move to fall

As measured by the REBC(Red Eye’s Bikini Clock) summer is officially over. We had one of the worst and best rides of the summer this weekend so it was a fitting ending. On the way to Baltimore we hit turbulence from ships exiting the harbor and quickly turned from boaters to small airborne craft pilots. At one point I looked back to check on our passenger and he was in the fetal position of the boat begging for mercy from the boating gods. Which was granted in the form of flat waters all the way back across the bay and we had three boats running flat our all the way back in the best ride of the summer. As we sat later at the bar of Lisa’s small plate attempting surgery on my finger from the latest and last of summers injuries with tweezers, a paperclip and scotch, The Tic-Tac kid and I shared a toast to a great season with lots of boating, a sprinkling of pretty girls and liberal doses of good times and good friends. So, away go the flip-flops and shorts; trade the red for white, gin for scotch, break out the tennis shoes and blue jeans. Baseball is headed to the stretch and the genetic misfits known as football teams capture our fancy as we head into the early days of fall. It was a great summer but given the injuries sustained in the Squirrel Wars of 2007, the the curious incident of the whiskey and biting dog incident, and now the holy god not only is that the biggest splinter I have ever seen that’s all the way under you nail accident (FYI-Doctors lie.4 Novocain needles in your finger is not a little stick. It is a big painful evil,nasty mother of all sticks) and other assorted missing nails, banged bones and torn bits of flesh another couple of weeks of summer may have well been the death of me.



Which brings us to the stock market. It makes less sense than my personal life at this point. At least there I understand the cause and effect of what happens (Basically, I am an idiot and set in my ways. As I have been given to understand I am also arrogant, obnoxious and condescending. And they say it like it’s a bad thing!). But I confess to being a little confused by the market and its seeming disconnect form the real world. As long as you do not eat or use energy, there’s no inflation. However a trip to the grocery store shows me that food prices are the highest I can recall seeing. Oil is at a new high. Back out auto gains driven by model year discounting and rebates and retail sales in Augusts back to school period were down. The consumer has depended on the housing ATN for the last several years, but with the credit dry up and in some areas declining values, that bank is closed. But everyone now expects the Fed to cute rates later today. This allegedly will reaffirm consumer confidence. But it also has the impact of bailing out banks and funds from the consequences of stupid decisions. Apparently takes risk and win. Great! Take risks and fail? No worry that’s what the fed is for. Unless you are an individual who took a jumbo two or three year Arm with a teaser rate and are going to see you mortgage rate double in a few months. You are just screwed. In the face of this the stock market is within 4% of all time highs. Lehman creates earnings in excess of estimates by changing their tax rate. Rally time in spite of the fact that revenues fell 47%.



Most of the activity I am seeing is in the indexes, leading me to believe that short tem money continues to dominate stock market action. The focus is on how will we react to the fed today, or ABC ‘s revised earnings SWAG. 4: 15 IS long term. Great company trading at book profitable pays a dividend, buying back shares and insiders buying the open market. Who cares? Special situation with a high-annualized yield? Sold it to pay margin calls on debt positions. Convertible preferred paying over 10% with strong management. No interest. Index baby. Bid em.



I have heard convincing arguments from Louis Navellier and even Jim Cramer of late that we are going to move into a market that favors value over growth. Here a shocking statement coming fromm me. I think I agree with them. Value has outperformed growth for over 7 years, a pretty much unprecedented run. Usually the periods are much shorter. This run has been fueled by falling rates and rising housing prices that have pushed traditional value industries forward and allowed for easy takeovers and refinancing of under performing stocks. Companies were bought on credit at stupid multiples of assets and earnings and launched the prices of cheap, undervalued stocks. Those days I think, are over. Having said I agree with the statement, now we have to look at where does this growth come form. It is not going to be tech unless corporate America gets a lot looser with the cap ex checkbook. We have already seen by the IPOD price cuts that consumers aren’t going to pay up (as they did in the past for new toys. The toy budget is already pretty stretched.) I think areas like heavy construction rebuilding the country’s badly stretched infrastructure perhaps. I like GNCI here and it sells at valuations I like. Coal should be a growth industry in years ahead as we look for ways to get away from foreign energy. Coal to liquid technology could play a big part in making coal a growth story. I like MEE, CNx and ICO here. Growth will come from new areas not yesterdays growth story. We will have to look for them. My other problem is that I think we have a few years of downright sloppy markets ahead. I don’t see how we cant. We have priced stocks for perfection in an imperfect world. It’s going to be tough to deal with and take some innovative and adaptive thinking to not just survive but earn good absolute returns. How do we do this? Selling put options on market sell offs on stocks we like. (A caveat here, I think it will be necessary to add some trader think to our methods and be willing to own the stocks put to us and use covered calls to trade around the positions and exit at a profit. I am kind of anti buy and hold here; also don’t post minimum margins. Post the full price of the underlying stocks). I think trading the value line 1 and 2’s under ten, buying on sell offs in the overall market and selling the next rally will work. The Dorsey Wright high low indicator has been successful in the past at timing shorter-term entries and exits in the stock market. We need to watch it closer. I remain very impressed with Navelliers Portfolio grader pro service that’s spots institutional buying in individual stocks. Paying attention to the grading of our stocks could materially improve our entries and exits and therefore on profits. It is going to be harder to make money for the next few years. When we run our screens finding stocks with profits and dividends trading below book, we are probably going to have watch our market entry point as well as institutional activity in the stock a lot closer than years past and be quicker to trade than we used to be. Further we should try to focus on areas that offer earnings growth because I think that’s where the money will flow. Just cheap isn’t going to be enough anymore. It’s going to have to grow as well. The idea isn’t to beat the market. If stocks are down 20% and I am only down 10, it is not a win. It’s a loss. You cannot eat relative performance.



So we move into fall now and look forward to crisp days and cool nights, breaking out the blankets and wamr socks. Sweatshirts are going to replace tee shirts and its just about time to shut the pool and clean the chimney in anticipation of crackling fires ad good red wine. After a wandering summer, the Great Girlfriend Hunt of 2007 begins in earnest (although hopefully out the (mostly self inflicted) weirdness of the 06 hunt). The Yankees and Boston are keeping it interesting; Detroit refuses to go quietly into the September night. The ravens beat the hated Jets, The redskins are surprisingly 2-0, and navy is not as good as years past but still fun to watch. Of course, there is the downside of Notre dame being truly horrible but we have to take the good with the bad. The leaves will turn here in the Mid Atlantic in a few weeks as well as all over the northeast with a spectacular splash of colors, giving us an injection of color before the gray of winter sets in. There is much to like about fall with the only real drawback being the women wear so damn many clothes!



We are going to get a rate cut today. I just do not think we are going to like it as much as current sentiment thinks we will.

an oldie

found this one lurking in some old files

My what a wonderful week we have had around these parts. We have learned al about dow theory. We have learned that it works almost all the time..except that it really doesn’t, it isn’t really a trading strategy and its kind of sort, just maybe a little. Or perhaps even a lot subjective.We have learned that denny mclain and pete rose were bad people who did bad things but it might not have been their fault because its well done that pitching too many innings or playing hard on the diamond makes one make bad nets on clubs,spades and even athletic contests.We have learned that phd students don’t like when phd holders makes jokes at their expense. To everyone’s shock and horror, we discovered that retail comp numbers don’t tell us much about where the stock price is heading.(kudos where due..)that was a nice piece of work). It was deeply disturbing to discover that a number cherished and admired by wall streeters was worthless.it was revealed that Americans and british don’t have the same sense of humour.apparently george carlin is not as sophisticated as monty python…just funnier.they do however think homer simpson is an okay guy.

However I must take great issue with the discussion of American beer as a poor product and American women as..what was the phrase..stroppy? As the lists in house expert on American drinking habits, along with my dedicated colleagues drs crossman and Hillman..although it is my understanding that dr Hillman is retiring from the active research field his contributions must be noted and appreciated…..and American woman and their relative levels of ..umm//stroppiness, I feel I must intervene to correct some misunderstandings and wrong assumptions in the data collection and analysis process.

Dr millers, whose work in finance,gambling and now drinking and womanizing I much admire and look forward to all his contributions, suggestion of a field trial is indeed a wonderful thought. However he has structured his control group in such a way to almost guarantee disaster. First, NEVER use fosters as a control. It is a good beer, however its US based advertising campaign is full of blond Australian surfer types and outdoor crocodile killers. The image that this creates in our quarries mind will be rather difficult for your average khaki and polo shirt type to overcome. If you are in one of the Dr Melvin under the bridge hall of fame establishments and proffer a fosters, the can is entirely too large. Far better to have the young lady bounce a 12 oz off your head for offering her some namby-pamby foreign crap in a funny looking can.As for the use of Colt .45 40 ouncer, this is fraught with peril. If it is accepted, you are on the wrong side of town and death is imminent. If the lovely of your intention accepts the cold 40 - one suggests you slam your own drink down and begin the process of hail marys or whatever archaic pre death ritual your religion practices.The French champagne may in fact be the worst of the bunch..if like so many of us you consider out right rejection and public humiliation to be worse than death.You see, we Americans have trained our women to understand that the proffering of expensive bubbly liquids and the acceptance thereof is an binding contract for immediate and prolonged sexual activity. Should you offer this to a lovely as a first drink, it would be considered extraordinarily forward and you can expect to find yourself red faced and wearing the remains of whatever watered down sucky American beer she was drinking.

When examining the drinking happiness and stroppiness factor of american women, one suggest the following control groups. The best test is of course the lovely with two empty miller lite bottles in front of her and a third on the way, accompanied by empty shot glasses of jaegemeister. It is preferred that she have the ring tan or other indicator that suggests the recent departure of a significant other.This is a young woman in a decidedly non stroppy mood who is drinking beer for the purpose we Americans use it for…to other more sophisticated overseas brethren we leave discussions of hoppiness and after taste..over here we use the stuff to lubricate the good times and unleash libidos.This young woman will consume enough watered down American crap beer and foul german rocket fuel to forget her troubles and begin making up for lost time having good times. The other worthy prey..I mean field subject is for course the cosmopolitan drinking female. If she is over 35, she has long ago decided what she likes and wants and you will know where you stand 30 seconds after you offer a drink….if she is under 35, she is a sex in the city junkie and feels a social contract to drink too much and have sex with relative strangers….not a bad character trait for our research studies. To be avoided at costs out the fruity umbrella drinking flocks…these are girls night out types and like herds of wildebeest in the wild they band up to protect the gaggle form invasion by predators. To attempt research here will soon exhaust the funds available for the project as they will accept all the 9 dollar fruity concoctions you offer but you will never get close enough to discuss trans continental stroppiness. White wine drinkers also make a poor choice as they tend to be settled, centered types and there’s probably a protective alpha male somewhere near by. Now the whiskey drinking woman…here is a woman with so many virtues that the great redneck troubadour Toby Keith recently penned a tribute to her and all her sisters nationwide…but no point looking for her..odds are she left with me an hour ago

endless summer? I don't think so

So now we have slipped past the dog days of autumn and begin down the slippery weeks of summers end. Labor day has passed, a wonderful weekend with a poker game to kick it off and some great boat rides blasting up the Chester River under clear blue skies enjoying the company of friends and all the great things that make up this last three day weekend of summertime. In the interest of editing we will leave out the part of the story that involves whiskey, ex-wives and angry dogs (who knew dog bites hurt that much or got that infected? My leg has colors in it that were never part of any rainbow I ever saw). Only two summer weekends left (keep in mind we are on the red yes calendar around here. Final bikini contest. End of Summer). Thoughts turn back to work and markets as volume returns to the street and begins to reassess exactly where we are as far the direction of the economy and stock market.

It remains a pretty mixed picture as of this moment in time. In the beige Book released today the fed stated that there was little economic turmoil outside the real estate markets. That’s like saying outside of those very large fang marks on it, your leg is fine, Mr. Melvin. What it doesn’t say of course is that the real estate market is huge in this country and the source of most people’s personal wealth. To say nothing of all the real estate agents, mortgage brokers, and associated jobs that will be lost in a real estate slump. Of course there is still the 800-pound gorilla of all those mortgage resets coming up. Even if many of these borrowers could qualify for a loan in the new environment, they could never afford the new payments.

Sounds bad doesn’t it? Maybe we need a rate cut to soften things up a bit, make a few more bucks available to smooth things out. But Wait. There’s more. As any person who eats food, buys gas or clothes or any other type of goods can tell, prices are rising across the board. Pretty much most raw materials are up near new price highs. We are a service economy so pretty soon service providers will raise the prices they charge so they too can continue to buy food, gas and all the other fun stuff we need to get through the day. The dollar is in a free fall against just about all currencies right now (this is causing me particular distress as the price of scotch has jumped 20% in the last month). Higher raw materials and energy costs? How can we lower rates in the face of these events?

Glad I am not fed Chairman right now. If he doesn’t act, he will disappoint the financial markets and cause stock prices to fall. If he does, he runs the risk of creating a stagflation scenario. Somehow I do not see the markets embracing that very fondly either.

So what now? First admit that I probably should have bought the 1380-1400 are on cash SP 500. The few market-timing factors I like showed it as a buying point. But I felt then as I do now that the risks of such a move were not worth the potential return. My monthly price chart shows 55 months of rising prices. Do we really have a one-month sell off those retraces150 points of a 700-point move? We have risen 100% off the lows but a 20 day 10% decline is all we get. A fed injection heals an economy that had all the loose lending and bad deals that mark a frothy economy? Did think so then and don’t now. Caution makes a lot of sense to me.

I did pick up shares of mortgage concerns and reits that make commercial and business loans a few weeks ago. They had fallen, were well below book value and had real loans on real property that had not been diced and sliced into derivative securities. I felt that they could ride this wave out and corporate insiders agreed with me. Yields were north of 10% on all of them and they have risen slightly since. I think BRT, CSE, GSC, JRT and NRF are probably still buys. Can they go lower in the short term? Of course. Will they be a lot higher in three years? I think they will and I ll be collecting some fat dividends along the way. I picked up a few shares in FMAR. This fast growing bank in Baltimore trades below book as a result of their own mortgage mistakes but they have a good CEO who is buying stock. ADPT is still a net-net worthy of purchase as well. I think you also can still buy BERK, BHBC, EIHI and ESST.EDCI is too cheap not to buy given the NOLs lurking on the balance sheet waiting for someone to figure out how to turn them into real money. Those inclined to sell options should be having a blast right now as huge moves in volatility make for a lot of trading opportunities.

Let me reiterate that I am not a long-term perm bear. In fact I think the real estate issues are going to take some time to work through the economy and the stock market. When it is time to buy I think it will resemble 2001 and 02 as an incredible buying opportunity that generates a lot of long-term wealth. I look forward at that time to being a lot more aggressive, employing strategies like the value Line 1 and two under 10 dollar list, the yield and return on equity strategy. As a bonus as the lending markets churn, with wall Streets all too reliable habit of throwing out the baby with the bathwater, small local banks will get very cheap. Historically buying these little gems has been incredibly profitable when you get them below book and ender 10 times earnings. We are close here but not just yet. I am watching insider buying in this sector very carefully looking for a sign to increase my buying here. The time to jump in with both feet is coming. It is just not here yet.

So, summers gone and the flowers are indeed all dying. Or soon will be. But this gives a fall to look forward to. This just might be a good thing. Lets be honest, a few more fast boat weekends with the tic-tac kid and my knees and liver would both sue for damages. There is no better time to be a sports fan. College football, that glorious pageant of sport where one group of twistedly mutated young men takes on another and an entire states pride rests on the outcome of the contest. Already we have seen one of the greatest upsets in all of college ball history when Michigan was upset by tiny Appalachian State (search youtube for their recruiting video to understand just how small this school is. I have made better films on my phone. My phone, btw doesn’t have video. That’s how bad it is) We have determined that my Beloved Notre Dame is not very good. Okay, they are actually very bad and I am dreading the amount of crap I ll have to take from beachclub Boy Saturday when we play his Penn sate Nittany Lions. I hate my bet even with the 17 points. Pro ball starts tomorrow night with what should be a barnburner between New Orleans and The Colts. I have to say that the over at 52.5 looks like a good bet from here. The ravens look very good and there are some great story lines though out the league. As a bonus we can now watch football on ESPN and not have to listen to Michael Vick stories. There is something grand, glorious and uniquely American that encourages eating and drinking excessively while watching violent powerful men do violence to one another whilst slightly dressed beauties dance among them sinning sings of praise. Goes to Tim’s central theory of life. All things are better with partly to mostly naked women in attendance.

Baseball races are heating up. The Red Sox look to be waltzing into the playoffs, the Yankees have to play in against the mariners but this will be tough with the roughed up pitching staff. The orioles might avoid last place (although I would not bet much more than a can of warm Schlitz on this), the cubs are prime to break hearts again with their lead in danger now and the Brewers charging forward like hopped up Dartmouth freshman on a panty raid, Crossmans Indians look like a lock for the playoffs. There does exist a very strong possibilities of the only two truly evil baseball teams on the planet meeting in the world series and I will be faced with the prospect of having to spend the last week of October snarling and hurling savage curse at the screen as the red sox play the mets. Still it is a great time to be a sports fan. Hell, even NASCAR has the race for the chase coming. No Junior though so no one south of the mason Dixon line will watch it.

The pipe, the pipes are calling, from the docks and to the games.

Caution in the markets, sports on the tube. Green label Bushmills on order. No dogs in the immediate vicinity. Life is good.

I could be early. I usually am. but here are 5 names that are commercial lenders with very little exposure to the residential mess. They tend to hold their loans as opposed to trading, they have been beaten down in price worse than the orioles against texas last week and there is massive insider buying in the shares.All yield well north of 10% at current levels. While continued problems may cause some dividend cuts, I think most of them will continue their payouts at these levels.







CSA-Capital Source

Operates as a commercial lending, investment and asset management company that
focuses on the middle market. The company provides senior and subordinated
commercial loans, invests in real estate, engages in asset management and
servicing activities, and invests in residential mortgage assets.
STARS Ranking: **
2008 EPS estimate $2.37
2007 EPS estimate $1.90
2006 Reported EPS $1.65





Text JER Investors Trust ---(S&P) 08-13-07 Sym JRT
JER Investors Trust, Inc. (JERIT) operates as a specialty finance company in
the United States. It acquires and originates commercial real estate
structured finance products.



GSC Investment ---(S&P) 07-13-07 Sym GNV
Seeks to generate both current income and capital appreciation through debt
and, to a lesser extent, equity investments, by primarily investing in private
middle market companies. It has elected to be treated as a business
development company under the Investment Company Act



NORTHSTAR REALTY FINANCE ---(S&P) 08-09-07 Sym NRF
Operates as an internally-managed commercial real estate company that makes
fixed income, structured finance and net lease investments in real estate
assets. The company intends to qualify as a REIT.
STARS Ranking: ***
2008 EPS estimate $0.93
2007 EPS estimate $0.70



BRT Realty Trust SBI ---(S&P) 08-08-07 Sym BRT
BRT Realty Trust operates as a real estate investment trust in the United
States. It primarily engages in originating and holding for investment senior
and junior commercial mortgage loans secured by real property.
Announced 2Q EPS $1.88 vs. $0.48 and 6 mos. EPS $2.91 vs. $1.09. Results
exclude gains of $0.04 for 6 mos. '07, and $0.04 & $0.03 for 2Q & 6
mos. '06, from discont. opers. Results for 2Q & 6 mos. '07 include a
one-time gain of $15.3M from the sale of securities.

Living and speculation, Gonzo style

I find myself in a most unlikely place an a sunny summer Saturday. Home, sitting at the computer after returning from a bookstore run for fresh reading material and the latest financial papers. This is more like my bad weather weekends but I find myself grounded from the world of fast boating. My ribs, the victim of a disastrous albeit temporary defeat in The Great Squirrel War are cracked and I find the idea of bouncing across the bay untenable at this moment. So I here I sit with a stack of books, there are no games on at the moment of interest. We are in the sliding dead end days of summer now for orioles fans, 15 games out of the wildcard, never mind the lead and with the exception of days when Eric Bedard strides to the field in the fashion of young potential god Of the Mound playing nothing even resembling the game of baseball. Preseason football holds no interest, all my fantasy football drafts are complete so I am left with time on my hands to ruminate about the ramifications of everything and nothing. At the moment, my focus is on the book I just completed, The Gonzo Way Bu the wife of The High Priest of gonzo, Anita Thompson



I confess that in my youth I was a great admirer of Hunter Thompson, the great god of gonzo. I stumbled across the good doctor when I was 18 and working my away through life as a traveling salesman of sorts. As I found myself all too many nights in yet another decrepit single sink railroad hotel on the outskirts of some military or small college town, books, my friends from childhood remained one of my favorite refuges from the world. I had a co-worker of a similar literary bent and we read all the stuff young men should read as they attempt to explode onto the worlds stage. Thompson, Kerouac, Ginsberg and of course John d. MacDonald. We toiled long hours each day selling modestly overpriced books to the unsuspecting and unwary and spent our nights, fueled by alcohol and a few select substances of suspect legality in savage pursuit of the lessons and legends of our literary heroes. Thompson was the perfection to which all aspired, and despite failing nightly to achieve the heights the good Doctor soared to, we never stopped trying. As years went by, I read him less and less as the political gulf between out views began to widen and nagging little things like marriage and children began to cut deeply into the available time for soul searching on the highways and in the bar rooms of life. It was clear to me that the reagens policies were working, restoring not just Americas economy but her self confidence and place in the world. Thompson continue to rant and rail against the great motivator’s well as refused to admit the utter failure of the Carter years and I just sort of stopped reading him. Along with jail cells. Illegal smiles, fist fights and Carlos Castaneda, Hunter Thompson became just another memory of a marvelously misspent youth.



When he showed up as an ESPN columnist, I started reading him again. He always was a keen observer of sports and a very astute and calculating bettor, especially of football. I found that I had missed his insights into games and even of life. I had been right about reagen but I had to admit that he had been all too correct about George the Younger and his misadventures with America. We still had some significant differences on the redistribution of wealth but if he could help me find one mispriced line a week I was willing to overlook it. I was shocked and saddened when he killed himself. I felt like an icon of my youth as well as one of the great writers of our day had left the world. It was a hole I suspected we would not see filled anytime soon. It was with some interest that I ordered Anita’s book and looked forward to reading it. It is a slim volume barely more than 100 pages but it is packed with some powerful insights. Anita chose not to write a history, leaving that task to others in the days to come, but focused on some of hunters core beliefs and some of the things she learned from him along the way. I was surprised to discover that many of these have direct application to speculating and living. Although I may not approach them in the same way as Mrs. Thompson some of these questions and insights are worthy of consideration. This is not a book review so much as my own thoughts in response to the questions raised and lessons learned from this little book. They are from both chapter and section titles that struck me as powerful.



Never Stop Learning.



This is chapter one of the book, as it should be. He quest for knowledge is one of the most important facets of a well lived life. I don’t think it matters what knowledge you search for as long as you are searching. We cannot all be looking for the deep hidden meaning of the universe but we can be learning something every day that benefits our live and those around us. A new way to improve your business, a new dish to cook, a new author to read, a new way to look at markets and at stocks. It really doesn’t matter what it is as long as you are learning and continue to seek to learn. The quest for knowledge is the quest for a better life.



Bet with Your head Not With Your heart



This simple sentence can do much to improve my life. Whether it be a stock, a markets, a baseball team or a woman, a judicious use of the brain cells can help prevent a loss. I love the Orioles as you all know. Betting on them would be financial suicide. I love women as well. Bets there have tended to end just as badly when blinded by desire and infatuation it is easy to make bets that have little or no chance of success. Don’t get me wrong. I ll probably continue to do it. But at least I won’t bet on the orioles. Same with stocks and the markets. I have seen all too many people take a round trip in a stock from low to high back to low because they fell in love with it. Use your head. Stocks cannot love you back. Same with particular strategies or methodologies. Markets adapt, so must we(this also goes back to never Stop learning).



It is Wrong When It Stops Being Fun



I think this might be one of the most important sentences in the whole book. Apply it to you job, your trades, where you live, your relationships, anything and see how stunningly true this is. We too often forget that life should be fun. If life was all that serious a venture we wouldn’t be mortal. If you do not love trading you probably should stop. If you cannot find the simple happy things about your partner and you no longer share the joy of being together, you should probably split. If you aren’t happy where you live, you should probably move. Hate your Job? Get a new one. Life is brutishly short no matter how long it my seem when your team is 20 games out, football doesn’t start for three weeks and your ribs are cracked by a vengeful squirrel. It is over far, far too soon. Enjoy every moment you can and when it stops being fun, it is wrong. Time to either make it fun again or move on.



We is the Most Important Word



I am paraphrasing and twisting the book here but remember this not a review just my thoughts and observations from reading it. While at heart a randian and well aware the consequences, success and failures of my own action are my own responsibility, I still feel that we is a huge factor in a life well lived. We. Ourselves and those around us. I am blessed (really I think the only word that fits) to be a part of two unique we’s. first there are those from the speculative word. Hanks to Victors creation of the spec list , I have met many of the greatest minds of our time, not just in financial fields but certainly that is a big part of it. But also men and women who excel in a range of fields, Education, Literature, Psychology, medicine Law, real estate, engineering, biotech, an incredibly wide range of fields. I have learned much from all of them and greatly increased my store of knowledge(again, see Never stop learning)There is a subset of this group, the after dark group that band of brothers, with a few sisters in the mix who roam the land from new York to Chicago, to Lexington, Annapolis and the wilds of Iowa soon talking drinking, playing learning and having fun. It is amazing to me how quickly we became close, the result of a lot of nights we will never remember in the company of those we will never forget. There are too many stories and too many lessons learned to list here but someday I think this a book I shall write. The after dark bunch spread for the Mighty Metropolis of Deltaville to the sunny climes of green bay and I have come to love them all over the years.



There is another we as well, that group of friends here on the island of misspent toys call Kent. I fell into this group a few years back and it has become a big part of my life. It was pointed out to me not long ago by an outside observer that what we have here is pretty unique. Our group ranges from late 20s to early 60s in age with mist in the 30s and 40s. By this time most people have settled down into their lives, have a few work friends, a neighbor or two, maybe some old college buddies they talk to once in a blue. Too have this large a group of individuals who call each other friend, and treat each other that way is unique. It is a wide range of occupations and all of us are reasonably successful(you have to be to pay these bar bills). I was asked if it was a love of boating that created the group. I started to say yes as boating is a central theme in warmer months. But as I though about it, I realized that was wrong it was a love of life that the group shared. Boating sure, but football Sundays around the TV with friends, long conversation about anything and everything, fishing( although not me. Do you know early those fisher types get up? On the weekend yet), steaks on the grill on a lazy Sunday evening, beers on the dock after a long week. We celebrate each other success and share the defeats. Marriages, divorces, births deaths, wins and losses I have seen the Kent Island bunch stand by each other through it all. It is like having an extended family, one that you actually like with no long harbored resentments of who mommy like best or who always got the biggest slice of cake. I consider myself lucky to have fallen in among them.



What is the desired effect.



Thompson liked to ask himself this question before taking action. What is the desired effect of our contemplated action? Outrage,humor,inspire? Why are we doing this? To make money? To have fun? I think this one sentence can greatly improve decision making ability. At least for me.



Would You do It again?



What a great way to review our mistakes and misadventures. Whether it be a bad trade, a failed relationship or just random screw up. Given the same set of circumstances would you make the same decision. If the answer is yes, then move on. The dice, as they sometime will, moved against you. You were true to yourself and played whatever the situation to the best of your ability and knowledge. If however, the answer is no, then there is studying to be done about how we reached the wrong decisions and what changes need to be made or where our knowledge needs to be expanded.



It is The Recovery That Matters



Adversity is like sh*t. It happens. Trades will go against us. Stocks will miss earnings. The upward drift ,in life as markets, will be bumpy. Relationships will fail, love will fade, there will be accidents of floods of reality and emotions. There was no guarantee on your birth certificate and the founding father only promised you the pursuit of happiness, not eternal happiness itself. It is how you deal with it that matters. Victor has long been the shinning example of this to me, dealing with adversity that can break you but he got up plowed on and rose again. We will be knocked down form time to time. But to get up and begin to heal and recover is to m the essence of the pursuit of happiness



Truth is Easier



No need for a lot of commentary here. This is one of life’s great truths that is all to easy to forget at times. Tell the truth, face the truth and let the chips fall where they may.



It Never Got weird Enough For Me



“Reality”, Thompson said in 2002, “is still stranger that anything I could make up” How true it is. Life is weird. But I think weird might be a good thing. I look at some of the weirdness is my own life over recent years. A high school dropout ghost writing two leading investment books. Soft spoken Kentucky drawls. Rib cracking squirrels, my mtv daughter finding and becoming immersed in classic literature and she doesn’t even have to study in school, three blondes in a bar, lets just be friends, Irish bars on 51st and 2nd, the journey to potters patch, whiteouts on rush street. Life is weird. If we live it right, taking intelligent risks in markets, love and life(in my case I may have to go with two out of three. Something about legs and breasts that make me break out in stupidity) facing our fears and overcoming them, daring to be a part of we and life will be weird. And exciting. And interesting. And successful in all the ways that matter. Embrace the weird. The alternative of course is boring normal. Nine to five. Frozen dinner. Spouse who doesn’t like, much les want to sleep with you. Network television. Generic beer. Sorry. Give me the weird. Good friends, good wine, victories and defeats, spoils and scars. I hope that for me, and for you, it never gets weird enough.

lights camera action

Debt crisis. No problem. Contract stock prices by exactly 10%. Inject liquidity and lower the discount rate. Goldman creates a fund to buy the mezzanine loans off the balance sheets of major banks( I m sorry but this begs the question…exactly who is dumb enough to invest in a fund that buys loans in deals that could not get market financing the first time?), open high yield spreads to 400bps over treasuries, leave emerging mkt debt at +250. Crisis over, resume upward march f the market. Seems a little scripted to me. But, for the moment that’s where we are.

No one is talking about all the loans that will not be able to refinance in the year ahead. That’s a lot of paper and a lot of real estate someone is going to have to figure out how to move. As Wilbur Ross noted on CNN.Com:



Now that we have identified the cause of the disease, how severe and how contagious is it? The present $200 billion of delinquencies will grow to $400 billion or $500 billion next year because $570 billion more low, teaser-rate mortgages will reset to market and consume more than 50% of the borrowers' income. Therefore most of the loans will be foreclosed or restructured. Probably 1.5 million to two million families will lose their homes. Meanwhile, few lenders will put mortgages on the foreclosed houses, so the prices will plummet

No one seems bothered by the fact that junk over treasuries are still low by historical measures, or that in past credit event spreads blew out to well over 1000 bps. No one is bothered that there are still a whole lot of structured debt products out there and no one knows exactly who owns them or what they are worth. Sound the all clear and buy em seems to be the mantra.

I just cannot buy into it. A one-month credit crisis? Are you kidding me? This will continue to have an impact in the stock and real estate markets for a while yet. There are all those loan resets. It will be much harder to do LBO and PE deals with debt as loan underwriting is actually back in vogue and you will have to be able to prove that you can afford to repay the loan. This will be a drag on stock and bond prices. I don’t think the fed can bail the markets out either. After initial skepticism that the fed will lower in September but now I think they might. Certainly the futures market thinks they will. It is not however, to help the markets, but because the economy is slowing. The consumer is slowing down; unemployment will rise with newly unemployed mortgage brokers and processors padding the rolls. The Early September economic releases will bear watching closely. I think the market may be screwed here. If they don’t lower rates, there is a debt problem that the street cannot refinance. If they do, because the economy has weakened, that also bodes ill for stock prices.

I am not a long-term bear. Last Friday I had buy orders loaded up and ready to go as I expected a huge sell off before bernake and Co. stepped in. I was sure we would have a buyable sell off that would create short-term opportunities in stocks. Instead, courtesy of the fed I am still on the sideline. I won what I won here but I cannot bring myself to add at these levels. We need to be lower to reflect the worsening economic conditions and levels of risk that exist in the market and the world.

In running my screens this morning I found nothing new of any real interest. The runs are full of mortgage reits and real estate related companies. Let me stress that I truly believe that these securities will be one of the single great opportunities of a lifetime just like junk bonds in 2001. It’s just too early but companies that have quality real property, reasonably financed and managed are coming down in price. When we get another good sell off and the shares start getting puked at ridiculous prices, I will buy them. Right now, prices are just reasonable.

I remain a buyer of ADPT, ESST, EIHI,BHBC and BERK. They all fall into the too cheap not to own category.I am keeping a ver close eye on a lot of small banks as the prices move down. Small local banks with good management and an indepth knowledge of their market are one of the most fruitful investments you can make, provided you buy them right.Wen prices of the majority of them get under or close to tangible book value it tends to touch off a consolidation wave and strong stock price moves. I am looking for opportunities to sell near term puts in CHIC, BGP,UNM and DDS at good levels. I am still short USNA ( like my gun and my scotch bottle I ll give this one up when they remove my cold dead hands. I am very much of the opinion that the company has zero value), and on any more rally in prices I shall join the esteemed Mr. Crossman in being short the emerging markets buy buying puts and selling call spreads on EEM.



All clear? Not yet

I love the message

the fed has sent to the markets.



do anything you want with shareholders and depositors money, no matter how risky or stupid. there are no consequences because we will bail you out.



carry trade?..go ahead..lever it up ten times. who cares?



loan 500 k to someone with a 500 credit score? Shit..make it 600



buy mortgage bonds with no idea of the actual collateral? we suggest you use borrowed money and buy twice as many.



the poor guy with the 2/28 teaser loan is still screwed but the asshole who sold it to him will find enough liquidity to charge someone else 3 points on the front side of a stupid loan.



do what you want.take any risk no matter how ill thought out or downright stupid. at the end of the day we will save you.



this is like punishing your teenage son for wrecking the family car by giving him the keys to a new camaro and a 12-pack.

random observations

A summer continues to wind its inevitable path to Autumn, the annual NYC trip is behind me, I find it helpful to pause and reflect about the lessons learned as we go move towards September. It has been a go summer so far, lots of boats, bars, baseball and friends to wile away the days and some interesting projects, as well of course the stock market and a growing pile of books to stimulate the mind. The following observations are totally random, likely useless with a high probability of being wrong. But what the hell..I have no intention of buying into this market just yet so this will keep me occupied in the interim.


When boating, even I who never drive due to the previously mentioned total lack of coordination and propensity for instantaneous stupidity, have observed that when running with or against the tide it is a fairly easy thing to keep the boat trimmed out and running smoothly. When, however, it is one of those lovely days when everybody and their cousin decides to go boating and the bay is full of wakes sloshing around that it gets a bit dicey. When you start taking the weaves on the side. From time to time it may even get bumpy enough to cause one to spill their cocktail. This is not fun. So it is with the stock market. Generally speaking markets tend to go along, some ups and downs but generally following the continued upward drift of mankind’s continual industrial, technological and financial progress. There will be dips. As long as they are identified and the factors are largely known and everyone is fairly rational, these dips are buying opportunities to benefit for the continual drift. Occasionally however we get a period where greed has been dominating for too long, there are questionable and unknowable factors that roil the market seas and one spills their proverbial cocktail. In periods such as this, wealth is lost not to be regained. We saw this is the 80s when the nifty fifty imploded dragging the market down to levels it didn’t recover for the better part of the decade. Recently we saw it in the 90s when there were too many tech boats and the water and the wakes crashed prices down to levels that most tech stocks still have not, and likely will never see again. Wealth was destroyed. Quotational loss can be handled as long as the business value remains intact. The real destruction of business value from overpaying relative to value cannot. I fear we may be in such a situation now. There is a lot unknowable about the current liquidity and credit crisis. No one seems to know who holds what and exactly what he or she hold is worth. One real problem is that all the pricing models, particularly in the mortgage backed market factor price appreciation in as a factor. When real estate is flat or declining the models are not accurate.

How can anyone rationally expect a credit boom of six years to end in one month?

From a moral point of view, should the Fed bail out Wall Street and the banks while allowing the consumer to fail?

With signs of inflation already present, wouldn’t an interest rate cut have consequences more serious than the current market dislocation?

Can you have a bear market and still be up for the year?


For the last year or so I have been very cautious. I have limited my buying to stocks and situations that appeared to be trading at rock solid valuations that had a large margin of safety. Silly me. As the quant funds that include these strategies in the mix have had to raise money to fund their debt and mortgage positions have puked these things out, they have gotten ludicrously cheap. Stocks that I valued at 4 now trade at a 1.40. Ones I had at seven are in the threes.

I have gone back and checked my valuations. I find them to be reasonably correct within the scope of my experience. This tells me that we are creating a get rich opportunity that will be even better than the one offered in 2001-02. Things need to shake out more than they have in my opinion but when they do we will be able to buy assets and earnings at ridiculous prices.

Back to school will be very interesting and tell us a lot about the length of this market turmoil. Consumers are being pinched by fuel costs and the newfound inability to take cash out of the family homestead. Many face real refinancing concerns soon. If most of the kids are smartly dressed, we are close to a bottom and price recovery. If we see a lot of hand me downs, buckle up.

I got the first signs of retail panic today with investors calling a little shaky with their statement being down month over month. They hadn’t seen that in a bit and they are getting worried. Not panic yet, and we have no firm wide warnings from the margin department so its not capitulation just yet.

New York is one of my favorite places to visit. Unlike Chicago however where I could see myself living, it’s always sort of a relief to leave there. Especially for my liver. Too may great bars to close together and too many interesting people to drink with.

Every time I think of moving to the Windy City, which is often, I wonder how I will deal with missing the island. It’s like living in a resort all summer long.

I think the more aggressive traders could make a case here for selling short term call credit spreads above the market on some of leading stocks and put credit spreads below on names that you like and pear cheap. If thee market goes up quickly, you end up short high PE stocks. Probably a good idea. If it continues down you ll be buying lower in stocks you like. Might be a good idea as well. If it stays in the middle, you keep the premium. Worth looking into.

As reminded by the summer boating season with all the tank tops, short skirts and bikinis, as well as the upcoming NFL season with all those lovely nearly naked cheerleaders, life is always better with scantily dressed females in attendance.

While no one does know exactly who hold what and what its worth in the mortgage market, it is worth something. This is going to make redwood trust a very interesting investment and some point. Right now their value is a moving target but once the smoke clears, these guys have liquidity and tend to make very good loans that are held rather than traded.

Exactly how did Mattel allow China to ship them toys with lead paint and potentially fatal magnets? Is there no quality control in Toyland?


Speaking of toy, it is always fun to watch someone come to the island of Misfit toys that is Kent Island that has never been there with us before. Most cannot comprehend that we really do live the way some of us do. It really is all resort all the time and we play as hard as we work. The average 2.3 children picket fence suburbanite has a hard time understanding the concept of living life like it was till fun. Our little group of business owners, successful executives and a t least one mid level stockbroker has, to our credit, figured out that life is fun, it was probably always meant to be. Bring on an orange crush and a summer sunset! It is one thing to declare enjoy life as no one gets out of here alive. Very, very few of actually live that way.


What a great time to be a sports fan! The best few months of the year are coming up. The rush for the play-offs in baseball. The Yankees are gaining on the reds ox and the orioles look pretty good under the new manager Dave Trembly. They play like they care. If Andy McPhail is smart enough to keep rising stars Markakis and Roberts, and build a staff around Bedard and Guthrie we will be one big bat away from serious contention in the division. This is the latest in the season I have still been watching and going to orioles games in awhile. Football is fast upon us. The ravens looked as good if not better than last year in last night’s preseason whomping of the Eagles. Several of the rookies looked much better than expected on both sides of the ball. Jared Gaither, the supplemental draft pick at OT looks like the steal of the century. Maryland looks awful so they can only exceed expectations, Navy looks good with a tough schedule and as goes Jimmy Clausssen so goes Notre Dame. Colleges kick off. Play-off runs. The NFL returns. The playoffs and World Series. Gonna be a good few months.

If the stock keeps falling, Charlotte Ruse needs to be bought. They are a cash flow machine with a great balance sheet. No debt. 87 million in cash. Insiders are buying. There is a buyback in place. Intelligent institutions are buying. Might be worth selling the Sep 15 puts if you can get .60 or better and are of an aggressive nature.


It’s bumpy right now. The market is taking waves and wakes on the side. Hold onto your cocktail. Keep the powder dry. This will end at some point. There is no rule that says we have to be fully invested or trade everyday. This type of sell off, where there is a snowball effect from margin calls and babies go flying with the bathwater create opportunities. When the bathwater is gone and the street is just throwing babies, it’s going to be time to make very serious money over the months and years ahead.

Like the Kent island crew and Travis McGee, don’t get so caught up in the little mundane matters of life. Get a cocktail, go watch the sunset. Markets come and go and the drift does always reassert itself. Regardless of stock market swings, there are a lot of opportunities to enjoy life. I suggest you avail yourself of them frequently and soon.

fourth of july, belated

The fourth of July is upon us once again. This great holiday celebrating the birth of the United States is celebrate in many different ways. There will be backyard bbqs with family and friends gathered around, ;and arguing the same childhood slights and injuries as ever, complete with aunt Edna drinking white zin and passing out into the cole slaw and Uncle frank setting the new neighbors house on fire with his fireworks display; Family trip to the beach with the kids and all the really cool sandy crotched bathing suits and sun burnt 3 year olds, spilled ice cream cones and body surfing you can stand; fireworks from coast to coast(I once flew west to east on fourth of July evening and it was probably one of the coolest things I have ever seen. It was clear with only very high cloud cover and you could see the displays from the hundreds of towns we overflew). There will be war movies, Turner classic will show the wonderful musical 1776 multiple times over the next few days and it is a neat way to look at the birth of our nation. There will be baseball games, softball tournaments, picnics in the park, roller coaster rides as americans of every size,shape,background, color and origin turn out to celebrate independence day.Me? I ll be skipping over the waves at 70 MPH in a boat driven by a bakd guy half crazed on tic-tics and miller lites with at least one half naked peruvian diplomat and any other female in whatever form of dress or undress we can entice to join us in our twisted insane little adventures. There will be fireworks and rock and roll at the dock bar, a bunch of good friends around. I ll get half baked on orange crushes, completely burnt by the sun because I lack one of those girl friend devices that come equipped with sun block so I ll forget to wear any, there will friends, music and just a damn good old fashioned American kind of fun to excess. As a bonus, I have enough firecrackers left to thoroughly piss off the neighbors again this year!

Before all this of begins, it is incumbent upon us to realize what this holiday is really all about. On various 4th of Julys through our history, we have had a brave group of men risking hanging for treason, dying in the fields of France to push back the Nazis attempt at world domination, doughboys marching to Lafayette’s tomb to announce that the Americans were there to assist against the boche, dying in the fields of Gettysburg .Jefferson and Adams died on July 4th in 1826, marveling at what they helped to create as they passed on. Our nation was founded on and continued by the heroic efforts of those who were not afraid to stand firm and fight for their freedom and liberty, who put the vision and hope for a nation where men could live their lives free from a ruling class. There has been much sacrifice by many and I think we must remember it before we light the grill and pop that first frosty one.
There has been much success along the way as well. Although there have been bumps along the way, our nations prosperity has grown over the centuries in a manner that is marveled at by the rest of the world. We created entirely new industries and technologies along the way, gave birth to a true middle class for the first time in the history of the world. We have indeed stood as the bright shining city on the hill that Ronald Reagan spoke of, offering hope and opportunity for those who wished to take advantage of it.


At such a time as this I cannot help but think about those inalienable rights out founding fathers discussed in the declaration

LIFE

We are free here in the United sates to choose our own path through life. The sate does not tell which school we must go to or where we must work we are free to choose. We can choose where we live, how we live, how many children we wish to have, what kind of car we drive. Want to walk down fifth avenue in salmon pant and a blue blazer? Have at it! Want to trade for a living and skip a normal job. Okay by us! Drop out of life, move to La and play poker for a living. Fine! Buy stocks under book value and write? Enjoy! Own a tire shop? Sell software? Be a shacked up free loader that sells rags? We could care less. It is your choice on what, when, where and how you make your living. Keep in mind however that with this right comes a responsibility. It seems all to often that this is overlooked and we look to government for answers and solutions to our problems and failures. If you find yourself living on welfare with nine hungry babies, it is a series of choices you made to get there. If you start an internet based buggy whip business and fail, you have to live with the consequences. If you put on the carry trade and it fails to carry, its on you to be strong enough to pick up and carry on. If your pair of aces is cracked by some idiot with a 3-4 unsuited draws out a straight for you last thousand bucks..its on you. Not society, not the government. You. We are fee to choose our own path. Should your be wrong or not work out as you had hoped it, one must be strong enough, brave enough , American enough to pick up and carry on, reinvent, survive and fins another way to thrive. Want to quit your job and stay home and watch Oprah? Fine. Just do not expect me to pay your electric bill. Want to buy an SUV? Okay but do not gripe to me about the price of gas. Want to be a welfare mom? Okay by me. Just do not expect me to feel sorry for you. It is your choice how you live you life. It is therefore, your responsibility to deal with the consequences of this choices. It has been a characteristic of this country and one we must never lose. Free to choose, to prosper, free to fail, free to get up and try again. The US is truly the land of second chances. Given the stories of many of our top business leaders over the centuries, there probably should be a merit batch for getting knocked out and getting back up.

LIBERTY

This actually a tricky one in these modern times. It was Benjamin Franklin who said They that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety. Well meaning officials and governments can easily deprive us of enough small liberties for it to become a big problem. Seat belt laws, smoking restrictions in bars, parts of the patriot act that allow domestic spying, all are acts that seem sensible and beneficial. Protecting us from our own dangerous actions and those of others. What a nice, kind government! However, it restricts our actions to act as free men and even begins to inhibit our right to use our property in any manner we see fit, and to earn our living as we choose. Seems sensible but removes small pieces of our freedoms. Liberty is defined as the right to act without restraint and to follow ones will as to their own path of conduct. There is of course an implied obligation to do no harm Your right to swing your fist ends where my nose begins. My right to drink ends at the ignition box. As George Bernard Shaw once quipped, “Liberty means responsibility. That is why most men dread it.” Increasingly we see government restrictions on behavior being passed and even embraced in the name of safety and of health. We must be ever vigilant unless we become like frog in the saucepan. If you drop a frog into boiling water, he will jump out. If you place the frog in a pan of cool water and heat it slowly, there be boiled frogs legs for dinners. Liberty is stolen slowly, in little bits and tiny pieces. Keep this in mind when you head to the voting booth. Free men and women do not need, nor do they allow government to make their personal choices on what they eat, what they drink, what they smoke or who they sleep with. Freedom is not free. It requires and demands vigilance and responsibility.

THE PURSUIT OF HAPPINESS

The big one. Note that the inalienable right is NOT happiness. It is the pursuit of happiness. In his excellent book, the history of happiness, Florida state professor Darrin McMahon examines mankind’s attempts to find happiness. Many turn to religion, others to more earthly forms of hedonistic delights, others to philosophy. Man has looked at philosophy, at politics, in our minds, in our hearts and between our legs in our pursuit of happiness. In the end the professor surmises, as do I that happiness lies in the journey we undertake. To obtain happiness means that we must be content..NO..we must CELEBRATE and delight in the life we live day to day. There are so many moment that make up our lives and to be happy we must learn to find them and celebrate them. A stock that doubles, a first kiss, a ten thousandth kiss, the birth of a baby. Those of you that have children as I do, recall how you felt when you first held your first born. That is the feeling of happiness. To be happy, we must be able to chase our dreams. I think we must be able to take risks and chance to failure as well. I have yet, for example, to meet a happy mid level bureaucrat. To be happy is to be alive and to enjoy all the moments of a lifetime. A walk off home run for the home team, quiet drink with an old friend, a real estate deal that closes quickly, a lawn well mowed, a road trip, a good morning kiss from someone you love, a sunset, a promotion, catching an inside straight or a flush draw, a 12 to 1 pony that wins, a childs high school graduation, a daughter who comes to you in her twenties and tells how much she appreciates you always being there, a loud night at a dock bar with great friends, music, poetry, literature, opening day, the NFL playoffs (if your team makes it of course0, march madness, starry nights, an attaboy for a job well done, a friends wedding, a friends divorce, all of these are the moments that make up a life. Ife itself is the pursuit of happiness. If we are smart enough to know that, to enjoy that and life in such a manner, as Charles Bukwski once said that the gods fear to take us, we shall be happy.

Happy Fourth of July to all. Through your journey through life, your liberty and responsibility, may you find the happiness you pursue!

the search for value

Not too long ago I was perusing some back issues of Outstanding Investor, a quirky publication featuring interviews with top investment managers. In spite of the editors ongoing love affair with Warren Buffet, I enjoy this publication and think it is one of the very best sources of investment ideas. While reading, I found an old interview with Peter Cundill, a value fund manager of some note who hails form Canada ad has much success applying his approach around the globe. In the interview, Cundill mentioned that one of us favorite screening methods was to search for stocks that trade below tangible book value, are profitable and pay a dividend. His reasoning was that if the assets were sound, then one was purchasing the earning power and dividend of the company basically for free and that this would provide a large margin of safety with upside potential. Sounds reasonable, doesn’t it?

I decided to run the criteria through a back test using the programs at backtest.org, an excellent site for quick and dirty checks on ideas and systems. The only drawback is that you are limited to the value line universe of stocks, but for quick tests it is excellent and easy to use(any suggestions for other backtesting tools welcome). I ran the test from 1986 through the end of 2006 and found that, indeed the results are excellent. The criteria returned an average of 17% versus the SP500’s 12 and had only 2 down years in the last 20. In fact, it has not been down January to December since 1990! Take note, however that 1990 was a doozy of a down year, down almost 30%.

I like this approach to screening. The presence od the dividend means that in all likelihood the company is generating more than enough cash to meet its bills and has enough left over to return to the shareholders each year. The profits make it less likely for the company to burn up assets and cash just too keep itself afloat. As always keep in mind that screening is the start of the process not the end and a more investigation must be done. As Chris Browne once remarked, first underwrite and then investigate.

What kind of stocks can we uncover today using this approach? Not too many household names that for sure. The stocks found here are going to be unloved and undiscovered and not mention of the tv shows until they are taken over or discovered by an eagle eyed analyst. When I ran the screen I included an extra margin of saety characteristics by adding a current ration of more than one. I have found over the years the more ways I prevent myself from being exposed to dangerous dying situations the more likely I am to avoid value traps and value destroyers. The current ratio just assures enough cash and short term assets exist to pay the bills without borrowing or looting the company.

There were as expected a lot of small banks and insurance companies on the list including such gems as Beverly Hills Bancorp (BHBC) which recently hired an advisor to look into selling the bank, Broadway Financial(BYFC) a small bank with a mostly Hispanic clientele in Los Angeles that has had recent insider buying trading at 85% of book value; Eastern Insurance holdings (EIHI) , a small workers comp and group insurance firm that has started getting analyst coverage with Keefe Bruyette rating it a buy with positive comments; Presidential Life a life insurance and annuity concern that has had recent insider buying. There are more but I think that gives some idea of what type of stocks this screen will turn up right now. With the market having had an extended run, its is going to be small and microcap names that turn up.

Among the no financial names were companies like Citadel Radio ( cdl) the company that just purchased ABC radio for Disney and now has over 100 radio stations across the nation; The challenging furniture market has seen the shares of Furniture brands and Haverty Furniture fall low enough to meet the criteria with both of these catching the yes of notable investment firms and activists in recent months; McClatchy News(MNI), the newspaper concern with over 30 daily papers around the country (these shares have been purchased by both Citadel and Renaissance taking good size positions of late. One of my favorite stock LS Starret(SCX) a company in the always exciting handheld tools business shows up as well. Again as with the banks and insurance companies not household names but viable business’ that pay dividends and sell cheaply compared to tangible book value.

In the continuing search for stock ideas the Cundill screens appear to be another viable method for searching out this, tails I breakeven, heads I win big stocks that I have found to work best for me over the years. The returns have always been very “frog” with value sitiing still until something unlocks then and leads to good size gains but it has so far been profitable. Lets hope it stays that way.

in which one ponders the merits of being a boat bitch

BB. That’s the common acronym around Kent Island for Boat bitch. A BB is an individual, like myself, that loves boating but has no boat. We have friends with boats. There are many reasons to be a BB. Some cannot afford the boat. Some, like my co-worker, have broken boats that will take awhile to fix. Me? Its simple. My love of boating is a lot like my love for baseball. Anyone who knows me knows I love the game, Watch it, read about it, study it. CanI play it? Lets just say I played a lot of right field as a kid. Played damn near every day. However I have the coordination and athletic ability of a piece of wood. Could field a little, but no arm and even I knew I was a guaranteed out when I came to the plate(except in wiffle ball. A wiffle ball I could hit and I had a really cool dipsy doodle pitch that was unhittable. Unfortunately there is no major league,or even high school Wiffle ball). So it is for boating. I love being on the water, and really enjoy go fast boating. I remain however a natural born klutz with terrible coordination and the response time of a lump of coal. To whit, none whatsoever. Giving me control of two 500 cubic inch motors would be like giving Hannibal Lechtor a sharp knife and a frying pan.So, its BB for me. To be a BB, you have to be blessed with a great group of friends who have boats, And I am. The crowd on Kent Island is one of the best groups of friends I have ever had in my life. The come form all walks of life but we all share one trait…we all refuse to grow up and often make peter pan look like a social security recipient.

Boat bitching is a great way to spend the summer. Hanging out with friends, riding up and down the bay, enjoying the incredible seafood of the midatlantic , adult libations, great music and of course, the bay itself. A summer on Kent Island is like living in a resort for 5 months. From May to September its pretty much non stop every weekend and several weeknights thrown in just for fun.Already this summer we have had some great adventures and times. Memorial Day at Buddy Harrisons on Tilghman Island. Captian Buddy in years past had always had what was generously called a bikini contest on this day and boaters came from all over Maryland. It has been the traditional opener of the power boat season .Last year his son was running for office and the contest was cancelled. This year, the son informed us there would be no contest this year to protect his political image. He forgot his dads health was much better. Buddy went into his pocket for a roll of hundreds and announced a contest. He raised the price until about ten girls were on stage and the familiar cry of “skin to win” filled the air. It’s a tradition and we refuse to allow some little political matter ruin such a fine upstanding cultural event! Little nervous on the way back when Rd decreed that he grew up here , it was his boat and he knew where he was going, Would have been believable if he wasn’t steering towards Annapolis instead of the narrows. FG has begun his annual assault on the bays fixed structures but a t least he hasn’t hit any bridges yet this year. DM picked up a new admirer and best little buddy who regaled us all with tales of his job as a pharmaceutical rep for various less than legal substances. He told us how much his watch cost, what his bar bill was the night before(although the number climbed by about a hundred bucks an hour each time he told the story). He let us know what fools we were for working when we could party like a rockstar full time like him. Best part of the day was when, as DM and I knew he would, walked off the swim platform straight into the water missing the dock he was aiming for by a good twenty feet. He ended his day as allof his type do. In a parking lot, shoeless in borrowed shorts and a towel, soaking wet, waiting his mommy come pick him up.A rock star indeed Seems for all his riches he lacked a car. It is not even July yet and we have had severall good trips, a bunch of breakdowns, hook ups and break ups. Summer on the island. I got a chance to introduce my daughter to go-fast boating courtesy of my regular ride JS. She loved it and we followed with traditional fathers day activities at red eyes. So I’ll never be father of the year,. We had a great time!

This past weekend, Gm was kind enough to invite some of us out for a boys day on the day on his beautiful new boat. We left the narrows headed for our destination when someone noticed a bad vibration. Bent Prop. Back to the marina. The crew at red eyes had us on the boat life and out of the water in a matter of minutes. Its good to have friends! The prop was indeed badly bent and the staff applied a high tech solution. They braced it with a block of wood and beat the hell out of it with a hammer until it was back in line . We were back underway in 30 minutes and had a great cruise down the bay to Annapolis and South river. Which brings me to this weeks lesson. Even in this hight tech world in which we live with all sorts of electronic solutions to our daily woes and tribulations, sometimes the best fix is the beat the hell out of the problem with a large hammer.

In the stock market the hammer continues to be price to book value and activist investing. Its working. We have had solid gains ion NSHA, SCX and Canadian trusts already this year. Selling puts on HDL, SHRP and PIR has filled the coffers with collected premium. SACS also are working well, with Ithaka closing their acquisition last week and are now an operating company dealing in medical devices that control body temperature using blood catheters. The company will now evaluated as an operating business and the warrants will price as a two year warrant with a $5 strike and not a deal making speculation. The esa warrants have moved up and I would hold off buying anymore at these levels. Thanks to Ryan Carlson for pointing out that the VRY SPAC deal was done by the same people who did EDA, a deal that worked very well with the warrants climbing from 1 to 5 in just a few months. We will add that one to the watch list. EDCI, PIR,PIR,HDL,BLG and GY all remain solid candidates for either outright purchase or selling puts. With the market a little shaky and volatility up,selling 1-2 month puts is probably best. I ran some screens last week for profitable companies that pay dividends and sell below book value. This is a simple screen I learned from the writing of notable value investor Peter Cundill. I will be writing more about the results and back tests of this method in the near future. Off this list I am adding two banks, Berkshire(BERK) out of New York city and Beverly Hills Bancorp(BHBC) out of California. Both are viable sale candidates and would be sold at much higher levels than they trade for in todays market. They are illiquid and hard to buy so caution is urged when placing orders.

I cant tell you exactly there the stock market is going to go. There are convincing arguments on both sides of the coin. We are hearing more rumblings about subprime mortgages and the consequences of a widening yield spread for investors and deal makers. These are the two biggest threats to stock prices right now. The economic signals remain pretty mixed right now with every piece of good news offset by bad. Home prices are weak and sales are forecast be slow as well. The bottom line is that the market has slowed in recent weeks, it is summer time, volatility is up and rates, although up from the highs remain above 5% on the five year. I am cautious and sticking to the hammer. Buying stocks and selling puts on stocks that sell below book value and are owned by smart, activist investors. I am keeping a strong margin of safety in the portfolios trying to own as many, heads I win a bunch, tails I break even or lose a little situations as I can find. So far, its working.

current thoughts

I really havent written much on the market since early in the year for two reasons. One, I really have not had much time to do much individual writing die to other projects and two, what was I going to say. Stock Markets up, film at 11?We have moved pretty much straight up all year long and there has been nothing much new to say and my core portfolio has stayed pretty much the same all year, Candian oil trusts, coal, activist stocks and spac warrants. With nothing much to say and no time to say I have been relatively quiet. That changes now however. Interest rate and inflation jitters have finally spook the stock market a little and we have seen some down days with increased volatility. The VIX is up about 50 % from January levels and it makes a little easy to fire off trades when you have some activity to take advantage of. For the first time in months I am finding puts worth writing on some undervalued stocks and I am happy to see the return of one my favorite trading methods. Puts on SHRP and PIR have looked especially attractive, although PIR is up sharp today reducing the opportunity for new positions somewhat.

The fed says that the main concern in the economy remains inflation and have pretty much eliminated the hope of a r ate cut, in fact hinting at the possibility of an increase. I think too much of an increase here whether it it imposed by the fed or the marketplace will have serious consequences. Energy costs for industry as well as consumers are already well above average and to now push borrowing costs higher will further squeeze margins, shrinking profit margins and reducing profits. Lower profits, in theory, are going to mean lower stock prices. I am not doom and gloom by any means but I think rising rates will be difficult for the stock market to contend with in the short run. In addition my main summertime economic indicator tells me the consumer is cautious. I have not encountered one back up at the by bridge this year. Not on Dover race weekend. Not on Memorial day. Not one Thursday or Friday have I even had to tap the brakes until I got to the toll booth. Im glad I don’t have a business in Ocean City this year. I suspect it is slower than usual. Having said that, it is a well know fact that I am the worst macro guy on the planet and have successfully been wrong in my prediction of market movements with something near perfect levels. So I will stick to my knitting with deep value and special situation investing.

I continue to play in the SPAC space and have recently taken an extensive look at the field We have profits in 4 of 5 positions taken over the last year in the warranst os special purpose acquisition companies, including a nine bagger in great lakes dock and dredging with only one small loss. Although this type of investing is pretty ..okay..very speculative, a small portion of capital applied here can be very rewarding, As I go through all the listings and recent events it is obvious that the biggest danger is a no vote to deal forcing the liquidation of the company and the warrants going worthless. Big firms such as fir tree and baupost own a lot of spac deals to play the arbitrage. If they like the deal, they vote yes and the stock usually goes up . If they don’t, they vote no and block the transaction and lock in a 10-12% profit in the liquidation. Win-win, unless you arelike me speculating on the warrants. To avoid this, Im only buying warrants where the deal is announced, there is insider buying and not a large institutional presence in the stock. Tough criteria but there are a couple that Pass. ITHK, EHHA and SHA pass this test. I also like ESA as there is not a large presence of arbitrage guys in the stock and Marshall Reynolds, the chairman has a long track record of successful deals. I ll add the warrants of all four to my speculative, you should buy this list.

On the pure value side I like SCX, LS Starett. This is one boring business, hand tools, saw blades and gauges but at exciting valuations. Two thirds of book, 50% of revenue, enterprise value to ebitda a takeover worthy 6 times. Debt to equity is 10% and they are profitable. When I am long stock I like to see the institutions with me and in LS Starret they are. Brandes, LSV, Bruce Sherman at Private capital and Charles Royce all have decent positions in the stock. I also like Adaptec here.The data management and storage company’s shares are trading around book value and are attracting attention. In addition, the company, trading at 3.76 a share has almost three bucks in net cash. Steel Partners filed a 13 d on the company yesterday and are getting close to the 10% ownership level. They have requested seays on the board and are very critical of current management. A s ale here would not be a huge surprise. Likewise, Educational Distributors has come under fire form the activists of late with both Robert Chapman and Daniel Loeb taking aim at the company and pushing for a sale or merger to take advantage of the over 4 bucks a share in Net Operating losses on the corporate books. To avoid change of control, it would have to be some type of reverse merger but it can and probably should be done. At 2.05. I think the hares are a good long term selection here. HDL, the music and dvd distributor alos looks very cheap here at half of book value, 10% of revenue and generating free cash flow. Marty Whitman recently bought 15% of the company and I think we should join him in owning this cheapie for the long term.

I am still long the three liquidations here and will keep them all the way through the runoff. Ecc capital, tripos and remec will, in my humble opinion, provide decent returns from these levels as they sell off the assets and give us the cash. I am looking for a chance to sell puts around here on real networks, Gencorp, Borders and BLG if I can get it done at a good price.


If you haven’t read it yet, Monsih Parabrai’s new book, the Dhando investor is out and is an excellent primer on the type of low risk high potential return investing. I attempt to practice. The central idea is if I am wrong I lose a little bit, if I am right I make a ton. The returns tend to be as Warren Buffet once said, lumpy, with gains accruing in a very frog like fashion. Periods of boring sideways followed by leaps as situations work out and are ecognized by other investors(thanks to Louis Navellier for the frog analogy. He of course was using it to refer to small stock in general but I find it an excellent analogy for seep value and special situation investing.). I think the stocks and securities mentioned above have these characteristics and have the potential for superior long term returns for patient investors.

With that it is summertime on the island and we are back to resort living. I spend most of my weekends begging and bumming for boat rides and hanging around dock bars with an great group of friends, indulging in cocktails, seafood ,conversation and of course the constant and futile search for the next incantation of the one true love of my life. It truly is a lot like being in a resort around Kent Island in the summer time and if you haven’t ever made it, it is getting to the time. The Bikini contests start at the red Eyes Dock bar this Sunday in my favorite ritual of fathers day( okay so I ll never be father of the Year but it is a good time). Also if you get the chance and inclination, the big grills will be lit and most likely so will we. The girls will be out, the bands rocking, the boats rumbling and it should be one hell of a time.

trip report redux

Finding myself, as I always do this time of year, sitting in the Lexington, Ky airport after a weekend of drinking gambling and carousing with fellow after dark specs, I find my thoughts turning to the weekend just past. This is a different kind of trip report this year as it was a much calmer trip.we were a week earlier thn usual due to some members family and school commitments so it wasn’t the makers mark Mile and Toyota Bluegrass stakes. It was also freakishly cold with a wind that had artic iciness to it. Coupled with the fact that it is easter weekend and Lexington was not as crowded and rambunctious as past keeneland trips.There were no Purple PT Cruisers, skinhead bars or even female arm wrestling championships this time. Just great friends, good food and good times. There were long conversations on the various markets, trading ideas, systems and strategies, as well as the latest chapters of the new hit series, Life in Deltaville starring the voodoo prof and Elena. Seems Deltaville is kind of hee-haw meets tha bay as told by a slightly mentally disturbed version of garrison keiler. We hear tales of streetlight shooting, coon killing and exploding handymen. Buying the wrong type or color of car..that’s is to say anything but a white pickup truck..is cause for being accussed of “turning”, a deltavillians way of saying hey ther boy that’s one gay ass looking toyoter you got there.It was decided during the first part of the first night as the stories spilled out all overt the table reeking of stale Budweiser and crab pots that a trip to deltaville to check out the Tide Inn and various drinking and boating establishments of the town must be forthcoming. The two CAICs(Chief Alcoholics in Charge) namely Crossman and myself rendered this unchallengeable ruling sometime between the restaurant and th bar and so a trip there to change small town mid atlantic life forever will be planned for later this summer.

Little tim and his gorgeous and pleasant fiancé sarah joined us for the first time. As they had an 8 hour plane trip for one day of frozen horse racing and it was more sedate that I think they expected, no drunken uk grad students or melvinian misadventures of any sort, I hope they will nevertheless join us again in future years as they were an excellent addition to our band of travelers, drunkards and miscreants. The voodoo prof, he of the legendary eatery discoveries and dining delights, showed the first ever sign of weakness in his ability to select unusual and outstanding eateries chose a carrabass, an Italian CHAIN located around a huge mall for our first evening gathering.To make matters worse, they had some sort of weird cable tv system and fred couldn’t even watch the masters and hiss and curse at tiger while discussing subprime mortgages, mortgage collapses and shorting overpriced vitamin multi level companies. Still, the food was god and the regular crowd quickly assembled, in from new york, chicago, Cinncinatti, Maryland and yes the lovely metropolis of Deltaville, Virginia. The talk ranged from markets, to sports and back again, boring the hell out of the women in the group to our usual total unawareness that they were sleeping with their eyes open.A decent evening and Crossman and I even got new underwear out of the deal. Leaving the voodoo profs unusual dining choice we made one of the weekends greatest discoveries, LIQUOR BARN. Picture a Sams Club Or BJ’s size warehouse. Now, Fill it with booze. Liquor, wine , beer of every possible variety. We were so awestruck we took pictures of each oter in front of the football field size isles of high quality scotch and bourbon.. We all bought stuff naturally, Scotch, Butternut brown ale, irish Whiskey, Woodsford 1792 special issue Kentucky Derby Bourbon signed by the brew master whoever he is. I don’t really like bourbon but is a cool looking bottle.. We love the liquor barn.Back then to the hotel bar, in years past the scene of much ribald and hilarious adventure involving me , whiskey , coeds and women of the racing world. Dead. Totally and completely dead. Oblivious to the lack of activity a geetar strumming troubadour struck up the tune at a decibel level more appropriate for the Lexington arena than a small hotel bar. Offthen to the Hyatt through the rabiits warren and maze of hallways, skywalks and stairs that VP and elenahad discovered to talk and drink in relative peace and quiet. As a bonus they had masters coverage which goes a great way towords calming Crossman.

The day at the track was a good one, if you could ignore the numbing cold.The insode grandstand was packed while the outside seats and even the rail were virtually empty. It was in the low 30’s with a wind-chill in the teens. Winds whipped, occasional snowflakes spilled across the track and we bet on horses all day. The listmaster had the best day cashing 3 out of 4 tickets.They were all strong horses at good odds to show, a chicken bet to me but given I was stuck a hundred by the end of the day I bow to his prowess. I got caught in the switches this year. In the past I was able to bet exactas all day and hit three or four every outing. This year I had thw e winners as one of my two exacta picks in five races, Instead of boxing the exacta bet had I bet them both to win I would have had a huge day. It will be worth going over past trip to the track to see if this is a more lucrative approach than just betting all exotics all day. We will not however discuss the superfecta missed by one stinking length or my one large win bet at 17 to 1 that led wire to six inches short of the wire. A Maryland horse at that. I admit that I love horse racing and in spite of the bitter temperatures, Keeneland is still a beautiful track and we got to watch some of the best horses in the country today run. Next year, only win bets and cheap superfecta bets for me.so if you go to keeneland with us, you should probable just box my win selections in an exacta bet and plan on retiring from your winnings.

I have come to the conclusion we need a sober scribe to accompany us on the se outing. The trding ideas and life philosophies that are tossed around over the course of a weekend are both a meal for day and a lifetime. This weekend alone we had conversations about the reverse carry trade, selling options on value stocks..(one of my pet theories that has worked well in practice but I have no idea how to obtain the data needed to totally test the theory, It does seem to me that if you do the valuation work first and locate stocks that are undervalued and then sell mispriced puts on them that the worst thing that happens is you buy a stock you like at a lower price. Best case you collect premium every month,, or get put the stock art a lower price. He problem with value stocks is that they can tend to linger for long periods of time until there is a catalyst to unlock the underlying value.), the almost absolute guarantee that trades with real high t factors, things that happened “always “ or “all the time” are an absolute lock to fail in the future.We covered gamble ring, bet sizing, money management ( we all pretty much felt that absolute bet sizing didn’t add much. There were observations that most CTA’s and funds used volatility based risk management systems that lowered position size as vol rose, and decreased as it rose…probably the exact opposite of the correct way to handle it.Somebody needs to write this stuff down. I would suggest a recording device but there are parts of the conversation that really do need to stay right at the table.

Lexington is one of the most unique towns in the world. Two things matter here and only two. Horse racing and Kentucky basketball. When good old Billy Clyde Gillespie left the texas a&m aggies this week to take the UK job, the town erupted. Some 5000 attended the news conference announcing his hiring. The Saturday newspaper had a six page special section on the coach, the team and the prospect for the wild cats next year. The Sunday editorials were not about the economy, the gubernatorial elections oe even the war in Iraq. All Billy Clyde, all the time. The basic statement seems to be, Welcome Billy, we love you. YOU BETTER WIN. In Kentucky it is not enough to make the dance. You have to win it after dominating the SEC all year. Gillespie is a great coach and an even better recruiter. I suspect we will be seeing Blue clad Kentuckians at the final four before too very much longer. The other great love here is racing. All the bars have horse racing on all day long. Tracks form all over the country are shown and these people watch it all day. They know the horse running at the Aqueduct, at laurel and Mountaineer Raceway. They discuss horseracing the way other towns discuss their baseball teams. Hey know their horse here. During the two three week racing sessions each year keeneland is THE social scene in Lexington. If you don’t have to work at one of the bars pouring ungodly amounts of Woodford reserve and makers mark for race fans, you are at the track for the days racing. They don’t save for family vacations in Lexington. They save for wagering money at keen land. Lets see, irish bars, horse racing, beautiful women and college basketball. All this and the liquor barn Its almost like heaven.

So another spring trip winds down and I sit in the airprt waiting for the plane to be called. It has once again been a weekend of great friends, incredible conversations with some of the most intelligent people I have ever had the pleasure to know. Lessons have been learned, methodologies discovered for trading and fro living as they always are on these trips. To the world at large I know it appears we are just drinking and carousing, gambling and dancing our way though the weekend. Of course we are. But along the way we learn much form each others conversations and discover a lot of things together. Not the least of which is that good friends, good whiskey and fast horses make the kind of memories we will cherish forever.

As always the trip home provides some of the more amusing moment. Sitting in the Detroit airport waiting for my connection to BWI, I sit in the fox sports bar, a civilized place where one can have a smoke with your beer. Sitting at the bar talking very loudly are three guys, pie eyed as hell just back form overrseas waiting for domestic connections. They are all back from the far east .I am listening to them discuss the merits of which type of wife one should buy, Korean, Chinese or Phillipines. The one fellow has drug out his computer to show his new buddies his design for a personal aircraft. His “bird” is going to put the aviaition industry out of existence. It worded well in a flight simulator under all circumstances, can be built out of balsa wood in his garage , his external airbags, programmable gps flight controls so you don’t actuualy have to know how to fly it, just plug in the course and go. It has luxury seating, cup holders and a Bose stereo system. He is quite passionate about building it, in spite of the fact that he feels very strongly the government will kill him for damaging the aviation industry.The fact that it appears form what I have heard defies the laws of basic physics and advanced engineering he has fric and frac as welllas the bartender ready to invest money. The bartender does have a concern being from Michigan. that’s all the snowbirds and old people flying south for the winter will be as serious a hazard in the sky as they are on the road.Our intrepid inventor admitted he had no knowledge of how to build a plane except on a simulator computer point and click program but he was going to seek out people who would teach him what he needed to know. Because knowledge should be free and he would find someone to teach him aircraft engineering for free out of their love of humanity. I am telling you, you cannot make this stuff up.