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.