The hardest thing to do is nothing. I don’t mean that personally
of course because as the butt indentations on the couch will attest I am a pro
at the weekend nothing. I can sit like a statue with a book and a ballgame for
hours and accomplish a glorious rousing round of not a damn thing. If I smoked
inside and could train the dog to fill a wineglass I could do nothing for
entire days without a second thought. I have never been one of those who thinks
every moment of every day must be filled with some productive activity. After
all as Nietzsche warned us excess productivity can bring the most gifted man to
madness. In the interest of maintaining sanity, I loaf. If loafing with no particular
intent was a sport I would be an all-star.
However in the stock market many of us find it impossible to
do nothing. After all the markets is open, I should be do something. I am
getting tweets about fantastic trade set ups and my Facebook page is full of incredible
cannot miss ideas. The talking heads on TV are raving and ranting about
undervalued stocks, earnings expectations and squiggling lines crossing over
scraggly ones. There is all this madness swirling about and I AM MISSING IT.
Victor Niederhoffer has often told me of studies that show that the average
investor, much like the average gambler loses far more money or underperforms
far more than they statistically should. The inability to do nothing when nothing
is called for is chief among the reasons for this excessive failure.
Right now is a prime example of the time to do nothing in my
opinion. If you were paying attention you were buying when the market sold off
in August and September. We were buying
some of battered foreign banks like Royal Bank of Scotland (RBS) as the market
was in mini meltdown mode. We bought shares of Granite Construction (GVA) when
it traded below book value. I added heavily to our private equity bank plays as
the prices cracked across the group. I was a scale buyer of shopping center
REITs like Kite Realty (KRG and Cedar (CDR). Hotels got cheap so I added to Sunstone
Investors (SHO) and Felcor Lodging (FCH). I had below market ordersI on microcap
net- net stocks like Lakeland Industries (LAKE), Gencor (GENC) and Air T (Air
T) that were filled. The news was universally bad and people were panicking out
of some stocks creating what I felt were safe and cheap opportunities.
Back then the news was universally bad, Europe was in
shambles, the mid-East was in full disaster mode, and there were still a few
folks in nice suits talking about a double dip recession. Volatility was rising
for much of the time period and the VIX index traded between 30 and 45 for most
of that time frame. Selected stocks were cheap and option premiums were fat so
it as a time for a value guy like me to be buying stocks and selling puts. Although
I probably retched over the garbage cans a few times as I entered the orders I
was doing just that. It was a time to be busy, a time to do stuff when you sat
down at the desk in the morning.
Fast forward to today. The economic news is better and stocks
have rallied sharply off the lows by more than 20%. The deep value stocks I was
buying them are up a huge number almost across the board with gains of 25%, 50%
and in a few fortunate cases even more. We had a flurry of takeover activity in
December that made me look a lot smarter than I really am. Buyers have emerged in the market and things
have calmed down quite a bit. The volatility index has been in a steady
downturn and as my good friend and technostat geek extraordinaire Tim Collins
points out is now barely old enough to drive at 17 and change. Just six months later
as far as the stock market is concerned it is a whole different world.
So we should sell right? God knows I could give you a host
of reason to do that. Europe is still a mess. The economic news may be better
but it is still not good. Earnings are marginally okay at best. The Mid East is
a hot mess with multiple balloons trying to go up. Oil is over $100 and that
will be a drag on the economy no matter what economists who live in the city
and haven’t owned a car since they sold their Edsel have to say on the matter. The election rhetoric is heating up and it is
going to get worse before this debacle is over in November. The market has
risen sharply and deep value stocks have led the way with huge gains over that
time. If I was hedge fund manager I would probably close for the year, book the
fee and head for the islands.
However if we look at the market since the first of the year
it is in a nice tight orderly uptrend. Central banks the world over are
flooding the financial markets with excess liquidity and in any country that
you might consider lending money, interest rates are very low. That does push
cash into the market. When I crunch the numbers on most of my stocks they still
trade below book value or have very low Enterprise Value to Ebitda ratios. We
are in that middle zone of the market where it is too late to buy and too soon
to sell. The hardest thing to do is to ignore the tweets, the posts and the talking
heads and just do nothing but that is exactly what you should be doing right
now.
Since the first of the year I have been refining my art of
doing nothing. The only real activity I have engaged in besides working with limited
success to sell a few (hopefully) overpriced puts in freshly rebroken stocks
like Radio Shack (RSH) and SUPERVALU (SVU) is in the natural gas sector. Even
that activity has been limited. I picked up a little Penn Virginia (PVA)
because in spite of some fleas and bugs on the company it is stupid cheap. If
management can successfully transition to more production from oil and liquids
and hold the shuttered gas properties as a natural gas call option the stock price could easily rise by several
multiples over the next few years. I also added a little more EXCO Resources (XCO)
on the dip. This is a Wilbur Ross stock and I have never lost money in a Wilbur
deal in more than 20 years of following him into stocks. I have puked a few
times along the way but I have never lost money buying a deal Ross was involved
in when the shares traded below book value. Add in the fact that Howard Marks’ OakTree Capital is in the stock and Boone Pickens is on the board
and two things are obvious. The stock is cheap and I really must make it a
point to go to the annual meeting with this cast of characters involved. Beyond
those nibbles I am doing my best to do nothing.
While I am doing nothing I am spending a lot of time
thinking about natural gas. This could be the next big inverse bubble. The
price of natural gas is at the lowest level in many years and prices have
fallen quicker than the Orioles in August. I talked to some friends about the
situation and its causes in an effort to
learn more. The best technical answer is that we used to have a shitload of gas
in storage and in the ground and we now have about ten shitloads of the stuff. There
are a variety of reasons for this ranging from weak demand due to a weak
economy to innovations such as fracking that allow gas to be produced in means
and locations formerly not possible. Many leases which have been signed in recent
shale fields require drilling activity be continuous or you lose your lease and
investment. In some cases gas is a byproduct of drilling for more profitable
oil and liquids and you choices are to store it or burn it off. The bottom line
is that there is a lot of natural gas and this is going to keep prices low for
now.
The flip side of that is that low prices will eventually
spur demand. Utilities that burn coal face increasingly stiff regulations and
costs. Using coal to provide power is about as popular as herpes and LeBron James in Cleveland right now. Many of them will simply turn to
gas as a generating fuel. Power plants for other large scale industrial
operations re going to increasingly turn to natural gas a power source as well.
Low price often creates its own demand. At the same time low prices can and
does curtail production. Many companies are cutting back gas drilling operation
to the bare minimum and concentrating on the more profitable oils and liquids
drilling activities. At some point in the future the lowered production and
higher demand creation will meet on one of those curvy lines economists love to
draw and prices will begin to firm.
This is starting to show up in some of the natural gas
exploration and production company stock prices. These firms are losing money
in the current environment and investors are starting to exit stage everywhere.
I am not yet seeing a plethora of companies in the space trading below tangible
book value yet but I expect to as we get
further into 2012. I mentioned EXCO and Penn Virginia as two I have already purchased
and I expect the list to grow over the next several quarters. This is going to
be another one of those long term takes forever “holy sit we had a bumpy ride
but made a lot of money” investments but for right now it is very early. The right
thing ot do here is watch learn and do nothing.
The other thing, what it with being almost Spring, that I spend
my nothing time thinking about is the Baltimore Orioles. They have taken an interesting approach to
their pitching problems this year employing something I like to call the Bear
Stearns approach. Much as the late lamented firm did with mortgage backed securities
they have taken some low A rated pitchers , some B ratings with upgrade potential,
some unrated foreign hurlers, thrown them all in a pile with the hopes of
emerging with a AAA rated staff that can compete in the AL East. I doubt that
it will work but it is probably going to be fun to watch. If Arreita ,Matusz and
Britton can bounce back and turn their rare moments of brilliance into sustained
solid pitching and the kid from Taiwan can pitch in the Majors they may be able to
fight towards break even.
We have a lot of question around the rest of the diamond as
well. How long will it take Markakis to heal
from abdominal surgery? How does the Brian Roberts saga play out this year?
Does Mark Reynolds offseason weight loss lead to a higher average and better fielding
or does he still strike out a lot, suck in the field and just lose a crucial 10
feet from his power swing? Does Weiters finally turn into a .300 and 30 hitter
with 100 RBIs in addition to being one
of, if not the best defensive catcher in the game? Can Chris Davis really play
this game and be the power hitting first baseman we need?
The team will probably be just as bad as years past. I am
not going to make my usual predictions that we get to .500 this year as I am just
plain old fucking tired of being wrong about this team. I will still be a die
hard fan, I will go to games. I will enjoy watching guys like Wieters, JJ Hardy
and Adam Jones play great baseball. I will watch the games every night I can on
TV to wife’s dismay. I will probably
show up for Opening Day if its possible around my schedule these days. I love
the Orioles and always will. I just am not going to expect much from them this
year.
We continue to settle into new life in The Burn and being
close to downtown has its benefits. For one thing it will now be a lot easier to
go watch the Orioles lose games. Little Italy is just a few minutes away as is
the Capital Grille. The Book Thing (http://www.bookthing.org/)
is now a pop in the car away and not a half a day endeavor.
We have found some great places right around the house as
well. Mikies and Willies are both first class dive diners with all the fine
tasting grease, gravy and great service an aficionado of such establishments
such as myself could want. We like Two Rivers Steakhousea lot but as Yogi Berra
once observed “that place is so crowded nobody goes there anymore.” We are HUGE
fans of the Mutiny Pirate Bar http://www.mutinypiratebar.com/
) here in Glen Burnie. Great food, a
variety of fresh oysters from different locales, fantastic servers, a commitment to having Orioles games on TV, a
world class list of rums from around the world, a wide selection f Caribbean
beers like Kalik and Presidente as well as a dead pirate with a drink in his hand
at the bar. It is everything I need in a local joint.
All is well with the world at the moment. The kids are good,
the son was promoted to a new store, the daughter is soon to graduate at long
last after scoring in the upper upper 90 percentile on the Praxis certification
exam and my stepdaughter is acing school and planning the birthday, although
after an unfortunate bathroom episode she has developed what she informs us is “lockedinaphobia.”
The wife must still love me as she has not killed me in my sleep yet. All is
good and getting better.
I swear I will get around to the book reviews soon but for
now I am perfecting my success as an investor. I am practicing what I preach
and doing nothing. The couch awaits.