If you have a chance to go to the NFL and make a gajillion bucks the idea of five years ducking fire in the hills of Afghanistan is just not that attractive. This is especially true for the long gray line. You can go in to the Navy and serve your country without ever having to sight your rifle on some insane Islamic fundamentalists bearing down on you. If you choose West Point you are pretty much assured that having religious sickos trying to kill you is in your near future. In the paper this morning where some past and present Army coaches attributed this as one reason for the decade long Navy win streak in the series.

Unlike the football factories there are no easy course for service academy football players. You are going to learn engineering , math, science and military history. You will get good grades or you will be asked to leave, or worse flunked out after the start of Junior year and have to serve your commitment as enlisted personnel and cannon fodder. You will learn military drill and you will practice such. You will serve various other duties as assigned of a military nature. You will take the mandatory physical education and training programs assigned for all students. If you want to play football you will do so on your own time.

This will be a hard played game with a high level of intensity. They will hit hard and do whatever it takes to win and take the commander in Chief trophy back to the Severn or the banks of the Hudson. It will be as rugged as any big rivalry but there is huge difference. The safety that levels a receiver going over the middle tomorrow may well be calling him for air support next year. The O-lineman battling all day with a linebacker may well depend on the middle linebackers marine patrol to rescue his pinned down unit sometime in the next few years. The punter whose soring kicks push the opponent deep into their own territory may be soaring over the return man’s head in an F18 next year to provide fire support. The Navy scat back slicing through the Army defense may need be calling his would be tacklers for artillery support as his company of marines moves up onto the line. This game is different.

Someone will win tomorrow and someone will lose. Whatever happens the United States of America wins as once again our best and brightest have answered the call to serve their nation with their minds, bodies and even their lives if need be. It is the biggest game of the year.


Wednesday, December 05, 2012

Holidays Rant

It must be time for a tirade. I haven’t gone off on a wild ass hare brained tangent in some time now and frankly I think I am overdue. Given all that’s going on in the world it is shocking I haven’t been on a grand profanity laced vile spewing tirade long before now. We have the fiscal cliff with the whole world hanging on to see if a compromise is reached. We have Pravda calling US communists. There is Joe Flacco playing like an elite QB-in an all-girls school in the northern reaches of Maine. We have every asshole in the world opining on shit they know nothing about on the news networks.Every day you have to listen to alleged financial professionals talk about Apple like it’s the keys to the goddamn kingdom of wealth. The only people dumber than our President are in the House and the Senate.  Maryland is going to the Big Ten even though they can’t even win in the ACC. It is a 12 hour drive from Louisville to the Atlantic Ocean but they are joining the Atlantic Coast Conference. You look around at the world and it’s hard not to think the Mayans may have been a bunch of cockeyed fucking optimists.

There are lots of good causes and subjects for a righteous tirade but I am going to kick off with Christmas. What have you fucking sinister bastards done with Christmas? I used to love Christmas. I would turn into a happy, happy ho-ho-ho motherfucker around Christmas time. Christmas always kicked off right after the Army Navy game on the first Saturday of December. I can even put up with those who think it should start Thanksgiving weekend. But it is absolutely ridiculous to be picking fake pine boughs out of my nostril while trying to pick up a teenage mutant ninja Barbie cat costume for the kid two weeks before Halloween. I can put up with the Salvation Army bell ringers in December but if I see you before the Thanksgiving turkey is thawed or the point spreads for that days games have been posted I am going to stuff your head in your damn kettle and play a rousing chorus of Ina Godda Da Vida. If I have to stumble over the Johnny Walker holiday gift sets to pick up some hooch for Labor Day it’s not a good thing. Christmas starts in December not mid fucking summer.

I get the whole idea of Christmas. The date has nothing to do with the actual birth of Christ but was designed by the men in pointy hats to replace Saturnalia and other Pagan Winter solstice festivities in order to retain converts. Not sure it was necessary since most of them were converted under pain of death but I guess the early Church fathers threw the pagans a bone. Most of the culture of the time had a winter festival as the work in the fields had come to a halt and it was kind of a last bash before the harsh winter set in. Booze, ribald behavior, grand feasts and just general good old we are about to freeze our asses off and will be lucky not to starve kind of shindig. To preserve the party the birth of Christ was switched to December and many of the old traditions were assimilated. I get it. To keep the coffers full you have to keep the parishioners happy and they wanted a party in early Winter so let’s give them a big one. What’s bigger than Gods Birthday?

But that's not enough. Now we have to go back and turn a couple of the old Gods into Santa Claus. What better way to celebrate the birth of the savior than inventing lies to tell the children about a jolly old fat man who brings all the kids presents. Let’s throw in some elves and flying reindeer to make it more believable for the little tykes. Don't let them think their parents loved them enough to scrimp and saved to give them gifts to celebrate the day. Let them think that the magic fat man dropped them off for free. In order to be sure they grow up well rounded let’s spend the first seven years of their lives hard selling them myths of magic fat men and bunny rabbits dropping off gifts to honor the birth and murder of their god and then tell them the savage truth and shatter all their illusions when they are 8 or so. That sounds like a grand idea doesn’t it?

Still in spite of all the basic madness I can get into a little Christmas. Deck the halls, exchange some gifts, break out the good wine, cook a giant ass turkey and put some Sinatra Christmas tunes on the boom box. We have had some mad Christmas celebrations around Chez Melvin. I am sure we will have many more but I am not participating in this mad circus that passes for Christmas these days.

I am a dyed in the wool capitalist and for years I have passed off the grumblings about the commercialization of the holiday as demented mutterings of left wing religious whackos. But mother of god this is out of hand. Wal Mart opens for Christmas shopping before Aunt Ethel has passed out from cheap gin or fat ass Cousin Leroy has consumed an entire pumpkin pie at halftime. People actually camp out to buy television sets and laptops and other life changing devices. Of course if they had just gone to work all week instead of eating  grilled hot dogs in a Best Buy parking lot they might not need the discounted price as badly. They have riots at Toy Stores to buy some piece of crap toy that will be broken before the sun sets Christmas day.

I thought it would be safe to watch TV once the election was over but we kicked right into Christmas shopping commercials. YOU! SHOP NOW! BUY THIS CRAP! WE ARE PLAYING CHRISTMAS SONGS WITH THE WORDS CHANGED TO PROMOTE OUR SHITTY PRODUCTS! YOU MUST BUY THEM FOR PEOPLE YOU DO NOT EVEN LIKE VERY MUCH! NOW! BUY THEM NOW.

If you aren't in the mall you must hate God and be against peace on Earth you evil bastard. This is insane.
Consider this. The US economy is 70% consumer related in nature. Something like one third of all retail activity takes place in the fourth quarter of the year. More than 20% of the US economy can trace its roots directly to a pagan orgy to celebrate the fact they stood a good chance of dying before spring and they all wanted to get drunk and laid before they died. Think back over the past few years and tell me how many of those Christmas presents you still actually possess or would have purchased for yourself in the first damn place? We go on a spending binge to celebrate the birth of a man who preached love one another and help the poor. We actually let our children grow up thinking they must be rotten little shits because Santa didn't break in and leave as many presents at their house as they did the rich kids across town. Retail has built the birth of God, a drug addled fat man in a red suit who sees flying reindeer and talks to toy building elves along with a pagan orgy into an excuse to go into debt to buy shit for people we don’t like and that they will never use because it shows our belief in good will for men. The scary part is not that they would try to sell us that crap. That’s their job. The scary part is that we buy into it.

I am not anti-Christmas. We should all have Christmas. We should gather our family, friends, and people we love together on Christmas Eve and celebrate.  Play the Christmas music (an aside. I love Christmas music even the pop stuff. But please if you are a death metal or rap group resist the urge to cut a holiday record. “ Gonna kill dat bitch ho in da santa hat”  and “death to the mothfuckin cop on Christmas eve “is not in the spirit of the season), roast the bird, pour the wine. Give each other gifts but make them mean something like good books or great music. Spoil the little ones the next morning if you are able but for godsakes let’s focus on something besides this shopping gives meaning and purpose to life crap. Let’s take a step back and actually enjoy the holiday instead of obsessing on whether we got the right gift for the kid in the mail room who routinely reads your issue of the Wall Street Journal while taking a dump before delivering it every day.

Fuck all these meaningless mandatory gifts. Give a homeless guy a sandwich. Or better yet a blanket and fifth of Jack. Find some young mother with three kids struggling to do the right thing  and take her family a months’ worth of food and books for the kids.  If you live in a college town find those kids who couldn't go home for the holidays and throw a dinner party. Randomly pass out some money to harried looking strangers with sad looks in their eyes.  Donate some books to the library. Pick up a soldiers tab in the airport bar. Get an old dog at the rescue shelter and take it home to have a peaceful old age while making a decent donation to the shelter. Give some cool little gifts to people you love and throw a few bucks in the direction of those who need a hand in this world. Makes more sense than a Simpson’s themed cocktail set for some cousin’s kid you have haven’t seen in a decade.

Take the time you would have spent shopping and volunteer to teach a literacy class. Take your kid fishing. Go for a walk with your wife. Put Coltrane on with headphones and crank that shit up loud. Read a book. Make love to your wife under the tree (there maybe an age limit on this. You really don't want to get found there in the morning because your trick knee kicked in and her arthritis is acting up). Take your kids to a ball game or a concert. Teach your son to throw a spiral. Call an old friend and swap stories and lies for a while.

They sell us the idea that Christmas can be magic if we just spend enough. Quit buying that shit. Christmas can be magic if you spend the day doing things you enjoy with people you love. Take the pressure out of the holidays and make it about love and family. Make it about heavy drinking and wild sex. Make it about an NBA game and a good book on a lazy day. Make it about anything but this mad rush to spend on shit no one needs or really wants. Lose the intense pressure for it to be some magical religious experience with snow flakes and wrapping paper. Make the magic your way.

Me? I'm gonna mix it up. I’m going to spend it with people I love having a big ass feast. I will drink excessive amounts of wine and invite friends and neighbors stop by for Christmas cocktails. The kids are flying in for the week. We put a ban on presents for the adults and will spend it at the bar and the bookstore as it should be. If my knee works, my arthritis doesn't kick up, the little one goes to bed early and my wife doesn’t kill me in my sleep maybe we can  have some wild  Christmas sex. Christmas day when the madness subsides I will try to hang out the couch and watch a movie or read a book until the kids get their hung over asses out of bed and the madness starts again. There will be magic of our own making that has nothing to do with fat men in red suits or the churches desire not to lose its pagan converts over the winter.  It will be the magic of family and friends, of love and kisses, of wine and laughter, of life and being alive not of the malls bottom line. It will be Christmas, Melvin Style.

Tuesday, November 27, 2012

Don't Be That Guy. Smart Put Selling

One of the more interesting discussions around Chez Melvin this past weekend has now spilled over into the week. The topic of option selling came up as a couple of folks have recently had their heads kicked in and net worth diminished by disastrous short put positions. I have been known to sell puts form time to time and found the conversation of great interest. The traders with losing option positions were experienced investors but new to the option selling game. Thyme made the same mistakes I always see made by pros and neophytes alike.

Selling puts on stocks, indexes and ETFs can look like free money.  We all know that most out of the money options expire worthless with the seller keeping the premium. What most traders fail to take into account is that option payoffs are asymmetric in nature. You can sell premiums and have 90% winners and end up broken by that final trade. Option sellers can find themselves collecting pennies and paying out dollars.

I only sell options on stocks I want to own. Valuation of the underlying stock is the first and foremost concern. If it is not cheap I do not care where the option prices. I have no interest in the trade. This is where most people lose money as option sellers. The premiums on the darling and popular stocks are often fat and just too tempting to pass up for many traders and investors. Why sell options for a 2 or 3% monthly return when you can collect much more than that by selling premium on stock like Apple (AAPL) or Chipotle (CMG)? After all they just keep going up and everyone loves them. What could go wrong?

What can wrong is the stock can fall out of favor as we have seen with these two glamour names this year. If you sell puts on one of these names and collect the fat premiums and the stock falls out of bed you are going to lose a lot of money. You could end up being put the stock and being forced to buy a stock you do not really want to own for the long term. If you compounded the error by posting minimum margins you are going to face a margin call of epic proportions. I always post the full purchase price of the underlying stock at the strike price.

The other mistake I see made is going to seem counter intuitive  I really do not like to sell options on a rising tape. It would seem that selling puts when the prices are rising. The price goes higher and you collect the premium. The problem with this theory is that each time you roll over the position you will be selling higher strike prices. In a rising tape volatility is usually rising and pricing is weakening. Markets are not unidirectional and if you have lost track of valuation first and sold at ever higher prices a small correction cap wipe out a years’ worth of gains.

I like to sell puts on stocks no likes at prices that I think are too cheap not to own. I am hoping the stock gets put to me and forces me to buy at lower than current market prices.  I prefer to sell them when there market is declining and there is a touch of fear in the air as this leads to fatter options pricing and better back in entry points for my long term position or higher premiums in my pocket. As a rule I pretty much never want to sell options of any kind when the VIX is below 20. I have seen way too many people carried out of the arena on their shield because of a volatility spike. I would rather be the guy selling insurance when everyone is willing to pay too much to protect against a downside that has already started.

I have found over the years that my best experience selling options have been in stocks that are so unloved there is not much option related activity. These usually have wide spreads and lower open interest. I will post an offer between the spread based on my calculation of option value and I get filled more often than not. It may take a few days but I am able to sell an option on a stock I like at a price I like. I scale into stocks so I do not need to sell 50 or 100 contracts at a clip. Just as with stocks my best results in the options selling business have come from doing what no else is doing and trading where larger competitors simply cannot.

Options selling can be a profitable tool for value investors. As with all tools there is a time to use it and a time to leave it in the box. Using the tool in manner for which it was not unintended can lead to serious injury or even financial death. Don’t be that guy.

Tuesday, November 20, 2012

Annual Thanksgiving Drivel

So here we are once again. Thanksgiving is fast upon us and the madness we refer to as the “Holiday Season” is upon us. Thanksgiving is like the feast before the slaughter in many ways. For one day we can eat, drink and watch football without worrying about gift giving or shopping. Unless of course you are one of the many dumbasses heading out for Black Friday shopping in the wee hours of the morning then it’s just the pre-battle dinner. I cannot for the life of me imagine of anything I need badly enough to head out for Black Friday or pre Thursday shopping.  I do not think I could look some poor minimum wage store clerk in the eye that had to come to work Thanksgiving at midnight so I could save a few bucks on a big screen TV and Tickle me (but not there without checking ID first) Elmo. Call me sentimental but I remember when Thanksgiving was about family, friends with lots of food and booze and not carb loading for shopping madness that puts WWE action to shame.

Tomorrow is the big travel today although some signs of the exodus have already started to appear. I am always that people will fight their way along turnpikes, through airports and jam into trains like sardines to spend a day with a bunch of folks they really don’t like that much anyway. There is nothing like fighting your way up I95 to spend two or three days of hearing about all the things you did wrong 30 years ago and rehash all the wrongs done to your siblings over the years. It must be magical to do a Usain Bolt through the Atlanta or Dallas airports to be in time to once again watch Uncle Frank get shit canned on your dads good booze while your cousins new baby daddy explains the intricacies of the parole and probation system over dried turkey and mashed potatoes that could easily double as stucco and mortar. There is a reason most of us don’t live that close to our extended family. Thanksgiving is a time to explore all those highly dysfunctional and unpleasant reasons while fueled up on liquor. Ah, the holidays indeed.   

We will see all those commercials and Hallmark movies that show families gathered to delightful dinners in a glow of soft candlelight. Most of us that have experienced the large extended family holiday gatherings over the years know that a far different picture usually emerges. Mom is frazzled beyond the breaking point  after two days cooking and cleaning and is desperately trying to resist the urge to smother her younger single professional sister in the green bean casserole after the 19th story about her fabulous weekends, Dad and Uncle Ernie are drinking Jack in the back yard and about to break into a fistfight over who won the 1972 Super Bowl, Aunt Ethel is puking in the potted plants, the baby has managed to obtain and eat an entire pumpkin pie, and although  Johnny is home from the army  no one has seen him or his pretty little 17 year old step cousin in some time now although there is bright red thong where his car used to be parked.  The TV is blaring a football game no one cares about and the youngsters are in the den watching 9 and ½ Weeks while Grandpa snores strenuously in the middle of it all and Grandma is slumped in the recliner with a bottle of sherry and a bendy straw. The great American family holiday!

After a few too many holiday gathering exactly like the one described above, along with threats of rectally inserted turkeys and full on food fights among unrestrained youngsters I have the misfortune of sharing a blood line with, the kids and I years ago came to the conclusion that we would rather say home and celebrate things our way. The Melvin way means tons of food, good wine and we only allow people we like to join us. My wife is of the same mindset so our holidays have become good times with people we actually enjoy being around. We admit no one we don’t care for regardless of birth circumstances, social status or blood type. It makes for a much more enjoyable relaxed holiday experience.

It is also a time of year when we really should set aside our worries for a moment and be thankful for all we have in life. There is plenty to worry about this year. Our government is heading away from a free market republic to more of a democratic big government form of socialism. There are plenty of historical precedents for this but that doesn’t mean I have to like it. The economy sucks.  Soccer is gaining in popularity. The Blue Jays just got a lot better and will be a threat this year. Taxes are going up. There is either global warming, climate change or a looming ice age depending which channel you have on at the moment. Honey Boo-Boo has her own show. Rush Limbaugh and Al Sharpton are still taken seriously be entirely too large a percentage of the population. Teen paranormal romance is now a section in Barnes and Noble stores. My Mother is coming next month. Rap music has not died off yet. The head of the CIA can’t even have a covert affair. There aren’t going to be any more Twinkies or ho-hos soon. There are plenty of things to worry about but this time of year is about being thankful.

As always I have to start with family. I have been blessed with an amazing if somewhat eccentric and weird immediate family. I have no idea why my amazing wife would marry me but every day I am damn glad she did. She calms me, excites me, and makes my life better in every way imaginable. I have no idea what she sees in me. I am messy, absent minded, stubborn and difficult…and those are my good qualities. She is a saint for putting up with me much less loving me. Every day I wake up next to her is a good one. Lisa has grown into this smart confident young woman and Tommy is a businessman of the highest order without losing an ounce of his magnificent if crude sense of humor. Maeve is growing smarter and more artistic with each passing day. Each day I am reminded that I am a lucky man and that I blessed that these amazing people put up with me.

I am also blessed with some great friends. Many culled themselves off the list in the aftermath of the great IRR last year but those that remain are steadfast and true companions along the road of life. I don’t travel as much right now so I may not be sharing bar adventures and dubious cocktails with the Chicago Curmudgeon, the Voodoo Professor, The world’s only living Iranian Jewish cartoonist, the degenerate Kentucky Colonel, the Cheesehead or others but I talk to them frequently still through the magic of Facebook, Twitter and other modern communication devices. I don’t see the island crowd every other night at the bar like the old days but I am still in touch with people like the littlest firefighter, Tic-tac, Rag Lady, and others. I expect to see them when the snow is ass high in the Mid Atlantic this winter. I am in contact with great people like Baldy, the Beard, the Preacher and Granola on a daily basis during market hours and beyond. I have a solid group of friends and for that I am thankful.

When you get right down to it at it is core life is magnificent. There is so much to be thankful for each year that we really should take time to express and explore our gratitude more often. My list grows all the time but among other things I am thankful for:

Each day I wake. This beats the living shit out of the alternative.

The dog. I still hate pets but walking the thing around the neighborhood here in Florida has led to me walking a few miles a day and losing about 10 pounds since we got here. Still not a fan of picking up the steaming piles of fresh shit but at least I don’t gag or throw up anymore.

Alligators. I love alligators. The dog and I see two or three a day and they are just cool.I may be gray and losing my hair but I am like a little kid when I see alligators.

Same for Pelicans. Have to drive to the coast to see them but I get a huge kick out of pelicans.

Books. Friends ,educators, entertainers, companions. Brain food. It’s a lifelong love affair.

Wine. Rounds off the edges off a bad day and adds a sparkle to the good ones. Damn tasty too.

The fact that less than 1/10 of one percent of investors pay a lick of attention to tangible asset value. The faux value investors out there create opportunities for those of us who actually practice it.

Ben Graham, Chris Browne , Walter Schloss and all the other greats who paved the way.

Florida.  Can’t manage an election or field a decent professional football team to save their lives but this is a great place to live.

Did I mention my incredible wife?

Zombies, Bikers and Insane Asylums.

Newspapers. I still love an old fashioned actual ink and paper newspaper. My extraordinary wife actually got me subscription to the daily paper here in Orlando. That never would have occurred to me.

Twitter. I freaking love Twitter. If you set your feed up right its better than a news ticker most days. It’s also a lot of und to trade barbs and quips with people like @tangletrade,@byrneTSCM, @Brian Sozzi and others.

Greed. No matter how much my liberal friends deny it greed has been the source of much of human advancement. Rather it be greed for money, achievement or knowledge greed moves us forward.

Sunsets. I am sure sunrises are awesome too but I don’t get up that early if I can avoid it. With a 9 yr old who thinks 7 is late I see more of them these days.

Sleeping in. Its rare these days so I appreciate it even more

Naps. I love naps. You can never take enough naps.

Travis McGee, Doc Ford, Spenser, Hawk, Tomlinson, Agent Prendergast, John Cory, Thorn, Jesse Stone, Stone Barrington, Lucas Davenport, Horatio Hornnblower, Cletus Frade, Harry Dresden and all the other boon companions of the written word.

Baseball my life friend and obsession. The Orioles in the playoffs just makes the year better. The Red Sox sucking is just sublime

Football because who doesn’t like barely controlled violence with half naked dancing girls?

Beethoven Bach, Miles Davis, Wilson Pickett, Handel, Springsteen, Waylon Jennings Jerry Jeff Walker, the Grateful Dead and everyone else who plays the soundtrack of my life.

My wife. My kids. My life. I am a lucky man and I know it. I have much to be thankful for again this year.

Now lets get the bird in the oven. Uncork the wine and get this party started. Happy Thanksgiving.

Monday, November 19, 2012

Convert and Prosper

The last few weeks have been strangely peaceful.  For the first time in months we could turn on the television without a constant barrage of campaign ads and misinformation. Although I am sure the networks and local stations will miss the revenue I am glad to see it end. I will be equally glad to see the end of the barrage of how to invest now columns and presentations that are flooding the media. It happens every election cycle and it is equally silly every time. However you pick stocks or investments keep doing what works. All these predictions will or will not play out but all the information will show up in the financials. If you like growth stocks buy the stocks that are growing revenue, earnings and margins. If you are a value type buy those stocks that are worth far less than their intrinsic or asset value. I think you make more money and sleep better by reacting to what does happen rather than trying to predict what will happen.

I had a before conversation with my friends at FJ Capital the other day. As always once the niceties were out of the way the conversation focused on bank stocks. Andrew Jose, one of the partners of the banks stock hedge fund, was kind enough to forward a copy of their latest presentation and thinking. It was chock full of information about small banks stocks but one section really caught my attention. It focused on mutual thrift conversions, an investment strategy that has been successful no matter who resides at 1600 Pennsylvania Avenue for more than three decades now. I see no reason it will not continue to be successful.

Mutual thrifts were formed decades ago to serve local communities. They are owned by depositors not stockholders. Over time these institutions generated solid earnings but they were limited by the nature of the institution and it was difficult to deploy the capital and grown the thrift. Many decided to convert to state chartered banks and issue stock to the public. It is a tightly regulated process that involves an appraisal and IPO offering to the public. These are small banks that come public at a steep discount to their asset value compared to larger institutions and they have been a steady source of profits for astute investors.

Andrew sent a table along that had some useful information about thrift conversions over the past 22 years. It seems that because the post IPO banks are trading at a discount to book value, have plenty of excess capital and have very clean loan portfolios the stocks have done very well. They also become very attractive takeover candidates. The average life span of a mutual thrift is pretty short. In the past two decades more than 75% of mutual conversions were taken over within less than 5 years. In the past few years I have had former conversion taken over at a pretty good clip with banks like Abington and Danvers taken over at large premiums to our purchase price.

Here where it gets interesting. If you look at conversion deals that have been done since 2006 the takeover rate declines sharply. Looking at the information Andrew provided it looks like there have been 80 conversions since 2006 and just 5 take overs. The credit crisis hit all segments of the banking industry and thrift conversions were not exempt. They withstood the storm better than most because of their more conservative approach to lending and high levels of capital but they still took some hits. In addition takeover activities slowed down to a near coma as the focus for many banks was to simply survive not grow. That will change over the next five years.

There are still substantial headwinds for the smaller banks. Regulatory costs and capital requirements will constrain top and bottom line growth. Real estate markets are still struggling in many areas of the country. Small business, an important small bank customer, is still reluctant o expand in an uncertain environment.  This all is more of a positive than a negative for our thrift conversion stocks. Although the world is not back to 2006 levels there are signs it is stabilizing. As banking’s focus is again turned towards growth the easiest path will be to acquire smaller institutions with excess capital and clean loan portfolios. Given that high regulatory costs make it difficult to operate and profit many of these former thrifts will find it easier to sell. Since the officers and directors tend to be large shareholders post conversion these deals will be done at solid premiums to book value and the current stock price.

The opportunity for the last 6 years’ worth of thrift conversion stocks is a huge subset of the trade of the decade. This is an investment strategy that has worked regardless of who was in the White House, which party controlled the congress or what condition the economy was in at the time. The inevitable market dips and declines were merely inventory creation events that allowed investors to buy at sale prices. The conversion process itself creates bargain issues adding capital to an already strong balance sheet. Most of these are smaller local institutions that are extremely well run in the first place and would be attractive without the extra capital. As the good folks at FJ Capital pointed out most of them get taken over in a few years.
The banking crisis has bought mergers to a standstill in all sectors of the banking industry including conversion. We now have an excess inventory of converted thrifts that are still public and trading at attractive prices. Most of them fit comfortably with my trade of the decade strategy of buying banks with high levels of capital, low loan losses and trade below tangible book value.

One such institution is Home Bancorp of Lafayette Louisiana (HBCP). The bank entered the conversion process in late 2008 just as the credit criis began to boil over. In spite of this they have done a great job since that time. They have seen deposit growth for 13 consecutive quarters as consumers favor a relationship with a strong small bank with strong local ties. The bank has been able to acquire other banks in the area with FDIC assistance. The organic nonperforming assets ratio is below 2. The total NPL ratio is over 3 but much of that is acquired loans that have FDIC assistance and guarantees. The stock trades at just 90% of tangible book value and the equity to assets ratio is over 14. Home Bancorp has been buying back shares and intends to continue doing so. During the third quarter they bought back 162,629 shares and more than 220,969 shares remain under the current buyback authorization.

The 2007 crop of 2007 has already given us several cheap stocks. I currently own shares of ESSA Bancorp (ESSA), First Financial Northwest (FFNW) and Westfield Financial (WFD) all of which engaged in conversion transaction just before the crisis struck. They are all still cheap and have decent fundamentals. First financial Northwest has had some difficulties with troubled loans and real estate owned but conditions are improving and they have plenty of excess capital. Very few of the 2007 crop have been taken over so far and I expect this to change over the next few years.

 The 2010 crop has given us some solid portfolio holdings as well. I wrote recently about Fox Chase Bancorp (FXCB). I own the shares and have a nice gain in the position. The shares now trade right at tangible book value and I would wait for a sell off to add or initiate a position in the stock. I also own Capital Federal Financial (CFFN) and am up slightly on the position.  The bank is in the Midwest and has one of the healthiest loan portfolios in the industry. The equity to assets ratio is a little over 20 and they have been using the capital to buy back shares and pay dividends. Neither of them is exciting or sexy but I expect to make enormous profits over the next decade as these banks grow or are taken over at large premiums.

The 2011 conversions included one of my favorite little bank stocks. BSB Bancorp (BLMT) is a four branch bank in Massachusetts that has incredibly attractive numbers. The stock trades at just 84% of tangible book value and the equity to assets ratio is over 16. Nonperforming loans are just .34% of total assets. Unlike many banks the past few years BSB is growing. They have seen solid growth in both deposits and loans over the past year. The bank has seen asset growth of more than 22% so far in 2012. Insiders like what they see in the future as they have been steady buyers of the stock so far this year.

The thrifts that converted to stock ownership since 2007 have not seen anywhere near the level of takeover and merger activity experienced in the past. I expect that to change and conversions will be a source of large profits for those that invest in these safe and cheap financial institutions. Most of them are way too small to write about on Real Money but it will be worth the time and effort to uncover these gems for your portfolio.

Monday, November 12, 2012

After the election: My America

I waited for the smoke to clear and the dust to settle before commenting on the recent election. My first thought is that the nation almost universally decries the incompetence of its government and then elects the same professional politicians, buffoons, idiots and outright scoundrels to office. We all say how concerned and involved we are but virtually no one can actually tell you what their candidate believes, how he has voted on key issues in the past or how we can expect them to behave in office. We vote for carefully crafted images formed by PR flacks and make decisions based on sound bites and yard signs. It  was another election of least bad choices and we all went along with it again.We have no one to blame for this mess but our own ignorance and apathy. 

My overriding thought is that with every election cycle we move further and further away from my America. The America I believed in and was taught as a boy is disappearing from the landscape.  My America was a land of opportunity and freedom. It was populated by cowboys, astronauts, heroes and pioneers. The good guys always beat the bad guys and you could be anything you wanted when you grew up. It was a vision as much as a landmass. It was our heritage, a gift given by those who came before and in my lifetime I have seen it thrown away in some ways and fade due to neglect in others.

My America is a land of opportunity. There are jobs for those who want them and the chance to chase your dreams for others. Business flourish because of innovation, hard work and creativity. They make products and services that make the populaces life better and are rewarded for it. Business push back frontiers with new discoveries and innovative propositions and the founders were generously rewarded for such. Taking risks is encouraged and those with the physical or intellectual bravery to do so could earn riches beyond imagination. This is as it should be.

However in my America business not only pursues profit and riches they understood that the general public and the workforce were a huge part of that success. They don’t get so focused on the short term that they lose sight of the fact that capital and labor is an interdependent relationship. The do not fall so in love with Wall Street and their own stock price that they lose sight of the long term. In my America founders and creators can earn vast amounts of wealth but caretaker CEOs do not earn 300 times their average employees wage. Corporations do not sit on billions on cash and lay off employees to make their quarterly number. The look to the long term and consider the human capital at risk as well as the cash. Their loyalty to those who toil may not be rewarded in this quarter’s stock price but it will be in the long run.

Labor does not off the hook here. In my America labor is not so greedy as to think they deserve more of the pie than those with their money at risk. They understand that to have good jobs there has to be a sufficient profit earned. Look at what has happened in union intensive industries like autos and airlines and you can see that when labor demands more than their share everyone fails. They understand that profit is necessary for commerce.

My America believes in free markets where each is free to trade with each other. They also understand that a free market comes with personal responsibility. If you don’t like Wal-Mart pushing out the little guy spend the extra money and shop at the little guys store. Don’t cry foul and expect the government to do something. If you are pissed off that Citigroup and Bank of America helped push us to the brink of financial ruin you don’t keep your accounts with them because they have lots of ATMs. If BP dumps oil into the Gulf and this upsets you quit buying gas there. The free market solves its own problems and does not rely on government intervention so that we may maintain our personal convenience. A free market rewards good products and good behavior and punishes the opposite. In case you dint know YOU are the market.

In My America we do not rely on the government for everything. In fact we don’t rely on them for much at all. We ask that they provide for the common defense and create an environment where commerce and the resulting prosperity can flow. Help provide the infrastructure that we may live well and do well, keep us safe and then stay the hell out of our way. We do not ask government to take money from our friends and neighbors at gunpoint to pay for our retirement, healthcare or day to day needs. We recognize that not one person on this earth owes another one damn thing as a result of the accident of birth and it is up to us to take care of us and live our lives in the best possible manner.

In my America we all know that sometimes someone may need a hand up. We are generous and not afraid to of our own free will help our friends and neighbors along the road of life. We know that some, such as the disabled and handicapped may need us to care for them and we are quick to do so. We do so because we are human and we care. We do it of our own free will and not because the tax collector has a gun in our face. As hedge fund manager and free markets supporter Roy Niederhoffer, capitalist extraordinaire Omid Malekan and others showed us in the aftermath of Hurricane Sandy individuals can accomplish faster than any government agency. We take of our kids and make sure they have what they need. We take care of our parents when they get old. We do not need the government and their good intentions and guns to do this because we care enough to do it ourselves.

In my America we care deeply and passionately about Education. In fact we care so much we don’t let the federal government get involved. We do not spend money on bureaucracies or special assistants to the deputy secretary of social studies. We spent it on teachers and books. We do not teach to the lowest common denominator, we teach to lift up all the kids and get special help for those who need it.We do not adjust our tests to fit special racial or demographic lines but treat all children as if they have equal potential.  We fill students with facts and figures not opinions. We do not teach self-esteem or diversity we teach reading, writing and arithmetic. We teach science and history, not religious theories and PC rewrites.  We focus on keeping schools safe for students as well as teachers. We teach them the basics and then how to use technology as a tool and not a crutch. We turn out graduates who can read, calculate and think not just pass a test.

My America is not an Imperialist presence on the world’s stage. We do not feel the need to keep troops all over the globe. We do not send out soldiers, sailors and marines to try and solve every problem caused by some crackpot dictator or tinhorn warlord. We cannot solve all the world’s problems or act as protector and policeman for the globe. If the UN wants to try let them form their own version of the French Foreign Legion but we are not participating. We practice a version of Teddy Roosevelts speak softly but carry a big sticks. We want peace prosperity and trade with all. We will stay out of your internal affairs and problems. But be aware that we are big and we are powerful. If you fuck with us or cause us harm we will declare war and destroy you. There will be no consideration to PC warfare and it will be your asses we are after not your hearts and minds. We want peace but if you force our hand you will get war as you have never seen it. More importantly our children will no longer die in far off lands for no good fucking reason or someone’s misguided good intentions.

In my America we do not celebrate diversity because we do not give a shit about it. We are a melting pot and no matter how we got here we judge each other by who we are and what we do. The color of your skin or the history of your ethnic or nationality no longer matters. You can celebrate if you so choose much as I do each St. Patricks Day but at the end of the day we are all Americans and hyphens are neither needed nor wanted. Racism goes way when we quit focusing on endlessly and treat each other as individuals rather than part of some group or another. You skin color grants you no special rights or privileges nor does it grant you any special claim on society. You are owned only opportunity and in my America we all have that.

In my America we do not let religious whack jobs or bigots hold important positions or attempt to dictate their beliefs to others. The government does not interfere in who does what to their own body, who sleeps with whom or who is married to whom. Our personal lives, our sexuality and our life choices are our own business. As long as we do not harm others we are free to worship as choose or not choose and to live our lives as we see fit with judgment of punishment.

In my America we do not have more than 2 million people in prison.  We sure as hell do not have 100,000 kids in juvenile facilities. We do not have a prison population that is almost half locked up for nonviolent crimes. We do not put people in prison to fight some unwinnable war on drugs. We find more productive ways to punish nonviolent criminals that provides a benefit to society instead of an enormous cost.  Judges do not make an example of an offender with an overly harsh sentence. It does not deter anyone and you are guilty of ruining a life that may have been salvaged. We look to practice justice not mere retribution. Save the prisons for violent criminals. of course if we provide the education and opportunity we are capable of, the prison problem may just reduce itself over time.

 In my America we all pay a flat fixed income and sales tax. Corporations pay the same rate as individuals. There are no deductions meant to control or influence behavior. We all enjoy the benefits and opportunities of society so we all kick in the same percentage. The sales tax ensures that the national sales tax guarantees that those that consume more pay more. Investment and savings are not taxed thereby proving an enormous pool of capital to create jobs and provide opportunities. Along with import duties these are the only taxes. There are no thousands of pages of add on taxes, fees and charges. We all have more of our money and the budget is balanced.

In my America legislators typically have two motions each year. One motion to pass the balanced budget and one to adjourn the session. We have more than enough laws on the books and everything that should be illegal and much that shouldn't be is already against the law. Anything further is just an attempt to influence and control the behavior of your fellow citizens and that should be a crime. No matter how good your intentions you do not have the right to tell me how to live my life. I don’t need you to tell me how to behave or what kind of toy I can have in my damn happy meal.

In my America we elect people who share our vision, our dreams and our dreams. We elect people who have real jobs and own real businesses.  We elect people not parties. We pay no attention to slick commercials and passionate speeches. Instead we elect those who realize that the job of an elected official is to protect the American dream by not impeding opportunity. We ask from our government only opportunity, safety and infrastructure. Everything else is our responsibility. If we all take care of ourselves and our loved ones, and willingly help those who need a hand out we do not need to feed a self-sustaining and self-protecting government bureaucracy.

My America obviously is just a vision and pipe dream. We can’t really create this land of opportunity, equality and freedom can we? Actually we could. We almost had it but since 1913 we have done our level best to give it away. The ability to live your own life and making your own choices, judging others by who they are not what they are,  revering education as much as athletics, enjoying peace and prosperity, all of this is always within our reach. The cost is personal responsibility, tolerance and unforced generosity. It seems to me that as each year and each election goes by fewer are willing to pay that price.